Testimony This Morning: Senate Budget Committee

Wednesday morning, starting at 10am, I’m on a panel testifying to the Senate Budget Committee about the need for a fiscal stimulus.  The other witnesses are Mark Zandi and John Taylor.

I’ll post my written testimony after the hearing. I expect to make three main points in my verbal remarks:

1) We are heading into a serious global recession, caused by and in turn causing a process of global leveraging (i.e., reduction in lending and borrowing).  We have never seen this kind of deleveraging – synchronized around the world, fast-moving, and with an unknowable destination.

2) I do not think we can prevent this deleveraging from happening.  Nor do I think we should even try to keep asset prices high (or at any particular level).  But in the United States we have the ability to mitigate some of the short-run effects and to lay the groundwork for a sustainable, strong recovery.  One sensible tool to use in this context is fiscal policy.  I lean towards smart spending programs, but as the economy continues to worsen, I think some kind of temporary tax cut could also help – it can potentially have relatively quick effects.  (Note: contrary to those who think that if tax cuts are saved by consumers, they are somehow “wasted,” I would point out that anything that improves consumers’ balance sheets is both good for them and for the financial institutions that lend to them.)

3) But there is a real limit to how far we can go with fiscal policy (and with other policy measures).  Irresponsible budget policies would not be a good idea – we need to continue a process of fiscal consolidation; it is most vital that people around the world remain confident in the U.S. government’s balance sheet.  Some of the highest numbers now being proposed for a fiscal stimulus are probably too high and a mega-stimulus could be counterproductive if it undermines confidence.

I’m proposing a fiscal stimulus of roughly 3% of GDP, to be spent over several years.  Given the uncertainties involved, this seems like reasonable middle ground – it’s enough to make a difference, but doesn’t promise a miracle; it can be spent sensibly and at an appropriate speed; and it will not undermine our ability to consolidate the U.S. fiscal position (i.e., bring government debt onto a sustainable path) over the medium-term.

2 responses to “Testimony This Morning: Senate Budget Committee

  1. I’m not sure how a tax cut is going to have any immediate effects, unless you are proposing some sort of immediate rebate solution. In that case, we know that those types of programs are usually used a short-term economic prop that only keeps the drop from happening so early.

    3% seems like a massive amount of money to inject back into the system. With the Federal Reserve and the Treasury printing and pumping over a trillion dollars back into the economy, we should already expect an inflationary wave to hit us in the next couple of years. At this point, it seems like the markets are correcting themselves and we really just need to cradle the egg as it’s falling instead of trying to stop it altogether.

    You should also remember that the congress, senate, and all other budget-makers are not the finest group of financiers. There is very little proof that we could see a federal “smart” spending program that does not get tied down with bureaucracy and waste.

  2. From approximately 1985 through today, the Earth’s population has increased by over 50%.

    Much economic theory is of the belief that as populations grow, they increase in productivity to a degree that allows all to live to some decent standard of living.

    This is flawed reasoning due to the fact that the less intelligent and less educated reproduce in disproportionate numbers to those who subsidize their existence.

    This will inevitably result in a situation such as that which we presently find ourselves in.

    Those who could not provide sustenance for themselves depended on debt and government subsidies.

    Supply and demand may be fooled for sometime, but they will always find equilibrium.

    I believe we violated Charles Darwin’s law of Natural Selection to an excessive degree and that we now have a serious problem.

    We are stuck in a negative-feedback loop.