[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
                         FULL COMMITTEE HEARING

                 ECONOMIC STIMULUS FOR SMALL BUSINESS:

          A LOOK BACK AND ASSESSING NEED FOR ADDITIONAL RELIEF
=======================================================================



                      COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 24, 2008

                               __________

                         Serial Number 110-108

                               __________

         Printed for the use of the Committee on Small Business


  Available via the World Wide Web: www.access.gpo.gov/congress/house



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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman


HEATH SHULER, North Carolina         STEVE CHABOT, Ohio, Ranking Member
CHARLES GONZALEZ, Texas              ROSCOE BARTLETT, Maryland
RICK LARSEN, Washington              SAM GRAVES, Missouri
RAUL GRIJALVA, Arizona               TODD AKIN, Missouri
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois               MARILYN MUSGRAVE, Colorado
HENRY CUELLAR, Texas                 STEVE KING, Iowa
DAN LIPINSKI, Illinois               JEFF FORTENBERRY, Nebraska
GWEN MOORE, Wisconsin                LYNN WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania          LOUIE GOHMERT, Texas
BRUCE BRALEY, Iowa                   DAVID DAVIS, Tennessee
YVETTE CLARKE, New York              MARY FALLIN, Oklahoma
BRAD ELLSWORTH, Indiana              VERN BUCHANAN, Florida
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
BRIAN HIGGINS, New York
MAZIE HIRONO, Hawaii

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

               Kevin Fitzpatrick, Minority Staff Director

                                 ______

                         STANDING SUBCOMMITTEES

                    Subcommittee on Finance and Tax

                   MELISSA BEAN, Illinois, Chairwoman


RAUL GRIJALVA, Arizona               VERN BUCHANAN, Florida, Ranking
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana              STEVE KING, Iowa
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania

                                 ______

               Subcommittee on Contracting and Technology

                      BRUCE BRALEY, IOWA, Chairman


HENRY CUELLAR, Texas                 DAVID DAVIS, Tennessee, Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              SAM GRAVES, Missouri
JOE SESTAK, Pennsylvania             TODD AKIN, Missouri
                                     MARY FALLIN, Oklahoma

        .........................................................

                                  (ii)




           Subcommittee on Regulations, Health Care and Trade

                   CHARLES GONZALEZ, Texas, Chairman


RICK LARSEN, Washington              LYNN WESTMORELAND, Georgia, 
DAN LIPINSKI, Illinois               Ranking
MELISSA BEAN, Illinois               BILL SHUSTER, Pennsylvania
GWEN MOORE, Wisconsin                STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania          MARILYN MUSGRAVE, Colorado
JOE SESTAK, Pennsylvania             MARY FALLIN, Oklahoma
                                     VERN BUCHANAN, Florida

                                 ______

            Subcommittee on Rural and Urban Entrepreneurship

                 HEATH SHULER, North Carolina, Chairman


RICK LARSEN, Washington              JEFF FORTENBERRY, Nebraska, 
MICHAEL MICHAUD, Maine               Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana              DAVID DAVIS, Tennessee
HANK JOHNSON, Georgia

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, PENNSYLVANIA, Chairman


CHARLES GONZALEZ, Texas              MARY FALLIN, Oklahoma, Ranking
RAUL GRIJALVA, Arizona               LYNN WESTMORELAND, Georgia

                                 (iii)



                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Velazquez, Hon. Nydia M..........................................     1
Chabot, Hon. Steve...............................................     2

                               WITNESSES

Connelly, Mr. Arthur, Chairman of South shore Bank , on behalf of 
  the American Bankers Association...............................     4
Oates, Mr. David, President, Oates Association on behalf of the 
  American Council of Engineers..................................     5
Bernstein, Ms. Rachelle, V.P. and Tax Counsel, National 
  Federation of Independent Business.............................     7
Zandi, Dr. Mark, Chief Economist, Moody's Economy.com............     9
Myles, Mr. William, Myles and Myles Retirement Planners, on 
  behalf of the Western Economic Council.........................    12

                                APPENDIX


PREPARED STATEMENTS:
Velazquez, Hon. Nydia M..........................................    27
Chabot, Hon. Steve...............................................    28
Altmire, Hon. Jason..............................................    29
.................................................................
Connelly, Mr. Arthur, Chairman of South shore Bank , on behalf of 
  the American Bankers Association...............................    30
Oates, Mr. David, President, Oates Association on behalf of the 
  American Council of Engineers..................................    40
Bernstein, Ms. Rachelle, V.P. and Tax Counsel, National 
  Federation of Independent Business.............................    44
Zandi, Dr. Mark, Chief Economist, Moody's Economy.com............    55
Myles, Mr. William, Myles and Myles Retirement Planners, on 
  behalf of the Western Economic Council.........................    48
Cochetti, Mr. Roger, Group Director, the Computing Technology 
  Industry Association...........................................    57

                                  (v)


   HEARING ON ECONOMIC STIMULUS FOR SMALL BUSINESS: A LOOK BACK AND 
                 ASSESSING A NEED FOR ADDITIONAL RELIEF

                              ----------                              


                        Thursday, July 24, 2008

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:19 a.m., in Room 
1539, Longworth House Office Building, Hon. Nydia M. Velazquez 
[Chair of the Committee] Presiding.
    Present: Representatives Velazquez, Shuler, Cuellar, 
Altmire, Clarke, Chabot, Bartlett, and Davis.
    Chairwoman Velazquez.  Good morning. I call this hearing of 
the House Small Business Committee to order.

           OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ

    Even in a free-market economy, certain conditions call for 
swift and sweeping government action. This February, in the 
face of rising unemployment and an escalating housing crisis, 
Congress took just that. In an overwhelmingly bipartisan 
effort, we passed this year's most critical piece of financial 
legislation. The Economic Stimulus Act of 2008 was a landmark 
bill and has helped to stem the effects of what has become a 
full-blown recession.
    As of today, 130 million American families have collected 
stimulus checks. Meanwhile, the country's 26.8 million small 
businesses have enjoyed significant tax write-offs for 
investments. Altogether, these incentives accounted for a $152 
billion shot to the lagging economy.
    The stimulus package was more than a Band-Aid resolution. 
It succeeded in blunting the effects of what would have 
otherwise been a crippling downturn. The individual rebates, 
for example, drove a spike in consumer spending. By late May, 
retail sales have climbed 1 percent, and the early indicators 
show that they continue to rise in June. In fact, many 
retailers report gains of 4.3 percent. These trends were 
especially helpful to small businesses, which tend to be the 
largest beneficiary of consumer spending.
    The stimulus package did more than just incentivize 
consumers. It also galvanized small businesses by promising 
instant write-offs and tax breaks on purchases. In doing so, 
this particular inducement has done more than just encourage 
small business commerce. It has the potential to put cash back 
in the pockets of our entrepreneurs. These rebates have done a 
great deal to bolster our struggling financial market.
    Yet, despite their many benefits, the economy has a long 
way to go. Rising inflation and climbing unemployment rates 
have dampened this spring's financial uptick, and we are now 
facing a perfect storm of financial crisis. But as today's 
hearing will show, this is not about looking backward, but 
forward. In addressing our economic woes, we must focus on ways 
to stimulate our small businesses. After all, they make up 99 
percent of American enterprises, employ more than half of the 
country's workforce, and are the backbone of our economy.
    A framework that grows on a combination of tax incentives 
and targeted investment would allow small firms to build off of 
the first stimulus package. Several proposals have been 
suggested for accomplishing this. These ideas include a second 
round of stimulus checks, increased infrastructure spending, 
and a payroll tax holiday.
    In this vein, I plan to introduce a bill later today to 
address certain tax challenges facing small firms. The Small 
Business Tax Modernization and Stimulus Act of 2008 will update 
outmoded tax codes, thereby correcting many of the inequities 
currently facing small firms.
    While looking for ways to stimulate our small businesses, 
it is important to search for solutions that have both long and 
short-term effects. Infrastructure spending, for example, will 
promise a little of both. Not only would it give an immediate 
boost, but it will also set up a series of returns down the 
road.
    We now know that the first stimulus package created a 
foundation for economic turnaround. Today, we will look at ways 
to build on that framework. As we move forward, we want to make 
certain that we provide maximum opportunity for our small 
businesses to grow. In past recessions, entrepreneurs have 
succeeded in bringing our economy back on track. This time 
around promises to be no different.
    I am pleased that today's witnesses could join us for this 
important discussion, and look forward to their testimony.
    With that, I now yield to Ranking Member Chabot for his 
opening statement.

