[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
               THE ECONOMIC OUTLOOK AND BUDGET CHALLENGES

=======================================================================

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

            HEARING HELD IN WASHINGTON, DC, JANUARY 27, 2009

                               __________

                            Serial No. 111-1

                               __________

           Printed for the use of the Committee on the Budget


                       Available on the Internet:
       http://www.gpoaccess.gov/congress/house/budget/index.html



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                        COMMITTEE ON THE BUDGET

             JOHN M. SPRATT, Jr., South Carolina, Chairman
ALLYSON Y. SCHWARTZ, Pennsylvania    PAUL RYAN, Wisconsin,
MARCY KAPTUR, Ohio                     Ranking Minority Member
XAVIER BECERRA, California           JEB HENSARLING, Texas
LLOYD DOGGETT, Texas                 SCOTT GARRETT, New Jersey
EARL BLUMENAUER, Oregon              MARIO DIAZ-BALART, Florida
MARION BERRY, Arkansas               MICHAEL K. SIMPSON, Idaho
ALLEN BOYD, Florida                  PATRICK T. McHENRY, North Carolina
JAMES P. McGOVERN, Massachusetts     CONNIE MACK, Florida
NIKI TSONGAS, Massachusetts          K. MICHAEL CONAWAY, Texas
BOB ETHERIDGE, North Carolina        JOHN CAMPBELL, California
BETTY McCOLLUM, Minnesota            JIM JORDAN, Ohio
CHARLIE MELANCON, Louisiana          CYNTHIA M. LUMMIS, Wyoming
JOHN A. YARMUTH, Kentucky            STEVE AUSTRIA, Ohio
ROBERT E. ANDREWS, New Jersey        ROBERT B. ADERHOLT, Alabama
ROSA L. DeLAURO, Connecticut,        DEVIN NUNES, California
CHET EDWARDS, Texas                  GREGG HARPER, Mississippi
ROBERT C. ``BOBBY'' SCOTT, Virginia
JAMES R. LANGEVIN, Rhode Island
RICK LARSEN, Washington
TIMOTHY H. BISHOP, New York
GWEN MOORE, Wisconsin
GERALD E. CONNOLLY, Virginia
KURT SCHRADER, Oregon

                           Professional Staff

            Thomas S. Kahn, Staff Director and Chief Counsel
                 Austin Smythe, Minority Staff Director


                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, January 27, 2009.................     1

Statement of:
    Hon. John M. Spratt, Jr., Chairman, House Committee on the 
      Budget.....................................................     1
    Hon. Paul Ryan, ranking minority member, House Committee on 
      the Budget.................................................     2
    Douglas Elmendorf, Ph.D., Director, Congressional Budget 
      Office.....................................................     4
        Prepared statement of....................................     7
    Alice M. Rivlin, the Brookings Institution and Georgetown 
      University.................................................    44
        Prepared statement of....................................    46
    Mark Zandi, chief economist and cofounder, Moody's 
      Economy.com................................................    52
        Prepared statement of....................................    54
        Supplemental statement of................................    55
    Laurence H. Meyer, vice chairman, Macroeconomic Advisers.....    72
        Prepared statement of....................................    73
    Kevin A. Hassett, senior fellow and director of economic 
      policy studies, American Enterprise Institute..............    75
        Prepared statement of....................................    78


                          THE ECONOMIC OUTLOOK
                         AND BUDGET CHALLENGES

                              ----------                              


                       TUESDAY, JANUARY 27, 2009

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:05 a.m. in room 
210, Cannon House Office Building, Hon. John Spratt [chairman 
of the committee] presiding.
    Present: Representatives Spratt, Schwartz, Kaptur, Doggett, 
Blumenauer, Boyd, McGovern, Tsongas, Etheridge, McCollum, 
Andrews, Edwards, Langevin, Larsen, Bishop, Connolly, Schrader, 
Ryan, Hensarling, Diaz-Balart, Simpson, Campbell, Jordan, 
Nunes, Aderholt, Lummis, Austria, and Harper.
    Chairman Spratt. I will call the hearing to order.
    Today's hearing comes at a time of severe economic 
distress. Unemployment is at a 16-year high. In 2008 alone, 2.6 
million jobs were lost. And each week seems to bring even more 
gloomy economic news. Whether one looks at the housing starts 
or foreclosure statistics or the balance in retirement plans, 
there is bad news all around us.
    One role of this committee, a traditional role, is to keep 
an eye on the bottom line. But getting the economy back on 
track must take priority in this instance over getting the 
deficit down. We simply cannot afford to let this economy get 
away from us, so we must do what is necessary to boost a 
weakening economy.
    At the same time, over the long run, we must also find a 
way to get the budget back on an even keel, on the path to 
being balanced again. And that, too, is part of our challenge 
today, to find some way to thread that narrow needle, serving 
the immediate interest of the country but also laying the 
foundation for the recovery and stabilization of the budget and 
the economy at this point in time.
    Congress is at work on a plan as we speak to provide a 
substantial boost to the economy in the form of a strong 
economic recovery package. Both Congress and the Obama 
administration are looking at other steps that may be needed to 
stabilize the economy. Charting the right steps begins with an 
understanding of the economy, and that is the purpose of our 
hearing today.
    As we continue our efforts to understand where things stand 
with the economy today and where things are headed, we are 
fortunate to have a very distinguished group of witnesses 
before us today. We will hear first from our new CBO director, 
Dr. Douglas Elmendorf.
    This, I believe, Doug, is your first appearance as a 
witness for CBO.
    Mr. Elmendorf. Yes, sir.
    Chairman Spratt. We are glad to have you and glad to have 
you at the helm in particular.
    Mr. Elmendorf. Thank you.
    Chairman Spratt. When this committee met last week, we 
recommended to the Speaker of the House that Dr. Elmendorf 
become the next CBO director. Thursday afternoon Speaker Pelosi 
and Senate Pro Tempore Harry Reid appointed him to that 
position.
    So we welcome Dr. Elmendorf, and we congratulate him.
    We also want to acknowledge the hard work of Bob Sunshine.
    Bob, stand up please.
    [Applause.]
    Chairman Spratt. Over the last couple of months and in 
prior years as well, he has acted as acting director of the 
CBO, and as Alice Rivlin just reminded us in the back of the 
room, he was there when she was first there; he was there at 
the creation. And we have been fortunate to have him in his 
position as deputy director since 2007.
    We are grateful to you, Bob, for your able work in the 
transition period and in particular for your service as the 
acting director.
    On a second panel, we will hear from a number of 
distinguished economists: Dr. Alice Rivlin was the founding 
director of CBO and served as OMB director under President 
Clinton, and she currently serves as a senior fellow at 
Brookings. We will also hear from Dr. Mark Zandi, who is the 
chief economist and cofounder of Moody's Economy.com; Dr. 
Lawrence Meyer, who is a former member of the Board of 
Governors of the Federal Reserve, currently vice chairman of 
Macroeconomic Advisers; and Dr. Kevin Hassett, who is resident 
scholar and director of economic studies at AEI.
    But before turning to our witnesses, let me turn to Mr. 
Ryan for any opening statement he may wish to make.
    Mr. Ryan. Thank you, Mr. Chairman.
    I also want to extend a warm welcome to our new CBO 
director, Doug Elmendorf.
    And I also want to say to Bob Sunshine, thank you for your 
service. You did a fantastic job extending the objectivity and 
integrity of the Congressional Budget Office during your 
tenure. So thank you, Bob.
    The need for today's hearing is obvious. Job losses are 
mounting each day, and we get fresh evidence of the fact that 
we are in the midst of a near economic downturn. Just yesterday 
Caterpillar announced they are laying off 20,000 workers this 
year.
    Clearly, Congress must take action to address this 
situation. The hard part is deciding what we should do. The 
House will consider this week an $816 billion economic stimulus 
legislation advertised as a focus plan to get the economy back 
on track and create jobs.
    But upon closer examination, it looks more like a 
sprawling, bloated spending bill that comes with a huge price 
tag with little evidence it will actually have any immediate 
impact on our economy.
    Please go to chart number 1. Under the guise of stimulus, 
this bill includes funding to buy cars for Federal employees, 
renovate Federal buildings and bulk up the National Endowment 
of the Arts.


    Please go to chart number 2. Even if it produces the 3 
million jobs that are being claimed by the administration, it 
will cost $275,000 per job. Compare that to the average income 
of an American or the tax bill that he or she will pay. They 
are the ones that will ultimately foot this bill.



    According to CBO's data, it will have little impact in the 
short run, with only 15 percent of the spending occurring this 
year.
    Congress should be focusing its efforts on proven, fast-
acting methods for sparking job creation. And frankly, I am not 
at all encouraged by the track record of these Keynesian fiscal 
stimulus plans. The advertised benefits of government spending 
simply fail to play out in reality. The most direct and cost-
effective way to get the economy back on track quickly is to 
boost tax incentives for private businesses to expand and 
create more jobs. Private capital in investment, not government 
borrowing and spending, is the key to restarting the engine of 
sustainable job growth in this country.
    That is why I am disappointed to see that less than 3 
percent of the current economic stimulus package is 
specifically aimed at encouraging private sector investment 
through tax incentives.
    There is a great deal of fear and uncertainty in the 
markets right now. A lot of private capital is on the side 
lines, and many business investment plans are frozen. This is 
not only due to the uncertain economic environment but also to 
the highly uncertain tax policy environment. And this is 
something Congress can and should address. Big tax hikes on 
work, savings, and investment are now less than 2 years away.
    At the end of next year, when these tax increases are 
slated to come on line, CBO tells us that the unemployment rate 
will be at 8.5 percent, which would be the highest jobless rate 
in more than 25 years. The huge spending in this package will 
inevitably lead to cause for even more tax increases. Allowing 
job-killing tax hikes to hit a still weak economy would be 
sheer folly.
    If we want to help this economy, we can start right now by 
giving workers, investors in businesses the certainty that 
Congress will not raise their taxes during this period of 
economic weakness. Our short-term reaction to the current 
economic crisis must not cloud the proven long-term economic 
strategies that should guide our recovery and help secure our 
renewed prosperity. Instead of the big government borrow, spend 
and consume approach of this bill, we should pursue incentives 
to put private sector capital to work to create permanent 
growth and job creation.
    I hope we can learn more today about the effectiveness of 
this bill to address our economy. And I look forward to the 
witnesses' testimonies, and I yield back the balance of my 
time.
    Chairman Spratt. Thank you, Mr. Ryan.
    Before getting underway, just a couple of housing keeping 
details.
    First of all, I ask unanimous consent that all members be 
allowed to submit an opening statement for the record at this 
point.
    Without objection, so ordered.
    We welcome before the committee our distinguished new 
director of the CBO, Dr. Douglas Elmendorf.
    I already had the opportunity to read your testimony last 
night. There is a lot of good stuff there. All of your 
testimony and all of the witnesses' testimony which has been 
filed will be made part of the record. You can summarize as you 
see fit, but I encourage you to take your time and walk us 
through it because there is a lot of very substantive 
information and material and analysis in your testimony.
    The floor is yours, sir.

     STATEMENT OF DOUGLAS ELMENDORF, PH.D., DIRECTOR, THE 
                  CONGRESSIONAL BUDGET OFFICE

    Mr. Elmendorf. Thank you, Chairman Spratt, Ranking Member 
Ryan, and members of the committee.
    I am very pleased to be here today to talk with you about 
the state of the U.S. economy and policy options for improving 
it. I am especially happy to be here today in my first 
testimony as director of the Congressional Budget Office.
    I would like to make just three points drawing from the 
written testimony. First, in the absence of any changes in 
fiscal policy, the U.S. economy is likely facing its most 
severe downturn since the Depression of the 1930s.
    Second, the bleakness of the economic and financial outlook 
has lead the great majority of economists to think that both 
large-scale fiscal stimulus and significant new monetary and 
financial policies are appropriate and needed to generate a 
strong recovery in the next few years.
    Third, in CBO's estimation, the American Recovery and 
Reinvestment Act of 2009, H.R. 1, would provide a significant 
boost to output and employment.
    Let me elaborate on these points in turn. First, CBO 
projected in early January that in the absence of changes in 
fiscal policy economic activity will contract more sharply in 
2009 than it did in 2008 and will expand only moderately in 
2010. As a result, the shortfall in the Nation's output 
relative to its potential, what could be made if we were using 
all of our resources fully, will be the largest shortfall in 
terms of both length and depth since the Depression. Lost 
output will represent nearly 7 percent of potential output in 
both 2009 and 2010, amounting to about $1 trillion of lost 
output each year and would be almost 5 percent of potential 
output in 2011.
    Payroll employment declined by 2 and a half million jobs 
last year. And CBO projects that, again, without further 
action, even more jobs will be lost this year. The unemployment 
rate increased by more man 2 percentage points last year, 
reaching 7 and a quarter percent and is projected to peak above 
9 percent next year.
    Data released after this forecast was finalized in mid-
December have been generally consistent with our forecast. In 
the financial system, recent data signaled that the improvement 
in conditions that began in October have continued thus far 
this winter.
    Still, for many borrowers credit remains much more 
difficult and expensive to obtain today than it was in 2007. 
Risk spreads on most types of private lending remain very 
elevated. And concern about the health of financial institution 
remains widespread.
    Meanwhile, data on the wider economy confirm the consensus 
assessment that the economy is in sharp decline. The economy 
shed more than half a million jobs last month. The unemployment 
rate jumped up. Industrial production, our manufacturing output 
essentially, fell 2 percent in December, and capacity 
utilization and manufacturing reached its lowest level since 
1983. Housing construction continues to drop sharply, and real 
business spending on equipment and software appears to have 
fallen at more than a 20 percent annual rate in the fourth 
quarter.
    My second point is that the expected severity and 
persistence of economic weakness have lead the great majority 
of economists to think that both fiscal stimulus and additional 
financial monetary policies are needed at this time. As the CBO 
has said before, fiscal stimulus policies are most effective if 
they are timely, occurring during the period of economic 
weakness; are cost-effective, providing the greatest possible 
economic impact per dollar of budgetary cost; and do not 
exacerbate the Nation's long-run fiscal imbalance.
    Moreover, the macroeconomic impact of stimulus is not the 
only consideration in designing it. Policymakers and members of 
the public clearly care also about who will be helped directly 
by the spending increases or tax cuts in addition to all of the 
people who will be helped indirectly through a stronger 
economy. And they care about what goods and services society 
will receive in exchange for the money involved.
    Constructing a stimulus package that both is effective in 
spurring economic activity and satisfies broader objectives 
about who benefits and what society receives in exchange is 
very challenging.
    Third, H.R. 1 is a massive fiscal stimulus. According to 
estimates by the CBO and Joint Committee on Taxation, the 
legislation would widen the Federal budget deficit by $170 
billion this fiscal year; $356 billion in fiscal year 2010; 
$174 billion in fiscal year 2011; and a total of $816 billion 
between now and 2019. Details of this cost estimate were 
released last night and are on the CBO Web site, and I am happy 
to talk about them if you have questions.
    The bill includes direct payments to individuals, 
reductions in Federal taxes and purchases of goods and services 
directly by the Federal Government and indirectly via grants to 
State and local governments.
    For the payments to individuals and reductions in Federal 
taxes, the macroeconomic impact would occur fairly rapidly.
    For purchases of goods and services, CBO has estimated 
fairly slow initial rates of spending. Of course, these 
estimates may turn out to be too low or too high. But here is 
why they are as low as they are:
    First, the usual process for drafting plans, soliciting 
bids and entering into contracts, makes typical spending rates, 
the ones we see year in and year out, much slower than one 
might think.
    Second, enactment of this legislation would occur nearly 
halfway through fiscal year 2009. The numbers that we report 
for what may appear to be the first year are actually for the 
first half-year.
    Third, a number of programs in this legislation would 
receive funding significantly above their current allocations. 
In the past, in all types of Federal programs, a noticeable lag 
has occurred between sharp increases in budget outlays, budget 
authority, and the resulting increase in outlays.
    Fourth, some programs would be essentially brand new. In 
this case, agencies would need to develop procedures and 
criteria, issue regulations, and review plans and proposals 
before money can be distributed.
    All that said, CBO estimates that roughly 21 percent of the 
total budgetary amount would go out in the next half of fiscal 
year 2009 and nearly half next year, for a total over the next 
year and a half of roughly two-thirds.
    The macroeconomic impacts of any economic stimulus program 
are very uncertain. CBO has developed a range of the estimates 
of the effects of H.R. 1 on GDP and unemployment that 
encompasses a majority of economists' views in our judgment. 
According to this analysis, the legislation would have the 
following effects relative to our baseline forecast:
    In the fourth quarter of 2010, GDP would be higher by 1.2 
to 3.5 percent. Employment would be higher by 1.2 to 3.6 
million jobs. And the unemployment rate would be lower by .6 to 
1.9 percentage points.
    In the fourth quarter of 2011, the positive effects in 
output and employment would be smaller but still significant 
because the spending out of authorized money will be going on 
and because the tax changes and some of the mandatory spending 
changes will still be in effect.
    Thank you, that concludes my prepared comments, and I am 
happy to take any questions that you have.
    [The prepared statement of Mr. Elmendorf may be obtained at 
the following CBO Internet address:]

     http://www.cbo.gov/ftpdocs/99xx/doc9967/01-27-StateofEconomy--
                             Testimony.pdf

