While not Greece, US faces own costs of large deficits, Baker Institute experts say

EXPERT ALERT

David Ruth
713-348-6327
david@rice.edu

Jeff Falk
713-348-6775
jfalk@rice.edu  

While not Greece, US faces own costs of large deficits, Baker Institute experts say

HOUSTON – (July 27, 2015) – While Greece and the United States face drastically different economic scenarios, the U.S. is experiencing — and will continue to experience — one of the fundamental economic costs of relatively large and persistent deficits, according to an issue brief from Rice University’s Baker Institute for Public Policy.

Credit: thinkstockphotos.com/Rice University

“Fiscal Imbalance in the United States: Where Do We Stand?” was authored by two experts in the Baker Institute’s Tax and Expenditure Program: John Diamond, the Edward A. and Hermena Hancock Kelly Fellow in Public Finance and an adjunct professor of economics at Rice, and George Zodrow, the Allyn R. and Gladys M. Cline Chair of Economics at Rice and a scholar at the institute. Both are available to discuss their insights with the media.

At face value, the differences between the two countries’ economic realities are stark. The U.S. is the world’s largest economy and can absorb large economic shocks much more easily than Greece, the authors said. In addition, the U.S. dollar is currently the world’s reserve currency and thus is perceived as a safe store of value in times of economic distress abroad. The U.S. also benefits from having its own currency because it can use monetary policy to offset economic downturns and to pay off debt if needed.

“However, the cost of servicing an increasing debt requires a reduction in other government spending to avoid increases in deficit spending,” the authors said. For example, under the Congressional Budget Office’s alternative fiscal scenario (based largely on current policy), the national debt is projected to reach 175 percent of the gross domestic product by 2040. “This cost can be reined in only with systematic tax and expenditure policy reforms that will put the United States back on a sustainable fiscal path.”

The authors said it is important to examine how fiscal policy changes affect the growth rate of the economy — often referred to as dynamic analysis of fiscal policy. “The use of dynamic analysis is growing in importance and, if used properly, could facilitate the adoption of policies that will increase economic growth and improve U.S. fiscal sustainability,” they said.

Diamond will testify before the U.S. Joint Economic Committee on the impact of dynamic scoring at 2 p.m. EDT July 28 in Room 216 of the Hart Senate Office Building, Washington, D.C. For more information about the hearing, see https://news2.rice.edu/2015/07/24/rice-u-economics-expert-to-testify-before-congress-july-28.

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For more information or to schedule an interview with Diamond or Zodrow, contact Jeff Falk, associate director of national media relations at Rice, at jfalk@rice.edu or 713-348-6775.

Related materials:

Issue brief: http://bakerinstitute.org/media/files/files/6fece99e/BI-Brief-072315-TEPP_Imbalance.pdf

Diamond bio: http://bakerinstitute.org/experts/john-w-diamond

Zodrow bio: http://bakerinstitute.org/experts/george-zodrow

Follow Rice News and Media Relations via Twitter @RiceUNews.

Founded in 1993, Rice University’s Baker Institute ranks among the top 10 university-affiliated think tanks in the world. As a premier nonpartisan think tank, the institute conducts research on domestic and foreign policy issues with the goal of bridging the gap between the theory and practice of public policy. The institute’s strong track record of achievement reflects the work of its endowed fellows, Rice University faculty scholars and staff, coupled with its outreach to the Rice student body through fellow-taught classes — including a public policy course — and student leadership and internship programs. Learn more about the institute at www.bakerinstitute.org or on the institute’s blog, http://blogs.chron.com/bakerblog.