Martin A. Regalia, Ph.D., U.S. Chamber of Commerce
(June 5, 1998)

Testimony: Dr. Regalia stated "the Chamber believes that deficit financing is inappropriate for any part of the federal budget." Instead of increasing investment, deficit financing is far more likely to lower long-term productivity growth, retard future economic growth, and limit increases in our standard of living.

Unlike the private sector, the Federal government has unlimited access to the credit markets, sovereign power to tax, and the ability to create inflation to reduce the real obligation of borrowing. Claims that the Federal government should borrow for capital expenditures to follow practices of corporations and households ignore this fundamental difference.

Deficit financing causes the government and the private sector to compete for the available pool of private savings. Because the government can outbid the private sector, government borrowing "crowds out" private borrowing. Unless the government investment is a perfect substitute for private sector investments that were "crowded-out", the economy ends up with a lower capital stock and misallocation of resources.

Excessive borrowing from foreigners can increase interest rates, cause unwanted currency appreciation, and reduce exports. Increased indebtedness to foreigners requires a subsequent transfer of wealth to foreigners for servicing and retiring the debt. If the Federal spending financed by foreign borrowing fails to promote sufficient future economic growth, the debt servicing and repayment can lower our future standard of living.

The disconnect between the government spending decision and the ultimate need for taxation can foster a lack of discipline. Because much of the voting population does not see the direct connection between the spending decision and the financing decision when debt financing is used, the voting public fails to control the spending appetite of the Congress. Tying government capital spending decisions to the taxation that they ultimately create produces a higher level of public scrutiny and better choices in public spending.

In FY 1997, the government raised about $1.6 trillion. The ratio of Federal government revenues to GDP stood at 19.8%, the highest level since World War II. This level is sufficient to fund worthy public investments and operating expenditures.

In closing, he said "cloaking federal government deficit spending in the guise of 'investment for the future' language only serves to erode our hard-won fiscal discipline." He stressed "deficit spending will not deliver the sound public investment our nation needs."

Questions from the Commissioners: Dr. Regalia did not testify before the Commission.

President's Commission to Study Capital Budgeting