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

David Malpass, President of Encima Global LLC, 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 David Malpass, President of Encima Global LLC, on the economic impact of debt ceiling brinksmanship before the Joint Economic Committee on Sept. 18, 2013:

…It’s vital that you discuss this issue of the debt increase and its vital economic and legislative issue.

The national debt already exceeds the nation’s annual output and the administration is now requesting that Congress increase the debt limit above $17 trillion.

As part of providing this increase, I think there should be an honest national debate on federal spending priorities and an agreement with the President on constructive spending restraint.

There’s huge economic upside for jobs, investment, the stock market and the dollar if you could lower the federal spending path or re-write the debt limit to make it more effective.

The federal government is spending nearly $3.6 trillion every year and is planning to increase spending rapidly in the coming years even with the sequester and the underfunding of national defense.

Some of the spending is successful and adds to the nation’s well-being. But another portion of the spending, several hundred billion dollars, is not successful enough to justify the taxes and debt used to pay it.

This has created a spending and debt crisis that harms the economy and undermines investment and jobs. The crisis is particularly acute because several categories of federal spending will need to increase over the next two decades as the baby boom ages and requires more government services.

Given this demographic and interest rate cycle, spending and debt should be at lower than normal levels now in order to prepare for the coming increases.

In addition, the maturity of the national debt held by the private sector should be longer than normal. Instead, the Fed’s bond purchases have materially shortened the effective maturity of the national debt, and both spending and debt are at record levels even though the demographic bulge is just beginning to hit the federal budget.

This leaves fiscal policy completely out of sync with long-term economic growth.

The debt limit provides a good opportunity to address this crisis.

In negotiating the next increase, Congress and the administration should take steps to downsize current spending and to slow future spending growth.

It’s also vital to improve the allocation of spending. Less successful government programs should be reduced in order to make room for new programs and for more spending on successful programs.

In my Aug. 30th Wall Street Journal column, I advocated a menu approach in which the various parties suggest numerous methods to reduce spending and then negotiate a compromise. I advocated replacing the debt limit with legislation to establish continued spending restraint that strengthens when the debt-to-GDP ratio rises above a ceiling.

I was privileged to work with Sen. Bill Roth on this committee in 1990 when he wanted to create a 50% debt-to-GDP limit. Unfortunately, the debt ratio is now more than double that and it will take many years of continued spending restraint to restore a more pro-growth debt level.

In the ideal, there should be a downward glide path for the debt ratio. A new law would set gradually lower debt-to-GDP limits, which if exceeded would require Congress and the administration to reduce their spending commitments or face escalating procedural restraints on spending.

…In making budget decisions, one of the confusing issues is whether austerity is bad for growth. Austerity or fiscal consolidation encompasses two separate economic policies: government downsizing on the one hand, which causes more growth, and private sector downsizing on the other hand, which causes recession.

Many of the reform programs undertaken in Europe that have been labeled austerity programs were harmful because they were built on private sector austerity not government downsizing. The austerity often took the form of higher value-added taxes, wealth taxes, and increases in government fees.

As the U.S. examine its options, it should aim to reduce ineffective spending. It drains the private sector because it requires new taxes or debt. An open Washington discussion of spending restraint, even a contentious one, using a menu of options as I’ve suggested would receive a very positive market reaction.

So in conclusion, the U.S. is stuck in a new normal of very slow economic growth, high unemployment and falling median incomes. Federal spending and debt trends are weighing on growth and investment. The debt limit provides an opportunity to break out.

The administration and Congress should create a menu of constructive restraints and agree on a package. Movement in this direction would create a very positive economic and market reaction.

Changes made now, even if they take effect in several years, would bring immediate benefits by improving the debt outlook.

Thank you very much.

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