Committee Searches for Economic 'Tipping Point'; Prefer Not to Find It

The Joint Economic Committee, the bicameral group of legislators that reports on the nation’s economic picture, asked some troubling questions in a hearing Tuesday -- what is the tipping point for the enormous debt the U.S. is carrying? And at what point do the nation's debts start to weigh down the economy so much, it turns into a long-term slump?

Witnesses testifying on Tuesday said the nation shouldn't even look for a tipping point, warning that the experiences of Greece or Italy and other heavily indebted nations show that the financial markets panic without warning.

"We know that the debt is now 100 percent -- approximately 100 percent of (gross domestic product)," said Allan Meltzer, a professor of political economy at Carnegie Mellon University in Pittsburgh. "That doesn't include the unfunded liabilities. It doesn't include (mortgage lenders)Fannie Mae and Freddie Mac. It doesn't include a number of other things."

By unfunded liabilities, Meltzer means entitlement programs. Social Security and Medicare alone have $46 trillion in unfunded liabilities, meaning that much more is promised in benefits than the government -- and taxpayers -- have as a plan to pay for them.

But some economists, and the Obama administration, argue that cutting too much spending too quickly could slow the economy even further. One witness told the committee that spending should be cut only a little now, but he also argued it must be cut a lot in the future to make up for that.

"The government would commit to lower deficits in the future, without sharply cutting the current deficit," said Laurence Ball, a professor of economics at Johns Hopkins in Baltimore. "Just as one example of how this might be done, one could imagine cost-saving measures in entitlement programs, such as a higher retirement age, that could be phased in over time. With any luck, major spending cuts would occur only after the economy has recovered from its current slump."

President Obama, in his latest plan to create jobs, dropped earlier proposals to do exactly that -- to raise the eligibility age for Medicare and to change the inflation adjustment to Social Security payments.

The president has argued it is necessary to reform the programs in order to save them, but in deference to the Democratic base, he has only proposed cuts in payments to providers such as doctors and hospitals, at least until after 2017 when he would no longer be president even if he were to win a second term.

Chris Edwards, Director of Tax Policy Studies at the Cato Institute, a libertarian think tank in Washington, argues that U.S. debt is so far out of control that it must be contained soon.

"We've had five trillion (in) deficit spending since 2008, the most enormous sort of Keynesian stimulus you can imagine, and yet we've had slower growth than any time since World War II. So I don't think spending helps."

Meltzer pointed to three "fiscal changes that really did enormous good." One was the tax cuts from the Kennedy and Johnson administrations, the most effective part of which were business tax cuts.

"They got the biggest bang for the buck," he said.

The second were the Reagan-era tax cuts which came in two rounds and boosted a flagging economy. Meltzer said a completely different option worked well too.

"(The) third policy that gave people confidence were the Clinton tax increases, which assured people that their future tax rates were not going to go up, that they had seen what they were going to have to take, and there wouldn't be anymore."

Meltzer said the increases gave people certainty about what tax rates would be, which reassured businesses they wouldn't go higher, allowing employers to plan and create jobs with confidence.

"It gives people confidence. That's what the public desperately needs at the moment," he said.

And he pointed to current conditions with this warning. "Fearing higher uncertainty about regulation and taxes, many investors hold cash and wait. Cash is their friend."

But investment and job creation is what the economy needs and the government is not in a position to be the engine. Ball, who warned about cutting spending too abruptly, said debts must be cut.

"Oh, absolutely," he said. "I think probably all three of us agree there is a tipping point and we don't know where it is, and it would be prudent not to find out."