Columbia University Professor Sachs Testifies Before Senate Budget Committee
Chairman Enzi, Ranking Member Sanders and members of the Committee, thank you for the very high honor and opportunity to testify today to the
In this brief testimony, I will argue that the continued reliance by both parties on tax cuts to spur private-sector growth is doomed to fail. A sound long-term budget strategy should be built on increased public outlays funded by increased tax revenues as a share of GDP, with budget deficits low enough to ensure a steadily diminishing ratio of the public debt to GDP. Of all of the FY2018 budget proposals before the
To explain my reasoning, it is useful to start by summarizing briefly America's ongoing economic crisis:
(1) Stagnant or falling earnings of working-class Americans, defined here as workers with less than a Bachelor's (BA) degree;ii
(2) Worsening health conditions for working class white, non-Hispanic, middleaged Americans;iii
(3) Sharply higher Income inequality between rich and poor Americans; iv
(4) The richest 1% of American households earning far more than the poorest 50% of households;v
(5) Sharply falling life satisfaction of Americans in contrast with the trends of other high-income countries.vi
Our nation's budget strategy should aim to end these highly adverse and
unprecedented trends. The solution requires increased public outlays for higher education, job training, income support for low-income workers, research and development, infrastructure, and other public goods.
The Mainstream Republican Party Strategy
I would characterize the mainstream
(1) Tax cuts, whether financed by cuts in government spending or increased budget deficits, will raise the net-of-tax return to investment and thereby raise the investment rate of private business;
(2) Some of these tax cuts should aim to spur private investments in infrastructure, for example toll roads and oil and gas pipelines;
(3) Environmental and financial deregulation will accelerate the flow of private investments;
(4) Higher private investment will raise economic growth;
(5) High economic growth will boost job creation;
(6) Higher job creation will raise wages and working-class incomes;
(7) Higher working-class incomes will raise the wellbeing of working-class Americans.
The Democratic Party Strategy
The mainstream Democratic Party strategy of recent years has also repeatedly espoused tax cuts and infrastructure spending. There are also, of course, key differences between the two parties. I would characterize the mainstream
Democratic Party budget prescriptions as follows:
(1) Tax cuts should be directed towards the middle-class and the working-class (for example through an expanded Earned Income Tax Credit) rather than towards corporations and high-income households;
(2) Corporate tax reform should aim at closing loopholes rather than cutting rates;
(3) Infrastructure spending should be financed by government outlays rather than private investments spurred by tax credits;
(4) Tax cuts should aim at "demand stimulus," especially increased consumption spending by working-class and middle-class;
(5) Government programs, especially safety-net programs, should not be cut to offset tax cuts.
Both Parties Have Been Too Lax on Budget Deficits Both parties have been short-sighted regarding budget deficits and the public debt. Larger deficits in the present require higher taxes or lower government spending in the future to service the build-up of public debts.
The current trajectory of public debt is frightening. The CBO projects the average budget deficit during the coming decade on current budget policies to be around 4 percent of GDP. On a business-as-usual scenario, according to the CBO, the debt-GDP ratio would reach around 150 percent of GDP in three decades (2047). vii.
The consequences, including large tax hikes and deep spending cuts, would likely prove devastating for American society, and especially for today's young people who would bear the heaviest burden of the future fiscal retrenchment. The
Many
Both Parties are Mistaken on the "Automatic" Linkage of Growth and Jobs Both parties have assumed that faster economic growth will almost automatically translate into more jobs, higher wages, and improved household incomes. Yet the linkage of growth and decent jobs is not as strong as widely believed and less strong than in the past. A considerable amount of current investment spending is on labor-saving machinery such as robots and artificial intelligence (AI) systems.
Such investments raise the US national income but also decrease the demand for lower-skilled workers and shift the national income even more towards capital owners. Recent growth has thereby been associated, somewhat counterintuitively, with a widening of income inequality and an absolute decline in the earnings of less-educated workers.
Consider a simple numerical illustration to elaborate the point. Suppose that annual GDP is
Initially, the
Now, suppose that economic growth accelerates the shift into high-productivity technologies such as robotics and AI. The GDP rises to
The economic pie is larger, though the slice going to the working class - constituting two-thirds of all workers - has gone down. Should we stop economic growth? Should we smash the machines? Hardly. In order to ensure that economic growth indeed raises all boats, we should ensure that the "winners" compensate the "losers" in the economy.
