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Washington, D.C.— Chairman Patty Murray (D-WA) and the Senate Budget Committee held a hearing with leading economists on  the effects of austerity on the economy, jobs, and long-term growth. Majority witnesses included former Treasury Secretary and NEC Director Larry Summers, now Charles Eliot Professor at Harvard University, and Simon Johnson, Ronald A Kurtz Professor of Entrepreneurship at MIT Sloan School of Management, a Senior Fellow at the Peterson Institute for International Economics. 

Senator Murray emphasized her belief that further immediate austerity measures would be the wrong approach for our country and our economy. Members and witnesses discussed the need to instead invest in short-term economic growth—in addition to laying a foundation for long-term, broad-based growth and prosperity.

Larry Summers testified that further austerity measures are not the right choice for the United States at this time: “First, it would not be desirable to undertake further measures to rapidly reduce deficits in the short run. Excessively rapid fiscal consolidation in an economy that is still constrained by lack of demand, and where space for monetary policy action is limited, risks slowing economic expansion at best and halting recovery at worst.” 

He also highlighted the importance of making targeted investments that will lay the foundation for future growth: “It is important to recognize that just as increasing debt burdens future generations, so also does a failure to repair decaying infrastructure, or to invest adequately in funding pensions, or in educating the next generation burdens future generations.”

 

Simon Johnson agreed that “a sudden move towards further tightening fiscal policy in the U.S. would undermine our economic recovery and has the potential to destabilize financial markets.  We are currently moving in a precipitate manner towards an excessive and inappropriate degree of immediate austerity” and “It is far more important to get the economy back onto a sustainable growth path.”

Key excerpts from Murray’s opening statement 

“I have long believed that the case for austerity during times of economic weakness has been fundamentally flawed. When demand falls off in the private sector and millions of workers are losing their jobs—I think the last thing government should do is make things worse by slashing spending and causing aggregate demand to drop even further.” 

“In recent weeks, however, it has been made clearer than ever that the case for short-term austerity is not just the wrong way to go—it’s flat out wrong. A very specific claim in an academic paper, cited frequently by many of my Republican colleagues on this Committee to make the case for short-term austerity—was found to be flawed. And recent changes in deficit projections have made it clear that, despite the claims of some of my colleagues—there is no short-term debt or deficit crisis. 

“We have serious long-term deficit and debt challenges that we need to tackle—we certainly don’t want to leave our children and grandchildren with an unmanageable pile of our bills. But we’ve made significant progress recently when it comes to our short and medium-term deficits. And now the focus should be on creating jobs, preserving our fragile recovery, long-term deficit reduction, and setting the conditions for economic growth built from the middle out.” 

“When the economy is struggling, government should act to make things better for the middle class and most vulnerable families by investing in jobs and economic growth that not only boosts demand in the short term, but also helps lay down a strong foundation for long-term and broad-based growth for years to come.” 

We need to focus above all else on our fragile economic recovery…the case for austerity in a time of economic weakness is simply wrong.” 

Continuing on the path to austerity right now would weaken our economy and do serious damage to job creation and growth.”

“The difference between $1.058 trillion and $967 billion may seem abstract—but we are going to continue to see the very real impact the spending cuts of sequestration are having on our veterans, our students, our seniors and our families. Not just today, not just tomorrow—but for years and years to come.” 

“Already House Republicans are recognizing the impact this approach has on our ability to maintain important national investments.  Their own budget places severe restrictions on spending levels for critical programs like our national defense, education, and health care spending – and so they are taking funding from some parts of the budget to pay for others. ‘Robbing Peter to pay Paul’ isn’t the right way to set our priorities as a nation It’s a gimmick.”

“As we will see over the next few weeks—the House Appropriations Committee is going to be highlighting the fact that even they know their budget’s levels—which are worse than sequestration—are not practical and not sustainable.”

 

Chairman Murray’s full opening statement: 

“The hearing will now come to order. 

“Before we begin, I’d like to take a moment to join my colleagues in remembering Senator Frank Lautenberg. 

“Frank was a passionate public servant who was not afraid to fight and vote for what he believed in.

“As the ranking member on this committee from 1997 to 2000, he helped negotiate the Balanced Budget Act of 1997, which produced the first balanced budget in decades. 

“He made tax relief and support for middle class families a priority—while also promoting a responsible approach to our deficit and budget challenges. 

“Frank gave everything he had to public service and those who served with him know that it gave him all the satisfaction in the world. 

“He will be missed by all those who served with him on this committee and here in the Senate. 

“I’d like to thank Ranking member Senator Sessions – and all my colleagues here for joining me today. 

“As well as the members of the public here and watching online.