           OPENING STATEMENT OF RANKING MEMBER CHABOT

    Mr. Chabot.  Thank you, Madam Chairwoman, and thanks for 
holding this hearing on the role that small businesses play in 
supporting our economy. I would like to welcome our 
distinguished panel of experts this morning, who have taken 
time out of their busy schedules to provide us with their 
views, and I want to especially thank Bill Myles from my 
district in Cincinnati, Ohio, whom I will be introducing later.
    Madam Chairwoman, small businesses, like all Americans, are 
concerned about the slowing growth of the economy. Energy 
prices are high. Too high. The stock market is lagging, people 
are losing their homes, and the U.S. dollar has weakened. Small 
businesses have been particularly hard hit by this confluence 
of factors.
    The economic stimulus package that was passed in a 
bipartisan manner early this year I think was the right thing 
to do. It was a temporary solution or fix to a problem as we 
saw it. It was one of those things that oftentimes has happened 
too rarely, both under Republican control and Democratic 
control, and that is something that happens in a bipartisan 
matter, and quickly. I supported it, as did you and most other 
Members of Congress. As I say, I think it was the right thing 
to do. But there are a lot of other more permanent things which 
need to be done, and I will get into those now.
    We need a comprehensive approach to stem rising energy 
prices, for example, to create more job and strengthen our 
economy. First, we should increase domestic oil production, 
invest in renewable fuels, and increase incentives for energy 
efficiency and new technologies. I strongly believe the most 
critical step toward reducing the price at the pump is boosting 
domestic oil production by opening Alaska's Arctic National 
Wildlife Refuge, or ANWR, and the Outer Continental Shelf, to 
environmentally responsible energy exploration. Until we can 
further develop cost-effective alternative energy solutions, we 
need more domestic oil production to help lower gas prices and 
move towards energy independence.
    Again, I want to emphasize that I also firmly believe that 
the alternative and renewable energy sources, whether it is 
wind, solar, biomass, are also an important part of this, and 
we need to emphasize that as well as ANWR and the Outer 
Continental Shelf and building new oil refineries, and the 
rest.
    Second, we need to make the 2001 and 2003 tax cuts 
permanent. These cuts included an across-the-board tax cuts for 
all working Americans, which is especially helpful to small 
businesses, since most of those folks file as individuals. In 
addition, this relief increased the child deduction, raised the 
student loan interest deduction, and eliminated the death tax. 
Of course, that was over time because we didn't have the votes 
in the Senate to make elimination of the death tax permanent. 
And as we all know, because we didn't have the votes in the 
Senate, that, what I believe is an egregious tax, will come 
back again very soon if we don't do something about it. 
Taxpayers will face the biggest tax increase in history if 
these that I have mentioned and others are allowed to expire.
    The chairwoman has called a number of hearings on health 
care, and I think we share a concern about the high cost of and 
access to health care. I believe we should continue to try to 
find innovative ways to make health care more affordable and 
accessible to small businesses.
    Finally, we must eliminate wasteful Federal spending. Our 
Nation's long-term fiscal health depends on cutting spending 
and working towards a balanced budget. The Congressional Budget 
Office estimates that for the first three quarters of 2008, the 
Federal Government incurred a budget deficit of $268 billion, 
more than twice the deficit recorded for the same period last 
year.
    These steps would help all Americans and especially our 
Nation's small businesses through our challenging economic 
environment.
    I again want to thank the chairwoman for holding this 
hearing, and I look forward to the testimony of all the 
witnesses here this morning, especially the witness from 
Cincinnati.
    I yield back.
    Chairwoman Velazquez.  Thank you, Mr. Chabot. I am pleased 
to welcome Mr. Arthur Connelly. He is the Chairman elect to the 
American Bankers Association. Mr. Connelly is also Chairman of 
South Shore Savings Bank. The American Bankers Association 
represents banks of all sizes on issues of national importance 
for financial institutions and their customers.
    Mr. Connelly, welcome. You have 5 minutes to make your 
presentation.

 STATEMENT OF ARTHUR CONNELLY, CHAIRMAN, SOUTH SHORE BANK, ON 
           BEHALF OF THE AMERICAN BANKERS ASSOCIATION

    Mr. Connelly.  Thanks very much, Madam Chairwoman, Ranking 
Member Chabot, and members of the Committee. My name is Arthur 
Connelly. My bank is a 175-year old mutual institution just 
south of Boston, with $950 million in assets.
    Our nation is certainly facing difficult economic 
conditions. However, I want to say at the outset that I am, and 
my banking colleagues across this country are very positive 
about our nation's economic future. Our nation has faced these 
challenges before and has emerged much stronger as a result.
    This is not to minimize the problems that are occurring 
today, whether they are from job losses, struggles to avoid 
foreclosure, or just trying to meet the daily needs in the face 
of high gas and food prices. These economic weaknesses will 
take many months to resolve, perhaps even several years. We 
need to collectively look for solutions that will ensure a fast 
recovery.
    The focus on small businesses is important now, as they are 
drivers of new ideas, new employment, and new economic growth. 
The vast majority of banks in our country are community banks, 
small businesses in their own right. In fact, 3,500 banks, 41 
percent of the industry, have fewer than 30 employees. Small 
banks like mine have been an integral part of our communities 
for decades, and we intend to be there for many, many more 
years to come.
    We continue to work to help resolve financial problems as 
quickly and judiciously as possible. Indeed, the process of 
economic adjustment is well underway, helped by Federal Reserve 
action and the economic stimulus package, Congressional 
actions, including improvements to the FHA program, the reform 
of the GSEs, and the temporary FHA program to assist distressed 
borrowers should all provide helpful tools, and we applaud 
those efforts.
    Before turning to a few suggestions for changes, however, I 
know that many of you may be wondering about the health of the 
banking industry in light of the recent failure of IndyMac. Let 
me assure you that the industry as a whole remains 
fundamentally strong. Ninety-nine percent of banks are 
currently classified by regulators as "well capitalized," the 
highest possible designation. We have the capital and the 
reserves to continue to make loans that are so vital to each 
and every one of our communities.
    Changes are needed, however, particularly to avoid a severe 
credit crunch. The secondary markets have already reduced the 
amount of credit available for residential and commercial real 
estate. ABA recommends a thorough discussion of securitization 
accounting rules to ensure credit can flow from this source.
    Moreover, FASB's so-called fair value rules often fail to 
reflect intrinsic values or provide accurate and useful 
information to investors. ABA recommends that these rules be 
revised immediately.
    The credit crunch can also stem from an over-reaction on 
the part of bank regulators. They are combing through banks' 
books, looking for anything to criticize. This clearly has a 
chilling effect on the willingness of a banker to make new 
loans to deserving individuals and small businesses that need 
help today. While banks will naturally be more conservative as 
the economy weakens, pressure to write down the value of loans 
where payments are current will have a devastating effect on 
the availability of credit.
    Finally, I want to mention an issue that has arisen very 
recently, the problem of naked short-selling, as well as the 
repeal of the uptick rule, which has had a dramatic impact on 
many publicly traded banks, large and small. In spite of the 
strength of the industry and the backstop of the FDIC, our 
members are reporting that bank customers are equating stock 
drops with the safety of their deposits.
    While the SEC's Emergency Order helped stop a speculative 
practice for a few large institutions, it really did nothing to 
help small banks. The ABA recommends that the SEC take 
immediate action to stop inappropriate short selling for all 
publicly traded banking institutions.
    Madam Chairwoman, we understand that you are about to drop 
a tax bill for small businesses. We want you to know that the 
ABA strongly supports initiatives like this one to address the 
concerns of small business.
    I appreciate the opportunity to be here today, and would be 
pleased to answer any questions.
    Thank you.
    [The statement of Mr. Connelly can be found in the appendix 
at page 30.]
    Chairwoman Velazquez.  Thank you, Mr. Connelly.
    Our next witness is Mr. David Oates. He is the President of 
Oates Associates, Incorporated, a civil and structural 
engineering firm operating in the St. Louis area for over 40 
years. Mr. Oates is here to testify on behalf of the American 
Council of Engineering Companies. ACEC and its member firms 
employs thousands of engineers, architects, land surveyors, 
scientists, and other specialists. Its members are responsible 
for more than $200 billion of private and public works.
    We welcome you.