    Chairman Spratt. Dr. Elmendorf, you have on your testimony 
figure one, do you have an electronic copy of that?
    Mr. Elmendorf. I do not have it with me, no, sir. I have a 
copy I can look at, but I don't have one that I can----
    Chairman Spratt. Let me just repeat the numbers you have in 
your testimony. To measure the worth and value and 
effectiveness of the stimulus program that is now being 
packaged and put together to be brought to the floor tomorrow, 
one critical way to look at it is what is potential GDP if the 
economy were running more or less on even keel, and what is 
actual GDP?
    Could you sort of translate this chart to us here? What is 
the difference today between the gap, performance gap, between 
actual GDP and potential GDP if the economy were running in a 
stable condition?
    Mr. Elmendorf. The potential GDP is a concept economists 
use to estimate the output the economy would produce if labor 
and capital resources were essentially fully employed. So when 
the unemployment rate rises or capacity utilization falls, 
output, actual output, is falling below potential output. CBO's 
estimate is that without any additional fiscal policy, that 
shortfall, the difference between what we could be producing 
and what we will be producing will be nearly a trillion dollars 
in 2009 and again in 2010.
    Chairman Spratt. Each year, a trillion dollars?
    Mr. Elmendorf. Each year, and will remain very large in 
2011. It is worth emphasizing here that people talk about the 
dates of a recession. The way that the National Bureau of 
Economic Research traditionally defines ``recessions'' is the 
period in which the output of the economy is falling. So if 
output turns back up next year some time, the NBER would 
consider that to be the end of the recession. But the shortfall 
in output from the potential output level will still be quite 
large. We are making a big gap, and when we turn the economy 
back around again, it will take a considerable amount of time 
before actual output rises back to potential output, before the 
unemployment rate falls back down to a more standard rate of 
unemployment. We have seen that coming out of the last two 
recessions, much milder recessions than we are enduring now, 
but nonetheless it has taken some time after the official end 
of the recovery for the unemployment rate to fall back down 
again.
    And the principal way to think about that is the actual 
output may be rising, but it is still well below the level of 
potential. And until it catches up again, we will not see 
unemployment back down to its traditional level, and we will 
not see employment back up to what it should be.
    Chairman Spratt. And potential GDP is not optimum GDP; it 
is a reasonable expectation at a normal----
    Mr. Elmendorf. Yes. It does not assume completely full 
employment. In CBO's case, it assumes an unemployment rate of 
about 4 and three-quarters percent, which seems consistent 
with--I think 4 and three-quarters percent, which seems 
consistent with what we observed in the past as the lowest 
sustainable rate of unemployment.
    Chairman Spratt. Now, looking at the value of the return 
over time, the benefit stream that accrues from the plan, is it 
proper to look at the flow over time more than 1 year, not just 
next year and the following year, but if it is education, for 
example, or if it is infrastructure, it has some lasting 
economic productivity improvement?
    Mr. Elmendorf. Yes, so there are really two issues there. 
The first thing is to say, because this GDP gap will persist 
for a number of years, fiscal stimulus to try to narrow that 
gap would be appropriate in the minds of a wide majority of 
economists for a number of years, not just in 2009 and 2010.
    A broader point I think you are making, Mr. Chairman, is 
that investments that are made in the economy today will reap 
benefits potentially for many years to come. And those 
investments can be in the form of physical capital, highways, 
broadband, water supplies, or it can be in the form of what 
economists call human capital, which are the education and 
skills of the workforce.
    Chairman Spratt. Now, towards the end of your testimony, 
you say all of these things need to be taken into account, 
including the long-term impact of having substantial deficits. 
And you warn against the accumulation of substantial deficits 
beyond the immediate situation. Could you elaborate on that 
just a bit, because I think it is very worthwhile testimony.
    Mr. Elmendorf. Yes, as you know, the long-run fiscal 
imbalance of this country under current policies is quite 
severe. If that imbalance is worsened, that has a number of 
consequences. One consequence is that, over time, that 
government borrowing crowds out a certain amount of private 
investment and leaves the economy poorer as a result.
    A further possible problem is that anticipation of 
government borrowing can push up interest rates. At the moment, 
interest rates in the United States on risk-free assets like 
Treasury securities are fairly low because foreign capital 
views us, despite all of our current problems, as a relatively 
safe haven in the world. So interest rates are low because 
foreign capital has come to this country.
    If we make the long-run fiscal situation worse in the eyes 
of people, investors around the world, and they are more 
worried about our long-run future and withdraw some of those 
funds or stop sending additional funds here, then that could 
push up interest rates in the near term and have a detrimental 
effect on economic activity now.
    I do not think, and most economists do not think, that is a 
very large risk at the moment because of the flight to safety 
that we see in times of crisis. But I think most economists 
would judge that to be an increasing risk as we come out of 
this recession in several years. If there isn't a sense at that 
point that the long-run fiscal problems are being addressed, 
there is a bigger risk at that point of more fear and then an 
increase in U.S. interest rates.
    Chairman Spratt. So the request before us is how to boost 
the economy, pick it up out of the current slump, get it back 
on track, but without worsening the long-term outlook for the 
budget and, in particular, the deficit and debt accumulation.
    Mr. Elmendorf. That is right. And that, as I said in the 
testimony, is a challenging task.
    Chairman Spratt. We have had recessions in the past. I 
guess 10 recessions since the Second World War. Few have 
elicited the kind of response we are seeing today. Is this 
disproportionate? Are we overreacting? Or would we be risking 
some serious downturn and loss of control of situation unless 
we acted?
    Mr. Elmendorf. I think you are absolutely right. We have 
not seen fiscal stimulus on this scale proposed in these past 
downturns. There are two reasons why most economists thought 
that made sense then, but this makes sense now. One is that 
this downturn looks to be more severe. The collapse of leading 
financial institutions, the flight from risk-taking has choked 
off credit that would normally flow to households and 
businesses. Tremendous losses in household wealth are holding 
down consumer spending and will do so for some time.
    Our overbuilding of housing in the past half dozen years 
means that, even at the low level of construction now, we have 
more houses than people want, and it will take some time to 
work that off. So housing will not provide support in the 
recovery.
    And moreover, the global economy is weakening. Forecasts of 
foreign economic growth in 2009 have been marked down by two 
percentage points just since last summer. So there are a number 
of reasons why this recession will be particularly deep in most 
economists' judgment and why the recovery will be slow in most 
economists' judgment. The second general reason why most 
economists favor larger fiscal stimulus now than they have in 
past recessions is that monetary policy has done a lot already 
to try to offset the weakness in the financial system and has 
used up all of its principal tool, which is reductions in the 
Federal funds rate, since that rate is now essentially at zero. 
It does not mean they are out of tools. As Chairman Bernanke 
has said very clearly, they have other tools, but these are 
untested tools, and they face difficulty in implementation.
    So economists see a more severe recession than we have had 
in the past and less ability of the Federal Reserve to offset 
that. And that has lead many people who did not support large 
fiscal stimulus even a year ago to support it today.
    There is uncertainty, of course, about these forecasts. CBO 
aims to have an economic forecast and budget projections for 
that matter for which the risks of the world turning out to be 
better or worse are approximately balanced. But most economists 
think that now the risk should not be viewed as balanced in a 
policy sense because of the limitations on what the Federal 
Reserve can do.
    If the economy were to boom again, the Federal Reserve 
could pull back on its special lending programs and it could 
raise the Federal funds rate. If the economy were to turn out 
much weaker than we expect, that would put even more pressure 
on a Fed that, as I said, is already operating on very 
unfamiliar terrain. That uncertainty and taking some insurance 
against that uncertainty is a further reason that economists, I 
think, on a widespread basis support large-scale fiscal 
stimulus now.
    Chairman Spratt. One final wrap-up question. In the past 
recessions since the Second World War, we typically had certain 
sectors that lead us in and lead us out of recession, 
automotives, real estate, consumer expenditures. Today 
automotives clearly are not going to lead us out of this 
recession in their current condition. Real estate is 
overhanging the market, and it is not going to lead us out of a 
recession. As far as consumer expenditures are concerned, there 
is a huge wealth effect, negative wealth effect, due to the 
decline in real estate values, which is a principal asset that 
households have, and businesses aren't likely to invest in this 
kind of scenario, at least not in the near term. What else, 
other than our intervention, would begin to give us a kick 
start to get out of this slump and back on the road to 
recovery?
    Mr. Elmendorf. I think you summarized the headwinds very 
aptly, Mr. Chairman.
    And that is exactly why economists believe that some 
combination of additional government demand for goods and 
services and additional private demands spurred by tax 
reductions are necessary at this time to put the economy back 
on a path to recovery.
    Chairman Spratt. Thank you very much, sir.
    Mr. Elmendorf. Thank you.
    Chairman Spratt. Mr. Ryan.
    Mr. Ryan. Thank you, Chairman.
    Dr. Elmendorf, the last time we had an administration that 
believed fiscal spending stimulus was the way to go coming into 
an economic downturn was in 1993 when the unemployment rate was 
7.3 percent and the Clinton administration then was asking for 
a $16 billion stimulus. Now, clearly, the economy is in worse 
trouble today than it was then. Even though our unemployment 
rate is not quite as high as it was at that specific time, we 
believe it will get higher.
    So the advocates of this particular stimulus bill say that 
the goal here is to get the money out the door as fast as 
possible. Let me ask you about that. According to your 
analysis, how much of the spending in this bill, not the tax 
cuts but the spending in this bill, which actually get spent in 
year 1 and in year 2?
    Mr. Elmendorf. According to our estimates on both 
appropriations spending and the mandatory spending, 15 percent 
of the spending would happen in the remainder of fiscal year 
2009, essentially the next 7 months.
    Mr. Ryan. Next two quarters.
    Mr. Elmendorf. And then 37 percent would occur in the four 
quarters of fiscal year 2010, for a total over the next six 
quarters, not quite the same thing as 2 years, over the next 
six quarters of 52 percent.
    Mr. Ryan. So half of it is outside of the next six 
quarters?
    Mr. Elmendorf. Right.
    Mr. Ryan. The administration's budget director, your 
predecessor, contends at least 75 percent of the spending in 
the bill will occur in the next year and a half. Now, CBO, we 
pride ourselves here that CBO provides independent objective 
analysis, but how do you account for the sizable disparity 
between your estimates of spend-outs and the OMB's estimates?
    Mr. Elmendorf. So the first thing, as I recall, what Peter 
Orzag said it was 75 percent of the total dollars from the 
package----
    Mr. Ryan. So he was talking, he was throwing, including the 
stimulus in with the spending----
    Mr. Elmendorf. So I believe that the comparable number from 
our estimates is 65 percent.
    Mr. Ryan. So when you add the tax side of it, that moves 
faster than the spending side of it, correct?
    Mr. Elmendorf. Correct.
    Mr. Ryan. So tax policy, as a rule of thumb here, is faster 
deployed in the immediate term than spending policy.
    Mr. Elmendorf. That is right, I think, in general. It 
depends of course on the specific provisions. But, in general, 
for this legislation, the tax provisions pay out faster than 
the spending provisions.
    Now, recall, though, that when I listed the criteria for 
effective fiscal stimulus, timely was one of the criteria, and 
the second one cost-effectiveness. And CBO judges and most 
economists judge that a dollar of government outlay has a 
larger effect on GDP than a dollar of tax cut for the simple 
reason that the dollar of extra government spending goes 
directly to demand for goods and services, whereas a dollar of 
tax cut will be partly saved by households in general and 
partly spent. Now depending on just what provisions are 
changed, one can obtain different answers.
    Mr. Ryan. There is a lot of great research from academics 
around the spectrum on multiplier effects. It is clearly, you 
know, we are not settled on that debate. I won't belabor that.
    Let me ask you about assuming that this $816 billion 
package is financed through borrowing, which obviously it will 
have to be, what is CBO's estimate of the interest impact of 
this bill over the next 10 years.
    Mr. Elmendorf. As it turns out, I believe I have that 
number here.
    Mr. Ryan. We have been asking for it.
    Mr. Elmendorf. So I think this letter, if I can actually 
find it, yes, I think that you should be this morning in 
receipt of our estimate of that. So we did a calculation, at 
the request of Congressman Ryan, about the cost of additional 
debt service that would result from enacting H.R. 1 under our 
current economic assumptions and assuming that none of direct 
budgetary effects of H.R. 1 are offset by future legislation. 
Under those assumptions, we estimate that the government's 
interest cost would increase by about a billion dollars in this 
fiscal year and the total of roughly $350 billion over the next 
11 years, 2009 to 2019.
    Mr. Ryan. Three hundred and fifty? Three-five-zero?
    Mr. Elmendorf. Yes, $347 billion.
    Mr. Ryan. So we are in excess of a trillion dollar package 
here when you count the additional costs.
    Mr. Elmendorf. Traditionally the way CBO talks about the 
effects of spending provisions, the way the Joint Committee on 
Taxation talks about the effects of tax provisions, we talk 
about the effect on non-interest spending and revenues. And the 
reason for that, I think, is simply that what happens to the 
interest costs depends on future policies that we are not 
entitled to speculate about. So we report the direct effects of 
this legislation.
    Mr. Ryan. So we are talking about a $1.2 trillion total 
cost when we count the interest into it.
    Mr. Elmendorf. If you add up our estimate of interest cost 
over the next 11 years with the estimate of the legislation, 
which we put at $800 billion roughly, then you get your number.
    Mr. Ryan. Thank you.
    One other question, because I don't want to belabor this 
stuff. We have all these other governments who are considering 
the same kind of thing. I guess it is 1936 all over again, and 
we are all Keynesians now. So Europe is taking about a big 
fiscal stimulus along these lines. You name the country, most 
of the industrialized world, China included, is talking about a 
large fiscal stimulus which must be financed by borrowing.
    So many of the world's nations are going to be going into 
the credit markets at the same time. We are all going to go 
into the credit markets with our bonds and try to finance this. 
What in your opinion is going to be the effect on the yield 
curves, on the price of borrowing, and how will that impact the 
overall global economy?
    Mr. Elmendorf. Most economists will tell you now that it is 
advantageous to the global economy for significant fiscal 
policy expansions around the world. You raise an important 
question about where the funds will come from. I think the 
answer to that question is that consumers and businesses are 
pulling back in their spending. The essence of fiscal stimulus 
is to provide demand for goods and services that private 
households and businesses are not providing at this moment. So 
the extra saving that they are doing will essentially provide 
the funds for the borrowing the governments will be doing.
    And the problem arises, as I mentioned earlier, several 
years down the road if household and business spending is back 
up again and conditions in credit markets, there are less funds 
available, and if all of the governments around the world have 
set themselves on permanent higher borrowing trajectories, then 
I think that problem becomes more acute.
    Mr. Ryan. In a number of months you are going to have to 
give us another deficit projection. Your current deficit 
projection is $1.2 trillion, but that is minus all the other 
things we are going to pass just in a matter of weeks here. You 
have this stimulus plan with your spend-out rates. You have got 
an omnibus spending bill that is going to pass in a week or 
two. You have got the supplemental spending, which I think is 
something like $25 billion we are projecting. Adding up what 
Congress is going to pass over the next few months, stimulus, 
omnibus, supplemental, what is the deficit going to look like 
this year, later this year?
    Mr. Elmendorf. I have not done that calculation, but, 
clearly, when you start at $1.2 trillion, if you add the 
effects of this legislation under consideration now and other 
things you have discussed, the numbers get very, very large.
    Mr. Ryan. What kind of ball park do you think?
    Mr. Elmendorf. I think if you take this legislation and add 
it to the baseline, instead of being at $1.2 trillion, you are 
at $1.4 trillion. The $1.2 trillion alone is more than 8 
percent of GDP. I think it is entirely possible that when you 
finish this year, the deficit will be 10 percent of GDP. That 
is an absolutely stunning figure.
    But it is also stunning that I sat here and reported our 
forecast and we believe the consensus of forecasts that, 
without fiscal action, we are entering the most severe downturn 
in the lifetime of anybody in this room. And I think the 
judgment of most economists is that very unusual circumstances 
call for very unusual actions.
    Mr. Ryan. I think we would agree; we may just not agree on 
how best to achieve it. Thank you.
    Chairman Spratt. Ms Schwartz.
    Ms. Schwartz. I thank you, Mr. Chairman. And I thank you 
for the first hearing of the committee, so we look forward to 
an interesting and maybe challenging year before us.
    Dr. Elmendorf, given what you have said and what we have 
just heard, first, let me just maybe reiterate something that 
we all know, but maybe we keep needing to be reminded of, we 
are in a dramatically severe economic downturn. I think almost 
every economist, as you point out, says we need strong, bold, 
clear action. And I will say, what we are trying to do here is 
to really take I think some of what you said, and I wanted to 
have you elaborate on this, is that the answer here is not any 
one single action, which makes maybe the recovery and 
reinvestment bill that we are going to have before us to be 
more complicated than some people might like.
    The Republican side has suggested that there is too much 
spending; we call it investment in both Americans and American 
businesses. They prefer spending as much money, if not actually 
more, but only in one direction, which is tax cuts for the 
wealthy and tax cuts for businesses. I think I would like you 
to speak to that as to whether that is actually, if we take 
just that action, more tax cuts alone, $4 trillion is what they 
are suggesting, which is far more than what we are suggesting 
in this stimulus and the recovery plan, whether that single 
action--actually, we have been doing that for 8 years--whether 
that would actually turn this economy around.
    Instead, I think what we are trying to do, and I want your 
response to this, is to really take what is a substantial sum 
of money--all of us are certainly well aware of $825 billion is 
a serious, significant investment. But we are trying to do 
three things. One is to relieve the burden on working families 
that have been hard hit by this economic downturn. We are 
talking about 95 percent of Americans getting an individual tax 
cut, not a one-time rebate but an ongoing tax cut, that 
hopefully will restore their confidence going forward; not a 
one-time spending spree one week but actually on ongoing 
confidence, education tax credit, the COBRA provisions in 
helping families.
    And secondly, we are trying to stem the job loss. You heard 
the numbers. Yesterday we lost 65,000 jobs in one day. It is 
stunning. We have to stem the job loss and begin to rebuild and 
stimulate the economy to create jobs. We are doing that through 
infrastructure spending. Business tax cuts are certainly an 
important part of this package and investments in new 
technologies, like green energy.
    And the third area is that we are looking to really promote 
the kind of investments that will create new jobs for the 
future, health IT, information technology, energy efficiencies.
    My question to you is, the balance between those three 
really targeted ways of spending taxpayer dollars to stimulate 
the economy to deal with the really tough situation that 
Americans are in and to grow jobs for the future, my question 
is, have we gotten the balance right in those three areas? And 
do we need to spend all those dollars in 1 year, but don't we 
need to actually build the confidence, as the chairman said, 
over time to get investor and consumer confidence back up? But, 
specifically, could you speak to the balance between these 
three areas, tax cuts, serious investments and helping 
Americans deal with a tough economy?
    Mr. Elmendorf. So, naturally, I can't tell you whether you 
have got that balance right. That is a judgment you all will 
have to make.
    Economists, as I said, are merely united in their 
conviction that further fiscal policy actions are appropriate. 
But they are much more divided about which actions, what sorts 
of actions, should receive the greatest attention.
    I think there are a number of reasons why you might choose 
a combination of strategies. One is that different policies 
have effects on a different time frame. The tax policies and 
mandatory spending programs pay out faster, in our estimation. 
The appropriations pay out more slowly. That doesn't mean in 
fact that they are less useful. As I said at the beginning of 
my testimony, we expect to have a very large shortfall in 
output relative to potential in 2011. You don't really want to 
have a policy that provides a lot of stimulus in 2010 and then 
goes away overnight; that risks dropping the economy back into 
a pothole.
    So in an effort to have stimulus that affects the economy 
now and next year and in 2011, you might find a collection of 
policies that spend out at different rates to be appropriate.
    I think a second reason a combination of policies makes 
sense is that there is a lot of uncertainty around the effects 
of every provision. We have made our best estimate drawing on 
the wisdom of the profession, but to be clear, we don't have 
any historical examples of this sort of condition and this 
magnitude of fiscal stimulus. So any estimate that we offer you 
will be very uncertain. And that is why I presented our numbers 
as a very wide range. So the uncertainty is also a reason why 
you might favor a combination.
    I think a third reason, as I said, is that there are 
different sorts of goods and services that are produced 
depending on what legislation you pass. Legislation that only 
cuts taxes will lead indirectly to the production of a lot of 
household demanded goods and services. Legislation that 
supports health insurance will lead to more health care being 
delivered. Legislation that supports highway building or water 
supply renovation will lead to better highways. So, ultimately, 
there will also be, in addition to the macroeconomic stimulus 
issues, there will be a value judgment about what sorts of 
products society should be focused on.
    Ms. Schwartz. But the concept of doing a combination, doing 
a variety, and stimulating growth in a variety of sectors 
rather than just picking one area is something you think will 
benefit all of us.
    The chairman wants us to move on.
    Mr. Elmendorf. I think that makes sense for the timing 
reasons and the uncertainty and the question of priorities.
    Chairman Spratt. Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Dr. Elmendorf, in your testimony I believe you said that 
CBO looked to the timing of the stimulus legislation, cost-
effectiveness, and that it be consistent with long-term fiscal 
objectives. With respect to being cost-effective, we have now 
learned that, I think what was billed as an $816 billion 
stimulus package, if you add in the debt service, is really 
over a trillion dollars.
    But before we add in the debt service, which of course does 
have to be paid, the proponents of this particular package I 
believe have talked in terms of roughly three and a half 
million jobs. And as the ranking member put up a chart, I 
believe that if those figures are accurate, and since they come 
from the proponents, I would assume they would be somewhat in 
the mode of a rosy scenario, it comes up to $275,000 per job. 
What is the definition of cost-effective by CBO standards?
    Mr. Elmendorf. I think we need to be careful in counting 
jobs. I think this has been an unfortunate drift in the public 
debate toward number of jobs measured at some particular point 
in time. What I think we all care about is the flow of jobs 
over time. If we can devise a stimulus package that would put a 
ton of money out there in the next 6 months, we might find a 
big increase in employment relative to what otherwise would 
occur. When the package ended, unemployment would fall right 
back again. So when we talk about jobs, we have to be careful 
not to pick out a particular year or quarter, but to look at 
the flow over the next set of years that are affected by 
legislation.
    Mr. Hensarling. Dr. Elmendorf, has CBO modeled how many 
jobs they expect to be created under this package?
    Mr. Elmendorf. Yes, and we have----
    Mr. Hensarling. How does that differ from the 
administration's figures?
    Mr. Elmendorf. Let me describe ours first. Our estimate is 
that it costs about $140,000 worth of GDP to get an additional 
job. How you get that much GDP, how much government spending or 
tax cuts you need, depends on the multiplier effects. So you 
take some amount of government extra spending or tax cuts, 
apply a multiplier effect on GDP, and then from that you can 
deduce effect on employment.
    Our estimates are about $140,000 per job next year. I think 
that is quite consistent, as best I can tell, with the 
estimates with the cost per job of the estimates given by 
Christie Romer and Jared Bernstein from the administration, 
given by some private forecasts.
    I think the difference in the forecasts----
    Mr. Hensarling. That doesn't answer the question, Dr. 
Elmendorf, and unfortunately, my time is running out.
    Also in your testimony, again, you talked about a package 
being consistent with our long-term fiscal objectives. We have 
known that, over the last 2 years, the Federal deficit has gone 
from roughly $160 billion to $1.2 trillion, I believe, in rough 
figures, an increase of roughly 800 percent. That is before we 
add on the cost of this particular package, which we now know 
is over a trillion dollars. I assume that you have looked at 
the experience of Japan in the early 1990s, their lost decade. 
They attempted 10 different stimulus packages over 8 years; 
their GDP did not increase. And I believe they took on the 
highest per capita debt in the industrialized world, and their 
per capita income went from second in the world to tenth in the 
world. What can we learn from their experience?
    Mr. Elmendorf. I think the principal lesson of the Japanese 
experience, and I will be talking about this tomorrow in 
testimony before the Senate Budget Committee, is that active 
financial and monetary policies are a critically important 