“I would also like to thank our witnesses:

“Larry Summers, former Treasury Secretary under President Clinton and NEC Director under President Obama, and now Charles W. Eliot Professor at Harvard University; 

“Simon Johnson, Ronald A Kurtz Professor of Entrepreneurship at MIT Sloan School of Management, and a Senior Fellow at the Peterson Institute for International Economics; 

“And Salim Furth, Senior Policy Analyst for Macroeconomics at the Heritage Foundation. 

“I appreciate you coming and sharing your expertise.

“The topic of today’s hearing is ‘The Fiscal and Economic Effects of Austerity.’ 

“This is a subject that has received a lot of attention recently—and it is important for those of us here on the Budget Committee to understand it as we work with our colleagues across the Senate to negotiate a budget deal between the House and Senate, replace sequestration, write and pass spending bills for next year, and make sure we are making the investments we need in jobs and long-term economic growth. 

“I have long believed that the case for austerity during times of economic weakness has been fundamentally flawed. 

“When demand falls off in the private sector and millions of workers are losing their jobs—I think the last thing government should do is make things worse by slashing spending and causing aggregate demand to drop even further.  

“When the economy is struggling, government should act to make things better for the middle class and most vulnerable families by investing in jobs and economic growth that not only boosts demand in the short term, but also helps lay down a strong foundation for long-term and broad-based growth for years to come. 

“That was the theory behind the Senate Budget we passed that put jobs and the economy first.

“It’s one shared by the vast majority of economists across the political spectrum.

“And it’s one of the many reasons I believe the House Budget is wrong for our country and our economy. 

“In recent weeks, however, it has been made clearer than ever that the case for short-term austerity is not just the wrong way to go—it’s flat out wrong. 

“A very specific claim in an academic paper, cited frequently by many of my Republican colleagues on this Committee to make the case for short-term austerity—was found to be flawed. 

“And recent changes in deficit projections have made it clear that, despite the claims of some of my colleagues—there is no short-term debt or deficit crisis.

“We have serious long-term deficit and debt challenges that we need to tackle—we certainly don’t want to leave our children and grandchildren with an unmanageable pile of our bills. 

“But we’ve made significant progress recently when it comes to our short and medium-term deficits. 

“And now the focus should be on creating jobs, preserving our fragile recovery, long-term deficit reduction, and setting the conditions for economic growth built from the middle out. 

“Since the Simpson-Bowles Commission’s report in 2010, we have worked to reduce the deficit by $2.4 trillion, disproportionately through spending cuts.  

“And, to be clear, that $2.4 trillion is the amount of deficit reduction before counting the $1.2 trillion in savings that will come from either sequestration, or – as proposed and passed by this Committee and the Senate in March – an alternative approach that replaces the damaging automatic cuts with a responsible and balanced mix of spending cuts and new revenue.      

“A few weeks ago, the Congressional Budget Office released its latest baseline which gave us an updated view on our debt and deficits. 

“These revisions show that we’ve made even more progress on reducing our short and medium-term deficits than we had thought. 

“CBO now estimates that the deficit for 2013 will be over $200 billion less than its February projection. 

“This means that in the two years from 2011 to 2013, CBO expects the deficit will have been cut in half.

“This is welcome news.

“And again, it makes it clearer than ever that now we need to focus above all else on our fragile economic recovery—and that the case for austerity in a time of economic weakness is simply wrong.

“History has shown us that austerity isn’t the right way to boost economic growth in the short term – especially during times when the economy is still recovering, as it is right now.

“Our experience as a country following the Great Depression in the 1930s showed us how turning to austerity too quickly can have serious consequences for economic recovery after a time of crisis.

“And, Europe’s recent adoption of austerity policies has yielded similarly negative results—countries across Europe have experienced economic downturns that have been exacerbated or prolonged by austerity policies. 

“Right now, we’re seeing how the indiscriminate and irresponsible cuts from sequestration are hurting the economy. 

“When I was back home in Washington state last week, I heard story after story about the impact they are having on families and communities. 

“I recently met with Elliott Greg in Kitsap County who runs the Kitsap Credit Union.  Elliot’s credit union has been part of that community for decades – and it’s grown with the thousands of Navy families who call Kitsap County home. 

“Even though sequestration has just been in effect for a few months– he’s already seeing dramatic impacts. 

“Families hoping to buy their first home or purchase a car are telling him with furloughs and layoffs looming – they can’t take out loans that they might not be able to pay back. 

“They don’t understand why Congress would continue along the path of deep and indiscriminate cuts—and frankly, I don’t either. 

“During this time when our economic recovery is real, but remains fragile, experts agree that we should be instead investing in job creation and economic growth.

“And continuing on the path to austerity right now would weaken our economy and do serious damage to job creation and growth. 

“Not only is austerity bad for short-term economic growth—but it also hurts our ability to lay down a foundation for long-term, broad-based growth and prosperity. 

