FEDERAL SPENDING AND THE RECOVERY: A Statement by Directors, Trustees and Fellows of Economists for Peace and Security, (www.epsusa.org ) February 28, 2011.
The budget adopted by the House of Representatives on February 19, 2011 does not make economic sense and is likely to do more harm than good. First, the rationale for the measure is based on a false premise. Secondly, the budget cuts being proposed will impede and may end the recovery. If the recovery fails, unemployment will increase and the financial crisis could re-emerge.
The premise that the US government is broke is false. The US government has never defaulted and will not default on any of its financial obligations. Deficit spending is normal for a great industrial nation with a managed currency, and it has been our normal economic condition throughout the past century. History proves, and sensible economic theory confirms, that in recessions, increased federal spending – not balancing the budget – is the tried and true way to return to a path of sustained growth and high employment.
Eliminating waste in government spending is desirable. But that is not what the House proposes; indeed the House budget failed to address the largest waste in federal government, namely in the military, and the House failed to remove our most egregious subsidies, such as to oil companies. To adopt a policy of deep budget cuts at this stage of recovery is to surrender to irrational fears in the service of a political, not an economic, agenda.
As economists, as citizens, and as long-time critics of waste in government, we call on the Senate to reject the House proposal and to craft an alternative that places first priority on sustaining economic recovery and on dealing with the country's true economic and social problems, which include unemployment, home foreclosures, the fiscal crisis of states and cities, our infrastructure needs, energy security and climate change.
Clark Abt, Brandeis University and Cambridge College
Kenneth Arrow, Stanford University, Nobel Laureate
Marshall Auerback, Madison Street Partners
Barbara Bergmann, American University and University of Maryland
Linda Bilmes, Harvard University
Stanley Black, University of North Carolina
Alan S. Blinder, Princeton University
Andrew F. Brimmer, Brimmer & Co.
Kate Cell, Principal, Kate Cell Consulting
Lloyd Jeff Dumas, The University of Texas at Arlington
Gary Dymski, University of California, Riverside
James K. Galbraith, The University of Texas at Austin
David Gold, The New School
Robert J. Gordon, Northwestern University
Michael Intriligator, UCLA
Richard F. Kaufman, Bethesda Research Institute
Ann Markusen, University of Minnesota
Richard Parker, Harvard University
Dimitri B. Papadimitriou, The Levy Institute of Bard College
Gustav Ranis, Yale University
Lucy Law Webster, Center for War/Peace Studies, New York
The above statement was appended to co-signer James Galbraith's testimony before the Senate Finance Committee 3/8/11. During his testimony, Galbraith also made these statements:
...The realized budget deficit is an economic outcome, not a policy choice. So long as the economy faces high unemployment, there is no fiscal formula – no combination of tax increases and spending cuts – that can make it go away.
One can reduce projected deficits – for future years – by raising future tax rates or cutting programmed spending for those years. But this is an artificial and unreliable exercise. The actual realized deficits in the future will depend on economic performance at that time, and it is economic performance that actually matters, not the deficit or the public debt. Thus tax reform – and spending policy as well, in my view – should properly focus on economic performance and not on deficits.
The Tax Reform Act [of 1986] saved the income tax. But in retrospect it had at least two problematic effects. The first effect – and here I speak broadly of the movement toward lower top marginal tax rates from 1978 through 1986 – was on corporate executive pay. It is probably not accidental that the years after lower marginal income tax rates took hold – along with lower rates on capital gains – saw the CEO pay explosion.
Why? In part, because lower marginal rates reduced the cost to companies of raising post-tax executive pay (just as the high marginal rates had deterred big pay packages in the first place). The new rules made it irresistible for those who controlled CEO pay to reward themselves in this way. Crudely put, companies quit building skyscrapers and their chiefs built themselves mansions instead. Many ills of American corporate governance can be traced to this new age of executive self-dealing.
Video of the Senate testimony and the transcripts of the economists' testimony can be found here.