compliment to fiscal stimulus. And that is not an idiosyncratic 
view of the CBO. I think that is a widely held view; one that, 
as I mentioned here, that we need a combination in most 
economists' judgment of fiscal stimulus and monetary, financial 
policies.
    I think the principal view looking back at the Japanese 
experience is that they flubbed the financial rescue. Basically 
they didn't face up to the extent of the problem. They ended up 
papering over the problem in a way that just festered.
    Mr. Hensarling. Dr. Elmendorf, how about our own lesson, 
and you are speaking of monetary policy, but if we as policy 
makers don't get it right--I don't think there is any debate 
that we need a stimulus package. There is a debate on whether 
or not we should be providing tax relief to families and small 
businesses or growing government. But can a case not be made 
that we sowed the seeds for this recession by public policy 
decisions in the last one, particularly monetary policy, in 
creating the easy money that allowed the housing bubble to 
occur?
    Mr. Elmendorf. In the judgment of most economists, the 
principal policy error regarding the housing and financial 
bubble was on the regulatory side.
    There is some disagreement about when the Federal Reserve 
should have stuck to a higher interest rate policy. If they 
kept interest rates much higher, that would in fact have choked 
off the housing and financial bubble, but it also would have 
choked off an awful lot of jobs during that period. The 
unemployment rate at the time the Federal Reserve pushed the 
Fed Funds rate so low was a very high unemployment rate. So I 
think there is disagreement among economists about whether they 
should have taken that medicine then or not.
    I think it is a more widespread view that our regulatory 
policies needed to be stronger.
    Chairman Spratt. Mr. Doggett.
    Mr. Doggett. Yes, sir. Thank you, Mr. Chairman.
    And, Dr. Elmendorf, thank you for your service. I know that 
your first report here concerning the effectiveness of this 
stimulus has stirred some controversy. And I think that it is 
important that we continue to get straight-on, independent 
objective reports from you. It is important they be complete, 
but I appreciate the analysis that you provided.
    Of course, if you make any exception to that, and it is my 
bill, it is okay to give the benefit of the doubt to the 
author, and I am sure all the other members here feel the same 
way.
    Seriously, as it relates to this economic recovery package, 
I think, given the size of the debt service you are talking 
about, that is important, and I believe these are more or less 
the words of Dr. Zandi, who we will hear from later, that we 
try to get the biggest bang for the buck, the most cost-
effective stimulus because we have, even though it seems, and 
it is, a very big package, we need to be getting the most 
economic growth we can for every dollar we put in.
    Now both you and Dr. Zandi have done some analysis in your 
testimony of what type of initiatives provide us the biggest 
bang for the buck. And just to summarize that, and of course, 
we had this testimony a little over a year ago when some of the 
same folks who are complaining about this package were 
complaining about our doing anything, in December of 2006, 
excuse me, December of 2007, running right on through last 
summer. But isn't the economic opinion pretty well united that 
at the top of the list of the biggest bang for the buck is to 
use extended unemployment benefits and food stamp benefits?
    Mr. Elmendorf. Yes. I think most economists view expanded 
benefits for low-income households as a particularly effective 
form of fiscal stimulus, because the money generally flows 
quickly and generally a high share of it is spent, so it 
satisfies both the timely and cost-effectiveness criteria.
    Mr. Doggett. With a package this big, you will have some 
elements that are more cost-effective than others. Clearly, 
with a package this big, you couldn't put it all in those two.
    But I believe Dr. Zandi's testimony indicates that, for 
every dollar that we spend on expanded unemployment benefits, 
we get $1.63 back in gross domestic product. For every dollar 
we spend on food stamps, we get back $1.73. Are figures in that 
range generally where economists come down?
    Mr. Elmendorf. I think----
    Mr. Doggett. Maybe not to the penny.
    Mr. Elmendorf. Yes, I don't want to speak that precise, and 
Mark, of course, can talk about them. But I think most 
economists view those categories as having particularly high 
multipliers.
    Mr. Doggett. On the other hand, you and Dr. Zandi have 
both, in your testimony, described some of the least effective 
ways, the most wasteful and inefficient, weak ways of 
stimulating gross domestic product. And at the top of that 
list, it looks like, though your estimates are somewhat varied, 
the least effective, most inefficient, most wasteful way of 
doing this is the loss carryback provisions, in other words, 
corporate tax breaks to let those who paid a little bit of 
taxes in prior years now get a check back from the government 
or credit back from the government at a time that they have a 
loss. Is that right?
    Mr. Elmendorf. We conclude that the multiplier of that, the 
effect on the economy of changes in the tax loss carryback are 
likely to be small. But I would emphasize, I think that 
judgment is particularly uncertain. In normal times, providing 
additional cash flow to businesses is not as effective a way of 
stimulating investment as a particular investment incentive.
    But we are not in normal times. Companies are having--are 
facing cash flow problems, of course, because of the recession 
and they are having difficulty borrowing. So that is a type of 
stimulus that we think is not likely to have big effects but 
where much bigger effects really are possible.
    Mr. Doggett. It may be that, for political reasons, just 
like we could not get support from the last administration, 
which was addicted to tax cuts as the only solution to every 
problem, no matter the economic weather, and so we went there 
instead of providing the much more effective extension of 
unemployment benefits that was really needed early last year, 
that we have to include ineffective, wasteful efforts.
    But I notice, for example, that Dr. Zandi, in contrast with 
getting $1.73 of Gross Domestic Product for every dollar, 
precious dollar that we take out of the Treasury for food 
stamps, his estimate is that on this loss carryback provision, 
this wasteful provision, we get a total of $0.19, only $0.19 
for every dollar taken out of the Treasury. Without asking you 
to be committed to whether it is 19 or 20 or 30 or 40, it is 
substantially less in terms of its economic benefit than doing 
some of the other things that are in the stimulus package; and 
there is consensus among a broad stream of economists that it 
is substantially less.
    Mr. Elmendorf. Our assessment is that it is likely to be 
substantially less. I think it is an area where consensus is 
harder to come by because of the uncertainties.
    Mr. Doggett. And he also estimates that a permanent cut in 
corporate taxes would only give us $0.30 for every dollar, in 
contrast with the higher amounts.
    Mr. Elmendorf. I think you will need to ask him that 
question. That is not part of this legislation, and we didn't 
speak to it in our report.
    Mr. Doggett. Thank you, Mr. Chairman.
    Chairman Spratt. Mr. Campbell.
    Mr. Campbell. Thank you, Mr. Chairman; and thank you, Dr. 
Elmendorf.
    If we do nothing and if there is no economic stimulus 
package, at what point, under your models, would the economy 
bottom and/or begin to recover; in other words, positive GDP 
growth?
    Mr. Elmendorf. We think that the unemployment rate will 
peak early next year. That means that--and unemployment tends 
to lag the economy, so we are looking at GDP that would bottom 
later at the end, perhaps, of this year.
    Mr. Campbell. And perhaps the first quarter of 2010, again, 
if we do nothing, would have positive--would have some growth, 
even if it is a tenth of a percent?
    Mr. Elmendorf. Yes. That seems likely.
    Mr. Campbell. Okay. So under that scenario then--and I 
can't remember the exact percentages--but something like 75 
percent of the spending stimulus in this bill will occur after 
a recovery has already occurred, even if we did nothing. And I 
guess my question is, isn't the purpose of these things 
supposed to try and make the recession shorter and shallower, 
and how can it do that if the spending comes after the 
recovery?
    Mr. Elmendorf. I think I need to emphasize here, again, the 
importance of the gap between potential output and actual 
output. When the economy turns back up, under our forecast, 
late this year or early next year, the difference, the 
shortfall in output relative to what the economy could produce 
at a more traditional unemployment rate and traditional rates 
of capacity utilization will be about $1 trillion. And because 
we expect the recovery to be slow, GDP growth actually to be, 
although growing, to not even be growing as rapidly as the 
labor force is for a while, that gap remains very large 
throughout 2010 and is larger in 2011 than it has been in 
almost all of the postwar years. So, again, whether the 
technical definition of recession has been passed, there will 
still be, I think, tremendous waste of resources, tremendous 
unhappiness.
    Mr. Campbell. In the interest of time, we will have to hold 
out.
    Another question. There was--in 2007, 2008, last year, 
there was an economic stimulus plan that involved refundable 
rebates to taxpayers with some spending, obviously a small 
amount of spending, but that doesn't seem too dissimilar from 
the refundable rebates that are in this bill. I believe--and 
correct me if I am wrong--but there is kind of universal 
agreement that that stimulus was not effective in 2008. Why 
would doing the same thing be effective in 2009?
    Mr. Elmendorf. I think, in fact, that the economists who 
study this question are less sure that last year's rebate was 
ineffective than one might think from reading the coverage in 
newspapers. Clearly, we have a recession anyway, so it was not 
effective in stopping the recession. But I think that is more a 
reflection, in most people's view, of the scale of the 
financial carnage and not something that speaks specifically to 
that tax provision.
    People who have looked very carefully at the household 
level spending data conclude that there was a real spending 
effect of that rebate. Moreover, this legislation does 
something a little different. That was really a one-time check. 
What this legislation does is to lower taxes for a period of a 
few years; and economists will generally conclude that the 
longer the tax change is for, that the larger the stimulative 
effect would be.
    Mr. Campbell. Okay. I am going to, before I run out of 
time, shoot you two more questions and then let you answer both 
of them so that I don't run out of time.
    For the purposes of this question only, I am going to 
except Keynesian theory. But even within Keynesian theory, 
doesn't infrastructure spending have a greater multiplier 
effect? If you build a wireless Internet across the country, 
won't that generate a lot more private jobs than spending the 
money on government buildings or, frankly, on education in the 
short term? So I guess question one is, isn't there a lot 
better Keynesian spending than some of what is in here?
    Second question, something we haven't talked about. We 
talked about Keynesian spending. We talked about the supply 
side. What there is hardly any of in this bill is any demand 
side incentives, such as large incentives for people to 
purchase homes or purchase cars, which are the two industries 
that brought us into this recession and perhaps maybe at some 
point could bring us out. Could you comment on the efficacy of 
any sort of demand side incentives?
    Thank you.
    Mr. Elmendorf. Thank you.
    So, first, on Keynesian stimulus, the principal way to 
think about Keynesian stimulus is putting dollars into people's 
hands that they then go and spend. So John Maynard Keynes 
wrote--and we had this in my prepared testimony today--that you 
could hide money in coal mines and then let private enterprises 
pay to dig it out. That would be better than doing nothing in a 
recession, because it would put money into the hands of those 
workers that they would spend. Now, naturally, we would be 
better off getting something intrinsically valuable.
    So, in general, economists don't think that a dollar spent 
in a certain place has a different effect on demand than a 
dollar spent somewhere else. The reason the tax cuts are 
traditionally viewed as having smaller multipliers is that part 
of it is saved. But the basic point of a dollar spent by the 
government is that it becomes income to somebody; and if that 
somebody is building--is digging a trench for broadband or 
digging a trench for a school building, it is basically the 
same thing.
    This is my time, not your time, I guess. Let me just say 
quickly, I think that Keynesian--the term Keynesian is viewed 
by some people today more negatively than I think is deserved. 
Keynesian economics does not answer all interesting economic 
questions. Economists have known for some time that Keynesian 
economics did not provide great insight into how to deal with 
the wage price spiral of the 1970s. It does not address the 
very important question of incentives created by government 
taxes and spending programs. But, in the judgment of most 
economists, it does provide a very important insight of what to 
do when there are vast amounts of unused resources in an 
economy. And notwithstanding all the various failings of 
Keynesian economics as Keynes understood it or some other 
particular professor understood it later, that insight is, I 
think, still very widely held among economists.
    Now, your second question was about sort of I think more 
targeted policies to spur demand for particular items. I think 
a good case can be made for that, but so can a good case 
against it. It is in some ways effective stimulus to spur 
demand where there already is an operation ready to supply it. 
So if you can keep auto workers at work, rather than laid off, 
that can be very effective.
    I think the counter argument is that we generally think 
that the government should not be picking which industries 
should be doing better or worse. So the risk one finds of 
helping demand in particular areas is that those areas, the 
areas that are chosen, may offer a role for the government that 
we don't normally support and don't think it is effective.
    Chairman Spratt. Mr. Blumenauer.
    Mr. Blumenauer. Thank you, Mr. Chairman.
    Thank you, Doctor. I want to follow up on your response to 
my friend from California a moment ago with the notion somehow 
that, because we stop the free fall in a year, that 
unemployment peaks, that somehow that is tantamount to a 
recovery. Now, it may be that our friends, based on the Bush 
administration's abysmal record of job creation, have defined 
down the definition of recovery, so that if unemployment is 
double digit and not getting worse, that somehow we have turned 
the corner and we don't have to worry about this stuff.
    But I want to--your point about this continuing on through 
2010, 2011, I would like to just take it one step further. I 
was on the committee 2 years ago. We had your predecessor, 
almost as smart and distinguished, before us and a 
distinguished array of economic experts of conservative, 
liberal, academic. I don't recall a great deal, with a great 
deal of precision, their forecasting our falling into this 
economic abyss. Is my memory failing me? Or were those 
certified smart people kind of missing the trench?
    Mr. Elmendorf. So I am one of the certified smart people 
who missed the trench.
    Mr. Blumenauer. Okay. So the great precision that you are--
not great precision. I mean, you have been very careful in 
qualifying this. But when my friend wants to wrap his arms 
around the hope that we stop the free fall in a year or two and 
that that equates to recovery, wouldn't you say we are, A, in 
uncharted waters; and, B, based on our past experience, 
Congress might err on the side of trying to help the public and 
the economy more rather than less?
    Mr. Elmendorf. I spent several years at the Federal Reserve 
Board heading up part of their economic forecasting group, and 
I think my experience has taught me that to call economic 
forecasting an inexact science gives too much credit. It is an 
inexact art, and our forecasts can be very wrong, and we 
report, in fact, systematically the errors we have observed in 
the past so people understand the uncertainty.
    As I said earlier, I think most economists' response to the 
uncertainty today is to err on the side of providing more 
stimulus on the grounds that a stimulus can be withdrawn by the 
Federal Reserve more easily than it can be added.
    Mr. Blumenauer. Thank you. I appreciate that clarification. 
I think it is important as we are going to move forward.
    I also appreciated your analogy with burying the money in 
the coal mine and putting people to work. I mean, have you 
attempted to analyze, in great detail, how much residual 
benefit will come?
    My good friend from Wisconsin flashed on the screen 
concerns about replacement of the Federal fleet or weatherizing 
Federal buildings, that somehow this is goofy. Doesn't that 
carry significant residual benefits for government operation 
and long-term cost savings?
    Mr. Elmendorf. The right kinds of investments, public or 
private, reap dividends over time. The estimates that I have 
offered you today do not incorporate any of those effects. We 
have focused for this purpose strictly on the demand side 
impact, which is likely to be most important in the short run.
    Mr. Blumenauer. Right. And I appreciate your clarification, 
and I understand that. But I just want to make that part of the 
record, as people try and take potshots at something that we 
should make more ambitious rather than smaller, that there are 
elements here that have residual benefits that are going to 
help our work for years to come, save energy, improve 
efficiency.
    The final point, and I would, if you want to clarify 
further, because I appreciate my friend from California 
bringing up, what is the difference between this and the last 
rebate that we threw out? The rebate that we had to make in 
that form because that is what the Republican administration 
and the Republicans in the Senate demanded. We would have had 
it be a somewhat broader net.
    But I want to go to that notion of psychology. If most 
people--isn't there evidence to suggest that people getting a 
check in a lump sum are more inclined to look at that as a 
windfall, they are going to save it, as opposed to something 
that people get week after week after week in the take-home 
pay. Doesn't that influence purchasing far more?
    Mr. Elmendorf. I think, as I said, I think most economists' 
view is that the more lasting a tax change is the larger the 
effect.
    Mr. Blumenauer. But my question was, what is in the check 
each week as opposed to a big windfall from the sky.
    Mr. Elmendorf. Yes. I think that is the intuition of most 
economists. I think there is not a great deal of evidence. I 
think there is some evidence about people taking a check as a 
windfall, and a change in take-home pay is not.
    Mr. Blumenauer. I would respectfully request that you maybe 
help us a little bit with that. There was a fascinating little 
article in the New Yorker this week that seemed to indicate, I 
just read it briefly, that there is some research to that 
effect.
    Mr. Elmendorf. I think there is some evidence, but I think 
we just haven't run every fiscal policy experiment enough times 
to be sure.
    Mr. Blumenauer. Thank you, Mr. Chairman.
    Chairman Spratt. Ms. Lummis.
    Mrs. Lummis. Thank you, Mr. Chairman. It is Mrs. Lummis.
    Dr. Elmendorf, my question is about cumulative impacts. 
When you add servicing our Nation's debt, plus the TARP 
payment, plus other spending that this Congress is likely to 
pass this year, plus the stimulus package, plus U.S. dependence 
on foreign energy, plus global spending by other countries 
trying to stimulate their economies, we are looking at, in my 
view, an unprecedented issuance of debt financing in the global 
markets this year. My question is, is there a saturation point? 
Is there a point that bottomless purchasing power by other 
countries of U.S. debt, coupled with debt of other countries, 
is reached? And is there any good modeling about the concerns 
that purchasers for the combined debts of global governments 
will dry up?
    Mr. Elmendorf. Well, Congresswoman, there certainly is some 
point at which it will become increasingly difficult for the 
U.S. government to borrow the sums involved. And you are right. 
The amount of borrowing is stunning.
    In the judgment of most economists, we are not near that 
point now, despite the tremendous volume of borrowing. Interest 
rates on Treasury securities are low. Interest rates on private 
borrowing are not low in general, and that is because of the 
flight from risk. But at the moment interest rates and Treasury 
securities are low, even though the whole world has seen and 
made their own calculations of the anticipated deficits and the 
effect of the TARP and so on.
    I think the reason that interest rates are not high is that 
borrowers, is that spenders are pulling back on their spending 
and doing more saving. And among those who are saving, there is 
a flight from private assets to less risky government assets, 
particularly U.S. government assets. So I think for the 
duration of this global recession, the condition is likely not 
to be certain but likely to persist.
    As I said, I think the bigger risk comes--and this is, I 
believe, a consensus view among economists--comes over time, as 
the global economy improves, we expect, over the next several 
years, and people are more willing to invest in risky assets, 
less determined to buy Treasury securities and become more 
concerned about the long-run fiscal imbalance. So I think that 
risk is present today, but not large, but certainly rising over 
time; and that is one of the reasons why a criterion of not 
worsening the long-run fiscal imbalance is on our list.
    Mrs. Lummis. Thank you. Is there a way to model global 
capacity to absorb global debt?
    Mr. Elmendorf. Yes, I'm sorry I didn't answer that, but I 
didn't have a good answer. I don't think modeling that is 
particularly difficult. Economists model lots of things. Lots 
of the models are bad. But I think international capital flows 
affecting the exchange rate and shifts in portfolio preferences 
are especially hard to model. So I don't think we have--and I 
will get back to you if I am wrong. I don't think that we at 
CBO have, nor have I personally seen, convincing models of 
those flows in a way that would add more to our understanding 
than the risks that you and I have just discussed. But we will 
check, and I will get back to you if we can do better.
    Mrs. Lummis. Thank you, Mr. Chairman. I do have one more 
question. It is with regard to the multipliers that the 
administration is using of 1.5. Is it your position that that 
is a correct multiplier, and are you comfortable with that 
multiplier?
    Mr. Elmendorf. The administration report from Christina 
Romer and Jared Bernstein talked about a multiplier on 
government spending of 1.5, on tax cuts of about one. We 
developed our multipliers on a more granular basis. We have a 
set of them listed in my written remarks.
    It depends exactly how you apply them to which provisions 
of the bill, so it is a little muddy. But our sense of this is 
that our multiplier and the multiplier they used are pretty 
close, and I think that is a reasonable multiplier.
    The difference in our estimates of job creation come, I 
think, from differences in spend-out rates. They assume a 
faster spend-out rate than CBO has estimated, so they get more 
money flowing out at the end of 2010. So if you look at 
employment at the end of 2010, that faster spend-out leads to 
more jobs.
    As I have said a number of times, I think we really want to 
look at employment over a period of time. The fact that the 
spend-out continues in 2011 under H.R. 1 is not a bad thing 
from the point of view of fiscal stimulus. You don't want the 
stimulus to go away overnight. You want it to taper down as the 
economy recovers. So we would find a substantial jobs effect in 
2011 and so on.
    So I think the differences that you see from our estimate 
to theirs are not particularly in the multipliers or the 
macroeconomic dynamics; it is more about when the dollars get 
out the door.
    Chairman Spratt. Mr. Etheridge of North Carolina.
    Mr. Etheridge. Thank you, Mr. Chairman.
    Thank you for being with us this morning.
    You mentioned to a question earlier, as related to the 
debt, the GDP in currently. I would be interested to know what 
that was in 2000, when we had projections of a huge surplus 
that was building out to as far as the eye could see, versus 
where we are and where the protections are now.
    And while you look for that, let me add another piece to 
that question. Because in the proposed recovery and jobs 
creation legislation it is designated to do a number of things, 
one of which is to provide for support for school construction 
bonds that are in this package plus a number of other public 
facility bonds that would create a number of jobs, build new 
facilities for growing school districts and those that are 
decaying and other health facilities and communities. But it 
would also help the economy as a whole by creating jobs and 
generating revenue, which is critical as we move across.
    My question, tied to my first one, is this, because I sort 
of feel like we are arguing above people's heads. Sort of 
reminds me of a guy who is standing in a mud hole, and he 
doesn't know whether it is a mud hole up to his waist or he is 
in quick sand and he is going to keep sinking. And so we can do 
nothing, and he can stay there, and when the sun comes out to 
get you dry and he would be in bad shape, or if it starts to 
rain he is really in a mess. And so the question becomes, do 
you do something or nothing? And I think the public is saying 
we want something done.
    Now, we can argue about how we do it and what we are doing. 
So my question as it relates to this piece by creating the 
jobs, as you do your modeling, what is the magnitude of this as 
we create jobs as the multiplier and the other provisions that 
are in this recovery package as you're aware of at this point? 
And what are the specific ideas or items that have been 
mentioned in the package do you feel have a positive aspect as 
it relates to the slumping GDP? I mean, it is easy to figure 
out what will happen if you do nothing, I think. We are not 
really sure what it would be, but we think it is going to be 
bad. What happens if we do this and we start to have an effect, 
versus 2000?
    Mr. Elmendorf. I didn't find the number. I think that the 
debt was about 25 percent of the GDP in 2000. Ending the last 
fiscal year, it is about 40 percent of GDP. I think reasonable 
forecasts, including some fiscal stimulus, would push the debt 
to GDP ratio up toward 60 percent of GDP several years from 
now. That is a dramatic and unfortunate reversal in terms of 
the long-run growth path of the economy.
    Mr. Etheridge. And that was a decision made by people in 
charge in 2000.
    Go ahead.
    Mr. Elmendorf. My tenure only started 3 days ago. But in 
the short run we think that all elements of the package, 
legislation as introduced, have some stimulative effect. And 
the choice among them depends on your judgment about the 
relative importance of timing and cost-effectiveness and long-
run impact and who benefits and what society gets. And there 
are often trade-offs. Some of the things that are most 
desirable in terms of long-run growth may not pay out as 
quickly. Some of the things that pay out quickly may not have 
as high cost-effectiveness, and that is a balancing act that we 
can only provide information about but only you can make the 
decisions.
    Mr. Etheridge. Let me follow that up, because my question 
was we don't have a modeling of that to determine. I recognize 
you can't do that until you see the final piece.
    Mr. Elmendorf. We have in my written testimony today you 
can look at the results of our modeling. So we have taken the 
legislation as passed. We have determined a set of multiplier 
effects, essentially how much bang for the buck there is across 
a number of categories of the package. We have taken every bit 
of the categories and put it into one of these categories, and 
we have estimated the effects on GDP and then the effects on 
employment.
    Now we have reported a range because of the great 
uncertainty. Our estimate is that we end up with a GDP growth, 
GDP by the end of next year, that is, as I said, 1.2 to 3.5 
percent higher, employment that is higher by 1.2 to 3.6 million 
