I was invited to testify at a hearing of the House budget committee on Sept 14. It's nothing novel or revolutionary , but a chance to put my thoughts together on how to get growth going again , and policy approaches that get past the usual partisan squabbling. Here are my oral remarks. (pdf version here.) The written testimony , with lots of explanation and footnotes , is here. (pdf) (Getting footnotes in html is a pain.)
Chairman Price , Ranking Member Van Hollen , and members of the committee: It is an honor to speak to you today.
Sclerotic growth is our country’s most fundamental economic problem. If we could get back to the three and half percent postwar average , we would , in the next 30 years , triple rather than double the size of the economy—and tax revenues , which would do wonders for our debt problem.
Why has growth halved? The most plausible answer is simple and sensible: Our legal and regulatory system is slowly strangling the golden goose of growth.
How do we fix it? Our national political and economic debate just makes the same points again , louder , and going nowhere. Instead , let us look together for novel and effective policies that can appeal to all sides.
Regulation:
Let’s get past “too much” or “too little” regulation , and fix regulation instead.
Regulation is too discretionary – people can’t read the rules and know what to do. Regulatory decisions take forever. Regulation has lost rule-of-law protections. Agencies are cop , prosecutor , judge , jury and executioner all rolled in to one. Most dangerous of all , regulation is becoming more politicized.
Congress can fix this.
Social programs
Let’s get past spending “more” or “less” on social programs , and fix them instead.
Often , if you earn an extra dollar , you lose more than a dollar of benefits. No wonder people get stuck. If we fix these disincentives , we will help people better , encourage growth and opportunity--and in the end we will spend less.
Spend more to spend less.
Spending is a serious problem. But moving spending off the books does not help.
For example , we allow a mortgage interest tax deduction. This is exactly the same as collecting taxes , and sending checks to homeowners – but larger checks for high income people , people who borrow a lot , and people who refinance often.
Suppose we eliminate the mortgage deduction , and put housing subsidies on budget. The resulting homeowner subsidy would surely be a lot smaller , help lower-income people a lot more , and be better targeted at getting people in houses.
The budget would look bigger. But we would really spend less -- and grow more.
Taxes
Tax reform fails because arguments over the level of taxes , subsidies , or redistribution torpedo sensible simplifications. We could achieve tax reform by separating its four confounding issues.
First , determine the structure of taxes , to raise revenue with minimal economic damages , but leave the rates blank. Separately negotiate the rates. Put all tax incentives in a separate subsidy code , preferably as visible on-budget expenditures. Add a separate income-redistribution code. Then necessary big fights over each element need not derail the others.
A massive simplification of the tax code is , I think , more important than the rates – and easier for us to agree on.
Debt and deficits
Each year the CBO correctly declares our long-term debt unsustainable. Yelling louder won’t work.
First , let’s face the big problem: a debt crisis , when the U.S. suddenly needs to borrow a lot and roll over debts , and markets refuse. This , not a slow predictable rise in interest rates and crowding out , strikes me as the biggest problem. Crises are always sudden and unexpected , like earthquakes and wars. Even Greece could borrow at remarkably low rates. Until , one day , it couldn’t.
The answers are straightforward. Sensible reforms to Social Security and Medicare are on the table. Address underfunded pensions , widespread credit and bailout guarantees.
Buy some insurance. Like every homeowner shopping for a mortgage , the US chooses between a floating rate , lower initially , and a fixed rate , higher initially , but forever insulating the budget from interest rate risks , which are the essential ingredient of a debt crisis. Direct the Treasury and Fed to buy the fixed rate.
Above all , undertake this simple , pro-growth economic policy , and grow out of debt.
Concluding comments
You may object that fundamental reform is not “politically feasible.” Well , what’s “politically feasible” changes fast these days.
Winston Churchill once said that Americans can be trusted to do the right thing , after we’ve tried everything else. Well , we’ve tried everything else. It’s time to do the right thing.