STATEMENT OF DAVID OATES, PRESIDENT, OATES ASSOCIATES, INC., ON 
      BEHALF OF AMERICAN COUNCIL OF ENGINEERING COMPANIES

    Mr. Oates.  Thank you, Madam Chairwoman, and members of the 
Committee. I appreciate the opportunity to testify before you 
today about the importance of a safe and efficient 
transportation system to our economy and the role that 
transportation and infrastructure investments play in promoting 
economic growth.
    As mentioned, my name is David Oates, and I am President of 
a civil and structural engineering firm in the St. Louis area. 
My firm currently employs 40 civil and structural engineers. I 
am also an active member of the American Council of Engineering 
Companies, or ACEC, the trade association of America's 
engineering industry. I currently serve as ACEC's 
Transportation Chair.
    On behalf of myself and ACEC, I urge you to include 
spending on our Nation's transportation and environmental 
infrastructure as you consider legislation to stimulate the 
faltering economy. I was very pleased yesterday to see the 
House pass H.R. 6532, a bill that addresses the impending 
shortfall of revenues in the Highway Trust Fund, which could 
lead to a 34 percent cut in your State highway program. I hope 
the Senate will act quickly on that legislation.
    But much more can and should be done beyond a short-term 
fix to the Highway Trust Fund. Additional spending on 
infrastructure, from roads and bridges, to sewer and drinking 
water systems, will provide a near-term boost to our economy 
through job creation, at the same time provide long-term 
benefits to our economy.
    My firm is involved in all manner of public work projects, 
but my passion and experience lie in the transportation field. 
So I will direct the majority of my comments to those matters. 
My written testimony contains much more information on water 
and environmental infrastructure.
    Transportation and transportation-related industries 
account for 10 percent of the U.S. Gross Domestic Product, and 
there is well-documented evidence of the direct correlation 
between transportation spending and job creation. One commonly 
cited study from the Department of Transportation found that 
47,500 jobs were associated with $1 billion in infrastructure 
spending.
    My firm and others in the transportation and engineering 
construction industry support well-paying engineering and 
construction jobs. Additional spending on transportation 
projects and programs will foster immediate job creation, but 
it is also important to appreciate the long-term benefits to 
our national economic competitiveness.
    The primary purpose of the Federal Surface Transportation 
Program is the safe and efficient movement of people and goods, 
which contributes to economic growth by facilitating on-time 
manufacturing and delivery, making personal business travel 
easier and reducing congestion and maintenance costs.
    Transportation investments also strengthen local and 
regional and State economies, and in turn generate additional 
tax revenue by allowing businesses to expand operations and 
hire more workers. Inadequate funding for transportation has 
led to deterioration, congestion, and delays, all of which 
raise the price of doing business through maintenance and 
repair needs, wasted fuel, and delayed cargo shipments.
    Last year, our national economy was crippled by nearly $80 
billion in congestion costs. On the safety side, traffic 
accidents and fatalities, beyond their personal impact, exact a 
$230 billion dollar annual toll in economic costs.
    The National Surface Transportation Policy and Revenue 
Study Commission concluded that we need $225 billion minimum 
annual investment to upgrade our system to a state of good 
repair and create more advanced sustainable system.
    The massive quantity of transportation and infrastructure 
needs are certainly not going to be met in one piece of 
legislation, but the American Association of Highway 
Transportation officials has identified over 3,000ready-to-go 
projects that would be sped up through additional near-term 
spending. An influx of additional funding would allow State 
DOTs to move forward with projects that are currently on hold.
    In my State, the Department of Transportation has 
identified 200 ready-to-go projects in need of $2 billion in 
funding, and these projects won't just go to huge multi-state 
firms. Small businesses like mine will benefit greatly from 
contracting and opportunities from this additional funding.
    By boosting infrastructure spending you can take an 
important step toward fixing structurally deficient bridges, 
rebuilding crumbling roads and highways, and the best part is 
that these are truly investments. We are building structures 
this will last and will provide added value for years and 
years. There is both a short-term stimulus and a long-term 
gain.
    On behalf of ACEC and the Nation's engineering industry, I 
want to thank this Committee once again for focusing attention 
on this important issue.
    I would be happy to answer any questions.
    [The statement of Mr. Oates can be found in the appendix at 
page 40.]
    Chairwoman Velazquez.  Thank you, Mr. Oates.
    Our next witness is Ms. Rachelle Bernstein. She is the Vice 
President and Tax Counsel for the National Retail Federation. 
Ms. Bernstein joined NRF in 2004, following 13 years as outside 
tax counsel to the NRF Government Relations Department. The 
National Retail Federation represents an industry with more 
than 1.6 million U.S. retail companies and more than 25 million 
employees.
    Welcome.

 STATEMENT OF RACHELLE BERNSTEIN, VICE PRESIDENT/TAX COUNSEL, 
                   NATIONAL RETAIL FEDERATION

    Ms. Bernstein.  Thank you very much, Madam Chairwoman, 
Ranking Member Chabot. I am Rachelle Bernstein, Vice President 
and Tax Counsel for the National Retail Federation, which is 
the world's largest retail trade association. NRF represents an 
industry with more than 1.6 million U.S. retail establishments, 
more than 24 million employees, about one in five American 
workers, and 2007 sales of $4.5 trillion. Most retailers are 
small businesses. Ninety-six percent of retail companies have 
only one location.
    Chairwoman Velazquez, Ranking Member Chabot, members of the 
Committee, NRF commends you for holding this important hearing 
to evaluate the impact on small business of the economic 
stimulus package enacted earlier this year and assess the need 
for additional relief.
    Early this year, Congress and the administration worked 
together in a bipartisan fashion to enact economic stimulus 
legislation to aid a slowing economy. The NRF commends the 
Congress for its quick action to address the Nation's economic 
needs. Because consumer spending represents 70 percent of the 
GDP, we believe that the tax rebate payments were particularly 
important. Today, we would like to share with the Committee 
what we have learned to date about the impact of these tax 
rebates.
    In the current economy, most categories of merchandise and 
most types of retail outlets are struggling to achieve even 
modest sales increases. Tax rebate payments are providing some 
stimulus, but consumer spending remains subdued because of the 
stresses of declining home values, escalating food and fuel 
costs, increasing unemployment, and weak financial markets. 
Consumers are concentrating their spending on essentials. They 
are also more concerned than ever with the pricing of 
merchandise. Consumers are shopping more online so that they 
can more easily make price comparisons and also save money on 
gas.
    For small retailers, this economic climate is even more 
difficult than for larger retailers. Small retailers tend to 
compete more on service than on price. Because small retailers 
cannot benefit from economies of scale, they are hit harder 
than other merchants by rising costs, particularly the rising 
cost of fuel. Small retailers who do not sell their goods 
online are not able to take advantage of the shift to online 
sales.
    Direct deposit of tax rebate payments began the last few 
days of April, followed by the mailing of the rebate checks 
through July 11 for eligible taxpayers who filed a tax return. 
After a decline in retail sales in March, there has been a bump 
in retail sales of general merchandise for April, May, and 
June, which we attribute to the distribution of the tax rebate 
checks.
    The April bump in retail sales was .6 percent seasonally 
adjusted month to month, which was the largest month-to-month 
increase since November of 2007. With substantially more checks 
distributed in the month of May, amounting to more than $40 
billion in rebates, retail industry sales increased by .9 
percent. Most of the May sales went to discounters and grocers, 
although some shoppers splurged on electronics and appliances.
    The Treasury Department distributed almost 30 billion in 
the month of June, but consumer spending remains soft, with an 
increase of .2 percent. Most of this increase seemed to be 
focused on necessities.
    A survey of consumers' use of tax rebate checks was 
performed by Big Research the week of June 3 through 10. As of 
that date, 45.3 percent of survey respondents had received 
their tax rebates, and 42.9 percent said they used the money to 
purchase something. However, nearly half of that money was 
spent on gas or necessities such as groceries rather than 
general merchandise, as envisioned when the rebate check 
program was passed by Congress. And 17.1 percent of the 
respondents initially saved their rebate money, but it appears 
that they may have set it aside for purchases in upcoming 
months.
    In survey findings released just this week, NRF found that 
one-fifth of parents nationwide have set aside a portion of 
their stimulus check for back-to-school purchases. 
Specifically, parents say they will use some of their tax 
rebate check to fund electronics, such as computers and cell 
phones.
    Despite a more modest increase in retail sales over the 
last few months than was expected from the rebate checks, we 
believe the results are better than they would have been if 
Congress had not enacted these rebates. Based on the economic 
information that is currently available, we believe that a 
compelling case can be made for providing additional economic 
stimulus legislation.
    If Congress does act on a second stimulus package, we 
believe it should once again include relief for the consumer. 
Since consumer spending is the largest contributor to GDP, it 
is difficult to foresee an improvement in overall economic 
growth until consumer spending improves.
    Chairwoman Velazquez and members of the Committee, thank 
you again for the opportunity to speak to you this morning. I 
would be happy to answer any questions.
    [The statement of Ms. Bernstein can be found in the 
appendix at page 44.]
    Chairwoman Velazquez.  Thank you, Ms. Bernstein.
    Our next witness is Dr. Mark Zandi. Mr. Zandi is the Chief 
Economist and Cofounder of Moody's Economy.com in West Chester, 
Pennsylvania. He received his Ph.D. At the University of 
Pennsylvania. At Moody's he directs the company's research and 
consulting activities. Moody's Economy.com is an independent 
subsidiary of the Moody's Corporation, and a leading provider 
of economic research and consulting services.
    Welcome.