“As a country, we must continue to invest in the programs we need to compete globally in the 21st century economy—the kinds of investments that make our country stronger. 

“In fact, the bipartisan Simpson-Bowles commission highlighted the importance of ‘investing in education, infrastructure, and high-value research and development to help our economy grow, keep us globally competitive, and make it easier for businesses to create jobs.’ 

“Investing in infrastructure like roads and bridges creates jobs today, but it also makes our families safer and lays down a strong foundation for long-term growth.

“I saw this first-hand in my home state last week where on Friday morning I saw the devastation caused when an entire section of Interstate Five collapsed into the Skagit River.  

“This is the kind of disaster we can expect when our roads and bridges have outdated designs or fall into disrepair.    

“And it should certainly be a wake-up call that we need to invest in repairing our crumbling roads, bridges, and highways. 

“Thankfully no one was seriously injured, and work is beginning on a temporary and long-term repair, but the local economy and the livelihoods of families are seriously disrupted without this critical artery being open for travel.  

“By strengthening our transportation systems, we are helping to connect people across town and across the country—and this will create a more productive environment for American businesses to grow over the long term.

“The same is true for our investments in our people and our schools.

“Investments in education, through programs like Pell grants and worker training, are some of the smartest the federal government can make to boost our economy in the long term. 

“If our businesses are going to be creating 21st century jobs – we need our students and workers to have 21st century skills. 

“And in order to maintain our edge in innovation, we also need to keep investing in our research and development. 

“These types of investments have led to private sector growth – and they’ve led to new industries, new drugs, new inventions and new jobs. 

“If we fail to maintain these important investments, we could lose our position as the global leader in research and technology. 

“But taking the path of austerity would cut these national investments in infrastructure, education, and research that help ensure that we leave our children a stronger country than the one we received.

“And it would weaken our economy in the short and the long term. 

“This debate can sometime seem academic—but it has very real implications on policy decisions we make here in Congress.

“I am extremely frustrated that some Republicans here in the Senate are blocking us from moving to a bipartisan budget conference where we could work together to move away from the constant lurching from crisis to crisis, and get back to the regular order my Republican colleagues have claimed they wanted.

“But even though we don’t yet have a budget agreement, over the next few weeks, the Appropriations Committees will begin making some key decisions about our discretionary spending for fiscal year 2014 – and they will face this choice between a path of austerity or an approach that maintains critical investments in our families and communities.

“Senate Democrats believe that the path of austerity that long-term cuts from sequestration lead toward isn’t the right direction for our country. 

“That’s why we are going to continue to work to replace sequestration with a balanced mix of responsible spending cuts and revenue from those who can afford it most. 

“And that’s why the Senate Appropriations Committee, led by Chairwoman Mikulski, will maintain a $1.058 trillion cap during this process – the amount of discretionary spending we agreed upon in the bipartisan Budget Control Act.

“House Republicans, on the other hand, will be writing their spending bills at the overall level that assumes sequestration will continue – $967 billion.

“And, to be clear—House Republicans aren’t keeping to the bipartisan Budget Control Act—they are violating it by shifting funds from nondefense programs in order to keep defense spending at pre-sequestration levels.

“We all know that sequestration was never intended to be implemented—so we should be focused on replacing it, not trying to make an unworkable policy just a bit less bad.

“The difference between $1.058 trillion and $967 billion may seem abstract—but we are going to continue to see the very real impact the spending cuts of sequestration are having on our veterans, our students, our seniors and our families. 

“Not just today, not just tomorrow—but for years and years to come. 

“Already House Republicans are recognizing the impact this approach has on our ability to maintain important national investments.

“Their own budget places severe restrictions on spending levels for critical programs like our national defense, education, and health care spending – and so they are taking funding from some parts of the budget to pay for others.

“‘Robbing Peter to pay Paul’ isn’t the right way to set our priorities as a nation

“It’s a gimmick. 

“And, as we will see over the next few weeks—the House Appropriations Committee is going to be highlighting the fact that even they know their budget’s levels—which are worse than sequestration—are not practical and not sustainable.

“My colleague, the Republican chair of the House Appropriations Committee, even said ‘this is clearly an austere budget year.’ 

“He didn’t mean that in a good way. 

“As we continue the appropriations process, I hope we can all keep in mind a clear vision for what will create economic success and broad-based prosperity in the short term and over the long term. 

“So I am glad that we are having this timely discussion today.

“We owe it to the American people to come together around a responsible vision for building a foundation for growth and restoring the promise of American opportunity.

“I look forward to hearing more from our witnesses about this important subject in just a few minutes. 

“But first, I will turn it over to our ranking member, Senator Sessions, for his opening statement.”

Archived Webcast

Witness Statement