Advancing a Free Society

Testimony to the Ways and Means Committee on the Effects of Spending and Deficits on Job Growth

Thursday, March 31, 2011

Chairman Camp, Ranking Member Levin and members of the committee: Thank you for giving me the opportunity to speak to you today.

In my five minutes, I would like to cover three issues. First, as is becoming well-accepted, the current spending pattern is unsustainable. Second, the problem was created by policy and can be remedied by changing policy. But raising taxes in an attempt to meet spending is not the right solution to the problem. Third, if the spending picture is not altered, economic growth will suffer, and with it, employment, wages, and the standard of living of the typical American.

It is becoming common knowledge that the US budget deficit is a threat to our long run economic survival. Most concerns are over the effect of the budget deficit on growing debt and the consequence of that debt on the ability of the US to borrow. As our debt gets large relative to GDP, we will eventually have to service this debt out of tax revenues and offsets in other spending, both of which will place significant burdens on the fiscal situation. More important will be the effect on the private economy as high levels of government borrowing raise interest rates and stifle business investment. A well-known study by Reinhart and Rogoff suggest that as debt-to-gdp ratios get above 90%, growth rates fall significantly. By one estimate, economic growth would be about 1½% at a 90% debt-to-gdp ratio, and about 3½% at levels of debt-to-gdp below 30%. Given the President’s budget and forecast deficit if enacted, our debt-to-gdp ratio will be over 70% by this time next year.

Read the full transcript: edward_lazear_testimony.pdf