     STATEMENT OF DR. MARK ZANDI, CHIEF ECONOMIST, MOODY'S 
                          ECONOMY.COM

    Mr. Zandi.  Thank you. Thank you, Chairwoman. Thank you, 
Committee, for the opportunity to be here today. Let me say 
these are my personal remarks and not representative of the 
Moody's Corporation.
    I have strong support for the idea that we need a second 
fiscal stimulus plan. I think that is a very laudable idea and 
is much needed in today's economy. I think the plan should be 
timely so that the stimulus gets to the economy by early 2009. 
I think it needs to be targeted to lower income, middle income 
households that will spend the money quickly, and to small 
businesses that will use the money quickly to support hiring 
and investment of their further activity, and that it should be 
temporary. It should not lift the long-term Federal budget 
deficit. That is a very significant problem that we are going 
to face in coming years, and we don't need to add to that 
problem.
    So timely, targeted, and temporary. I think those are the 
key criteria.
    I support the idea for a second stimulus plan for three 
reasons. Reason number one, the economy is still very weak. We 
have lost over 400,000 jobs since the beginning of the year. 
They are very broad-based. It is not just housing, vehicle 
manufacturing; it is retail, it is financial services, it is 
information services, it is professional services. In fact, 
there are only two industries that are adding to payrolls in a 
consistent way, and that is health care and educational 
services. That is it.
    The job losses are broad-based across the country. In my 
view, 19 States are in recession. Ohio is one of those States. 
California, Arizona, Nevada, Michigan, Rhode Island. They are 
all over the country. There are many other States that are very 
close to recession, and probably will be in recession before 
this is all said and done.
    The problems the economy faces are persistent. They are not 
going away quickly. The housing downturn is in full swing. 
Price declines will continue through this time next year, even 
under the best case scenario.
    The problems in the financial system are well-entrenched. 
The banking system is writing down problem loans, and that will 
continue for the foreseeable future. High energy and food costs 
are a significant drain on the economy that aren't going to go 
away. So I think the economy's problems are persistent.
    The second reason for my support is that the benefits from 
the first stimulus package are fading. The tax rebate, which 
was the principal element of the first stimulus package, about 
$100 billion, that has lifted retailing activity in April, 
March, and June. Talking to retailing clients that I have, they 
already are seeing retail sales are falling off quite 
dramatically in the month of July, so we are seeing it fall off 
very rapidly.
    The investment tax benefits, they of course expire at the 
end of the year, and what they have done is in a modest way 
pushed investment forward into this year, stealing away from 
investment for next year, so if those investment tax benefits 
are not extended, then there will be a payback in early 2009 
with less investment by businesses. So the stimulus is going 
from a plus, and it will be a negative later this year into 
2009. So a second reason for support.
    The third reason for support is monetary policy can't help. 
The Federal fund rates target is 2 percent. It is not going to 
go any lower. There are concerns about inflation. I don't think 
that means the Reserve will tighten monetary policy soon, but 
what it surely means is that this is not going to be any 
further easing of policy. Interest rates are not going any 
lower. So we can't count on that. So if policymakers are going 
to stimulate the economy, it has to be Congress and the 
economy. It has to be fiscal stimulus.
    So those are the three reasons for support. What should the 
plan look like? I think it probably should be $50 to $100 
billion. That would be equal to the difference between what 
economists think is going to happen next year and what the 
economy should grow in a normal, well-functioning environment, 
the difference between what we think growth will be and what 
economists call the potential growth, that growth necessary to 
maintain a stable rate of unemployment.
    Most economists, including myself, believe that 
unemployment will rise into 2009 if the economy doesn't 
experience stronger growth. In fact, the unemployment rate 
today is 5-1/2. Most economists think it will be between 6 and 
6-1/2 percent by the spring, summer 2009. Of course, that 
understates the stress in the job market. Many people are being 
pushed from full-time to part-time employment. They are still 
working but losing overtime hours. So there is a lot of other 
stress. So that $50 to $100 billion would go a long way to 
filling that gap.
    And if economists are wrong and the economy turns out to be 
better, that is not a real problem. We have a 5.5 percent 
unemployment rate. We could use a little bit of extra growth 
anyway to bring that rate down, back to where most economists 
would think is full employment, which is below 5 percent. So I 
don't think there is much downside to being wrong. It would be 
nice if we were wrong.
    In terms of what should be in the plan, I am going to throw 
out some ideas, all of which are more or less good, some better 
than others, but it depends on circumstances.
    I think extending the Food Stamp Program would be a great 
idea. You can implement that quickly. You can have it out there 
in 60 days. All research shows people spend that within 30 days 
after that. These are going to help low-income households 
struggling with the high food costs. It is killing them. I 
think that would be helpful, a very efficacious kind of policy.
    I think a gas tax holiday is a good idea. I think that 
would help people who are struggling, low-income households 
that are struggling to get to work, driving long distances, and 
any help they can get in terms of tax relief there, I think 
would be helpful.
    Those are for consumers. For businesses, I would extend the 
investment tax benefits for another year. I don't think the 
cost to Treasury is very significant, and I think that would at 
least take away that drag that will be on the economy in 2009, 
particularly for small businesses that will face higher costs 
because of that.
    Here is a little bit of a stretch, but I think a payroll 
tax holiday would be a very good idea. It would go to low-
income households, people who don't pay income tax but work and 
pay payroll tax, and to small businesses, because that will be 
a cash infusion to them that they can use to hold on to their 
workers and to investment. So those are for businesses.
    For government, aid to State and local governments would be 
very good. There was a very good piece in the Journal today 
about the size of the fiscal problem States are facing. They 
are going to cut back on Medicaid and other infrastructure. 
That would be very beneficial, to get them some help to 
forestall some of those cuts.
    Finally, infrastructure spending. The only caveat there is 
you have got to figure out how to cut the checks quickly. If 
you can't, then it is not worth it. Criteria number one is 
timeliness. If it is not timely, it is not stimulus. It is not 
counterproductive. So if you can marry stimulus with 
infrastructure, that is great. But you have got to figure out 
how to execute. That is very important.
    With that, I will stop. Thank you for the opportunity.
    [The statement of Mr. Zandi can be found in the appendix at 
page 48.]
    Chairwoman Velazquez.  Thank you, Dr. Zandi.
    And now I will recognize Ranking Member Mr. Chabot for the 
purpose of introducing our next witness.
    Mr. Chabot.  Thank you, Madam Chairwoman. I am pleased to 
introduce William Myles from Cincinnati, Ohio. Bill serves as 
Vice President and member of the Board of Directors at the 
Western Economic Council, an organization created 20 years ago 
to promote economic development and community pride in western 
Hamilton County, Ohio. He is a retirement planner with the firm 
of Myles and Myles located in Covington, Kentucky.
    Bill has been working with clients for over 30 years in the 
firm that his father founded back in 1965. He is also a member 
of the leadership team of Agenda 360, an economic development 
strategic plan for Cincinnati and it's surrounding counties.
    A graduate of the Citadel, Bill lives with his wife Barb in 
the Cincinnati neighborhood of Bridgetown. We are pleased to 
have him here this morning, and look forward to your testimony. 
Thank you.

