WASHINGTON (CN) – The U.S. national debt would have been higher without the stimulus, and the “collapse in tax revenues” during the economic calamity is a critical factor in the huge debt, experts told senators Tuesday, as Republicans backed away from their criticism of the recovery program, saying there is no way to tell whether it worked.
“I do think that absent the stimulus, [the national debt] would have been worse,” University of Maryland Economics Professor Carmen Reinhart said.
“The main cause of debt explosions is not the widely cited costs of bailing out the banking system. Nor is it the fiscal stimulus,” Reinhart told the Senate Budget Committee. “The critical factor is the collapse in tax revenues in the wake of deep and prolonged economic contraction.”
She explained to the few senators who made it to the hearing despite a heavy snow storm that the stimulus efforts maintained some tax revenue by supporting businesses and saving jobs.
Massachusetts Institute of Technology Professor Simon Johnson, who characterized himself as an opponent of most government stimulus efforts, said he would give the Recovery Act “a very positive assessment,” noting the unique gravity of the recent recession. “I think it saved jobs and I think it prevented damage.”
Republicans had been critical of the $787 Recovery Act, painting it as expensive and wasteful. But Alabama Republican Jeff Sessions seemed to reflect a change in his party. “I frankly don’t know how our actions worked after the financial collapse,” he said, calling the injection of funds “troubling” instead of outright wrong.
The hearing comes after January saw a drop in unemployment from 10 to 9.7 percent. It also comes after a 5.7 percent average annual economic growth during the fourth quarter of 2009.
The panel agreed that the government should not take immediate steps to reduce the debt, but should instead put together a credible long-term plan to assure investors that the debt is not on an explosive path.
“We cannot have fiscal austerity now,” Johnson said, referring to when a government reduces its spending. And Reinhart discouraged the government from raising taxes too soon. “Higher taxes have a deleterious effect on growth,” she said.
Last week the White House rolled out its fiscal year 2011 budget proposal, predicting a $1.3 trillion deficit. This will contribute to the roughly $12 trillion gross national debt, which is expected to swell to more than $21 trillion by 2020.
But even if the debt has been slightly restrained by the stimulus, experts agreed that it still poses a significant problem. Donald Marron, a professor at the Georgetown Public Policy Institute, said the public debt will grow faster than the nation can pay it, even if it has a decent recovery.
Gross debt, which currently sits at just less than 90 percent of the economy, counts all of the debt owed by federal government. Publicly held debt, which is at roughly 60 percent of the economy, is the debt owed to the public, and leaves out what the government owes to trust funds like Medicare and Social Security.
Reinhart said a 90 percent gross debt-to-economy ratio marks a threshold, above which economic growth is slowed by 1 percent a year.
The United States now faces the lowest revenue as a share of the economy in the last 60 years, as well as the highest spending as a share of revenue in the last 60 years.
“You cannot leave any stone unturned,” Reinhart said in urging the government to reform both spending and revenue when it tackles the problem.
Johnson and Marron said the government should reform the tax system to promote good and discourage bad. Johnson proposed taxes on pollution and more tolls to combat traffic while recouping money. He also proposed more lenient taxes on savings accounts and income.
In a phone interview last week, Research Director of the Committee for Economic Development Joseph Minarik said that with a near 80 percent publicly held national debt – like the one predicted for the end of the decade – the United States would have to spend about 4 percent of its gross domestic product just to service the debt.
And with revenue at roughly 18 percent of the economy, a quarter to a fifth of government revenue “would be soaked up simply servicing the debt,” he said.
Sessions noted that the United States spent $170 billion interest this year on debt.
Democrats, meanwhile, used the bleak outlook to promote health care.
Rhode Island Democrat Sheldon Whitehouse said that cutting duplications and other inefficiencies in Medicare could save between $700 billion and $1 trillion a year. “I believe that significant savings can be achieved that way,” he said.
Some Republicans have called for the privatization of Social Security and significant restructuring of Medicaid.
North Dakota Chair Kent Conrad blamed the media for not focusing on health reform’s role in reducing debt. “Instead, it’s death panels and things that don’t even exist that get the attention.”
In any case, Reinhart warned, “We never know when the wolf will be at our door.”