jobs, and an unemployment rate that is lower, by .6 to 1.9 
percentage points. Those are very sizeable effects on the 
economy. Whether they are enough, that is a judgment you have 
to make.
    Mr. Etheridge. Mr. Chairman, I raise that question because, 
depending on where you are in the country, it has a greater 
impact. For instance, nationwide, your unemployment rates now 
are roughly 7.2; and the new numbers have come out. In North 
Carolina, they are 8.7; and we are shedding jobs by the 
thousands, not by the hundreds Statewide. And it has been in 
textiles, it has been in furniture, it is now in high tech, 
manufacturing. It goes down the list because we are a heavily 
manufacture State. As a matter of fact, 72,000 jobs were lost 
between November of 2007 and 2008.
    Mr. Elmendorf. As I say, it is a tremendous range in 
experiences across States. It is getting worse almost 
everywhere but at different rates and from very different 
starting points.
    Chairman Spratt. Mr. Austria.
    Mr. Austria. Thank you, Mr. Chairman. Thank you, Dr. 
Elmendorf.
    Let me just say that, you know, one of the things, you 
testified earlier that stimulating the economy now and reaching 
broader expectations is very challenging. And as I travel 
across my district in Ohio and I am sure most other areas 
across this country, there are real families that are hurting 
right now. There are small businesses in particular that I talk 
to, business owners that are reluctant to invest back into 
their business because of the uncertainty of the financial 
market, the uncertainty of the economy. And I think we all 
acknowledge that there is considerable weakness and uncertainty 
that remains in the economy, but I think what we are hearing 
today is the argument of a hefty infusion of government 
spending spread across 150 different programs within this 
package.
    So, focusing on the short term, let me ask you, as far as 
fiscal policy, it operates with long and unpredictable lags. We 
are hoping, obviously, that the economy will recover quickly. 
And since much of the spending occurs far into the future, my 
question is, if the economy were to recover before large 
amounts of the spending occurs, should we go back and remove 
the fiscal stimulus?
    Mr. Elmendorf. I think the first recourse, if the economy 
recovers sooner than we expect, would be tightening of monetary 
policy. As I said, the Federal Reserve is finding increasing 
difficulty in easing policy but would not find it hard, I 
believe, to reverse course and tighten policy. Beyond that, 
certainly tightening of fiscal policy would be an option; and 
there would be a strong case for doing that.
    One thing that you are seeing here in terms of the spend-
out rates from appropriations bills is that policies set in 
motion take a little time to unfold. That would be true in 
reining projects back in, of course. Once a project has been 
authorized and digging has begun, presumably you would not want 
to stop it. But apart from that kind of restriction, I think it 
would be quite reasonable to consider tightening policy, yes.
    Mr. Austria. Let me ask you, Doctor, if we are looking at 
the short term and we are spending a considerable amount of 
money in a very short time period, how do we make certain that 
this money is spent to deal with those real issues that are the 
real crisis that we have right now in creating jobs and improve 
the long-term productive capacity of the economy?
    Mr. Elmendorf. Well, I think that you could be looking at 
the effects on fiscal infrastructure and the effects on what I 
call human capital, a whole range of policies for education, 
for building of skills, for building of private manufacturing 
capacity, new equipment, for building of government and 
renovation of government buildings. All those things can reap 
benefits over time.
    CBO released a study on infrastructure last year that tried 
to look category by category at the cost-benefit ratio of 
different forms of investment. Concluded, for example, that 
tens of billions of dollars of additional highway spending 
would pass a cost-benefit test, not that an arbitrary 
allocation of that money to highways might pass that test but 
that spent in the right places would pass that test. But, in 
fact, it is very difficult to do this category by category. 
There isn't that much evidence, to be sure. And we can offer 
some judgment about that, but also it depends on what your 
priorities are.
    Mr. Austria. Doctor, let me just kind of follow up. You 
mentioned earlier that, you know, digging I think holes for 
infrastructure and digging holes for broadband basically give 
you the same results; and I think there are some that would 
that argue that if you want to create jobs you hire somebody to 
dig a hole and then you hire somebody to fill the holes. And 
getting back to infrastructure in particular, you know, the 
capital construction programs for public infrastructure are 
very slow spending, averaging I think it was 25 percent in the 
first year.
    And then some have suggested that CBO is wrong, that this 
money will spend out much faster. I was hoping maybe you could 
comment and explain the estimates and how you derived those 
estimates.
    Mr. Elmendorf. So we have a lot of--``we'', I am new--but 
we, CBO, has a great deal of experience watching these 
individual budget accounts over time. So a starting point in a 
sense is the rate at which money that is authorized normally 
turns into outlays.
    In highways, for example, 27 percent of new budget 
authority is spent or outlayed on average in the first year. 
But then, beyond that, we look very specifically as what this 
legislation would do; and then we talk with people outside of 
CBO to gain more evidence.
    In the case of highways, again, as an example, we talked 
with people in transportation departments in half the States 
representing two-thirds of national highway spending; and we 
talked with them about the speed at which they thought they 
could implement the legislation and spend the money.
    And so, of course, there is a wide range of responses to 
that. Some States are more ready to go than others. But we do 
that account by account, and we have discussions, and then 
people refer to make further rounds of telephone calls.
    Now, for all of that, we will undoubtedly be wrong in one 
direction or the other, but we try to pick a point where the 
odds of our being too low equal the odds of our being too high.
    In this legislation, there were a number of themes across 
these various forms of increased appropriations. One is just 
that normal spend-out rates are not that high. Second is that 
we are starting midway through a fiscal year, so one just needs 
to be careful in looking at a table for comparison. A third is 
that very large increases in allocations--and there are some 
very large ones proportionally in this legislation, 10 times 
the last year's support for water projects, a much larger 
increase proportionally for broadband investment in rural areas 
and so on, that those tend to be spent out more slowly. So we 
make that sort of adjustment.
    Chairman Spratt. Mr. Andrews.
    Mr. Andrews. Thank you, Mr. Chairman.
    Thank you and welcome, Director.
    Could you rank for us the efficacy of the stimulus tools, 
giving consideration to which one of those you think would get 
us closer to the upper end of your forecast range. In other 
words, I think we have a unanimous vote here in favor of a 3.5 
percent in GDP instead of 1.2 percent. If you could rank the 
four tools, which are purchase of goods and services, grants to 
State and local governments, transfers to persons, and the tax 
cuts, in terms of efficacy and getting the upper end of that 
range, how do they rank?
    Mr. Elmendorf. Let me first quickly clarify, when we 
report, as we do, the multiplier effects, the bang for the buck 
by category, there is a high and low estimate for each 
category. For any given type of stimulus, we are quite 
uncertain about its effects.
    Mr. Andrews. Of course. You are an economist. We understand 
that.
    Mr. Elmendorf. I mean, economists should be very cognizant 
of the uncertainty. Sometimes they aren't sufficiently 
cognizant. We--looking across these categories, the types of 
stimulus that have the largest bang for the buck are purchase 
of goods and services by the Federal Government, transfers to 
State and local governments for infrastructure investments and 
transfers to persons. As I said, that is just one criterion of 
several in making this judgment. But according to that 
criterion of bang for the buck----
    Mr. Andrews. And that is in rank order.
    Mr. Elmendorf. Yes.
    Mr. Andrews. Do you know--and, if not, you can supplement 
the record, what the actual outlays will be for debt service in 
this fiscal year on the national debt versus what we 
anticipated in the budget resolution we did last year? I assume 
it is considerably lower because of the drop in Treasury bill 
rates.
    Mr. Elmendorf. We will need to get back to you on that.
    I think there are two effects that I think work in opposite 
directions. Treasury rates are lower, but we are borrowing more 
money because of the worst economy. And I don't know offhand 
the balance of that.
    Mr. Andrews. I understand. I would be interested on a per 
dollar borrowed basis how much lower it is.
    And then, have you publicly announced a score yet for the 
fiscal year we are in of the TARP? Have you scored on the 
credit reform basis the TARP outlays we have done so far?
    Mr. Elmendorf. Yes, we have. There was a report--so in our 
annual budget economic outlook there was a reporting of that 
through the end of the year. And we have since updated that 
report, and there is a specific report that we are required by 
statute to produce.
    Mr. Andrews. And what is that number?
    Mr. Elmendorf. The estimate I believe--but, again, this can 
change by the day, because we are looking at market valuations 
of assets. The latest estimate that I have is that the net 
cost, the risk-adjusted present discounted value of the 
commitments under the TARP I have is $189 billion.
    Mr. Andrews. Is that based on the outlay of $350 billion in 
cash?
    Mr. Elmendorf. No, that includes our estimate of the use 
and potential losses on the entire $700 billion. Because the 
legislation for that was passed. Now we will just keep track of 
that as it is.
    Mr. Andrews. Will that be a recurring number in each year's 
budget, or is that a one-shot credit reform entry?
    Mr. Elmendorf. It is one shot if we estimated it correctly. 
To the extent that we did not, there will be revisions that 
will appear in subsequent years. But it is not recurring at 
that level.
    Mr. Andrews. When the Secretary sells assets, if he should 
recover a net profit from the sale of the assets, how will 
those revenues be booked for budget scoring purposes?
    Mr. Elmendorf. Our approach to this, estimating these costs 
under our judgment and under the legislation as it was passed, 
is to calculate on a risk-adjusted present-value basis. So the 
purchase and sale, per se, have no direct effect on the budget 
cost, except to the extent that they demonstrate that our 
estimate was wrong.
    Mr. Andrews. But if your 189 hopefully underestimated the 
revenues, if it was as conservative as it should be, how will 
we then get the benefit of that in future years' budgets?
    Mr. Elmendorf. What you will see is that the debt of the--
the outstanding Treasury debt will decline. So it has risen 
more than the deficit says, because we have been playing this 
financial role, and it will decline more as well.
    I would just mention, to clarify, OMB has been scoring this 
on a different basis. Our reports try to tell you our view as 
required by legislation but also to express them on a basis 
more comparable to OMB. So far at least, they have done theirs 
on a cash basis.
    Mr. Andrews. Understandably.
    Thank you, Mr. Chairman. Thank you, Director.
    Chairman Spratt. Mr. Harper of Mississippi.
    Mr. Harper. Yes, sir.
    Greg Harper from Mississippi. How are you? And 
congratulations. And we don't envy your task that you have, but 
we certainly appreciate the effort you made to get the numbers 
right.
    My question is, are there any things in this package that 
you just think shouldn't be in there?
    Mr. Elmendorf. That's not a judgment I can reach, 
Congressman.
    Mr. Harper. Well, from a budget standpoint, are there 
things in there you think are not stimulus?
    Mr. Elmendorf. Every increase in government spending or 
reduction in government tax revenue we think provides some spur 
to economic activity. The amounts can differ. But, as I have 
emphasized, there are also differences in the timing of the 
effects and differences in other characteristics. I don't have 
a way to consolidate all of that into a single measure of good 
and bad. All I can do is to tell you how these possibilities 
rank under the alternative criteria and then different criteria 
and then you have to put together.
    Mr. Harper. Forgive me for putting you on the spot like 
that, but do the deficit numbers, this huge deficit spending, 
does that trouble you as an economist?
    Mr. Elmendorf. I think that anybody who is paying serious 
attention to the U.S. government budget, both the present and 
the future, is concerned and has been for some time. I think it 
worries me more now because we are adding a lot of debt, even 
without additional policy, and I think you are about to 
implement additional policy.
    But, to be clear, it also worries me a tremendous amount 
that we are in a recession the likes of which I have not seen 
and hope to never see again in my life and with monetary policy 
employing tools that we have never used in at least 75 years 
and so on. So a lot of things worry me now. The deficit is one 
of them.
    Mr. Harper. Okay. Do you anticipate that as we address what 
is going to be an incredible growth in the budget deficit, do 
you anticipate that tax increases will become necessary down 
the line to deal with those issues? And if we do the tax 
increases, will that derail the recovery?
    Mr. Elmendorf. I won't predict what you will vote for as a 
Congress. I will predict that the scale of spending reductions 
or tax increases necessary to move the economy, to move the 
budget back into balance will be very substantial.
    Mr. Harper. Do you anticipate or is it a goal that we have 
a balanced budget? Is that--do you see that as a goal we should 
have?
    Mr. Elmendorf. I think it would be a consensus view among 
economists that something much closer to balance than the CBO 
currently projects makes sense. Whether zero is the precise 
goal you could get more professional arguing about, but the 
notion that we should be moving back toward greater balance 
than we foresee in the baseline projection, I think it would 
receive very little objection.
    Mr. Harper. You know, in Mississippi we have had some 
problems in the housing market last year and some other 
problems that were going on. But the real problem came to bear 
when we started paying $4 a gallon for gas at the pump. And it 
hurt a lot of students. You know, our State people do have to 
drive a reasonable distance to get places; and that had a 
profound impact on seniors, people that were on fixed incomes 
and workers. It was--it hurt all of the small businesses in a 
great way.
    Wouldn't it stimulate the economy if we did things to get 
our own natural resources, drill for oil in ANWR, drill 
offshore? Wouldn't that have an impact on consumer confidence 
and gas prices and help us, you know, sell more cars?
    Mr. Elmendorf. The decline in the price of gasoline is one 
of the few bright spots for the U.S. economic outlooks. Of 
course, that is a reflection of weakening global economy. But 
just by itself it is a bright spot. Obviously, that is--a 
greater extraction of natural resources that you propose has 
other, raises other considerations.
    Mr. Harper. What happens if we do this plan and then we 
have really done nothing to do anything about going to get and 
increase our supply of fossil fuels at this point to help us 
during that time? What happens if we go to $4 a gallon again 6 
months from now in the middle of this attempted recovery?
    Mr. Elmendorf. That would be another blow to economic 
activity, no doubt. I think unlikely, given the global economic 
conditions, but possible; and that would be unfortunate.
    Mr. Harper. Thank you.
    Chairman Spratt. Mr. Edwards.
    Mr. Elmendorf. Dr. Elmendorf, I am glad to hear there is 
concern from Republicans as well as Democrats about the 
deficit.
    I am angered by the level of deficits we are having to 
face. But as I listen to the discussion of it, after having 
been on this committee for 6 years, I am reminded of the wisdom 
of the former Speaker of the House, Sam Rayburn, who said, 
there's no lesson learned in the second kick of a mule.
    I would apply that to this committee in this sense, that in 
1981 President Reagan and Republicans, along with a number of 
Democrats in the Congress, bought into the idea and sold the 
idea that we could have a massive increase in defense spending, 
balance the budget and pass massive tax cuts. David Stockman 
later in a moment of honesty wrote a book and admitted that was 
a false promise, and he knew that it was. You couldn't do all 
that and balance the budget. We ended up with the largest 
deficits in American history.
    The second kick of the mule was 20 years later when 
Republican colleagues, including members of this committee, who 
wrote the budgets at the time because they were in the 
majority, once against promised us that we could have it all. 
We could have massive tax cuts, balance the budget and even 
fight a war in Iraq and Afghanistan and balance the budget.
    Well, that second kick of the mule resulted in the largest 
deficits in American history. I just hope we have learned the 
lesson from Mr. Rayburn and don't have to go back to the third 
kick of the mule. Because what I am hearing from some of the 
very architects of the budgets that I think contributed greatly 
to the economic mess we are in today are proposing, all we need 
now to get out of this mess that they helped create is more tax 
cuts, unpaid-for tax cuts, $4 trillion of unpaid-for tax cuts 
that would increase the national debt far more than the 
spending in this bill.
    I am glad there is bipartisan interest in the deficit 
today. I wish some would go back and look at the predictions 
some of us made in 2001 and 2003, versus the predictions made 
by those that said we could have it all, the tax cuts and 
balance the budget, and determine who was right and who was 
wrong. But at least we are at a point now where I am very happy 
there is bipartisan concern about the deficit.
    So let's go directly with that point into the deficit 
caused by this stimulus package if we pass it. I wish we didn't 
have to increase the deficit this year or next with the 
stimulus package. But having voted against the budgets that led 
to this mess, I am going to be part of voting for a stimulus 
package that hopefully helps us get out of it.
    You projected that the CBO says that the stimulus package 
could increase the GDP by as much as 3.6 percent in 2009/2010; 
on a minimum side, 1.3 percent. Tell us how much the deficit 
would be reduced compared to not doing anything if this 
stimulus package actually increased GDP by 3.6 percent. 
Because, obviously, economic growth and output help reduce 
deficits.
    Mr. Elmendorf. As we say in the cost estimate, it does not 
include the dynamic effects of strong economic growth. We have 
done a back-of-the-envelope calculation of that. It is pretty 
straightforward to think about. In general, a dollar of extra 
GDP reduces the government budget deficit by about $0.20, and 
that is mostly through higher tax revenue, a little bit through 
lower spending on means-tested programs and so on.
    Mr. Edwards. So if you increased the GDP by $1 trillion, as 
you projected this package could do, that is in effect reducing 
what the deficit otherwise would have been by about $200 
billion; is that correct?
    Mr. Elmendorf. Yes. So that is closer as you asked to the 
high end of the range that we--of economic outcomes, the 
average of the high and the low outcomes that we track. The 
midpoint of those has a multiplier of about one. In that case, 
800 or so billion dollars of extra deficit would lead to a 
fifth of that, or about $160 billion of sort of feedback from 
the economy and, in fact, would be smaller if we were on the 
low end or larger if we are at the high end of our range.
    Mr. Edwards. You have also said one of the key criteria in 
this package should be not creating long-term additional 
structural debt or deficits. Would the $4 trillion that some 
have proposed in additional tax cuts that aren't matched by 
spending cuts, would that increase the long-term structural 
deficits of this country significantly?
    Mr. Elmendorf. Yes. Large permanent tax cuts would 
exacerbate the long-run fiscal imbalance if they were not 
combined with some offsetting change elsewhere in the budget.
    Mr. Edwards. Thank you.
    Chairman Spratt. Mr. Aderholt.
    Mr. Aderholt. Dr. Elmendorf, thank you for being here; and, 
of course, congratulations on your new role as Director of the 
Congressional Budget Office.
    Mr. Elmendorf. Thank you.
    Mr. Aderholt. Just one thing that many of us have noted, 
that out of the $500 billion in the spending plan that has been 
proposed, only about $30 billion will be for highways; and a 
lot of--much of the rest of that amount will be for various 
government programs in ways that appear, at least on face 
value, to not have a stimulative effect, such as maybe the $50 
million for the National Endowment for the Arts. How much of 
the $500 billion would you say will actually stimulate the 
growth and create jobs in the economy?
    Mr. Elmendorf. In our estimation and I think the estimation 
of most economists, all of the increasing government spending 
and all of the reduction in tax revenues provides some 
stimulative effect. People are put to work, receive income, 
spend that on something else. That puts somebody else to work.
    And for short-term purposes, what really matters most is 
how many extra dollars get spent, and that is why Keynes used 
this imaginary story about putting money in mines and paying 
people to dig it up. It is just the act of getting purchasing 
power into the economy.
    Now, over time, putting money in mines and digging it up 
does nothing for our consumption possibilities or the future 
growth of the economy. So spending the money on something else 
presumably makes much more sense. But in terms of the direct 
effect, it is either the spending or the taxes in a variety of 
categories, and the differences amount to how quickly it 
happens and to the bang for the buck. But nothing really has 
the bang for the buck of zero.
    Mr. Aderholt. So what percentage of that, out of the $500 
billion, would you say actually would stimulate the economy, in 
your opinion?
    Mr. Elmendorf. I think all of the $800 billion provides 
some stimulative effect. The extent of stimulus varies by 
categories. But it all matters, all of it.
    Mr. Aderholt. The President has talked about saving or 
creating three million to four million jobs, with 90 percent of 
them in the private sector. About $200 billion to $300 billion 
in this proposal, somewhere between 25 and 35, 36 percent, will 
be spent on government programs that have very little 
connection to the private sector. Even accepting the 
administration's estimate, how many government jobs would this 
bill be creating?
    Mr. Elmendorf. I am sorry, that is a question we have not 
tried to answer. It is quite complicated. The estimates that we 
have made, as I say, divided all parts of the bill into half a 
dozen categories with different multiplier effects, different 
bang for the buck. But to address the private sector job count, 
we would have to drill down much deeper and really investigate 
what happens at a very particular level.
    So there will be some highway projects that will involve 
private contractors and some that will involve government 
employees. There can be school construction done by employees 
of the Montgomery County Public School System and some school 
construction done by private employees under contract to the 
Montgomery County Public School System. So to figure out who is 
actually getting a government paycheck and a private paycheck 
would be very complicated, and I am not sure we could, and we 
have not tried.
    Mr. Aderholt. What are your thoughts as far as taking a 
government job and stimulating the economy as opposed to 
private sector jobs and as far as how those compare and as far 
as the overall stimulation of the economy?
    Mr. Elmendorf. Again, in terms of the short-term stimulus, 
either kind of job works because the people who get those jobs 
and receive the paycheck go out and spend it; and that is--or 
spend much of it, and that is the multiplier effect that 
economists talk about. I think the differences would come down 
to what you judged as the most effective in supporting long-run 
economic growth more than in terms of short-term stimulus.
    Mr. Aderholt. I see my time is running out, Mr. Chairman. I 
yield back the rest of my time.
    Chairman Spratt. Mr. Scott of Virginia. Mr. Larsen of 
Washington had to leave. Mr. Schrader.
    Mr. Schrader. Thank you, Mr. Chairman.
    I appreciate the discussion here today, and I just wish 
some of those that have evinced concern about the deficit that 
we seem to be incurring this current year were willing to speak 
up over the previous 8 years where we ran a $10 trillion debt. 
And I guess if that is the low mark we are aiming for, geez, we 
have got a lot of room to work here in the next few years of 
this administration.
    Having said that, I do have some concerns about the debt we 
are accumulating. I agree with Mr. Andrews. And I go to your 
figure one that you have in your document; and when I look at 
the recovery in the outyears, you paint a linear picture. We 
get back to the same linear rate we had prior to the recession.
    And I guess my concern--and I would like your opinion. My 
concern is that that linear rate is not going to be--is not 
going to recur, that indeed the growth rate and our GDP will be 
significantly lower than that linear rate because the previous 
years were based on the Ponzi schemes of the 1980s, with merger 
mania, you know, get-rich-quick schemes that empowered the 
wealthy, threw a lot of working men and women out of their 
jobs, the dot com bubble of the '90s and here now the thought 
that my house is always going to be worth more than I paid for 
it.
    So those get-rich-quick concepts are no longer there; and 
shouldn't we be moderating our GDP expectations, hopefully, in 
a more value-based economy where there is real production and 
real value to what we are doing? So I am concerned we are not 
going to have the tax revenues needed to pay for our programs 
and do the things we want to do in the outyears.
    Mr. Elmendorf. You raise a number of issues. Let me say, 
briefly, the potential GDP line in this picture actually is 
affected a little bit by the economic downturn. We have much 
lower investment and spending projected for the next several 
years. Businesses tend not to invest as much in recessions. 
That lowers the amount of capital that we will have down the 
road. In fact, if you look carefully, there is a little bit of 
flattening of the potential output.
    The other issue you raise I think involves the demand, the 
potential supply of goods. You also raise questions about the 
demand for goods. The bubble economy, the rise in value of 
stocks and houses, has encouraged consumer spending in a way 
that is not likely to be repeated soon; and the huge losses are 
holding down spending by households and will for some time.
    Over time, this projection says that the policies under 
current law will eventually pull us out. That is a feature of 
economies that eventually they tend to right themselves. 
Consumer spending adjusts for lower wealth but then will start 
to pick up again and so on.
    We might be wrong about that, certainly. But we hope to 
have balanced the risks. I think--but it is a problem for the 
next several years, certainly, of not having sufficient demand 
for goods and services to put people back to work; and that is 
why I think this consensus has developed on behalf of some form 
of fiscal stimulus and some form of financial monetary policies 
to try to return people to work more quickly. And I think there 
will definitely be less risk taking, less financial engineering 
than was the case a few years ago. That should not hinder, if 
anything, possibly, by redirecting smart people's attention to 
other aspects of the economy, could help long-run growth.
    Mr. Schrader. If this package did not include any aid to 
our States that basically deliver the education for America, 
that provide for the health care of millions of individuals in 
our great country and make us safe in our own homes with our 
public safety budgets, what would be the effect not just on the 