STATEMENT OF WILLIAM MYLES, MYLES & MYLES, RETIREMENT PLANNERS, 
           ON BEHALF OF THE WESTERN ECONOMIC COUNCIL

    Mr. Myles.  Thank you, Chairwoman Velazquez, Ranking Member 
Chabot, and all the members of the Committee for the 
opportunity to speak today. The Western Economic Council was 
founded 20 years ago as a nonprofit economic development group. 
Today, our members represent nearly every aspect of life in the 
western suburbs of Cincinnati, Ohio. As members, we voluntarily 
work to foster a greater economic and built environment for our 
region.
    In an effort to prepare for this hearing, I asked our 
members a number of questions on the subject. Much was revealed 
after several dozen conversations.
    Consumer rebates are being used in every imaginable way. 
Recipients I spoke with are respectively paying bills, buying 
gasoline, buying a high definition television, going on a trip, 
investing in long-term savings, putting the money on the side 
for a time when they may need it, and everything in between.
    Who would argue any payments to consumers is not in itself 
positive for the economy? An $1,800 check to a family of four 
with adjusted gross income of $70,000 is, by any measure, 
something of a windfall.
    One of our members shared a report of the International 
Shopping Centers Trade Group from earlier this year. It 
reported their tenants were crediting increased sales to the 
rebates. Last week, the same group reported those sales had 
leveled off and it expects a record number of their tenants 
will go out of business in 2008.
    The anecdotal conclusion of the great majority I canvassed 
is that consumer rebates are helpful, yet not enough to lift 
the economy out of a low spot in the business cycle. Rebates 
may never be reliable at stimulating the economy because they 
don't guarantee the desired change in behavior.
    Conversely, tax deductions are inherently reliable. 
Generally, our members feel a better short and long-term 
approach is to target benefits to those who have directly 
invested in the means of production of goods and services.
    The owner of a home improvement company hesitated last year 
to buy additional equipment. This year it is a different story. 
He will hire more people to use this new equipment because of 
the tax benefits to small business. He, and others like him, 
will be creating a recurring $1,800 payment to newly hired 
workers.
    If the goal is to assist those suffering through a 
particular hardship, such as avoiding home mortgage 
foreclosure, perhaps specific legislation will be more 
efficient than broad, one-time consumer rebates as a solution. 
This was, along with transportation infrastructure 
improvements, a common alternative to consumer rebates 
suggested by our members.
    Perhaps in the fullness of time empirical data will reveal 
the true impact of the Economic Stimulus Act of 2008. In the 
meantime, however, our members value the tax incentives as 
having a greater effect on their businesses than consumer 
rebates. They very much want you to know that continuing the 
tax incentives to small businesses is critical fuel for what 
has become the engine of the American economy.
    Thank you again on behalf of all our members.
    [The statement of Mr. Myles can be found in the appendix at 
page 55.]
    Chairwoman Velazquez.  Thank you, Mr. Myles.
    Mr. Connelly, if I may, I would like to address my first 
question to you.
    Due to the problems at Fannie Mae and Freddie Mac, the rise 
in foreclosures, and most recently the failure of IndyMac, many 
are calling for increased intervention. Secretary Paulson is 
among those who believe that this is necessary.
    What solutions do you favor to return stability and 
liquidity to financial markets, without being overly 
burdensome?
    Mr. Connelly.  Thank you, Madam Chairwoman. We think that 
the housing bill is a great start. Establishing a level playing 
field regulating nonregulated mortgage lenders is essential. 
More importantly, it is essential to find a balance. Extreme 
caution is necessary. Consistent prudence and moderation on the 
part of the regulator is critically important. Prudent and 
responsible reporting on the part of the media is important.
    We have heard a lot in the last week or so about the list 
of troubled banks in this country. It is critically important 
to understand that 99 percent of the banks in this country are 
well capitalized, number one.
    Number two, that 87 percent, historically, 87 percent of 
the banks that have been on FDIC's problem bank list have 
successfully worked their way off.
    So FDIC's list is a meaningless to the public unless they 
have the backup data that should be confidential and the public 
shouldn't have while forbearance and due diligence is being 
exercised.
    So I think caution and balance is the most important thing 
and doing everything we can to control inflation.
    Chairwoman Velazquez.  Thank you.
    Dr. Zandi, as you know, any stimulus enacted could put a 
further strain on our national debt. Is there potential concern 
that the short-term benefits created by the stimulus package 
could be outweighed by the long-term effect of increases to our 
national debt?
    Mr. Zandi.  Not if well designed. A key criteria for a 
fiscal stimulus plan should be that every element of it is 
temporary, that it is not something that is put into law for 
except a very brief period of time. Therefore, it would add to 
the deficit in that window. That is the idea. That is how you 
get stimulus. You are borrowing money and you are using that to 
put into the pocket of business people and consumers so that 
they put it into the economy right away.
    Now that would be a problem if you kept borrowing money 
because investors would say, Oh, you're going to borrow a lot 
of money. You're going to have to pay a high interest rate. But 
if you go to them and say you are borrowing once for these 
things, then they won't charge you a higher interest rate for 
it so you get the benefit with no cost.
    Anything you do that has long-lasting consequences would be 
counterproductive and detrimental.
    Chairwoman Velazquez.  Ms. Bernstein, you spoke about the 
effect of the first stimulus package in terms of the rebate 
checks that were issued, how it boosted consumer spending, and 
you talk about the surveys that you conducted right after May, 
June and July, and in all those first months after the rebates 
were issued you saw consumer spending going up, then in July it 
is dropping.
    Ms. Bernstein.  It is still unclear to me what is happening 
in July. Obviously, we don't have the results of the month yet. 
I can tell you anecdotally I have heard from some retailers 
who, based on the first week of July, think that the results 
may be better than they were in June. So I think it is just a 
little too early to be able to make an analysis of that 
situation. Remember, the checks kept coming out through July 
11.
    Chairwoman Velazquez.  But it is your opinion that it 
really provided some short-term boost to the economy?
    Ms. Bernstein.  Absolutely. Absolutely.
    Chairwoman Velazquez.  Mr. Oates, you touched on the 
benefits derived from increased infrastructure spending, but I 
did not hear how it will affect overall GDP. I ask this 
question because Chairman Bernanke indicated last week that our 
economy will grow appreciably lower below its rate, and likely 
be around 1.6 percent for the remainder of the year. Are you 
aware of any correlation between infrastructure spending and 
increases in our GDP?
    Mr. Oates.  Yes. Standard & Poor's reports that every 
dollar invested in highway infrastructure or highway 
construction generates about $1.80 in Gross Domestic Product in 
the short term. As I said in my testimony, transportation and 
transportation-related industries account for 10 percent of the 
U.S. Gross Domestic Product.
    So when you look at those two factors, the influence of 
additional investments in transportation and infrastructure on 
the overall economy could be substantial. Also, the efficiency 
of highway improvements affects the economy. Researchers from 
New York University show that every dollar invested in the 
Nation's highways generates about 30 cents of production cost 
savings to businesses every year. So over 4 years you would get 
a return on that investment. That same study estimated that 
highway investments contributed an average of 25 percent of 
total productivity gross nationwide over the last 40 years.
    Chairwoman Velazquez.  Mr. Oates, you mentioned the 3,000 
highway projects that are ready to go and the money is there. 
The problem that I see is that many small businesses rely on 
contracts from agencies other than DOT. Do you know of any 
other government agencies that have similar contracts in that 
ready-to-go phase?
    Mr. Oates.  I can speak for the clients that we have in our 
local area, the counties and cities that we do work for. If 
they had, and as Dr. Zandi said, if they had a check or had 
assurance of funding quickly, most of them have projects that 
they can move ahead and get started on if something happens 
quickly. So, yes, there are a number of our clients are waiting 
for funding for projects that they have ready to go or they can 
advance from next year and do some other things the following 
year.
    Chairwoman Velazquez.  Ms. Bernstein, the second part of 
the stimulus involved increasing the section 179, along with 
allowing businesses accelerated depreciation. Are you aware of 
any evidence empirically or anecdotally that those in your 
industry have been using the tax breaks to buy new equipment or 
make investment?
    Ms. Bernstein.  I can only give you anecdotal information. 
What I have learned from retailers is that as this year began 
and the economy was so soft, they continued with projects that 
had to be done or where they were committed to a contract that 
they couldn't get out of. In terms of new spending on 
improvements that might be needed or other types of equipment 
that they might need but might not necessarily buy, people were 
just not spending the money because the industry was doing so 
badly and there was so much cutting back on expenditures.
    Chairwoman Velazquez.  Dr. Zandi, you mentioned that the 
benefits of the first stimulus package are fading. You support 
a second stimulus package, but you say that it should be 
timely, targeted and temporary. If you are asked to say today--
