Transcript: Daniel Mitchell’s testimony on the economic impact of debt ceiling brinksmanship before the Joint Economic Committee – Sept. 18, 2013

Daniel J. Mitchell, Senior Fellow, Cato Institute, on the economic impact of debt ceiling brinksmanship before the Joint Economic Committee on Sept. 18, 2013. SOURCE: Joint Economic Committee

Partial transcript of testimony of Daniel J. Mitchell, Senior Fellow, Cato Institute, on the economic impact of debt ceiling brinksmanship before the Joint Economic Committee on Sept. 18, 2013:

…I have five points I want to make. I’m a centrist between Mark’s four points and Donald’s six points.

First, it’s very important to understand that our chief fiscal problem is excessive fiscal spending. Deficits and debt are undesirable, of course. But there are simply ways of financing government spending, and the other ways of government spending – higher taxes and printing money – they’re also undesirable.

In other words, we should look at government spending on things that’s not very efficient at doing. That’s sort of the underlying disease. And deficits and debt are symptoms but so are higher taxes.

Second, the best way to gauge good fiscal policy as Chairman Brady indicated is to try to control government spending so it grows slower than private sector economic output. If you do that, you’re shrinking the burden of federal spending as a share of GDP over time and you get a very positive self-reinforcing cycle in that ratio of government spending as a share of GDP where the numerator is shrinking and the denominator is growing.

If you don’t do that, if you allow government to grow faster over an extended period of time, then the private sector sooner or later – it may be five years or it may be 50 years – but sooner or later you’re going to wind up like Greece because it’s a mathematical certainty that if a government for a long period of time grows faster than the private sector, you get in trouble. Why? The private sector is your tax base and if government is always growing faster than the private sector, no amount of tax increases in the long run are going to solve the problem and that’s assuming that you identify fiscal balance as the problem rather than the overall burden of government spending.

Third, I want to say something very optimistic. It is possible to make rapid progress with even a modest amount of spending restraint. Consider what’s happened in the past two years. For the first time in five decades, government spending in nominal terms has shrunk, where government spent less last year than the year before and less that year than it spent before that.

And what has happened during that two year period? Well, the burden of government spending has fallen from 24.1% of GDP to 21.5% of GDP. And for those who focus on red ink, it’s worth noting that that period of fiscal restraint resulted in our deficit going from $1.3 trillion to $642 billion.

And indeed, if we maintain some sort of fiscal discipline going forward, it’s amazing how quickly we can make progress. If government grows just 1% a year, we’d balance the budget in three years. If it grows 2% a year, we’d balance the budget in four years. And if we let government grow 3% a year, we’d balance the budget in seven years.

Indeed, it’s worth noting what happened in Canada in the 1990s. They had a five-year period where government spending grew 1% a year. This was mostly under a liberal party control in Canada at the time. In that five-year period, they went from having a 9% of GDP deficit at the start to a small budget surplus at the end. And it’s worth noting that of course their economy grew faster not slower as the burden of government spending fell.

My fourth point is that an increase in the debt ceiling is not needed to avoid default. It’s needed to avoid messy budgeting. It’s needed to avoid some of the complications with payments to providers, state and local governments, and all those things that Donald mentioned.

But when you have annual interest payments of $230 billion roughly and annual tax revenues approaching $3 trillion, you don’t need to be a mathematical genius to realize that the Treasury Department should be able to manage that and avoid default, even though as I said it would be a messy process for other parts of the budget.

Indeed, I’d even quote Donald in my testimony but since he’s here let me go ahead and say two other people. Stan Collender said, “It’s worth taking a few steps back from the edge. A default wouldn’t be automatically miss payments to existing bond holders; it could be made the priority while payments to others could be delayed for months.” The Economist Magazine said, “Even with no increase in the ceiling, the Treasury could easily service its existing debt. It is free to roll over maturing issues, and tax revenue covers monthly interest payments by large multiples.”

The only caveat would be if for some reason the Treasury Department didn’t want to pay interest on the debt and I don’t think that’s realistic or likely at all.

My final point is that a fight on the debt limit might be worthwhile if it generates some sort of good fiscal policy outcome.

And let’s look at Greece as an example of what not to do. There’s nothing akin to a debt limit in that country. But imagine there was. And imagine that a group of lawmakers, say 15 years ago, dug in their heels and said, “No, we’re not going allow more red ink.” That probably would have caused a lot of turmoil at the time. But if the net result was to force Greek politicians to restrain the growth of spending over a multi-year period, then it’s quite likely that the people in Greece would have been spared the economic and fiscal misery that they’re suffering right now.

Let’s close with an analogy. Yesterday’s long-run fiscal outlook from CBO shows that a do-nothing or status quo approach guarantees fiscal chaos. In other words, we’re in a car. We’re heading toward a cliff. We don’t know whether we’re going to hit that cliff in 5 years, 25 years but if we don’t take steps now when it’s relatively easy we will eventually cause a crisis. So I suggest that we should begin to steer away from the cliff, perhaps by adopting something similar to Switzerland’s debt rate which is of course akin to Congressman Brady’s MAP Act to impose annual limits on the growth of government spending.


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