Suppose, for example, that the 50 million college graduates are levied an incremental
Both parties routinely confuse the creation of "jobs" with the creation of decent jobs. Many of the millions of jobs created in recent years have not been decent jobs in the sense that they do not provide the conditions for a dignified and secure life out of poverty. This is especially true for most of the new jobs occupied by less-educated workers, notably workers who lack a bachelor's degree or higher.
The market demand for less-educated workers is already low and still declining as the result of rapid advances in robotics and artificial intelligence. Yes, millions of new service-sector jobs have been created for less-educated workers, but these jobs have been at very low wages, with high job insecurity and few if any nonwage benefits. The low earnings cannot cover the costs of health care, college tuitions for children, leisure time for the family, maternity and paternity leave, quality child care, and pre-K (except government funded). In communities dominated by less-educated workers, the local property and sales taxes are not enough to maintain decent local infrastructure, such as safe, lead-free drinking water, storm protection, clean-up of toxic sites, and a decent quality of local education.
There are two key ways to foster decent jobs. The first is to provide more students with the opportunity to complete a college education free of crippling student debt. The second is to provide government supplements to market earnings, either through direct transfer payments, refundable tax credits (such as the Earned Income Tax Credit, or EITC), and the public funding of essential needs such as health care coverage and college tuition costs.
Such government policies would of course require more, not less, government spending and revenues. Yet for the
The
The
The
A Growth Strategy to Achieve Decent Jobs for All
The economy today is creating jobs but not decent jobs. A true growth strategy to create decent jobs should include the following policies:
(1) A long-term rise in the proportion of individuals completing a college degree through increased public outlays to cover tuition costs.
(2) A long-term rise of public infrastructure spending financed by an increase in tax revenues (e.g. through a new carbon tax) as well as a new class of public infrastructure bonds backed by future user fees and general revenues; increased public outlays to ensure that new jobs are also "decent jobs,"especially for less-educated workers.
(3) For less-educated and lower-earning workers, public outlays to ensure adequate take-home pay (e.g. through an expanded EITC); access to quality healthcare, education, childcare, and pre-K; leave time for vacations, maternity, paternity, and illness; and a safe physical environment at work and in the community.
(4) Policies to speed the transformation to a low-carbon economy, also thereby creating millions of new jobs in green tech.
(5) Transition to a single-payer health system (such as Medicare for All), paid by increased government outlays that are more than offset by the elimination of payments for private health insurance;
(6) Higher government revenues to pay for the above measures, with total federal tax revenues rising gradually from around 18 percent of GDP to around 23-25 percent of GDP over the coming decade (2018-2028).
(7) Tax reforms to include an end of corporate loopholes, higher marginal tax rates on high-income earners; a new carbon tax, and a wealth tax on very high net worth (e.g. 1 percent per year on net worth above
(8) Reductions in effective corporate tax rates (e.g. expensing of new equityfunded investment) only as part of an overall increase in federal revenues.
Budget Policy for the Long Term Senators, in conclusion, please let me emphasize the importance of a federal budget framework that looks forward to the kind of America we want in 2030 and beyond. In our current politics, we sometimes feel lucky to think ahead a week, month, or year. Yet to build a stronger and sustainable future for our country, we need to retrain ourselves to think ahead for a generation and more. We need to contemplate the dynamics of technology, demography, global warming, public debt, and other long-term trends, if we are to get our policies right. We need to stop drafting legislation by lobbyists, and begin again to draft legislation based on long-term needs and the best knowledge of scientists, engineers, and public managers. Most importantly, we need to plan ahead in an honest, transparent, and deliberative manner.
In my recent book, Building the New American Economy: Smart, Fair, and Sustainable, I urge America to adopt clear and bold
i See "The People's Budget: A Roadmap for the Resistance,"
ii
iii
iv Thomas Piketty Emmanuel Saez Gabriel Zucman, "Distributional National Accounts: Methods and Estimates for
v Thomas Piketty Emmanuel Saez Gabriel Zucman, op. cit.
vi
vii CBO, The 2017 Long-Term Budget Outlook,
viii
Evidence from Capitalized Income Tax Data,"
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