we are limited here in terms of how much money there is--what 
will be the most targeted and most productive stimulus 
provision that could be included in any package?
    Mr. Zandi.  Well, the thing that provides the most economic 
bang for the buck so that every dollar you spend, you get more 
GDP, is the food stamp extension. That is the most obvious 
thing to do. Infrastructure spending is also very important, 
but goes to the timeliness issue. You just need to get those 
checks out there and have projects that work well.
    Of the various kind of tax breaks, the most efficacious, 
the most bang for the buck, could be a payroll tax holiday. 
More than the income tax rebate, for various reasons.
    Chairwoman Velazquez.  Why do you think that?
    Mr. Zandi.  For one reason, it would benefit very low-
income households. Some 40 million people are working, pay 
payroll tax, and don't pay much in the way of income tax. This 
would be a significant benefit to them. It goes right into, 
many cases, into their bank, checking account, and as such 
people spend that much more readily, much more quickly than 
getting a rebate check.
    Also, I think it is designed to help employers. For small 
businesses I think that would be important. And this might help 
them survive. I think that would be also very effective.
    The thing that is least effective would be the benefits 
investment. Kind of the accelerated depreciation. I am not 
saying that doesn't help, it is just it doesn't help as much as 
other things.
    Chairwoman Velazquez.  Thank you very much.
    Now I recognize the ranking member.
    Mr. Chabot.  Thank you.
    Dr. Zandi, when you said it doesn't help as much, you might 
be thinking, and I assume in the short term, but it has also 
been indicated here we get a bump-up for a couple of months, 
then it falls back off. If you want to do something structural, 
something that is actually going to benefit the economy over 
the long term where small businesses may be able to grow and 
hire more people, which is actually perhaps better for the 
country and maybe employs more people and maybe means that 
recessions aren't as deep or that everybody does a little 
better over the long term, that those investment type tax cuts 
are important as well, aren't they?
    Mr. Zandi.  I wouldn't disagree with that. Anything that 
raises investment obviously helps our economy in the long run. 
Focusing on the idea of trying to stimulate economic activity 
in the near term and trying to get the most out of the limited 
budget that you have, you are going to get less of a boost, 
near-term boost. I am not saying that you shouldn't have these 
other objectives in mind.
    Mr. Chabot.  I supported the economic stimulus package, as 
most Republicans and Democrats did, but I think the argument 
that I would make is that if we can improve the overall economy 
over the longer term by having businesses be healthy, 
especially small businesses, because that is the emphasis of 
this Committee, that you are hiring more people and people have 
jobs for a longer period of time and we have a more resilient 
economy. So the recession, which are inevitable to some degree, 
will be less deep and perhaps less frequent if the country--if 
we grow the pie, so to speak, rather than just redistribute 
money, which is the alternative, even though that may help for 
a month or two?
    Mr. Zandi.  Excellent point. Let me make one more point. 
Most of the benefits to the investment tax that we put in place 
for the stimulus package generally benefit businesses that make 
large investments. If you make a small investment, the actual 
benefit to the business is very, very small. They are much more 
worried about sales, much more worried about--the last thing on 
their list is the so-called cost of capital, particularly for 
small equipment. It is not going to much a big difference. They 
know that ultimately down the road their tax bill is going to 
be higher. All you are doing is shifting the tax liability from 
today to tomorrow. And they know that. That tax benefit that 
you have probably benefits bigger companies that make big 
equipment purchases. That benefits them more than the small 
businesses.
    Mr. Chabot.  I have quite a few small business folks in my 
community that have told me they have directly taken advantage 
of those, and that enabled them to do better than they 
otherwise would and keep employees on longer and sometimes hire 
more, which is what we want to do.
    Mr. Myles, let me go to you if I can. In your retirement 
planning and that sort of thing, how important would it be in 
long-term planning if, for example, we made the tax cuts that 
we passed in 2001 and 2003 permanent and if we did some 
structural things like simplify the Tax Code and people could 
rely on it for longer periods of time so they didn't worry 
about us changing things around. How much would that have to do 
with improving the overall economy and peoples' lives?
    Mr. Myles.  There is nothing you could do that would be 
more important than that. That is simply the number one 
planning challenge. I can't say it any better than you just 
did.
    Mr. Chabot.  Right now you don't know what we are going to 
do and you don't know that the tax cuts are going to continue 
or not because at this point next year they are going to--a lot 
of them are going to go out of existence and the taxes will go 
back up to the levels that they were some years ago, and a lot 
of Americans aren't aware of that, quite frankly. Is that your 
understanding?
    Mr. Myles.  It is very much so, from the estate tax on the 
top end, to the savers' tax credit for those most modest 
earners among us. Very true.
    Mr. Chabot.  Thank you.
    Ms. Bernstein, if I could go to you next. You had mentioned 
with reference to the economic stimulus package and how people 
utilized it and what they spent it on, I think you said half of 
those actually spent it, ended up spending it on gas or fuel of 
some sort and food.
    Ms. Bernstein.  Right.
    Mr. Chabot.  So how important is it that we get a handle on 
this energy crisis that we find ourselves in in this country?
    Ms. Bernstein.  I think it is important to get a handle on 
it for many different reasons. Not being an economist, I don't 
know how quickly that can be put into place and whether that 
will--how well that can affect the immediate situation. But 
from the retail perspective, we are hit by it in many ways. 
Obviously, to the extent that consumers are using their wages 
or rebate checks or whatever money they have to spend on gas 
instead of spending it on other things and get the same amount 
of gas, that is a real problem for the retail industry, which 
is really suffering.
    In addition, obviously the fuel costs are very high for 
retailers that must get their inventories to their stores. For 
small retailers that don't have the benefits of economies of 
scale, those delivery costs to get things to their stores end 
up being that much higher and end up being something that is 
much more of a burden to them. So all around fuel costs are 
important in the retail industry.
    Mr. Chabot.  Thank you. If gas was as a year and a half ago 
or so, $2 something a gallon, now $4 a gallon, and the consumer 
is paying that, and maybe some of that out of the economic 
stimulus package, if a significant portion is going to say 
Saudi Arabia or Nigeria, Venezuela, or wherever it is going, 
that portion isn't doing a heck of a lot for the retailers here 
locally or the overall economy. Would you agree with that?
    Ms. Bernstein.  That would appear to be so, but I have to I 
say I have no particular background.
    Mr. Chabot.  Thank you.
    Mr. Oates, if I could go to you next. You had mentioned the 
importance of the highway funding and the infrastructure and 
all those things, which I certainly agree with you. Let me ask, 
how much confidence do you have in Congress, and again, I would 
stipulate that I mean under Republican control in the past or 
Democratic control now, how much confidence do you have that 
the decisions relative to where the highway funding ought to be 
spent is going to be based upon the merits as opposed to pork 
barrel earmark-type spending, which may end up in say a bridge 
in Alaska that doesn't go any place, and perhaps in a smaller 
State like, say, West Virginia, which traditionally has had a 
fairly powerful representation in the Senate and been able to 
direct a fair amount of money in that direction--this is a 
pretty long question--but would you feel more confidence; do 
you think we ought to adjust our thinking up here on the Hill 
in how we go about funding things and should they be funded 
more upon the merits as opposed to some political decision 
making process?
    Mr. Oates.  They said there would be no trick questions. 
Talking about the stimulus package, I think both in the 
timeliness and how this is done, for it to be effective for 
infrastructure, it does need to be distributed in some way that 
is just straightforward grants to States and/or local 
communities to take care of certain infrastructure things with 
as few strings as possible and probably distributed by State 
size or community size or something like that so that the State 
and the local folks can decide where they need to spend that 
money within a certain range of parameters. If a local 
community has another $500,000 that they can go spend on a 
sewer project or a road project yet this year, if they have 
that money, they will be able to do something with it and they 
will be able to hire people, buy supplies, it will help all 
different sizes of businesses.
    Mr. Chabot.  Finally, Mr. Connelly, with the economy as it 
is today, and tighter markets, is it getting tougher or is it 
relatively tough for small businesses at this time to get 
access to credit, and did you have any suggestions as to what 
we can do about that.
    Mr. Connelly.  First of all, Mr. Chabot, thank you for not 
asking me the last question.
    Coming from the home of the Big Dig, I might have a 
uniquely different opinion. It's business as usual in my town. 
Our small business lending and residential lending are up 
substantially over this time last year. I just spent the 
weekend with 300 of my closest friends, bankers from across the 
country, who tell me that lending is going on.
    Now, admittedly, there are pockets where there are 
problems. We are not making loans like the old Ninja loans; you 
know, no income, no jobs, no assets. But we are making loans 
