The way forward from government shutdown and debt ceiling confrontation

Chairman Brady, Vice Chair Klobuchar, and Members of the Committee, thank you for inviting me here today to discuss possible solutions to the government shutdown and debt ceiling debate and ways to move our country forward in a fiscally-sustainable way.

We meet today in the midst of a historic government shutdown, with the government’s debt limit rapidly approaching. In a recent article, my colleague Abby McCloskey and I reviewed the history of debt limit increases and concluded that debt limit struggles have been quite common in recent U.S. history, and have lead more often than not to legislation that ties increases in the debt limit to specific factors. While a full accounting of the costs and benefits of these prior actions would require estimates of the long run impact of the policies that were enabled by debt limit actions, there is little dispute in the economics literature that struggles like that of 2011 increase economic policy uncertainty, and this heightened uncertainty has negative economic consequences. A recent path-breaking paper by Baker, Bloom, and Davis1, shows these effects clearly. The authors compile a unique index of policy uncertainty, which draws on news coverage of uncertainty in policy decisions, the number of federal-tax-code provisions set to expire, and the disagreement among forecasters about economic variables one year in the future. They use this index to estimate the impact of policy uncertainty on the economy, finding massive negative effects; their results imply that a 112-point rise in their policy-uncertainty index - which occurred between 2006 and 2011 - would reduce real GDP by 3.2 percent and employment by 2.3 million jobs. The chart below shows the large spike in uncertainty that occurred during the debt-ceiling debate in 2011. It should not be in dispute that we can do better.

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Kevin A.
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State income taxes and the Supreme Court: Maryland Comptroller v. Wynne

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Tuesday, October 28, 2014 | 9:30 a.m. – 12:15 p.m.
For richer, for poorer: How family structures economic success in America

Join Lerman, Wilcox, and a group of distinguished scholars and commentators for the release of Lerman and Wilcox’s report, which examines the relationships among and policy implications of marriage, family structure, and economic success in America.

Tuesday, October 28, 2014 | 5:30 p.m. – 7:00 p.m.
The 7 deadly virtues: 18 conservative writers on why the virtuous life is funny as hell

Please join AEI for a book forum moderated by Last and featuring five of these leading conservative voices. By the time the forum is over, attendees may be on their way to discovering an entirely different — and better — moral universe.

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A nuclear deal with Iran? Weighing the possibilities

Join us, as experts discuss their predictions for whether the United States will strike a nuclear deal with Iran ahead of the November 24 deadline, and the repercussions of the possible outcomes.

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The forgotten depression — 1921: The crash that cured itself

Please join Author James Grant and AEI senior economists for a discussion about Grant's book, "The Forgotten Depression: 1921: The Crash That Cured Itself" (Simon & Schuster, 2014).

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