March 30, 2011

Debt And Deficits: The Symptoms, Not The Disease

Testimony Before the House Committee on Ways and Means
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Good Morning Chairman Camp, Ranking Member Levin, and distinguished members of the committee. It is a pleasure to be here this morning to discuss the most important topic of debt and deficits and how they relate to economic growth and job creation.

Deficits and debt matter. First, they matter politically. Polls show that debt and deficits are defining issues of American politics.1 Washington should indeed be focusing on these important issues. Unfortunately, this focus is often misplaced as debt and deficit are the symptoms of government spending, not the disease. The disease is government spending. As a result, the only way to cure debt and deficits is to cut government spending.

Debt and deficits are the symptoms, not the disease, but the persistent failures of lawmakers to cut spending have resulted in a situation where these symptoms have started provoking other symptoms. Think of them like tumors. Tumors are a symptom of cancer. But independently tumors wreak all sorts of havoc on the body. They not only fuel their growth by stealing nutrients from other bodily purposes, but they also impinge on the function of vital organs like the brain, the lungs, and the liver.

So it is with debt and deficits. They hinder economic growth and destroy jobs. Besides being expensive and self-perpetuating, they increase the probability of a severe fiscal crisis and can signal to investors that the United States may be getting closer to the time when it won‘t be able to pay those investors back.

While economists understand the negative consequences of the failure to cut spending and the persistence of deficit and debt, they can‘t pinpoint at what point these debt levels become unacceptable to global credit markets. Economists can‘t reliably predict what the form the fiscal crisis will take. For instance, the fiscal crisis could be a slow, yet rampant destruction of our economy. It could also be more abrupt with creditors losing faith and pulling their money from the United States overnight, throwing the country into a vicious debt spiral, another deep recession, and ultimately a lower standard of living here and presumably around the world.

But the main reason why deficit and debt matter is that American families will be the ones on the receiving end of economic uncertainty, higher interest rates, lower growth, higher unemployment rates, and lower standards of living. Maybe even more importantly, future generations will have to pay today‘s deficits. We are about to embark on the most massive transfer of wealth from younger taxpayers to older ones in American history. It will be not just unprecedented but also unfair: Our children will pay for the decisions we make today.

The solution is for Congress to act now and cut spending. In particular, Congress should reform Social Security, Medicare, and Medicaid, which are the main drivers of the spending explosion. The solution is also for Congress to resist the temptation to address these deficits by raising taxes. First, no amount of taxes could address the phenomenal fiscal imbalance that our country will face in the future. But, raising taxes would also add to our problems by hindering economic growth,2 thereby reducing tax revenue and adding to the deficit.


1.Tony Blankley, “Debt Doom Refocuses Politics,” Washington Times, February 21, 2011.

2.Christina D. Romer & David H. Romer, “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks,” American Economic Review, American Economic Association, 100 (2010):763–801.