Economists: Spending-Driven Debt Holding Back Economic Growth, Job Creation

In February 2009, President Obama pledged to cut the deficit in half by the end of his first term out of concern that “over time, federal borrowing will make it harder for the U.S. economy to grow and create jobs,” according to an administration official.  (Bloomberg, 2/21/09)  Having since run the three largest deficits in U.S. history, it is clear the White House has forgotten that reckless spending holds back economic growth and private-sector job creation. Republicans have been making that point consistently, and will continue to do so with today’s House vote to disapprove of the president’s request for another increase in the debt ceiling.  Hopefully when he introduces his budget next month, President Obama will not just listen to Republicans, but also the many economists who warn that the “largest threat to long-term growth” is excessive government spending:

  • 150 Economists: “To Support Real Economic Growth and Support the Creation of Private-Sector Jobs, Immediate Action Is Needed to Rein in Federal Spending.” (Letter to President Obama, 2/13/11)
  • “The Largest Threat to Long-Term Growth is…Government Spending.” “Perhaps the largest threat to long-term growth is the recent high level of government spending, which will result in high deficits or will require that we raise taxes substantially. Either course impedes economic growth.” (Stanford University Professor Dr. Edward P. Lazear, Testimony, 3/30/11)
  • “[C]urrent Debt Trajectories Are a Risk to Long-Term Growth.” “[C]urrent debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP. … [B]urdens above 90 percent are associated with 1 percent lower median growth.” (Carmen M. Reinhart, Senior Fellow, the Peterson Institute for International Economics and Kenneth S. Rogoff, Professor of Economics at Harvard University, Bloomberg News Op-Ed, 7/14/11)
  • The Longer Washington Democrats Wait to Address the Skyrocketing Debt, “The Bigger the Negative Impact Will Be on Growth.” “Our results support the view that, beyond a certain level, debt is a drag on growth. … The only possible conclusion is that advanced countries with high debt must act quickly and decisively to address their looming fiscal problems. The longer they wait, the bigger the negative impact will be on growth, and the harder it will be to adjust.” (Bank for International Settlements Economists Stephen G. Cecchetti, M.S. Mohanty and Fabrizio Zampolli, The Real Effects of Debt, September 2011)
  • “Credible Actions that Reduce the Rapid Growth of Federal Spending and Debt Will Raise Economic Growth and Lower the Unemployment Rate.” (Stanford University’s Hoover Institution Economists Gary S. Becker, George P. Shultz and John B. Taylor, Wall Street Journal Op-Ed, 4/4/11)
  • Skyrocketing Debt Creates “A Significant Amount of Uncertainty” In the Economy, “Has a Negative Impact on Job Creation.” “Spending and its symptoms (debt and deficit) often signal to consumers, businesses and investors that taxes are likely to go up in the future.  This prospect tends to inject a significant amount of uncertainty into the economy and weakens confidence.  … This, in turn, hurts an already sluggish economy and has a negative impact on job creation.” (Dr. Veronique de Rugy, Senior Research Fellow at the Mercatus Center, Testimony, 3/30/11)
  • “[B]usinesses, Entrepreneurs and Investors Perceive the Future Deficits as an Implicit Promise of Higher Taxes.” “[B]usinesses, entrepreneurs and investors perceive the future deficits as an implicit promise of higher taxes, higher interest rates, or both. For any employer contemplating locating in the United States or expansion of existing facilities and payrolls, rudimentary business planning reveals this to be an extremely unpalatable environment.” (Former Congressional Budget Office Director Douglas Holtz-Eakin, Testimony, 3/10/11)
  • Businesses “Don’t Know What Spending and Tax Policies to Expect in the Future, and Thus Cannot Plan Accordingly.” “Uncertainty surrounding the country’s fiscal path is eroding confidence among businesses and individuals. They don’t know what spending and tax policies to expect in the future, and thus cannot plan accordingly. If businesses and individuals do not know what spending cuts and/or tax increases they might face in the future, or even if the country might face a fiscal crisis of some form or another, they will be less willing to make longer-term investment decisions in our economy.” (Maya MacGuineas, President of the Committee for a Responsible Federal Budget, Testimony, 3/10/11)
  • A Credible Plan to Reduce the Deficit “Will Increase Economic Growth and Reduce Unemployment.” “Basic economic models in which incentives and expectations of future policy matter show that a credible plan to reduce gradually the deficit will increase economic growth and reduce unemployment by removing uncertainty and lowering the chances of large tax increases in the future.” (Stanford University’s Hoover Institution Economist John B. Taylor, Economics One Blog, 2/28/11)
  • “Countries with High Debt… Tend to Have Weak Job Growth.” “Sun Won Sohn of California State University says when the government borrows too much, it competes with the private sector for capital and interest rates go up. He says countries with high debt, like Japan, tend to have weak job growth. ‘On the other hand, if you look at countries with a low debt, they have a pretty strong economic growth and job creation — a good example being Germany,’ he says.” (NPR, 7/18/11)
  • The Economy Loses .017 Percent in Growth for Every Percent of the Public Debt-to-GDP Ratio Above 77 Percent. “The estimations establish a threshold of 77 percent public debt-to-GDP ratio. If debt is above this threshold, each additional percentage point of debt costs 0.017 percentage points of annual real growth.” (Economists Mehmet Caner, Thomas Grennes, and Friederike Köhler-Geib, Finding the Tipping Point - When Sovereign Debt Turns Bad, 5/20/10)
  • “The Problem We Face is that the Extraordinary Deficits We Created Are Likely to Restrain Economic Growth in the Future.” (Thomas F. Cooley, Professor of Economics at NYU’s Stern School of Business, Forbes Op-Ed, 6/9/10)

Today’s House vote on the debt ceiling resolution is a further indictment of Washington Democrats’ reckless spending binge that has hurt economic growth and added more than $4.5 trillion to the nation’s debt in just three years. In the words of one job creator: “The budget deficit does matter. As a country we are spending way beyond our means and there appears no political will to address the spending issues.”  Next month, President Obama has an opportunity to send a clear signal to job creators that Washington is serious about addressing the debt now – reducing the risk that American families and small businesses will be faced with job-crushing tax hikes down the road. If the president puts forth a serious, credible plan to cut spending and address the debt, Republicans stand ready to work with him on that effort.