economy at large but on those individuals and those 
institutions back home?
    Mr. Elmendorf. I believe there is a report from the GAO 
that estimates that operating budget deficits of State and 
local governments in the next 2 years will exceed $300 billion. 
Those governments are under various degrees of pressure to 
balance their budgets. That will mean tax increases or spending 
cuts and of a scale that we have not seen in some time. With 
house prices falling, property tax revenues will go down. With 
consumer spending falling, sales tax revenues will go down. The 
cutbacks will be large, and the provisions in H.R. 1 would 
offset some part of that. That is about as specific as I can 
be.
    Mr. Schrader. Thank you.
    Chairman Spratt. Mr. Simpson of Idaho.
    Mr. Simpson. Mr. Chairman, I don't really have any 
questions except a couple of statements and I guess to welcome 
you to your new position.
    Basically, if all government spending is stimulus, why stop 
at $825 billion? Why not go to 2 or $3 trillion? I mean, if we 
are going to stimulate the economy, let's really do it.
    Mr. Elmendorf. Well, sir, there are people who have made 
exactly that argument for why this policy is not sufficient.
    Mr. Simpson. I was afraid of that.
    Mr. Elmendorf. I think the answer--and I am not sure what 
the right size of package is. I don't think there is a 
consensus among economists about how much to do. I think the 
considerations involve the loss of output and income in jobs. 
So even with H.R. 1, by our estimates, there is still an 
unemployment rate that is substantially above what we have 
gotten used to over the last 7 years, lower employment than we 
would otherwise have. So even with H.R. 1, a package of that 
size, there is still a substantial shortfall in economic 
activity relative to what we could be doing. So some people see 
that and say that more should be done. People also say that we 
are uncertain; and because we are not sure if things got worse, 
that might be very bad, another argument for doing more.
    On the other hand, people say, look, $800 billion is a lot 
of extra debt to incur. It imposes a burden on the future. And 
maybe we also need to be working through financial and monetary 
policies that might be particularly effective at getting the 
economy going again, and that is why some people would say we 
should have smaller numbers for fiscal stimulus. And those are 
all legitimate arguments.
    Mr. Simpson. Let me ask you a question. This gets back to 
what Mr. Blumenauer was talking about when we criticize some of 
the particular spending proposals that are in this economic 
stimulus plan, a lot of them that are spent out in 2 and 3 and 
4 and 5 years down the road.
    We have a normal appropriation process here. If there is 
only so much of this money that is going to be spent this year, 
why not go through the normal appropriation process? As an 
example, there are something like 32 new programs that have 
never been authorized by Congress or anybody else. I don't know 
whether they are effective or the right way to be spending 
money, other than they were dreamed up in somebody's office and 
put into this bill.
    Why not--if the money is not going to be spent this year, 
why not go through the normal appropriation process and do it 
where we have hearings and oversight and determine whether the 
money is best effectively spent there or somewhere else? If all 
government spending is stimulative, we are operating right now 
on a 2008 fiscal year--on a 2008 budget year because of the 
continuing resolution. That means that the increases in 
spending that we had in 2009, we are a third of the way through 
this fiscal year and we are not spending that money because we 
are operating at the 2008 level.
    Would not having passed the 2009 appropriations bills on 
time, as we should have done, not also been a stimulative, that 
increase in spending that we would have had.
    Mr. Elmendorf. Yes, it certainly would have been.
    Mr. Simpson. We have $500 million that we have put into 
that stimulus package for EM cleanup. It is very near and dear 
to my heart. EM cleanup is spent in different districts around 
the State, at the Idaho National Lab. We put $500 million into 
EM cleanup. We actually had an increase in the 2009 
appropriation. Had we passed that, we probably wouldn't have 
had to put $500 million into a stimulus package.
    What seems to me is that what we are trying to do is spend 
money on every good idea somebody has had in the back of their 
brain somewhere for years and years and put it into an 
emergency stimulus so that we can pass it, instead of going 
through the normal appropriation process. That is what many of 
us are complaining about. Not that we don't need a stimulus 
package. We all believe we need a stimulus package of some 
sort. It is the way we are doing and the way we are avoiding 
the rigmaroles of the regular legislative process that concerns 
most of us. Most of us, if this money is being spent out there 
this year, this is fine.
    I will tell that you when the stimulus passed last year the 
$500 or $600 checks that went out to everybody, I voted against 
it. I reason I voted against it is I didn't think it would have 
any very long-term effect. And if you look at the economic 
numbers it is barely a blip in the economic scale as to what it 
had. I thought we would spend it better by doing infrastructure 
projects.
    I was told by then OMB Director and by Bernanke that those 
projects take so long to get out there that the money won't go 
out. And, in fact, we have shovel-ready projects in the States, 
some $67 billion, as I understand it, where we are only putting 
$30 billion into it, that are ready to go today.
    I do not have a problem with that kind of stimulus program. 
But when we are sitting there looking at programs that will be 
spent 2 and 3 and 4 years down the road, I think we need to go 
through the regular legislative process.
    The other thing I would note, just because somebody needs 
to respond to some of the rhetoric that has been going on, Ms. 
Schwartz said in her testimony when she was comparing the 
relative value of spending versus tax cuts and so forth and the 
balance that ought to occur there, that apparently Republicans 
only wanted tax cuts and then only for the wealthy. That was 
her exact words.
    Apparently, she hasn't read what the Republican proposal 
is. We would drop the 15 percent rate to 10 percent, the 10 
percent rate to 5 percent. That means anybody on the first 10 
percent of their income, on the first $16,700, lowering the 
rate to 5 percent. I don't know that I'd call that the 
wealthiest individuals in this country. Maybe that fits her 
category, but I am tired of the worn-out rhetoric.
    We have a legitimate debate about how much of this should 
be in tax relief and how much should be in spending, and we 
ought to focus on where this ought to be.
    Chairman Spratt. Thank you, Mr. Simpson.
    We now go back to Mr. Scott.
    If you suspend just for a minute, the Republican members 
have a meeting with the President at 12:15. We, by all means, 
want to accommodate, so we are going to take a break right at 
12:15. We will take one more round of questioning to finish 
out, if that is agreeable for everybody.
    Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Elmendorf, we have heard a lot about the situation and 
need for stimulus. My question is, does the difference between 
stimulus priming the pump and expenditures as we have just 
heard that go for long periods of time, do we need a stimulus 
to just prime the pump or do we need long-term spending to get 
us out of the mess we are in?
    Mr. Elmendorf. I think most economists expect that in 
absence of new fiscal policy the economy will be well short of 
the potential number of jobs, amount of income for several 
years, 2009, 2010, well below in 2011, and still below in 2012. 
The number of forces that I mentioned are leading to a slow 
recovery in our estimation and the estimation of most 
economists. And that is the case, all else equal, for fiscal 
stimulus that lasts for some time.
    Mr. Scott. So when we talk about timely, targeted and 
temporary, timely and temporary means several years?
    Mr. Elmendorf. Yes. So one difference I think now, the 
discussion now from the discussion last winter, that last 
winter there were people predicting a long, deep recession, but 
that was not the consensus. There was much more uncertainty at 
the time, much more of a sense of what was needed was a quick 
jolt. I think now, with the deterioration we have seen in the 
economy and the financial system over the past year, has moved 
people to looking over a longer horizon.
    Mr. Scott. Would there be an advantage in getting jobs that 
could be done extremely quickly? I am speaking I guess 
specifically about summer jobs, because people would be hired 
in a matter of months.
    You have shovel-ready projects for which people have told 
us they can get people hired within 120 days. There seems to be 
some question about that, but the 120-day figure is something 
that a lot of the Departments of Transportation around the 
country said they could meet. But summer jobs, they have to be 
on the job, and it is temporary. They are off the job by the 
end of the summer, and they are relatively inexpensive. A few 
hundred dollars, maybe $1,000, $2,000, no more than $4 or 
$5,000 per job. You have people up and working.
    Would it make sense to increase the number of jobs that you 
know will be up and running this summer, education programs, 
summer camps, other jobs for youth, youth build and those kinds 
of things?
    Mr. Elmendorf. It certainly is useful to get money out the 
door as quickly as possible. This summer qualifies for that. I 
think the greater challenge is in trying to organize the 
people, select them, put them to use at constructive tasks. I 
think that is a challenge, and I don't know enough offhand to 
judge how much of that could be done.
    Mr. Scott. Let me tell you, if you give community action 
agencies notice, 2 or 3 weeks notice that there are summer jobs 
available, they will not run out of young people to take those 
jobs. You could do other things like in Federal agencies have 
internships and those kinds of things. You can increase funding 
for Upward Bound. There are a lot of things that you could do 
for which there would not be a lot of confusion in getting 
people on the job working, receiving paychecks by this summer.
    Mr. Elmendorf. I think the challenge is in getting the 
money from here out across the States and across the 
communities. So, for example, our conversation with State 
Transportation Departments, one of their concerns is the 
highway money that is directed to local governments. Not that 
the local governments can't use the money, but it is one more 
step in the allocation process, and it takes time. And I think 
there is some underlying trade-off. The more that you want to 
influence who gets the money and what they do with it, the 
harder it will be to move very quickly.
    Mr. Scott. Something like summer camps run by local 
recreation programs, those could be put together fairly 
quickly.
    Mr. Elmendorf. I agree. I am not an expert at that, as I've 
said. I think the issue is you need to decide which summer 
camps, where in the country get the money, and then you need a 
process for keeping track of whether they deserve the money and 
what they do with the money.
    Mr. Scott. You tell school systems, local community action 
agencies--let me tell you there would not be a problem getting 
people hired in programs designed this summer if we act within 
the next couple of weeks.
    Thank you, Mr. Chairman.
    Chairman Spratt. Thank you, Mr. Scott.
    Let take one more question from Mr. Langevin, and then we 
will recess the hearing for about an hour. We will come back at 
1:15.
    Mr. Langevin. Thank you, Mr. Chairman.
    Mr. Elmendorf, thank you for being here today. Welcome 
aboard and congratulations in your new role. It comes at a 
challenging time.
    Mr. Elmendorf. Thank you, Congressman.
    Mr. Langevin. I know we have gone over this a couple of 
times, but, again, the difference in GDP if we do nothing 
versus enacting the stimulus package as proposed.
    Mr. Elmendorf. Our estimate is that in the fourth quarter 
of 2010 GDP would be higher by 1.2 to 3.5 percent if we 
implemented H.R. 1 relative to doing nothing.
    Mr. Langevin. Thank you.
    In my State, most of our businesses for job creators are 
small businesses; and I know the programs like the 7(a) loan 
program through SBA have been highly effective. I am not 
certain, as I am still looking over the details of the stimulus 
package, I don't necessarily see anything yet that increases 
7(a) loan programs. Would that type of investment be a 
multiplier that would be worth undertaking and worth investing 
in this stimulus package? And at what level should we invest if 
we were going to do that?
    Mr. Elmendorf. I think--as I said, I think money that gets 
pushed out to hire people to do something stimulates the 
economy; and for short-term stimulus it doesn't matter much 
exactly what they do. But it can matter a lot over time, 
depending on whether we want to move the economy in more energy 
efficient directions or with different infrastructure or what 
have you. And, also, I think the speed varies across sector. It 
is more difficult to scale up programs to a very large order of 
magnitude or not.
    So one constraint--I am not an expert at every possible 
part of the economy or every part of this package, to be clear. 
But I think it can be a constraint just how much money can go 
into some area all at once. And it is a constraint in terms of 
what the Federal Government can manage, what State and local 
governments can manage and also what the private sector can do.
    We need trained workers to do certain tasks. At the end of 
last year, a survey of transportation contractors, a quarter of 
them reported a shortage of skilled labor, not so much 
unskilled labor but skilled labor. So there are going to be 
constraints in terms of the real economic activity in terms of 
workers and materials and so on that can be an issue.
    Mr. Langevin. I don't know if that answers my question. Let 
me ask you it a different way.
    Would you like to see a greater investment in support of 
the 7(a) loan program in the stimulus? Would that be something 
that is positively viewed, or should we leave it where things 
are?
    Mr. Elmendorf. So I think--again, I don't make 
recommendations on what I would want, but I think more of that 
would provide additional stimulus to the company.
    Mr. Langevin. Mr. Chairman, I hope we could encourage that 
in the stimulus program. In a State like mine, where small 
business accounts for about 95 percent or greater of the jobs 
in our State, that is something that would be of great benefit.
    My final question really focuses on the national debt, and 
this is something that I have been concerned about for quite 
some time. I even intend to vote for the stimulus package. I am 
of the opinion, as others are, that we have to do this, that 
doing nothing is just unacceptable and would make the situation 
worse.
    At what risk, at what level of debt do we get to the point 
where that level of debt is really unsustainable? How much room 
do we have really before we have hit a ceiling and can no 
longer deficit spend, that the national debt crosses a 
threshold that is just at a level that is unsustainable?
    And the second half of that is, what tools in the future 
would be most effective in paying down the national debt? Even 
if they are creative solutions, things we haven't yet thought 
of, a national sales tax or something that doesn't even exist 
right now, but what tools would be most effective in bringing 
down that debt?
    Mr. Elmendorf. We are on a path--as I say right now, 
Federal debt at the end of the last fiscal year was about 40 
percent of GDP. We are on a path to push up it to about 60 
percent of GDP several years from now. That would be the 
highest ratio of debt to GDP that we would have had in this 
country since the early '50s when we were coming down from the 
very high debt incurred during the Second World War.
    Other countries have operated for years with more debt. 
Their excess levels of debt tend to worry people. Their 
securities are not viewed as the security you most want to have 
in a financial crisis like ours are.
    So there are certainly risks. It is very difficult to know 
where the tipping point might be. One could go on for some time 
accumulating debt. But at some point, as concern rises--and it 
is not just the current level of debt but the forecast--at some 
point then there could be a rather abrupt reaction, and 
economists are not good at predicting what that is.
    Policies you could undertake, anything that raises taxes or 
cuts spending numerically does the trick. We can talk with you 
about the effects of different policies on incentives in the 
economy, on long-term economic growth and on the well-being of 
particular individuals, but those are really what the choices 
will come down to.
    Mr. Langevin. Thank you, Mr. Chairman.
    Chairman Spratt. Dr. Elmendorf, thank you very much for 
your testimony. We have a couple more questions to put to you. 
Because of the present situation with the Republican members, 
we are going to recess the hearing until about 1:15.
    Have we covered all the Republican witnesses? Have we? We 
have two more on our side to ask questions. John? Marcy?
    Agreeable to you, we will dispose----
    Mr. Elmendorf. I am at your disposal, Mr. Chairman.
    Chairman Spratt. Two more witnesses. Bear with us just a 
moment.
    With your understanding, we will go to Marcy Kaptur and 
then come back to you; and that will wrap up the round of 
questioning.
    Ms. Kaptur. Thank you, Mr. Chairman. That shows great 
sympathy for our guest and for all of us. We appreciate it very 
much.
    Let me place on the record that today in Ohio, in Toledo, 
my home, unemployment has risen to 10.7 percent, up from 7.0 
last year; in Sandusky, Ohio, 11.4 percent, up from 8.4 percent 
last your; Lucas County, 9.9 percent, up from 6.5 percent; Erie 
County, 9.8, up from 7.3; Ottawa County, 12.4 percent, up from 
9.1 percent. According to the numbers we have, there are 
currently 11,100,000 Americans unemployed; and by this year's 
end we anticipate it could reach over 12 million.
    The statement I want to make is that putting people to work 
now, applying hands and minds in useful enterprise, is the most 
important step we could take, rather than sidelining 
individuals to help this economy move forward. And so my 
question, Doctor, is, as I look at your testimony, you say even 
if we pass this, the number of jobs created this year could be 
less than a million or maybe as much as 2 million. That is so 
small in terms of the need; and, therefore, I must ask the 
question, which programs in the stimulus are best suited to put 
to useful work those who are unemployed?
    That is my first question.
    Mr. Elmendorf. So I think if you look across pieces of the 
stimulus legislation there is some trade-off between the 
immediacy of the effect and the ultimate bang for the buck. So 
the parts of the package that put money into the economy most 
quickly are the changes in tax policy and the changes in 
entitlement policy. Slower spend-out rates rise in the 
appropriations parts of the package in general.
    However, our judgment, drawing on the consensus of the 
economists you use, is that direct appropriation spending by 
the government has a large bang for the buck over time. So 
there isn't a single--just looking at those first two criteria 
that we talked about, the timeliness and the cost-
effectiveness, there isn't a simple ranking of the pieces of 
the package. There are some pieces that are both fast and have 
a high bang for the buck. Those tend to be payments to low-
income individuals.
    Ms. Kaptur. But that doesn't put people to work if they are 
getting an unemployment compensation check.
    Mr. Elmendorf. Well, no, it does, because they take the 
money and they spend it. And the reason it has more stimulative 
effect than a broad-based tax cut would is because, though 
people have lost their jobs and are subsisting on an 
unemployment insurance check that is a fraction of what their 
previous earnings were, are likely to spend a large fraction of 
that check. So it doesn't put them back to work, but it does 
keep to work the person in the clothing store or the auto 
dealership.
    Ms. Kaptur. I hear you on that. But one of the difficult 
parts on this is people want to work. They don't want to 
receive subsidy checks, even though they have earned them 
through their years of work.
    So my question is, in this program you mention some of the 
transportation projects, for example. You know what we need in 
our cities right now? We have got to fill potholes. We have to 
buy the asphalt to put in the potholes. This is not glamorous. 
You were talking about smart people. I think we need 
responsible people, we need good people, we need ethical 
people, we need people who have experience, and we need to put 
people to work.
    Sometimes you can be sort of overeducated. My goal is to 
get people to work to do useful work that is needed right now. 
We need trees cut down. We have got 20 million trees in Ohio 
and Michigan that have to be cut down. We could put them to 
work tomorrow.
    What programs? Can you go through this list? If you can't 
do it right now, can you tell me one, two, three, four, five, 
which are the ones that can put people to work the fastest?
    Mr. Elmendorf. So I will go back--I can't tell you offhand. 
I can go back and check which are the specific items in 
legislation we think would spend out fastest. But you might be 
surprised. So highways is not a category that we think spends 
out particularly rapidly. And that is not a judgment that there 
are not immediate needs, as you say. The judgment about the 
process of getting money all the way through the chain to the 
person who needs to get paid to fill in the pothole. And we 
have talked with Departments of Transportation in half of the 
States accounting for two-thirds of national highway spending, 
and some of them were optimistic and some less so about their 
ability to put money out the door right away.
    Generally when we have seen big increases in spending on 
highways, for example, it is not all fancy. Some of it is basic 
work. When the budget authority goes up, the outlays follow 
with a lag. Between 2006 and 2008, budget authority for 
highways rose by 17 percent, but outlays rose by only 10 
percent. There are now tens of billions of dollars of 
unobligated balances in the highway fund, money that has been 
authorized by Congress and not obligated yet by the States. It 
is simply takes time, and that is the challenge.
    I will go back and check which pieces moves the fastest.
    Ms. Kaptur. Yes, because to have that low a rate of 
reemployment is very troubling to this Member.
    Chairman Spratt. Thank you, Ms. Kaptur.
    Mr. Yarmuth.
    Mr. Yarmuth. Thank you, Mr. Chairman.
    Welcome and congratulations.
    Some critics of this proposal have characterized it as 
throwing everything against the wall and hoping something will 
stick. I think I heard that over the weekend. And you mentioned 
before, and I agree with you, that desperate times require 
desperate measures. And I actually characterized it as to 
pretty much the same thing, that we are throwing everything we 
have at our disposal, given that we don't have monetary policy 
to use, at this desperate situation.
    Mr. Scott has mentioned something that we haven't thrown 
yet. Is there anything else that you at the CBO can think of 
that we would throw at this situation that we haven't thought 
of?
    Mr. Elmendorf. I--that is a fair question. Unfortunately, I 
don't have a great answer. I don't have offhand in my mind a 
list of obviously overlooked opportunities, but I will give 
that more thought and let you know promptly if I have further 
ideas.
    Mr. Yarmuth. Thank you.
    We had some discussion earlier about job creation and how 
much it was estimated it would cost to create a job, $140,000 
to twice that or whatever the discussion was. And you just 
alluded to the issue of saving jobs as well as creating them. 
Is there any way to estimate how many jobs saved--and, 
obviously, I would think it is a much more difficult 
assessment--but is there any way to estimate how many jobs 
could be saved by this plan, as opposed to created?
    Mr. Elmendorf. Our estimate is the difference in the net 
total number of jobs in the economy. So it reflects some 
combination of jobs saved and jobs created. We don't really 
have a way of keeping track of that separately.
    As you know, there is a tremendous amount of churning in 
the U.S. economy, the labor market on a regular basis. A 
tremendous number of jobs created and lost with the net being 
the difference between them. And what we have estimated here is 
the net difference in jobs under this plan versus without the 
plan. I am not really able to do that break down.
    Mr. Yarmuth. Well, I asked the question almost rhetorically 
almost. Because you mentioned that you were a little bit 
concerned about the use of jobs as the one standard in 
evaluating the success of this program, and I share that 
concern.
    You also mentioned--you have used the phrase several time--
the ultimate bang for the buck. In your definition or CBO's 
definition, what is ``ultimate''?
    Mr. Elmendorf. What I mean by that is, as the dollar goes 
out of the Federal budget, what is the effect on GDP? So 
whenever the dollar goes out, what does it do to GDP?
    Mr. Yarmuth. So the ultimate bang for the buck does not, 
for instance, calculate the cost to the economy and society of 
neglecting some of these things that will be neglected because 
of the desperate situation that we are in?
    Mr. Elmendorf. No. This is a much simpler estimate, just 
referring to the macroeconomic impact, without taking account 
of either the underlying trajectory with or without the plan in 
terms of the quality of our public utilities and so on.
    Mr. Yarmuth. Right. And the cost to society and to the 
ultimate economy, the long-range economy in the cuts in 
education that would ensue if we did nothing to support the 
States and their efforts.
    Mr. Elmendorf. Right, we have not looked carefully at that 
aspect.
    Mr. Yarmuth. One thing--and this is not a question. This is 
just illustrative. My brother is in the barbecue business. He 
runs a successful chain of barbecue restaurants. And he said to 
me not too long ago, he said, I finally determined, if people 
can't afford to buy barbecue, it doesn't matter what my tax 
rate is.
    And I think that in terms of the analysis of what we should 
be concerned about is giving people the money to spend, 
creating the demand side is much more important than giving 
breaks to businesses which, in many cases, will not use them to 
create jobs, will use them to pay off debt or sit on the 
sidelines until conditions improve.
    So I throw that out just as an anecdote that may or may not 
be of value.
    Mr. Elmendorf. Thank you, Congressman.
    Mr. Yarmuth. Thank you for your testimony. I yield back.
    Chairman Spratt. Mr. Elmendorf, this is the conclusion of 
your part of our hearing. We very much appreciate your thorough 
and thoughtful answers, as patiently delivered as they have 
been painstaking. I think this all goes well for our working 
relationship in the future. Thank you very much indeed.
    To our other witnesses, we beg your indulgence until we can 
once again get the full committee together. We will go with the 
second panel at that time. In the meantime, you are welcome to 
use the anteroom just behind me to relax, to have a sandwich, 
if you would like, or use the telephone. We will start back up 
somewhere around 1:15.
    Mr. Elmendorf. Thank you, Mr. Chairman. I look forward to 
being back before you again soon.
    Chairman Spratt. It won't be long. Thank you very much 
indeed for your excellent testimony.
    [Whereupon, at 12:30 p.m., the committee was recessed, to 
reconvene at 1:15 p.m.]
    Chairman Spratt. We will now turn to our second panel. We 
are still waiting for the Republican members to come back from 
their hearing or meeting with the President, and we are still 
rounding up some Democrats, but we think it is important that 
we get under way and not ask our second panel to forbear any 
longer.
    Once again, let me invite all four of you here.
    Dr. Alice Rivlin, as I noted earlier, was the founder, 
present at the creation of the Congressional Budget Office. She 
served as OMB Director under President Clinton. She is 
presently at Brookings.
    We will also hear from Dr. Mark Zandi, who is the Chief 
Economist and cofounder of Moody's Economy.com; and from Dr. 
Laurence Meyer, former member of the Board of Governors of the 
Federal Reserve and currently Vice Chairman of the 
Macroeconomic Advisers; and Dr. Kevin Hassett, Resident Scholar 
and Director of Economic Studies at the American Enterprise 
Institute.

