Elmendorf Joins the Announcement Effect Club

Oct 26, 2011 | Economics

At today’s Super Committee hearing, each of the twelve members had the chance to address CBO Director Doug Elmendorf on issues related to discretionary spending and the budget at large, and in it, Director Elmendorf made some very important statements regarding our fiscal challenges and the benefits of addressing them. In the process, he joined CRFB's Announcement Effect Club by saying that agreeing to future debt reduction can have positive effects on confidence and the economy in the near-term.

In one memorable segment, Senator John Kerry (D-MA) asked Elmendorf about the short-term impacts of achieving savings beyond the mandated $1.2 trillion in savings, to which, Elmendorf responded:

“Just looking at the aggregate deficit reduction, I think it is clear that larger reductions, coming from the work of this committee, would have a positive effect on current spending and on current output and employment and conversely, that a failure of this committee to reach an agreement or for Congress to enact an agreement reached by this Committee, would have a negative effect on confidence and thus on spending.”

Elmendorf’s response highlights the incredible importance of the Super Committee’s actions: failure to achieve its mandated savings would likely have a negative effect consumer confidence and further stifle aggregate demand, not to mention that failure might even lead to another downgrade. Elmendorf also noted that greater savings levels, especially a “Go Big” approach, would have even larger economic benefits over the medium and long-term as the crowding-out of private investment was reduced. In response, Kerry noted some more negative consequences of achieving just the mandated savings:

“And if we do simply $1.2 trillion or $1.5, which is the targeted goal and that is all we do, isn’t it a fact that we will be back here in a year or two or three at maximum dealing with the very same issues that are on the plate now about the unsustainability of our budget?”

Elmendorf agreed that lawmakers would ultimately have to come back to the table at some point in the future if they don't succeed in putting debt on a downward path.

This exchange between Kerry and Elmendorf vivifies a number of positive benefits of a “Go Big” approach. Should the Committee succeed in only achieving $1.5 trillion in savings, these measures will act as merely another band-aid, only to be ripped off a few years down the line, exposing our fiscal wounds and forcing us to once again address our fiscal challenges and the tough politics they involve.

We hope this exchange caught the ears of the other Committee members and will help guide their discussions towards a “Go Big” approach, and we welcome Dr. Elmendorf to the Announcement Effect Club.