House Speaker John Boehner, giving Wall Street leaders his prescriptions for growing the U.S. economy and reducing the nation’s debt, built his case on several assertions that are contradicted by market indicators and government reports.
Boehner said in his May 9 speech to the Economic Club of New York that government borrowing was crowding out private investment, the 2009 economic-stimulus package hurt job creation, and a Republican plan to privatize Medicare will give future recipients the “same kinds of options” lawmakers have.
With Democrats and Republicans sparring over legislation to extend the government’s $14.29 trillion debt limit and trim budget deficits, negotiations are being complicated by disputes over basic economic facts.
“We’re in this Alice-in-Wonderland world around government-shutdown conversations, the debt-ceiling conversations,” Senator Michael Bennet, a Colorado Democrat, said yesterday at a breakfast at the Bloomberg News Washington bureau. The debate “has not established a shared understanding of the facts” about the nation’s economic problems, he said.
Boehner’s spokesman, Michael Steel, rejected the premise that the speaker’s economic analysis was incorrect, saying in an e-mail that “reality” doesn’t support the criticism.
Boehner’s statement in his Wall Street speech that government spending “is crowding out private investment and threatening the availability of capital” runs counter to the behavior of credit markets.
“Look at interest rates. Look at capital spending,” said Nariman Behravesh, chief economist of IHS Inc., a research firm based in Englewood, Colorado. “It’s very hard to come to a conclusion that there’s any kind of crowding out.”
The cost of borrowing is low by historical standards. Yields on 10-year Treasury notes were 3.21 percent and yields on 2-year Treasury notes were 0.59 percent at 5 p.m. in New York yesterday, according to Bloomberg Data. Average spreads on investment-grade corporate bonds have narrowed from 1.64 a year ago to 1.39 on May 9, according to Barclays Capital.
The TED spread, the difference between what banks and the U.S. government pay to borrow for three months, fell 2.2 basis points since May 9, the biggest drop since April 5. A narrowing spread means banks are more willing to lend. The 23.87-point spread is just below the two-year average.
Business investment in equipment and software was up 15.3 percent last year and 11.6 percent at an annual rate in the first quarter of this year, according to the U.S. Commerce Department.
Backed by Greenspan
Still, some economists, including former Federal Reserve Board Chairman Alan Greenspan and Stanford University Professor John B. Taylor, a Treasury undersecretary in Republican President George W. Bush’s administration, have argued that the deficits have been crowding out private investment.
Greenspan said the deficit is one reason that corporate investment as a share of profits is lower than historical patterns, in an interview on CNBC’s Squawk Box on Dec. 3, 2010.
“Approximately one-third of the decline in capital investment as a share of cash flow is directly attributable to” the “crowding out by U.S. Treasury borrowing,” Greenspan said in the interview.
Boehner, 61, an Ohio Republican, also said the 2009 stimulus program “hampered job creation in our country,” a view at odds with the Congressional Budget Office’s findings last August. The stimulus package increased the number of people employed by between 1.4 million and 3.3 million and cut unemployment by between 0.7 percentage point and 1.8 percentage point, according to CBO.
The speaker also repeated an assertion made by House Republicans that their plan to privatize Medicare will give future recipients “the same kinds of options that members of Congress currently have.”
The CBO projected in an April 5 report that under the Republican plan, by 2030 the government would pay 32 percent of the health-care costs of a typical 65-year-old. The U.S. Office of Personnel Management’s benefit handbook says the government pays as much as 75 percent of the health-care costs of federal workers, including members of Congress.
Taxes are a flashpoint in the budget talks, with Republicans rejecting increases in the negotiations, which continued yesterday at the White House between Vice President Joe Biden and bipartisan congressional leaders.
In his speech, Boehner criticized a 1990 budget deal that included a tax increase, saying “the result of that so-called bargain was the recession of the early 1990s.” The speaker said, “it wasn’t until the economy picked back up toward the end of that decade that we achieved a balanced budget.”
1993 Tax Increase
The speaker didn’t mention a 1993 tax increase that raised the top individual marginal rate to 39.6 percent, where it stood until 2001. In 1998, the government recorded its first budget surplus in almost 30 years.
The U.S. economy grew at an annual rate of 4.1 percent in 1994, the year after Congress passed the second tax increase of the decade. The growth rate dropped to 2.5 percent in 1995, and thereafter rose to 3.7 percent in 1996. The economy grew more than 4 percent a year from 1997 through 2000.
The 1990s were a period of “stalemate between the Republican Congress” and President Bill Clinton, a Democrat, that paved the way for balanced budgets because there was “no major giveaway legislation,” said Eugene Steuerle, a former Treasury Department official who is Institute Chair at the Urban Institute, a nonpartisan research center in Washington.
Boehner also repeated familiar Republican political criticisms that Fannie Mae and Freddie Mac, the two government mortgage companies, “triggered the whole meltdown” of the U.S. financial system.
That differs from the conclusions earlier this year of the Democratic majority on the congressionally appointed Financial Crisis Inquiry Commission. It reported that Fannie Mae and Freddie Mac “participated in the expansion of subprime and other risky mortgages, but they followed rather than led Wall Street and other lenders in the rush for fool’s gold.”
Three of the panel’s four Republicans, while faulting Fannie and Freddie, didn’t place the blame squarely on the two mortgage giants.
“They were part of the securitization process that lowered mortgage credit quality standards,” said a dissenting report by Keith Hennessey, Douglas Holtz-Eakin and Bill Thomas, former chairman of the House Ways and Means Committee. In a Wall Street Journal essay, the three said laying primary blame on government intervention is “misleading” and cited 10 reasons, taken together, for the crisis.
Only Peter Wallison, the other Republican commissioner, offered support for Boehner’s view that Fannie and Freddie caused the mortgage bubble and subsequent collapse. Wallison’s dissent put most of the blame on government housing policies that encouraged Fannie and Freddie to buy more subprime mortgages to promote home ownership among low-income people.