   STATEMENTS OF ALICE M. RIVLIN, PH.D., SENIOR FELLOW, THE 
 BROOKINGS INSTITUTION; MARK ZANDI, PH.D., CHIEF ECONOMIST AND 
  COFOUNDER, MOODY'S ECONOMY.COM; LAURENCE MEYER, PH.D., VICE 
 CHAIRMAN, MACROECONOMIC ADVISERS, LLC; AND KEVIN A. HASSETT, 
 PH.D., SENIOR FELLOW AND DIRECTOR OF ECONOMIC POLICY STUDIES, 
                 AMERICAN ENTERPRISE INSTITUTE

    Chairman Spratt. By common consent, we have agreed that Dr. 
Rivlin will go first.
    Welcome again to the Budget Committee. How many times you 
have testified, I don't know, but we always come away wiser and 
better informed because of your contribution. So the floor is 
yours, and we look forward to your testimony.

              STATEMENT OF ALICE M. RIVLIN, PH.D.

    Ms. Rivlin. Thank you, Mr. Chairman. I am very pleased to 
be back here. I always enjoy coming before this committee.
    I will summarize my testimony fairly briefly, since we 
don't have a lot of time. But I would like to emphasize some 
points that we have not talked about, particularly the long-run 
budget deficits that are looming ahead of us and what I see as 
the opportunity for the Congress as they act on the stimulus to 
also take action on the long-run budget deficits at the same 
time.
    On the outlook, the risks, it seems to me, are on the 
downside. You are going to hear from modelers who are more 
expert in running the models than I am, and you have already 
heard from Doug Elmendorf. But I think it is important to keep 
in mind that there is just enormous uncertainty at the moment 
and I think three reasons, at least three reasons, not only for 
their being a great deal of uncertainty but for the risks being 
mainly on the downside.
    One is that the financial system is still not stable. The 
models that people use to make forecasts have been calibrated 
on what has happened in the ups and downs of the economy over 
the last several decades since World War II. But in that period 
we have not had a recession in which the cause was a financial 
meltdown. So what you get from models is the answer to the 
question here is what we think will happen under these current 
circumstances if the financial system is operating normally, 
and we know that ours is not.
    Second point, we don't want to get back to the overspending 
and over-borrowing economy that brought us to this path. We 
have been living beyond our means. We must be aspiring to a 
new, normal economy in which there is less consumption and more 
saving and less dependence on foreign borrowing. That will give 
us a more stable long-term situation, but it will make it 
harder to climb out of this recession.
    Finally, I am concerned about the impact of the very rapid 
increases in the U.S. debt on willingness of our creditors, 
especially our foreign creditors to keep buying Treasury 
securities. They are buying them now because there is nothing 
else to buy, and we are the most secure place to put their 
money. But I think we have to worry as the world economy 
recovers about the magnitude of the debt that we are pushing 
out there.
    Now, I would like to make a distinction which has been lost 
in recent times between a stimulus and an investment plan. I 
think we need both. We need in this quite dire situation a 
stimulus that is, as we used to say, targeted, temporary and 
spends out quickly. And there is much in H.R. 1 that is of that 
nature: cash to low and moderate income people, aid to the 
States, temporary appropriations for genuinely shovel-ready 
projects. All of that I think could spend out quite quickly.
    But we also need, in my opinion, a longer-run, very well-
thought-out investment in public infrastructure and in the 
skills and capabilities of our economy. That ought not to be 
just shoved into a quick stimulus. It should be very well 
thought out. It should include transportation projects, mass 
transit particularly, communications projects, I think health 
information technology especially, and a heavy emphasis on 
improving the skills of the workforce.
    We need all of that to grow our economy and to be more 
productive in the future. But we need to plan it well, and I 
think over time we need to pay for it. What we need is a shift 
of resources from somewhere else into more public investment, 
which we have neglected for a long time. We don't need to worry 
right now where the resources are going to come from, but if 
this is a well-planned long program over time we are, with any 
luck, going to get back to fuller employment, and we will need 
to worry about that. So the resources can only come from 
reducing other government spending or from additional taxes. 
That should not be forgotten.
    I believe that we have a serious--much more serious than we 
are remembering now--problem of long-term deficits built into 
our budget for reasons that are familiar. We have spending 
projections rising very rapidly, faster than the GDP will grow, 
faster than revenues at any set of tax rates, coming from the 
principal entitlement programs, especially Medicare and 
Medicaid and, to a lesser extent, Social Security. That used to 
be very far in the future. It is not anymore. It is beginning 
now and that spending will rise; and, for that reason, I think 
we have to now, while we have the chance, take actions that 
will bring down those deficits in the future.
    You could fix Social Security right now. It wouldn't hurt 
the current economy. Nobody is going to do it by cutting 
benefits for people who are already retired. But if you did 
something like was done in 1983, a package of Social Security 
reforms enacted now that could include raising the retirement 
age gradually in the future, indexing it to longevity, changing 
the indexing so that benefits do not go up as rapidly, 
especially for high-income people, raising the cap to which 
taxes apply. A package of things like that enacted now could 
reassure the world that we are putting our financial house in 
order for the future and not do any concurrent damage.
    Medical care is harder, but it is not impossible. If the 
Congress were to take seriously the mandate to make Medicare 
more efficient and put in place the data collection and the 
changes in incentives that would make this program more cost-
effective over time, this is the time to do it, because it 
takes some upfront investment and the payoff is long term.
    Finally, process reform. I know this committee has been 
over time committed to caps and to PAYGO. I would encourage you 
to stay committed, not to make too many exceptions. But in the 
long run, that is not enough. That will keep the deficits from 
getting worse, and the getting worse is already built in. So I 
think the Congress is going to need to shift to some new budget 
process that will put entitlements and taxes into a long-run 
structure so that you can actually decide--you are forced to 
actually decide on the magnitude of the long-term deficits and 
take steps to keep the budget in the range in which you want 
it.
    Thank you, Mr. Chairman.
    Chairman Spratt. Thank you.
    [The prepared statement of Alice Rivlin follows:]

 Prepared Statement of Alice M. Rivlin,* the Brookings Institution and 
                         Georgetown University

    Mr. Chairman and members of the Committee: It is a pleasure for me 
to be back at the House Budget Committee. I am especially gratified to 
follow my former colleague, Douglas Elmendorf, as he makes the first of 
many appearances before this Committee as Director of the Congressional 
Budget Office.
---------------------------------------------------------------------------
    *The views expressed in this testimony are those of the author and 
should not be attributed to the staff, officers or trustees of the 
Brookings Institution or Georgetown University.

    I will say a few words about the uncertainties of the economic 
outlook and then turn to the question of how to deal with the immediate 
and longer-run challenges of fiscal policy. The challenge of budget-
making has never been greater. Indeed, I believe that the future 
viability of the United States economy depends very heavily on budget 
policy-makers' ability to focus on two seemingly contradictory 
imperatives at the same time:
     The immediate need to take actions which will mitigate the 
impact of the recession and help the economy recover--actions that 
necessarily require big increases in the budget deficit
     The equally urgent need to take actions that will restore 
fiscal responsibility and reassure our creditors that we are getting 
our fiscal house in order--actions to bring future deficits down.
    I stress two sets of actions because I do not believe it will be 
sufficient to pay lip service to the long run challenge, while acting 
only on deficit-increasing responses to the current financial and 
economic crisis. Congress and the Administration must work together on 
actual solutions to both problems at the same time.

                          THE ECONOMIC OUTLOOK

    We meet at a time of extraordinary uncertainty about how deep the 
recession will be and how long it will last. Forecasters all admit that 
they have little confidence in their ability to predict how consumers, 
producers, and investors at home and abroad will react to the 
cataclysmic economic events that have occurred. But people in the 
forecasting business still have to produce forecasts, so they do the 
best they can. The Congressional Budget Office (CBO) forecasts that the 
recession will ``last well into 2009'' and that the economy will begin 
to recover, albeit slowly, in 2010. CBO expects unemployment to peak at 
about 9 percent. The CBO is a bit more pessimistic than the Blue Chip 
average of commercial forecasters, because the rules of CBO forecasting 
do not allow them to take account of likely congressional actions to 
stimulate the economy and enhance recovery.
    Right now I think we should be skeptical of all forecasts and 
especially conscious of the risk that things may continue to go worse 
than expected. The current CBO forecast is much more pessimistic than 
the one released just last September, and the Blue Chip consensus has 
been going steadily south for many months. Additional revelations of 
weakness in the financial services sector could further impede credit 
flows and produce a continued slide in all forecasters' expectations.
    Indeed, uncertainty about the health of the financial sector 
compromises all current forecasting efforts. The economic models used 
by forecasters are based on the experience of the post World War II 
period, especially the last several decades. Not since the 1930's, 
however, have we experienced a downturn caused by crisis in the 
financial sector. Despite aggressive efforts of the Treasury and the 
Federal Reserve to stabilize the financial sector, credit is not 
flowing normally, even to credit- worthy borrowers. Continued 
instability in the financial sector and credit tightness could deepen 
the recession and delay recovery.
    Also adding to the uncertainty and increasing the chance that 
recovery will be unusually slow is the fact that returning to the pre-
crisis economy is not desirable. Before the current crisis Americans 
were consuming and borrowing too much, while saving too little. We had 
become an over-mortgaged, over-leveraged society dependent on the 
inflow of foreign credit. If recovery from this recession is to be 
solid and sustainable, we must stop living beyond our means. We must 
transform ourselves into a society that consumes less, saves more and 
finances a larger fraction of its investment with domestic saving, 
rather than foreign borrowing. This transformation is necessary, but it 
will put recovery on a slower track.
    Indeed, not since we were a developing country have we been so 
dependent on foreign creditors. We are lucky that, even though this 
world-wide financial crisis started in the United States, the response 
of world investors has been to flock to the safety of U.S. Treasuries, 
which makes it possible for our government to borrow short-term at 
astonishingly low rates. But we cannot count on these favorable 
borrowing conditions continuing forever. Especially if we fail to take 
serious steps to bring down future budget deficits, the United States 
Government could lose the confidence of its foreign creditors and be 
forced to pay much higher interest rates on to finance both public debt 
and private debt. Rapid increases in interest rates and a plummeting 
dollar could deepen the recession and slow recovery.

     AN ``ANTI-RECESSION PACKAGE'' AND INVESTMENT IN FUTURE GROWTH

    Despite the uncertainty of forecasts it is already clear that this 
recession is bad and that worse is yet to come. Recessions always 
increase budget deficits as revenues drop and recession-related 
spending increases. These automatic deficits help stabilize the 
economy. In addition, since an unusually severe downturn in the economy 
is threatening, the government should act quickly to mitigate the 
downslide with spending increases and revenue cuts that will stimulate 
consumer and investor spending, create jobs and protect the most 
vulnerable from the ravages of recession.
    What we used to call ``stimulus'' (temporary spending or tax relief 
designed to jump-start the economy) has been merged into a broader 
concept of ``recovery'' and investment in future growth. However, I 
believe an important distinction should be made between a short-term 
``anti-recession package'' (aka ``stimulus '') and a more permanent 
shift of resources into public investment in future growth. We need 
both. The first priority is an ``anti-recession package'' that can be 
both enacted and spent quickly, will create and preserve jobs in the 
near-term, and not add significantly to long run deficits. It should 
include temporary aid to states in the form of an increased Medicaid 
match and block grants for education and other purposes. Aiding states 
will prevent them from taking actions to balance their budgets--cutting 
spending and raising taxes--that will make the recession worse. The 
package should also include temporary funding for state and local 
governments to enable them to move ahead quickly with genuinely 
``shovel ready'' infrastructure projects (including repairs) that will 
employ workers soon and improve public facilities. Another important 
element of the anti-recession package should be substantial transfers 
to lower and middle income people, because they need the money and will 
spend it quickly. This objective would be served by increasing the 
Supplemental Nutrition Assistance Program (SNAP), unemployment 
compensation, and the Earned Income Tax Credit. Helping people who lose 
their jobs to keep their health insurance and aiding distressed 
homeowners also belong in this ``anti-recession'' package. On the tax 
side, my favorite vehicle would be a payroll tax holiday, because 
payroll tax is paid by all workers and is far more significant than the 
income tax for people in the lower half of the income distribution. 
Moreover, a payroll tax holiday would be relatively easy to reverse 
when tax relief was no longer appropriate. This anti-recession package 
should move forward quickly. Because its components would be temporary, 
there would be little reason for concern about its impact on the 
deficit three or four years down the road.
    The anti recession package should be distinguished from longer-run 
investments needed to enhance the future growth and productivity of the 
economy. The distinction is not that these longer-run investments are 
less needed or less urgent. We have neglected our public infrastructure 
for far too long and invested too little in the skills of the future 
workforce. If our economy is to grow sustainably in the future we need 
to modernize our transportation system to make it more efficient and 
less reliant on fossil fuels. We need to assure access to modern 
communications across the country and invest in the information 
technology and data analysis needed to make medical care delivery more 
efficient and effective. We need a well thought-out program of 
investment in workforce skills, early childhood education, post-
secondary education, science and technology. Such a long-term 
investment program should not be put together hastily and lumped in 
with the anti-recession package. The elements of the investment program 
must be carefully planned and will not create many jobs right away.
    Since a sustained program of public investment in productivity-
enhancing skills and infrastructure will add to federal spending for 
many years, it must be paid for and not simply added to already huge 
projected long-term deficits. That means either shifting spending from 
less productive uses or finding more revenue. Overtime, Congress could 
reduce commitments to defense programs and weapons systems that reflect 
outmoded thinking about threats to U.S. security, reduce agricultural 
subsidies, and eliminate many small programs that have outlived their 
original priorities. Reform of the tax system--including making the 
income tax simpler and fairer or increasing reliance on consumer 
taxation--could produce more revenue with less drag on economic growth. 
None of these policies would be easy, but the resources to pay for 
large permanent increases in federal spending must be shifted from 
somewhere else as the economy returns to full employment. Congress will 
only be able to accomplish this reallocation of resources if it 
reinstates some form of long run (say, ten year) PAYGO and caps on 
discretionary spending.
    I understand the reasons for lumping together the anti-recession 
and investment packages into one big bill that can pass quickly in this 
emergency. A large combined package will get attention and help restore 
confidence that the federal government is taking action--even if part 
the money spends out slowly. But there are two kinds of risks in 
combining the two objectives. One is that money will be wasted because 
the investment elements were not carefully crafted. The other is that 
it will be harder to return to fiscal discipline as the economy 
recovers if the longer run spending is not offset by reductions or new 
revenues.

             IMMEDIATE ACTION TO BRING DOWN FUTURE DEFICITS

    As this Committee knows well, projections of the federal budget 
show rapidly rising spending over the next several decades attributable 
to three major entitlement programs; namely, Medicare, Medicaid and 
Social Security. Under current rules, Social Security spending will 
rise rapidly over the next two decades, but level off after the Baby 
Boom generation passes through the system. The health care entitlements 
are expected to rise even faster. Moreover, they are expected to keep 
on rising because they are dominated by continued increases in the 
spending for health care in both the public and private sectors. If 
policies are not changed Medicare and Medicaid--and to a lesser extent 
Social Security--will drive federal spending up considerably faster 
than the rate at which the economy is likely to grow. Unless Americans 
consent to tax burdens that rise as fast as spending, a widening gap 
will open up. We will not be able to finance these continuously growing 
deficits.
    Because rapidly rising debt threaten our credibility as sound 
fiscal managers, we do not have the luxury of waiting until the economy 
recovers before taking actions to bring down projected future deficits. 
Congress and the Administration should take actual steps this year to 
reduce those deficits in order to demonstrate clearly that we are 
capable of putting our fiscal house in order. This can be done without 
endangering economic recovery.
    The crisis may have made Social Security less of a political 
``third rail'' and provided an opportunity to put the system on a sound 
fiscal basis for the foreseeable future. Fixing Social Security is a 
relatively easy technical problem. It will take some combination of 
several much-discussed marginal changes: raising the retirement age 
gradually in the future (and then indexing it to longevity), raising 
the cap on the payroll tax, fixing the COLA, and modifying the indexing 
of initial benefits so they grow more slowly for more affluent people. 
In view of the collapse of market values, no one is likely to argue 
seriously for diverting existing revenues to private accounts, so the 
opportunity to craft a compromise is much greater than it was a few 
years ago. Fixing Social Security would be a confidence building 
achievement for bi-partisan cooperation and would enhance our 
reputation for fiscal prudence.
    Vigorous action should also be taken to make Medicare more cost 
effective and slow the rate of growth of Medicare spending, which 
contributes so much to projected deficits. While restraining health 
spending growth should be a major feature of comprehensive health 
reform, Medicare is an ideal place to start the effort. Medicare is the 
largest payer for health services and should play a leadership role in 
collecting information on the cost and effectiveness of alternative 
treatments and ways of delivering services, and designing reimbursement 
incentives to reward effectiveness and discourage waste. Congress has a 
history of allowing pressure from providers and suppliers (for example, 
suppliers of durable medical equipment or pharmaceutical companies) to 
thwart efforts to contain Medicare costs. The government has also not 
been adequately attentive to punishing and preventing Medicare fraud. 
The United States will not stand a chance of restoring fiscal 
responsibility at the federal level unless Congress develops the 
political will to hold health providers accountable--whether in the 
context of existing federal programs or comprehensive health reform--
for delivering more cost effective care. A good place to start is 
Medicare.

                             PROCESS REFORM

    This Committee does not need to be convinced that deficits matter 
and that the deficits looming in the federal budget--exacerbated by the 
rapid increases in debt associated with recession and financial 
bailout--must be dealt with sooner rather than later. You know that 
procrastination will make the hard choices harder and make us 
increasingly dependent on our foreign creditors and exposed to their 
policy priorities. The question is: should you take actual steps now to 
reduce future deficits or design process reforms that will force you to 
confront viable options and make choices in the future? My answer is: 
do both.
    Fixing Social Security and taking aggressive steps to control the 
growth of Medicare costs would be visible evidence that Congress and 
the new Administration have the courage to rein in future deficits. But 
the Congress also needs to restore discipline to the budget process--
not use recession or the financial meltdown as excuses for throwing 
fiscal responsibility to the winds just when we are going to need it 
more than ever. A large temporary anti-recession package is the right 
fiscal policy in the face of severe recession and should not be subject 
to offsets--that would defeat the purpose. But more permanent 
investments in future growth--also good policy--should be paid for and 
not allowed to add to future deficits. Caps on discretionary spending 
and PAYGO for revenues and mandatory spending should be reinstated and 
seriously enforced.
    Moreover, PAYGO is not enough, because it only guarantees that 
congressional actions with respect to entitlements and revenues will 
not make projected deficits worse than they would be under current 
policies. But, we all know that deficits projected under current policy 
will rise at unsustainable rates. Spending required by Medicare, 
Medicaid and Social Security will rise substantially faster than 
revenues at any feasible set of tax rates. We will not be able to 
borrow that much money--even if we thought it desirable to do so.
    The current budget process subjects a declining--discretionary 
spending--to annual scrutiny by leaves entitlement programs and 
revenues on automatic pilot outside the budget process. Fiscal 
responsibility requires that all long-term spending commitments be 
subject to periodic review along with taxes and tax expenditures. There 
is no compelling logic for applying caps and intense annual scrutiny to 
discretionary spending, while leaving huge spending commitments, such 
as Medicare or the home mortgage deduction entirely outside the budget 
process and not subject to review on a regular basis. I am a member of 
a bipartisan group called the Fiscal Seminar (sponsored by The 
Brookings Institution and the Heritage Foundation) that addressed this 
problem in a paper entitled, Taking back our Fiscal Future, in 2008. We 
may not have come up with the right solution, but we certainly 
identified a serious problem that stands in the way of getting the 
federal budget on a sustainable long run track.

                         NOT A PARTISAN MATTER

    The challenges that face this Committee--mitigating the recession, 
enhancing future growth, restoring sustainable fiscal responsibility--
cannot be solved by one political party, but require non partisan 
analysis and bipartisan cooperation. Many budget analysts with quite 
disparate views on particular policies share the conviction that 
Congress and the Administration must meet the double challenge of 
reviving the economy and restoring fiscal responsibility at the same 
time. I attach a memo to President Obama signed by twelve experienced 
budget analysts (including myself) that emphasizes these points.
    Thank you, Mr. Chairman and members of the Committee.

