Promoting Fiscal Discipline and Broad-Based Economic Growth

Mr. Chairman and members of the committee, thank you for the opportunity to appear before you today. To summarize my testimony, we are neither paying our way nor investing sufficiently in our workers. The nation’s low saving rate and the combination of real income stagnation and increased income risk for most families represent the most pressing economic problems facing the country:

• The low saving rate, which is closely tied to the Federal budget deficit, generates massive borrowing from abroad and mortgages the future incomes of Americans.
• Stagnant income and increased income risks for middle- and low-income families threaten a backlash that could significantly reduce growth.

The 2001 and 2003 tax cuts substantially exacerbate both problems. The tax cuts increase government borrowing and reduce national saving. In addition, they widen income inequality and will ultimately reduce incomes for most middle- and low-income families, while diminishing the effectiveness of the tax system in cushioning fluctuations in after-tax income.

Proponents of the tax cuts argue that these costs are worth bearing because the tax cuts generate economic growth. The tax cuts, however, have had at best a modest positive effect on short-term economic growth-and any such positive effect could have been accomplished at lower cost through other means. Furthermore, the tax cuts will likely reduce economic growth over the long run. The tax cuts thus increase government debt, reduce national saving, increase income volatility, reduce incomes for most families in the long run, and impair long-term economic growth.

A much better approach to promoting economic growth involves increasing national saving and making investments in education, research, and economic security. This approach is likely to be both more effective at generating growth and more likely to result in broad-based participation in that growth. It is the basis of a new project, The Hamilton Project, at Brookings.