with prudence. We are looking at income and likelihood and 
ability to repay. It wasn't our institutions that caused the 
problem. So there is lending going on out there, and in some 
pockets there is a lot of lending going on.
    Mr. Chabot.  Thank you very much. I yield back, Madam 
Chair.
    Chairwoman Velazquez.  Mr. Shuler.
    Let me just remind Mr. Chabot that bridge to nowhere is 
important because that is the only way to transport that oil.
    Mr. Shuler.  Thank you, Madam Chair. Dr. Zandi, I want to 
ask kind of the chicken or the egg kind of thing. What impact 
has the weak dollar had on both petroleum prices, other 
imports, food prices? Because if you look at it, the gas prices 
haven't gone up in Europe because of the strong Euro, but they 
are buying almost what, 1-1/2 to almost 2 barrels for our 1 
barrel that we purchase. So what impact has the weak dollar had 
on the economy, or has it been the economy obviously impacted 
the weak dollar?
    Mr. Zandi.  It is both. On net so far, the weak dollar has 
been a benefit to the economy in that the plus from increased 
trade has offset the negatives resulting from higher import 
prices, including the higher cost of oil and other commodities. 
Now oil prices are higher, commodity prices are higher because 
of the lower dollar because these products are traded globally 
in dollars, and so when the dollar falls in value, to ensure 
that demand and supply globally remains the same the dollar 
price has to rise. So there is debate as to what degree the 
lower dollar has contributed to the run-up in oil prices. But, 
in my guesstimate, roughly $25 of the increase in oil prices 
since 2002 is the dollar.
    So you go back to 2002, WTI was trading for $25. Now it is 
trading for $125, and $25 of that is the weaker dollar. That 
has been very negative. So taken by itself, that is a problem. 
But in the context of the pluses on net so far, it has been a 
net plus.
    Mr. Shuler.  So if we continue to increase the debt over 
the long period of time, and I know we have talked about the 
taxes expire. I have children, a three-year-old little girl and 
a seven-year-old little boy. What is the impact to our children 
if we don't have the revenues in hand and we continue to 
increase our national debt? I mean we are ultimately going to 
get to the point where we are upside down, and what impact is 
that going to have? I know the short term--we can talk about 
short term. We can stimulate it all we want, and instead of 
$100 billion, let's put $400 billion in. But what impact is 
that going to have on my children's future both 10, and 15, and 
20 years down the road? If there is a shortfall in Congress 
that I see as everybody looks 2 years ahead because that is 
their next election, so what is the impact that we are going to 
have 10 years, 15, 20 years, and that is what we should be 
talking about, is what the long-term impact is going to be. 
Yes, we are going to increase and stimulate the economy today, 
but what impact will that also have in 5 years, in 10 years, 
and in 20 years?
    Mr. Zandi.  You make an excellent point, and I think our 
most significant economic problem is the daunting fiscal future 
that we face. The arithmetic doesn't work. Something is going 
to break if something doesn't change. It doesn't have to happen 
this year, and it won't, doesn't have to happen next year, and 
it won't, but at some point over the next 5 to 10 years it is 
going to become very clear that the fiscal situation is 
untenable.
    You have three choices, really. One is doing nothing and 
let the deficits increase, and that will be catastrophic 
because rates will rise and undermine investment, and the 
economy will struggle. We will have many more problems. The 
other option is to raise taxes. The third option is to cut 
spending. That is it. Those are the three choices. Obviously, 
they are very difficult choices that you are going to have to 
make, but you are going to have to make them and figure out a 
way to do it. But that is clearly our most significant economic 
problem.
    Let me just say though the long run is made up of a lot of 
short runs, and we are now in a short run that is very 
debilitating and painful and people are obviously under a lot 
of stress, and I think we can do some things in the near term 
to alleviate that stress without jeopardizing our long-term 
economic health. That is a reasonable discussion to have, but 
that is not to say we shouldn't have this discussion about what 
we are going to do about our fiscal problems in the long run.
    Mr. Shuler.  I have 10 seconds. I kind of want a yes or no, 
or just an answer. We have to stimulate the economy, put 
between $50 or $100 billion into the economy, or more. How do 
you recommend we do that? Do we print more money or do we 
borrow it from foreign investors, like we have been? One of the 
two.
    Mr. Zandi.  I thought you said yes or no.
    Mr. Shuler.  I know what the answer is. We have got two 
options.
    Mr. Zandi.  You are going to have to borrow money.
    Mr. Shuler.  So we borrow money from the Chinese to 
ultimately buy more Chinese products. I wish I was in that 
business, to lend somebody money that is going to ultimately 
buy my products.
    Mr. Zandi.  That is not quite fair. Put it into a bridge or 
a road.
    Mr. Shuler.  That would be wonderful. I yield back.
    Chairwoman Velazquez.  The time has expired.
    Ms. Clarke.
    Ms. Clarke.  Thank you, Madam Chair. This is a great 
hearing, but I have to tell you I am sitting here and it is 
kind of scary. I want to just ask the question about 
infrastructure development to Mr. Oates in particular because 
one of the equations that I see that is sort of missing in 
terms of the stimulus of infrastructure is sort of the 
companion infrastructure, which has to do with energy that goes 
along with it. Because if indeed we are going to talk about 
rebuilding roads, we have to talk about what it costs across 
the board.
    In terms of energy right now, we are really struggling. How 
are we going to pay for the oil that goes into the bulldozer or 
the other equipment? How are we going to move products or 
materials from one place to another?
    One of the challenges that I think we face is how we are 
identifying an emerging industry, which is the redevelopment of 
energy and the infrastructure that we need to distribute it.
    So has your organization taken a position with respect to 
energy and how it is distributed and what we need to put in the 
pipeline now? Because a lot of what we are talking about here 
are dealing with variables that currently exist. What has made 
American great is the imagination of what can exist. I think we 
have to move into that mode if we are going to talk about 
prosperity again and not this do we print money or do we borrow 
money scenario.
    How do we create wealth again I think is the major issue 
that we need to be focusing on. We are trying to survive. Our 
kids will be struggling to survive if we don't talk about the 
innovation that has made America great.
    So I want to know whether there have been any 
conversations. For instance, we are having blackouts in 
Brooklyn, New York, and ConEd can patch and patch and patch for 
as long as they want to. It is an old city. This place, as long 
as we continue to use the types of appliances and lifestyle 
that we have, we are going to constantly be going through these 
blackouts. No one is talking about that new infrastructure that 
goes along with engineering and transportation in order to get 
us where we need to be.
    Have you had any conversations or has that risen as an 
issue for your organization?
    Mr. Oates.  Energy questions have come up in our 
organization. We are mostly a public infrastructure 
organization and deal with investments there. I am a 
transportation engineer, so I don't know a lot about a whole 
lot of the other infrastructure issues.
    One of the issues could be that it is more difficult for 
Congress to get spending in those areas because a lot of that 
is controlled by private companies that deal with the 
infrastructure for energy. So I can't answer a whole lot.
    Ms. Clarke.  I am just thinking, construction costs right 
now skyrocketing. A lot of that has to do with labor, but it 
also has to do with energy. Right?
    So maybe, Dr. Zandi, do you have any ideas about the fact 
that our energy costs are sort of the companion? It is like the 
shadow, like that extra piece that is hanging off in everything 
that we are talking about here, whether it is the cost of food, 
whether it is the cost of products. It is just sort of hanging 
off and we are kind of ignoring it. We are talking about it but 
we are kind of playing footsie with it, but it is costing us.
    Do you have any ideas about how the public can partner to 
jettison us to deal with this? Because I think that that is 
probably one of the pieces that helps us in the long run. It is 
the new industry that creates wealth.
    Mr. Zandi.  We are talking about energy specifically?
    Ms. Clarke.  Energy specifically.
    Mr. Zandi.  I think here the solution to our energy 
problems are long term.
    Ms. Clarke.  They are.
    Mr. Zandi.  There is very little you can do in the very 
short run. I mentioned the gas tax holiday. I think that takes 
some of the edge off for some of the folks, but that is very 
modest and doesn't solve our long-term problems. With respect 
to long-term energy, really what policy should be focused on is 
supply, and that is I do support expandingoffshore drilling. I 
think that makes perfect sense.
    By the way, you don't need to see oil wells dug to affect 
the current price because as soon as the markets sense this is 
going to happen, prices will come down to reflect that.
    Ms. Clarke.  Mr. Zandi, I don't want to take you into one 
particular industry; what I am talking about is innovation. 
There are going to be a whole host of different types of 
production of energy for us. If we don't do that then we are 
doing a disservice to his 10-year-old son and3-year-old 
daughter because we are talking about thelong term, and 
everything that we are talking about today has that as part of 
the equation. And while people keep saying it is long term, it 
is now and it is long term. If we don't start, because we are 
doing little pieces, the snippets that you are talking about, 
right, it still remains a part of the equation that we have yet 
to address?
    So I think that part of the equation, and I am winding 