                               ATTACHMENT

                                                  January 22, 2009.
To: President Obama
From: Bob Bixby, William Galston, Ron Haskins, Julia Isaacs, Maya 
    MacGuineas, Will Marshall, Pietro Nivola, Rudy Penner, Robert 
    Reischauer, Alice Rivlin, Isabel Sawhill, Eugene Steuerle

Subject: A Budget We Can Believe In
    Your first budget will be a defining document. It will cast the 
basic mold of your administration, highlight your key priorities, and 
specify how you are going to deliver on your most important campaign 
promises or modify them in light of new developments. The decisions you 
make in shaping this budget will be among the most consequential of 
your tenure.
    In our view, the overriding imperative for your first budget is to 
strike a judicious balance between America's short-term and long-term 
economic needs. To accomplish this, that budget must be strategic as 
well as tactical. The steps you take to address our short-term problems 
must not make it harder to achieve our long-term goals. Indeed, they 
should set the stage both for steady economic growth and a sustainable 
fiscal future. To be a truly transformative president, you must not 
allow the urgency of the short-term to crowd out concern for the 
country's long-term wellbeing.
    As you have noted, the key short-term challenges are:
     stabilizing America's financial markets to ensure an ample 
and affordable supply of credit, which is the lifeblood of our economy; 
and
     reducing the severity and duration of the current 
recession and getting Americans back to work.
    At the same time, your budget must set in motion measures that deal 
with two critical long-term challenges to America's economic health:
     controlling the growth of health costs and putting Social 
Security on a financially sustainable path.
     reforming America's tax system to make it more efficient, 
fairer and simpler and to raise adequate revenue while maintaining 
economic growth.
    These short- and long-term economic imperatives are inextricably 
linked. The costs of stabilizing the financial markets and stimulating 
economic growth will generate a large increase in our national debt. We 
will have to borrow money in domestic and international capital markets 
to finance this debt, and without a serious commitment to long-term 
fiscal restraint, lenders will eventually question the nation's fiscal 
credibility. They may respond by reducing the share of their portfolios 
devoted to U.S. government debt or by charging higher interest rates. 
In the extreme, the reluctance to buy U. S. debt could cause a crisis 
in international capital markets. No one can describe the risks 
precisely, but Wall Street's recent troubles demonstrate that the 
perils of over reliance on debt can come swiftly and in unpredictable 
ways. What is predictable is that if the long-term problem is not 
confronted, interest costs will absorb a growing proportion of our 
budgetary resources and, together with growing health costs and Social 
Security, will threaten to crowd out spending on programs for the poor, 
children, and improving the nation's infrastructure. Moreover, our 
dependence on foreign creditors and the resulting mortgage on future 
national incomes will diminish American standards of living for 
generations to come.
    We understand full well the myriad considerations that will shape 
your fiscal proposals for the next fiscal year. We suggest, however, 
two criteria that a future-oriented budget for fiscal 2010 should meet.
     First, you have pledged repeatedly to scrub every line 
item in the current budget with an eye to finding items that are either 
ineffective or outdated. We do not believe that this effort will be 
credible unless it produces significant savings from both programs and 
tax expenditures.
     Second, the stimulus package should not worsen the long-
term fiscal outlook. To the extent that it includes items that increase 
the long-term budget deficit, offsetting long-term spending cuts or 
revenue streams should be proposed.
    We believe, moreover, that Congress must re-impose caps on 
discretionary spending as soon as the economy begins to recover from 
the recession. The budget documents you submit to Congress should make 
it clear that you will support such a move.
    The long-term budget challenge can be stated succinctly. Three 
large programs--Social Security, Medicare, and Medicaid--now constitute 
almost one-half of non-interest federal spending and are growing faster 
than tax revenues because of soaring health costs and the aging of the 
population. If we fail to reform these spending programs and insist on 
maintaining the tax burden where it is has been over the past 50 years 
(about 18 percent of GDP), deficits will soar, and the public debt is 
likely to exceed 100 percent of the GDP within 25 years. That compares 
to 37 percent at the end of fiscal 2007.
    It's entirely understandable that public concern over the long-term 
budget problem has now been swamped by the financial crisis and 
accompanying recession. But as President you can't afford to lose sight 
of these inconvenient truths. The budget deficit for fiscal 2009 is 
estimated at $1.2 trillion by CBO, and this excludes any new spending 
as part of a stimulus bill. The federal debt owed to the public may 
increase by considerably more than 50 percent over the next two years. 
Although large debt increases occurred in the early 1980s, they did not 
occur as quickly. Moreover, there are two important differences from 
that era. First, we are now more dependent on foreign private and 
government investors to buy our debt. Second, relative to the size of 
the economy (GDP), Social Security, Medicare, and Medicaid are much 
larger now than they were then, and they are expected to grow more 
rapidly as the oldest baby boomers begin to retire. Consequently, the 
budget deficit will contract more slowly than usual as the economy 
recovers.
    Although we are rightly absorbed by our short-term problems, the 
long-term budget situation ultimately poses graver challenges to the 
success of your presidency. Social Security, Medicare, and Medicaid are 
expected to constitute 1.8 percent more of the GDP in 2016 than they 
did in 2008. That may not sound like much, but if the growth were to be 
financed entirely with tax increases, it would imply an overall tax 
increase of almost 10 percent above historical levels--and that would 
only be the first of many tax increases to follow. If it were financed 
by cutting all other non-interest programs including defense, the 
across-the-board reduction would have to be more than 20 percent 
compared to baseline levels. Even if a number of inefficient and low 
priority programs are eliminated, it would not be possible to fulfill 
your election promises--to expand health insurance coverage or to 
increase public investment in education, infrastructure, and research 
on alternative energy sources, among many others--without digging our 
long-term fiscal hole even deeper.
    Your budget should make it very clear that you take the long-term 
budget problem seriously. It must quantify the cost of our long-term 
promises and explicitly state the goal of achieving fiscal 
sustainability. As a first step, we should stabilize the ratio of debt 
to GDP while creating an atmosphere conducive to economic growth. The 
budget could, for illustrative purposes, specify two or three 
combinations of target revenue and spending paths that would achieve 
this initial goal.
    We believe you should do more than express your concern about the 
danger of escalating future deficits. You should move quickly to reduce 
them without endangering near-term economic recovery. First, you should 
give high priority to putting Social Security on a sound fiscal basis 
to reduce future deficits and show our creditors that we are taking 
serious steps to manage our national finances. Second, you should take 
quick action to reduce the growth of Medicare by shifting to payment 
systems that reward effective treatments and discourage wasteful 
spending.
    The long-term fiscal problem is complicated by the fact that it is 
difficult to contemplate increased revenues being part of the solution 
so long as the public rightly remains highly distrustful of our 
inequitable and economically inefficient tax system. Tax reform is 
always difficult, but it will be necessary to achieve a rational 
solution to our long-term problems. Hundreds of billions of dollars 
worth of tax expenditures in the federal code must be evaluated and 
eliminated where they inhibit economic growth, are inefficient, have 
undesirable distributional consequences, or are difficult to 
administer.
    Throughout your campaign, you pioneered new ways of involving the 
American people in our nation's political life, and you have signaled 
your determination to continue that commitment as president. Our long-
term economic and fiscal future is an issue that cries out for just 
such public engagement. Congress is unlikely to cooperate in 
undertaking such painful reforms so long as the general public remains 
unaware of the magnitude and urgency of the long-term fiscal challenge. 
Therefore, we recommend that you launch an intensive public education 
campaign. This could include a series of town hall meetings across the 
country or fireside chats to explain the problem and lay out options 
for solving it to the American public. Although you could send 
surrogates around the country, you should personally take part in some 
of these meetings to underscore their vital importance, as President 
Clinton did a decade ago. If Americans grasp how essential budget 
reform is for the wellbeing of their children and grandchildren, they 
will be more likely to accept the sacrifices necessary to get the 
budget under control.
    One additional (and crucial) point: it makes no sense to undertake 
a challenge of such magnitude unless it yields structural changes that 
are enduring. To that end, we recommend two key shifts in our budget 
procedures.
     Once an agreement for tax and long-term spending reform is 
in place, it must be enforced by pay-as-you-go rules that require that 
all tax cuts or entitlement increases be financed by some combination 
of tax increases and entitlement cuts. Without such rules, a painfully 
negotiated agreement is likely to erode over time.
     In addition, targets for entitlement spending and tax 
expenditures should be budgeted for the long run, say, 30 years. If 
unexpected events push spending or tax expenditures above targets, 
automatic triggers could be used to slow spending growth, increase 
revenues, or some combination of the two.
    We have outlined a formidable task. It may be possible to muddle 
through another eight years without facing the long-term challenge. To 
evade it, however, would be to squander an historic opportunity to set 
our economy and governing institutions on a sound and sustainable 
course. To be remembered as a truly transformative president, you must 
boldly confront--and master--the toughest problems of your time.
    The signatories to this memo are all members of a group that has 
been meeting together for several years at the Brookings Institution 
under the auspices of Brookings and the Heritage Foundation. The views 
expressed are those of the individuals involved and should not be 
interpreted as representing the views of their respective institutions.

    Chairman Spratt. Now let's go to Dr. Zandi, and let me say 
that there are some votes coming up on the floor. We are going 
to finish this one way or the other. We want every witness to 
have an opportunity to be on the record.

                 STATEMENT OF MARK ZANDI, PH.D.

    Mr. Zandi. I will keep it to 2 hours. I will stick to that. 
Yes, sir.
    Thank you, Mr. Chairman for the opportunity and members of 
the committee. I am an employee of the Moody's Corporation, but 
these are my own personal views.
    I will make six points.
    First, the near-term economic outcome is grim. The economy 
has lost 2.6 million jobs over the past year. I think it is 
very possible we lose just as many jobs in the first half of 
2009. The unemployment rate is 7.2 percent. It will easily be 
over 9 percent by the end of the year. And the downturn has 
engulfed every industry, every occupation and every corner of 
the country, which is the hallmark of this downturn. It is the 
breadth of the downturn.
    Consumer spending has collapsed, business investment is 
down, exports are falling. The only source of growth at the 
current point in time is government spending.
    So, first point, the outlook is very dark.
    The second point is that this dark economic outlook is 
dependent on policymakers doing three broad things very quickly 
in the next few weeks:
    First, to stabilize the teetering financial system, some of 
the remaining TARP money should be used to purchase and then 
guarantee troubled assets. This is important to getting the 
assets off the balance sheets of these institutions and also 
establishing a market for these assets which is necessary to 
get private capital back into the financial system.
    Second, the TARP money should be used for a very large 
foreclosure mitigation plan which includes mortgage 
modifications with writedowns. We have learned that 
modifications that only include rate reductions and term 
extensions are not working. There is a very high redefault 
rate. So we need writedowns.
    Third and most importantly and most immediately, I think it 
is key for policymakers to implement a very aggressive fiscal 
stimulus plan. Increased government spending and tax cuts are 
necessary to fill the void left by slumping private economic 
activity.
    Third point, the House Democratic fiscal stimulus plan 
which includes $825 billion in stimulus will not reverse the 
downturn, but it will provide a very vital boost to a flagging 
economy. By my estimates, with this stimulus there will be 
approximately 3 million more jobs; and the jobless rate will be 
1.5 percentage points lower by the end of 2010 than without any 
fiscal stimulus. Without stimulus, the unemployment rate will 
rise well into the double digits and the economy will not 
return to full employment, which by my estimate is a 5 percent 
unemployment rate, until 2014. So very vital to pass the 
stimulus plan.
    Point four, the economic benefit of the House plan depends 
on how quickly the government spending can occur. Of course, 
the recent CBO analysis says the spend-out rates can take 
years. If the past is indeed prologue, and I think much of 
their analysis is based on past historical experience, then I 
am overestimating the benefits of the House plan. Policymakers 
should therefore fund projects that can be implemented quickly 
and should also establish mechanisms that will provide the 
necessary oversight to ensure that the projects are conducted 
in a timely fashion.
    Point five, policymakers may also want to consider 
expanding the size of the stimulus. I don't think $825 billion 
is enough, and I would increase the size of the package by 
including more tax cuts. Tax cuts do not have the same economic 
bang for the buck as increased government spending. Some of the 
tax cuts will be saved, some of it will be used to repay debt, 
not bad things but not good for the economy in the very near 
term, and some of it will be used for the purchase of imported 
goods that don't help jobs here in the United States. But they 
can get into the economy quickly, quickly in 2009.
    Two proposals, a refundable tax credit for a home purchased 
in 2009, payable at the time of the purchase, would be an 
effective way to help stimulate home sales and work off some of 
the mountain of inventory. In the current plan, there is a tax 
credit, but it is only for first-time home buyers. I would make 
it for all home buyers, and I would make the credit payable at 
the sale so they could be used for the down payment to 
facilitate sales.
    The second proposal, a payroll tax holiday for the entire 
third quarter of this year for both employees and employers. If 
you did that, it would be a tremendous boost to lower and 
middle income households and most critically to small 
businesses, many of whom are going to fail in this economy if 
they don't get immediate help.
    The cost of these two proposals would bring the total cost 
of the House plan to just over $1 trillion, which I think is 
more consistent with the severity of the situation that we are 
in.
    Point six, final point, there are very reasonable concerns 
that the cost of all the actions policymakers are taking to 
quell a crisis will overwhelm the government's resources and 
further exacerbate the Nation's daunting long-term fiscal 
challenges. There is no doubt that the Federal debt will rise 
substantially. Doug Elmendorf pointed out that the debt to GDP 
ratio is 40 percent. I think a reasonable forecast is when this 
is all said and done it will be 60 percent. It is important to 
consider, however, that the Nation's budgetary problems would 
likely be even worse if policymakers do not respond 
aggressively to the crisis, as a sliding economy would 
undermine tax revenues and result in much higher government 
outlays.
    Moreover, while running massive deficits are very 
undesirable, the resulting debt load is still manageable. Sixty 
percent is still very manageable. Global investors are fully 
expecting and remain very avid buyers of our Treasury debt, in 
part because the U.S. economy remains the global economy's 
triple A credit. For the U.S to maintain its financial 
standing, however, policymakers must immediately begin to 
address the Nation's long-term fiscal challenges.
    Let me say in conclusion that any fiscal stimulus plan in 
my view is more than dollars and cents. It has to be effective 
in lifting spirits. Confidence hit a new all-time record low in 
the month of January. A confidence report survey for January 
came out this morning. It hit an all-time new record low.
    So the stimulus has to be passed very quickly and, most 
importantly, has to be explained very clearly so that 
households and businesses are convinced that it is going to 
work. Unless the plan helps dissipate the current dark mood of 
pessimism, it will do little to stem the current economic 
downturn.
    Thank you.
    Chairman Spratt. Thank you very much.
    [The prepared statement of Mark Zandi follows:]

   Prepared Statement of Mark Zandi, Chief Economist and Cofounder, 
                          Moody's Economy.com

    Mr. Chairman and members of the committee, thank you for the 
opportunity to testify on such an important matter in a time of 
economic and financial crisis. I am an employee of the Moody's 
Corporation, but my remarks today reflect my personal views.
    I will make six points this morning:
    1. The near-term economic outlook is grim. The economy has already 
lost 2.6 million jobs since the current downturn began and will lose 
about as many more during the first half of this year. Unemployment, 
which is now at 7.2%, will rise to nearly 9% by year's end. The 
downturn will engulf nearly every industry, occupation and region of 
the country. Consumer spending has collapsed, business investment is 
declining, and exports are now falling, as the entire global economy is 
suffering a synchronized downturn.
    2. Even this dark economic outlook requires that policymakers take 
three broad actions in the next few weeks. First, to stabilize the 
still-teetering financial system, some of the remaining TARP money 
should be used to purchase and guarantee troubled assets on the 
system's balance sheet. Second, the TARP money should also be used to 
fund an aggressive foreclosure mitigation plan that includes mortgage 
write-downs. Without such a plan, foreclosures will continue to surge, 
further undermining the financial system and broader economy. And 
third, policymakers must implement an aggressive fiscal stimulus plan. 
Increased government spending and tax cuts are necessary to fill the 
void left by slumping private economic activity.
    3. The House Democratic fiscal stimulus plan, which includes some 
$825 billion in stimulus measures, will not reverse the economic 
downturn, but it will provide a vital boost to the flagging economy if 
passed quickly. With the stimulus, there will approximately 3 million 
more jobs, and the jobless rate will be 1.5 percentage points lower by 
the end of 2010 than without any fiscal stimulus. Without a stimulus, 
unemployment will rise well into the double digits by this time next 
year, and the economy will not return to full employment until 2014.
    4. The economic benefit of the House plan critically depends on how 
quickly the government spending can occur. A recent Congressional 
Budget Office analysis shows that historical spend-out rates on such 
outlays can take years. If past is indeed prologue, then I am 
measurably overestimating the economic benefit of the House plan. 
Policymakers should therefore fund projects that can be implemented 
quickly and should also establish mechanisms that will provide the 
oversight necessary to ensure that the projects are conducted in a 
timely fashion.
    5. Policymakers may also want to consider expanding the size of the 
stimulus package with more tax cuts. Tax cuts do not have the same 
economic bang for the buck as increased government spending, as 
households will save some of the tax cuts or use them to repay debt or 
purchase imported goods, but tax cuts can get into the economy quickly. 
A refundable tax credit for a home purchased in 2009, payable at the 
time of the purchase, would quickly stimulate home sales and reduce the 
mountain of unsold homes weighing on house prices and exacerbating 
foreclosures and the crisis in the financial system. A payroll tax 
holiday for employees and employers in, say, the third quarter of this 
year would also provide a large boost to lower- and middle-income 
households and struggling small businesses. These two tax cuts would 
bring the total cost of the House plan to just over $1 trillion.
    6. There are very reasonable concerns that the cost of all the 
actions policymakers are taking to quell the crisis will overwhelm the 
government's resources and exacerbate the nation's daunting long-term 
budget challenges. There is no doubt that the federal debt load will 
rise substantially as a result, from about 40% of GDP now to as much as 
60% of GDP, as the budget deficit this year and next will collectively 
total several trillion dollars. It is important to consider, however, 
that the nation's budgetary problems will likely become even worse if 
policymakers do not respond aggressively to the crisis, because the 
sliding economy would undermine tax revenues and result in much higher 
government outlays. Moreover, although running massive deficits is 
highly undesirable, the resulting debt load is still manageable. Global 
investors are fully expecting this and remain avid buyers of Treasury 
debt, in part because there is little private sector borrowing at this 
time and in part because the U.S. remains the global economy's Aaa 
credit. Reflecting this, Treasury yields remain near record lows. For 
the U.S. to maintain its financial standing, however, policymakers must 
immediately begin to address the nation's long-term fiscal challenges.
    I will conclude by saying that any fiscal stimulus plan has to be 
about more than dollars and cents to be effective in lifting spirits 
and the economy. It must be passed quickly and explained clearly so 
that households and businesses are convinced it will work. Unless the 
plan helps dissipate the dark mood, it will do little to stem the 
economic downturn.

    [The supplemental statement of Mr. Zandi follows:]

 Supplemental Statement of Mark Zandi, Chief Economist and Cofounder, 
                          Moody's Economy.com

    Mr. Chairman and members of the committee, my name is Mark Zandi; I 
am the chief economist and cofounder of Moody's Economy.com.
    Moody's Economy.com is part of Moody's Analytics, an independent 
subsidiary of the Moody's Corporation. My remarks represent my personal 
views and do not represent those held or endorsed by Moody's. Moody's 
Economy.com provides economic and financial data and research to over 
500 clients in 50 countries, including the largest commercial and 
investment banks, insurance companies, financial services firms, mutual 
funds, manufacturers, utilities, industrial and technology clients, and 
government at all levels.
    The new administration and Congress are working to implement a 
large fiscal stimulus plan to mitigate the severe economic downturn. 
The latest step in this effort is the plan put forth by House Democrats 
in mid-January. As laid out in the American Recovery and Reinvestment 
Act, the plan would cost $825 billion and include a large number of 
spending increases and tax cuts.\i\ The national, industry and state 
economic impact of this stimulus plan are assessed in the following 
analysis.
    The House stimulus plan will not reverse the current downturn, but 
it will provide a vital boost to the flagging economy. With the 
stimulus, there will be 3 million more jobs and the jobless rate will 
be more than 1.5 percentage points lower by the end of 2010 than 
without any fiscal stimulus. Without a stimulus, unemployment will rise 
well into the double digits by this time next year, and the economy 
will not return to full employment until 2014.
    The economic benefit of the House plan critically depends on how 
quickly the government spending can occur. A recent Congressional 
Budget Office analysis shows that historical spend-out rates on such 
outlays can take years. If past is indeed prologue, this analysis is 
overstating the economic benefits of the House plan. Policymakers 
should therefore fund projects that can be implemented quickly and 
should also establish mechanisms that will provide the oversight 
necessary to ensure that the projects are executed in a timely fashion.
    Policymakers may also want to consider expanding the size of the 
stimulus package with more tax cuts. Tax cuts do not have the same 
economic bang for the buck as increased government spending, as 
households will save some of the tax cuts or use them to repay debt, 
and purchase imported goods, but tax cuts can get into the economy 
quickly. A refundable tax credit for a home purchased in 2009, payable 
at the time of the purchase, would be an effective way to quickly 
stimulate home sales and reduce the mountain of unsold homes weighing 
on house prices and exacerbating foreclosures and the crisis in the 
financial system. A payroll tax holiday for employees and employers in, 
say, the third quarter of this year would also provide a large boost to 
lower- and middle-income households and struggling small businesses. 
These two tax cuts would bring the total cost of the House plan to just 
over $1 trillion.
    There are very reasonable concerns that the cost of all the actions 
policymakers are taking to quell the crisis will overwhelm the 
government's resources and exacerbate the nation's daunting long-term 
budget challenges. There is no doubt that the federal debt load will 
rise substantially as a result, from about 40% of GDP to as much as 60% 
of GDP, as the budget deficit this year and next will collectively 
total several trillion dollars. It is important to consider, however, 
that the nation's budgetary problems will likely become even worse if 
policymakers do not respond aggressively to the crisis, because the 
sliding economy would undermine tax revenues and result in much higher 
government outlays. Moreover, although running massive deficits is 
highly undesirable, the resulting debt load is still manageable. Global 
investors are fully expecting this and remain avid buyers of Treasury 
debt, in part because there is little private sector borrowing at this 
time and in part because the U.S. remains the global economy's Aaa 
credit. Reflecting this, Treasury yields remain near record lows. For 
the U.S. to maintain its financial standing, however, policymakers must 
immediately begin to address the nation's long-term fiscal challenges.
    Any fiscal stimulus plan has to be about more than dollars and 
cents to be effective in lifting spirits and the economy, however. It 
must be passed quickly and explained well so that households and 
businesses are convinced it will work. Unless the plan helps dissipate 
the dark mood, it will not stem the economic downturn.

