The Republican-controlled U.S. House’s fiscal program may already be creating jobs: Conservative economists are in demand. And one of the most sought-after is Kevin Hassett, senior fellow and director of economic policy studies at the American Enterprise Institute.
Hassett served as John McCain’s chief economic adviser during the 2000 U.S. presidential primary; he advised George W. Bush on his 2004 campaign and McCain again in 2008.
The 48-year-old University of Pennsylvania Ph.D. is known for his work on macroeconomics and tax-reform policy. Investors may recognize him as the co-author of Dow 36,000, published in 1999.
Staff Writer Julie Segal talked to Hassett about deficit-cutting and Social Security.
Does the U.S. dare cut the deficit when the recovery seems so fragile?
In a recent paper, Matt Jensen, Andrew Biggs and I review the history of various countries’ fiscal policy successes and failures. Frankly, it’s kind of surprising — to Keynesians, at least — but when a country finds itself with a big deficit, it can ignite a short-term boom by cutting government spending and restoring some order to the budget.
When there is a massive deficit, companies are rightly anxious that something bad is going to happen — that their taxes are going to go up a lot to close the deficit. That makes them very reluctant to expand. But if you contract spending and restore the country to a sustainable fiscal path, people are optimistic and expand. So there is a lot of evidence that fiscal consolidations are not contractionary.
Might that apply to the U.S.?
When you look at how corporate America is behaving — holding on to cash because of policy uncertainty — we’re exactly at the point where we could have a very successful fiscal consolidation.
Can the U.S. afford Social Security?
The real problem is that we’ve promised future benefits that are far in excess of the revenue coming in. The solution is simply to cut future benefits — not change the benefits for people who are already retired, but change the formula. Right now we’re in the worst of all worlds: We are promising people a decade or two from retirement a very generous benefit, but we don’t know how we’re going to pay for it and we’re probably going to have to cut it. If you are counting on having that generous Social Security plan, you might save less for retirement. But if we go to a transparent new formula that tells people what their benefit is truthfully going to be, folks can start saving in anticipation of that.
Nobody likes the tax laws.
Yes, we need fundamental tax reform. The system could be a lot better, a lot simpler and a lot more efficient for the economy if it did away with the stupid stuff and then lowered the tax on everything else. The best way for the U.S. to get on the right track economically and begin to look forward to a strong recovery would be to have a fundamental reform that stops all the crazy distortion that the current system has and replaces this tangled mess of a tax code with a broad base and low rates.
How do you broaden the base?
The best tax base is consumption rather than income so that if people are saving and investing, we encourage that rather than tax that. But if we consume and take resources out of society, then people will have to be taxed. The easiest way to get to a consumption tax is to have some kind of value-added tax replace the income tax. I’m not necessarily saying that is possible, but the economic benefits from it would be extraordinary.