down, Madam Chair, is that we have to make incremental steps as 
we try to solve the immediate, to come to that point where we 
have reached the tipping point for the development of new 
industry in energy. If we don't, we will wake up 10 years from 
now and the same challenge that we are facing in terms of how 
we make things happen will continue to exist.
    So in terms of the economics of that equation, I think we 
have to have a wider view of each step that we are taking for 
our economy and what the shadow that is cast by the energy 
costs involved has done in every sector of our lives.
    Thank you very much, Madam Chair.
    Chairwoman Velazquez.  Mr. Chabot.
    Mr. Chabot.  Thank you. I will be brief, Madam Chair. This 
has been a very interesting discussion. Dr. Zandi just said 
something that I just wanted to point out and just emphasize a 
little bit. I would agree with the gentlelady that this is a 
long-term problem that we have here, and it would be good if we 
could work this out together in a bipartisan manner. We do too 
little of that in Congress, but this is one we really ought to 
work on together, and perhaps the rest of the Congress should 
look to this Committee because the chairwoman has worked over 
the last year and a half in a very bipartisan manner, and I 
commend her for that.
    Doctor, you just mentioned that if, for example, we 
announced that we are going to drill offshore or in ANWR, or 
wherever, where we know that there are significant quantities 
of energy available to us that we have essentially put off 
limits, that you would see that essentially directly affect the 
price because the markets would know that we are serious about 
this. We are actually going there to get this, even though we 
may not see that oil for some years. That is why some have 
argued we are not going to see it for 3 years, 5, 10, so why do 
we have to do this now. That is why I think we should have done 
it 3 years, 45 years, 10 years ago, and voted consistently to 
do that. But that is the past.
    As this point, as you indicated, it would be reflected 
immediately in the markets because of speculation. This is 
something the Republican leadership pooh-poohed. They said 
speculation. I agree with the Democrats. I think that is part 
of it, not the whole thing, but part of it. And so that is why 
it is so important that we act sooner rather than later to 
actually announce we are doing this. Even if we don't see that 
oil, we will see it reflected in the prices very quickly in the 
downside because of the speculative part of that. Is that 
correct?
    Mr. Zandi.  Let me just point out the conduit through which 
this would reflect current price maybe as another conduit. You 
have global energy prices that feel like prices are going to be 
higher in the future, therefore you are going to keep more oil 
in the ground today because you are going to get a much higher 
price down the road. So if they sense there is going to be new 
supplies coming on and the price may not be higher, they will 
be much more forthcoming with supplies today and it will bring 
current prices down.
    Mr. Chabot.  Again, I just want to reiterate what I said 
before. Even though I and many talk about increasing supply 
now, drilling in ANWR, Outer Continental Shelf, that is only 
part. We clearly have to emphasize increased technologies of 
the future, whether it is wind, solar, biomass, geothermal. All 
those things are part of this picture as well, as well as 
making it possible to build new oil refineries in this country, 
which we haven't done in over 30 years. It needs to be a 
comprehensive energy policy, and again, I wish this Committee 
was in charge of it because I bet we could solve it in about a 
week through the great work of Chairwoman Velazquez.
    Chairwoman Velazquez.  On this issue I am not that sure. 
But let me just say, Dr. Zandi, that look, we all support 
drilling, and what we are saying is that there are a bunch of 
oil companies today that are holding leases in about 68 million 
acres of land and they are not drilling it. And we are saying 
use it or leave it. We are going to take it away.
    So you mentioned that probably those companies are 
speculating about oil prices going up and that might be the 
reason why where they can drill today they are not doing it. So 
without a single new lease or single new drilling 
authorization, we can get 4.8 million barrels of oil a day in 
this country without going into ANWR.
    But that is not the question today. That was the statement 
of the day.
    Mr. Zandi.  I think this is an energy policy debate.
    Chairwoman Velazquez.  Yes. Sometimes it doesn't matter the 
topic, we end up talking about ANWR. So we have got to have 
ready our talking points.
    About the holiday, the pay tax holiday that you mention as 
being part of the second stimulus package, there are some 
critics that maintain that while employees could see immediate 
relief, employers could be burdened by administrative 
challenges. It is their concern that small firms will face 
compliance issues and that this could potentially minimize the 
benefits.
    Mr. Zandi.  Excellent point. That is the single most 
significant negative of that particular proposal. You have to 
turn the switch on and off. For many, particularly small 
businesses, they don't have a payroll company that is managing 
their affairs. If they don't do it right, they will get 
penalized, although you might construct a legislation so they 
don't over a period of time.
    The other downside is companies more than likely will try 
to figure out ways to include compensation that they would pay 
out at some other point in that period so that they wouldn't 
have to withhold payroll tax. So I am not saying there is no 
downside. There are. That clearly is, in my view, the most 
significant downside, the administrative costs, particularly to 
small businesses. But if you ask them would you want the cash 
in exchange for a little bit of administrative difficulty, I 
bet they would take the cash.
    Chairwoman Velazquez.  Ms. Bernstein, I would like to hear 
your comments.
    Ms. Bernstein.  I agree with what Dr. Zandi has just said. 
The larger employers use outside service providers, and I know 
there are certain payroll companies that can handle this. This 
is an issue that we looked at a little bit when we were looking 
at what type of consumer rebate would work, whether it could be 
a check or whether it would be faster to get the rebate payment 
to consumers by actually doing it through employer withholding. 
So it is a similar issue.
    I am a little more concerned, as Dr. Zandi said, about the 
small businesses that don't necessarily use those same outside 
payroll providers and that there might be more of a burden. 
But, remember, on the small business side, the self-employed 
person pays payroll tax twice, so it probably is a significant 
benefit for a small business person who pays as the employer 
and as the employee. And so it is possible that they might be 
able to get more access to more of the software that is out 
there, and perhaps if it was widespread enough the costs could 
be minimized.
    The question is how long would that take; what would be the 
start-up time? If you wanted to turn this on more quickly, it 
might be more of a burden.
    Chairwoman Velazquez.  Dr. Zandi, in your testimony on page 
5 you provided "fiscal economic bang for the buck." You have 
the payroll tax holiday at 1.29; across-the-board tax cut, 
1.03; accelerated depreciation .27.
    So as we discussed before, our budget is limited, and when 
we are considering a second stimulus package, we have got to be 
targeted, we have got to be specific. We need to know. One of 
the many things that we are going to be considering is going to 
have the most positive impact in terms of our economy.
    How do you come up with these numbers?
    Mr. Zandi.  It is based on a simulation of a macro 
econometric model that I constructed for the purposes of doing 
this kind of an evaluation. I did it a number of times. I did 
it in preparation for the 2001 stimulus plan and updated it for 
the January-February period for the most recent stimulus plan. 
I have a much more detailed document. I would be happy to 
describe it.
    Chairwoman Velazquez.  It really caught my attention.
    Mr. Connelly, this is my last question. In the housing bill 
that we passed yesterday, you saw what we did, the Federal 
Government, regarding Bear Stearns, now Freddie Mac, Fannie 
Mae. You represent small banks. What will you say will be an 
action taken by Congress that could prove beneficial for small 
banks to continue the great work that you are doing?
    Mr. Connelly.  Well, I think the improvement to the FHA 
programs, GSE reform, temporary FHA program, are all great 
things. There is a critical thing I want to mention though, and 
that is we need to recall the lessons that we have learned from 
the previous rounds of economic weakness. Coming from New 
England, I recall the real estate debacle of the early nineties 
and a lot of problems that caused small businesses to be 
squeezed out of business as a result of performing/
nonperforming loans. Just this weekend I heard from some of my 
colleagues around the country that regulators are beginning to 
ask for appraisals on performing loans, and it is important 
that we not force currently performing loans into a distressed 
condition by making such requests.
    So I think we really want to be careful on the regulatory 
side that we not add fuel to the fire. Those lessons that we 
learned 5, 10, 20 years ago are so critically important to bear 
in mind.
    Chairwoman Velazquez.  Again, let me take this opportunity 
to thank you all. This has been an insightful discussion. As we 
move forward in terms of having discussions along the 
leadership regarding a second stimulus package, I promise you 
that the discussion that we had today will prove beneficial in 
my input in those meetings where I meet to discuss with the 
Democratic leadership what we are going to do next. Hopefully, 
I will be there at the table representing the voice of small 
businesses in this country. Thank you very much.
    Mr. Chabot.  I am sure Nancy Pelosi will care a lot what I 
thought about the issue, too.
    [The statement of Mr. Cochetti can be found in the appendix 
at page 57.]
    [Whereupon, at 11:43 a.m., the Committee was adjourned.]
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