                              INTRODUCTION

    The global financial system has effectively collapsed, undermining 
investor, household and business confidence and pushing the economy 
into a lengthy and severe recession. Real GDP, employment, industrial 
production and retail sales are falling sharply, and unemployment is 
rising quickly. Policymakers are working to implement a large fiscal 
stimulus package; yet, even with such a stimulus, the economy appears 
headed toward its worst downturn since the Great Depression.
    The proximate cause of the crisis was the collapse of the U.S. 
housing market and the resulting surge in mortgage loan defaults. 
Hundreds of billions of dollars in losses on these mortgages have 
undermined the financial institutions that originated and invested in 
them, including some of the world's largest. Many have failed, and 
others are struggling to survive. Banks fear extending credit to one 
another, let alone to businesses and households. With the credit spigot 
closing, the global economy is withering. Global stock investors have 
dumped holdings as they come to terms with the implications for 
corporate earnings. A self-reinforcing adverse cycle has begun: The 
eroding financial system is upending the economy, putting further 
pressure back on the financial system as the performance of assets from 
credit cards to commercial mortgage loans sours.
    This cycle can be broken only by aggressive and consistent 
government action. In the United States, the public policy response to 
the financial crisis has been without precedent. The full faith and 
credit of the U.S. government now effectively backstops the financial 
system, significant parts of which have been nationalized. With the 
takeover of Fannie Mae and Freddie Mac, the government makes nearly all 
the nation's residential mortgage loans. And as the $700 billion 
Troubled Asset Relief Program is deployed, the government is gaining 
sizable ownership stakes in the nation's largest financial 
institutions.
    In an effort to restart money and credit markets, the Federal 
Reserve has vastly expanded its role. The Fed has adopted a zero 
interest rate policy, and in an attempt to bring down long-term 
interest rates, it has made clear that the funds rate will remain there 
indefinitely. The Fed is also ramping up a policy of quantitative 
easing, in which it effectively prints money to purchase securities and 
extend loans to financial institutions that use their securities as 
collateral.\ii\ The central bank is already purchasing commercial paper 
and debt issued by Fannie Mae and Freddie Mac and the mortgage 
securities they insure. If conditions continue to erode, the Fed will 
turn to buying long-term Treasury bonds and perhaps eventually 
municipal bonds, corporate bonds, and even corporate equity.
    Money markets have responded to the Fed's unprecedented actions. 
Libor has fallen, suggesting that the interbank lending market is 
performing better. Commercial paper rates have fallen, and the volume 
of new issuance has increased sharply. Residential mortgage rates have 
also declined, with 30-year fixed rates for prime conforming borrowers 
falling from above 6% to nearly 5%. Despite the improvement, money-
market conditions remain far from normal, and even after financial 
institutions begin lending more freely to one another, they will be 
slow to extend credit to households and businesses, considering their 
worries about creditworthiness in a severe recession. Moreover, lower 
mortgage rates will not quickly revive home sales, given rising 
unemployment and plunging house prices. The link between the Federal 
Reserve's actions and the economy runs through the financial system. 
With that system in disarray, the efficacy of monetary policy has been 
significantly impaired.
    Policymakers have also worked directly to shore up the housing and 
mortgage markets and the broader economy. A number of programs have 
been put in place to enable stressed homeowners to avoid foreclosure. 
These include FHA Secure, Hope Now, and Hope for Homeowners. Fiscal 
stimulus measures, including last summer's refundable tax rebates and 
investment tax incentives, have provided some economic support.
    Much more needs to be done to quell the financial panic and 
mitigate the severe downturn. The remaining $350 billion in TARP funds 
must be deployed aggressively and broadly. Most of the initial $350 
billion in TARP funds was used to inject equity into the financial 
system; although this helped forestall a complete collapse, it did not 
significantly improve the flow of credit to households and businesses. 
To do this, some of the remaining TARP money must be used to either 
purchase troubled assets from distressed institutions or provide 
guarantees against losses on those assets, or both. These steps would 
help establish a market and prices for these assets. Only then will 
private investors be able to determine the value of financial 
institutions, a prerequisite for providing them with private capital.
    The remaining TARP money should also be used to fund a much larger 
and more comprehensive foreclosure mitigation plan. Millions of 
homeowners owe more than their homes are worth, and unemployment is 
rising quickly. Foreclosures, already at record high levels, are sure 
to mount. The Hope Now and Hope for Homeowners programs face severe 
impediments, and even under the best of circumstances will likely be 
overwhelmed by the wave of foreclosures still coming. No plan will keep 
house prices from falling further, but quick action could avoid the 
darker scenarios in which crashing house prices force millions more 
people from their homes, completely undermining the financial system 
and economy.\iii\
    The top priority should be the implementation of a large fiscal 
stimulus package. The House Democratic plan proposed in mid-January 
includes both increases in government spending and tax cuts. The plan 
would cost approximately $825 billion, equal to 5.5% of the nation's 
gross domestic product. This is not as costly as the public works 
projects of the 1930s, but it is costlier than the 3% of GDP spent to 
stimulate the economy during the tough downturn in the early 1980s. The 
cost of the current package would thus be consistent with expectations 
regarding the severity of this downturn. At 5.5% of GDP, the stimulus 
would also be about enough to ensure that the economy stops contracting 
by the end of 2009 and that GDP returns to its prerecession peak by the 
end of 2010--reasonable goals.
    The mix of tax cuts and spending increases in the stimulus package 
is designed to provide both quick relief and a substantial boost to the 
struggling economy. The tax cuts will not pack a big economic punch, as 
some of the money will be saved and some used to repay debt, but they 
can be implemented quickly. Aid to state and local governments will not 
lift the economy, but it will forestall cuts in programs and payrolls 
that many governments would be forced to make to meet their states' 
constitutional obligations to balance their budgets. Infrastructure 
spending will not help the economy quickly, as it will take time to get 
even ``shovel-ready'' projects going, but it will provide a significant 
economic boost. Because the economy's problems are not expected to 
abate soon, this spending will be especially helpful this time next 
year.
    With government making so many monumental decisions in such a short 
time, there will surely be unintended consequences. Some may already be 
evident: Nationalizing Fannie Mae and Freddie Mac while not rescuing 
Lehman Brothers from bankruptcy may very well have set off the 
financial panic. The former Treasury secretary's reversal on the use of 
TARP to purchase troubled assets began a chain of events that resulted 
in the near failure of Citigroup. And policymakers need to be wary of 
the costs of their actions, as global investors will eventually demand 
higher interest rates on the soaring volume of U.S. Treasury debt. Any 
measurable increase in long-term interest rates would be 
counterproductive; its effect on the housing market and the rest of the 
economy would offset the economic benefits of the fiscal stimulus.
    But policymakers' most serious missteps so far have come from 
acting too slowly, too timidly, and in a seemingly scattershot way. 
Early in the crisis, there were reasonable worries about moral hazard 
and fairness: Bailing out those who took on, originated or invested in 
untenable mortgage loans would only encourage such bad behavior in the 
future. And a bailout would certainly be unfair to homeowners still 
managing to make their mortgage payments. But as the crisis deepened 
and continued, those worries hindered policymakers far too long, 
allowing the panic to develop. With so many people suffering so much 
financial loss, moral hazard is less of an issue. Debate about whether 
it is fair to help distressed homeowners stay in their homes appears 
quaint. Their problems are clearly everyone's problems. Only concerted, 
comprehensive and consistent government action will instill the 
confidence necessary to restore financial stability and restart 
economic growth.

                           ECONOMIC BACKDROP

    The need for more policy action grows more evident as the financial 
and economic backdrop darkens. The financial panic that began in early 
September with the nationalization of Fannie and Freddie may have 
passed its apex, but the collective psyche remains frazzled. And even 
if the panic soon subsides, substantial economic damage has been done. 
The collapse in confidence, the massive loss of wealth, and the 
intensifying credit crunch ensure the U.S. economy will struggle for 
some time.
    Money markets are improving thanks to massive intervention by 
global central banks but remain far from normal. The difference between 
three-month Libor and three-month Treasury bill rates--a good proxy for 
the angst in the banking system--is still an extraordinarily wide 100 
basis points (see Chart 1).\iv\ This spread is down from the record 
spreads of mid-October, which topped 450 basis points, but it is still 
very high compared with past financial crises, not to mention the 
average 50-basis point spread that prevails in normal times. The Fed's 
program to purchase commercial paper directly from issuers has pushed 
those short-term rates down as well, but they too are still very high.



    Credit markets remain badly shaken. Bond issuance has come to a 
standstill. No residential or commercial mortgage-backed securities 
have been issued in recent months, and there has been little issuance 
of junk corporate bonds and emerging market debt. Asset-backed issuance 
of credit cards and vehicle and student loans and issuance of municipal 
bonds also remain severely disrupted. Investment-grade bond issuance 
has held up somewhat better, but that too all but dried up in October 
and early November. Credit spreads--the extra yield investors require 
to be compensated for investing in riskier bonds--also remain 
strikingly wide as investors shun anything but risk-free Treasury 
bonds. The difference between yields on junk corporate bonds and 10-
year Treasuries had ballooned to over 2,000 basis points, and the 
difference between emerging debt and Treasuries to over 1,200 basis 
points. Historically, yield spreads for both have averaged closer to 
500 basis points.
    Commodity and foreign currency markets have been roiled. Oil prices 
have fallen more than 50% from their record peaks in early July, and 
prices for commodities from copper to corn have plunged. The global 
recession has undercut the financial demand that had sent prices 
surging this past summer. Economies reliant on commodity production 
have been hit hard, and their currencies have rapidly depreciated. The 
Canadian dollar, which had been close to parity with the U.S. dollar as 
recently as this summer, has dropped back to less than 80 U.S. cents, 
and the Brazilian real has fallen more than 40% against the U.S. dollar 
since the panic began.\v\
    Volatility in global stock markets has been unprecedented and the 
price declines nerve-wracking. Since the downdraft began a few months 
ago, global stock prices are off 30% in local currency terms and more 
than 40% from their year-ago highs. No market has been spared. The 
declines have been so precipitous that U.S. and European bourses have 
tried imposing limits on short-selling, and Russia has suspended 
trading for days at a time, but without meaningful effect. Mutual fund, 
401(k) and hedge fund investors simply want out of stocks, regardless 
of the losses and any associated penalties.
    Even if the global financial system stabilizes soon, substantial 
damage has already been done. The U.S. economy was struggling before 
the financial panic hit; it has been in recession for over a year. Real 
GDP fell in the last quarter of 2007 and again in the third quarter of 
2008.\vi\ Some 2.6 million jobs have already been lost so far on net, 
and the unemployment rate has risen nearly 3 percentage points to 7.2%. 
The downturn is broad-based across industries and regions, with 38 
states now in recession (see Chart 2).\vii\ Data since the panic hit 
have been uniformly bad, suggesting the downturn is intensifying. 
Retail sales, vehicle sales and industrial production have plunged, and 
the increase in unemployment insurance claims in January is consistent 
with another monthly job loss of 500,000.



    The panic's most immediate fallout is the blow to confidence. 
Consumer confidence crashed in October to its lowest reading since the 
Conference Board began its survey more than 40 years ago. This is all 
the more surprising given the plunge in gasoline prices during the 
month; cheaper motor fuel in times past has always lifted households' 
spirits. Small business confidence as measured by the National 
Federation of Independent Businesses has also plunged to a record low 
(see Chart 3). Current events have so soured sentiment that they are 
sure to have long-lasting effects on household spending and saving, as 
well as on business decisions regarding payrolls and investment.



            is the house stimulus plan the appropriate size?
    The $825 billion, two-year fiscal stimulus plan proposed by House 
Democrats is large enough to provide a substantive near-term boost to 
the economy, but not so large as to result in measurably higher 
interest rates. Global investors remain avid buyers of U.S. Treasury 
bonds despite fully anticipating the costs to the Treasury of 
responding to the financial and economic crisis. Investors have 
discounted a stimulus plan whose costs are similar to those proposed by 
the House. This is not say the U.S. government can borrow unlimited 
amounts without pushing interest rates higher, but with little 
corporate and household borrowing, the government is able to borrow at 
very low interest rates.
    The costs of the House plan are approximately equal to the 
estimated direct net cost to the economy of the financial panic. The 
hit to household wealth is among the most significant costs. Net worth 
has fallen close to $12 trillion since peaking a year ago. Of that, $4 
trillion is due to the 25% decline in house prices, while the rest is 
due to the 40% decline in stock prices (see Chart 4). Every dollar 
decline in household net worth reduces consumer spending by 5 cents 
over the next two years.\viii\ If sustained, the wealth lost over the 
past year could thus cut $300 billion from consumer spending in 2009 
and a like amount in 2010. More than in past recessions, the financial 
pain of this recession is being felt by all Americans, from lower-
income households losing jobs to affluent households with diminished 
nest eggs.
    The financial panic has also significantly impaired the 
availability of credit and increased its cost. Credit growth was 
weakening rapidly even before recent events. The Federal Reserve's Flow 
of Funds shows that debt owed by households and nonfinancial 
corporations actually fell in the second and third quarters of 2008 
after inflation for the first time since the savings and loan crisis of 
the early 1990s. To date, weakening credit growth is largely due to 
disruptions in the bond and money markets. Lending by banks, S&Ls and 
credit unions has remained sturdy. But this is probably because nervous 
borrowers have pulled down available credit lines, and with banks now 
tightening underwriting standards and cutting lines, this source of 
credit is drying up. According to the Fed's senior loan officer survey, 
lenders have tightened credit over the past year as aggressively as 
ever. The net percent of loan officers who say they are willing to make 
a consumer loan is the lowest on record, with the exception of 1980, 
when the Carter administration briefly imposed credit controls (see 
Chart 5).\ix\



    The impact of a credit crunch is difficult to quantify, but the 
economy's performance during the early 1980s and early 1990s suggests 
it can be substantial. The downturn in the 1980s was the most severe in 
the post-World War II period, and although the downturn in the 1990s 
was not as bad, the economy struggled long after the recession formally 
ended. Using these two periods as a guide suggests that for every 1 
percentage point decline in real household and nonfinancial corporate 
debt outstanding, real GDP declines by approximately 35 basis points. 
Thus, if real debt outstanding declines 12.5% from its early 2008 peak 
to a trough in late 2010, which seems plausible, this credit effect 
will cut approximately $325 billion from GDP this year and a similar 
amount next year.
    The only significant positive for the U.S. economy out of the 
financial panic is lower energy and commodity prices. With oil now 
trading at nearly $50 per barrel, a gallon of regular unleaded gasoline 
should cost about $1.75. Gasoline prices peaked last summer above $4 
per gallon and have averaged closer to $3 last year. Every penny per 
gallon decline in the cost of gasoline saves U.S. consumers just over 
$1 billion a year. Assuming gas remains below $2 per gallon through the 
coming year, Americans will save well more than $100 billion in 2009 
compared with fuel costs in 2008. There will also be measurable savings 
on home heating and food bills as agricultural and transportation costs 
fall. Total savings in 2009 compared with 2008 will thus approach $200 
billion.
    Calculating the costs to the economy from the wealth and credit 
effects, less the benefits from lower commodity prices, puts the net 
direct cost of the financial panic this year at $425 billion in 2009 
and a like amount in 2010 (a $300 billion wealth effect plus a $325 
billion credit crunch effect minus $200 billion in savings due to lower 
commodity prices). That is about the cost of the House stimulus plan. 
This is a simplistic analysis; it does not account for all the indirect 
costs of the panic to the economy and the multipliers, but it gives a 
sense of the fallout's magnitude.

                  WHAT IS IN THE HOUSE STIMULUS PLAN?

    The plan includes a reasonably designed mix of about $550 billion 
in government spending increases and $275 billion in tax cuts. Although 
the timing of the stimulus has yet to be determined, the tax cuts are 
expected to occur largely in 2009-2010, and much of the spending would 
begin in 2010 (see Table 1). A recent Congressional Budget Office 
analysis raised the significant concern that if experience is a 
reliable guide, then much of the spending may not occur until well 
after 2010. The economic benefit will be measurably diluted if indeed 
past is prologue. Policymakers will need to choose projects that can be 
implemented quickly and establish mechanisms to provide the oversight 
necessary to ensure that these projects are done in a timely fashion. 
For the purposes of this analysis, it is assumed that approximately 80% 
of the stimulus in the package will be provided to the economy by the 
end of 2010.\x\



    Increased government spending provides a large economic bang for 
the buck and thus significantly boosts the economy. The benefits begin 
as soon as the money is disbursed and are less likely than tax cuts to 
be diluted by an increase in imports. The most effective proposals 
included in the House stimulus plan are extending unemployment 
insurance benefits, expanding the food stamp program, and increasing 
aid to state and local governments. Increasing infrastructure spending 
will also greatly boost the economy, particularly because the downturn 
is expected to last for an extended period. Most of the infrastructure 
money will be spent to hire workers and buy materials and equipment 
produced domestically.
    Tax cuts generally provide less of an economic boost, particularly 
if they are temporary; on the other hand, they can be implemented 
quickly. A particular advantage of the individual tax cuts in the House 
stimulus plan such as the payroll tax and earned income tax credits is 
that they are targeted to benefit lower- and middle-income households, 
which are more likely to spend the extra cash quickly. Investment and 
job tax benefits for businesses are less economically effective but are 
not very costly, and they more widely distribute the benefits of the 
stimulus.

                             INCOME SUPPORT

    The plan includes some $100 billion in income support for those 
households under significant financial pressure. This includes extra 
benefits for workers who exhaust their regular 26 weeks of unemployment 
insurance benefits; expanded food stamp payments; and help meeting 
COBRA payments for unemployed workers trying to hold onto their health 
insurance.
    Increased income support has been part of the federal response to 
most recessions, and for good reason: It is the most efficient way to 
prime the economy's pump. Simulations of the Moody's Economy.com 
macroeconomic model show that every dollar spent on UI benefits 
generates an estimated $1.63 in near-term GDP.\xi\ Boosting food stamp 
payments by $1 increases GDP by $1.73 (see Table 2). People who receive 
these benefits are hard-pressed and will spend any financial aid they 
receive very quickly.



    Another advantage is that these programs are already operating and 
can quickly deliver a benefit increase to recipients. The virtue of 
extending UI benefits goes beyond simply providing aid for the jobless 
to more broadly shoring up household confidence. Nothing is more 
psychologically debilitating, even to those still employed, than 
watching unemployed friends and relatives lose their sources of 
support.\xii\ Increasing food stamp benefits has the added virtue of 
helping people ineligible for UI such as part-time workers.

                   AID TO STATE AND LOCAL GOVERNMENTS

    Another potent tool in the plan is some $200 billion in aid to 
state and local governments in the form of a temporary increase in the 
Medicaid matching rate to ease the costs of healthcare coverage; help 
for school districts; and broader fiscal relief to states to prevent 
cuts in key programs.
    More than 40 states and a rapidly increasing number of localities 
are grappling with significant fiscal problems. Tax revenue growth has 
slowed as home sales, property values, retail sales and corporate 
profits have all fallen. Personal income tax receipts have begun to 
suffer as the job market slumps. Big states including California and 
Florida are under severe financial pressure, and smaller states 
including Arizona, Minnesota and Maryland are struggling significantly. 
The gap between state and local government revenues and expenditures 
ballooned to over $100 billion--a record--in the third quarter of 2008, 
according to the Bureau of Economic Analysis (see Chart 6).



    Because most state constitutions require their governments to 
eliminate deficits quickly, most have drawn down their reserve funds 
and have already begun to cut programs from healthcare to education. 
Cuts in state and local government outlays are sure to be a substantial 
drag on the economy in 2009 and 2010. Additional federal aid to state 
governments will fund existing payrolls and programs, providing a 
relatively quick boost. States that receive checks from the federal 
government will quickly pass the money to workers, vendors and program 
beneficiaries.
    Arguments that state governments should be forced to cut spending 
because they have grown bloated and irresponsible are strained, at 
best. State government spending and employment are no larger today as a 
share of total economic activity and employment than they were three 
decades ago. The contention that helping states today will encourage 
more profligacy in the future also appears overdone. Apportioning 
federal aid to states based on their size, rather than on the size of 
their budget shortfalls, would substantially mitigate this concern.

                        INFRASTRUCTURE SPENDING

    The increased infrastructure spending in the House plan is also a 
particularly effective way to stimulate the economy. The plan includes 
$160 billion in such spending, with $90 billion in more traditional 
infrastructure projects such as highway construction, public transit 
and waterways; and $70 billion for a variety of energy, science and 
healthcare projects. The boost to GDP from every dollar spent on public 
infrastructure is large--an estimated $1.59--and there is little doubt 
that the nation has underinvested in infrastructure for some time, to 
the increasing detriment of the nation's long-term growth prospects.
    The argument against including infrastructure spending as a part of 
any fiscal stimulus plan is that it takes substantial time for the 
funds to flow into the broader economy.\xiii\ Infrastructure projects 
can take years from planning to completion. Moreover, even if the funds 
are used to finance only projects that are well along in their 
planning--so-called shovel-ready projects--it is difficult to know just 
when projects will get under way and when the money will be spent. 
These are reasonable concerns in most recessions, but the economy's 
current problems appear likely to continue for some time. It is also 
reasonable to be worried that this money will be spent on pork-barrel 
projects chosen for political rather than economic reasons. To address 
this worry, policymakers plan to put in place tight controls to monitor 
the spending.\xiv\

                                TAX CUTS

    The House stimulus plan includes an estimated $165 billion in tax 
cuts for individuals and $110 billion in business tax cuts. The largest 
part of the individual tax cut is a permanent payroll tax credit for 
workers, amounting to as much as $1,000 for married couples. The earned 
income tax credit will also be expanded. Business tax provisions 
include bonus depreciation allowances and a five-year carry-back of net 
operating losses, which allows firms to convert losses into cash by 
claiming a refund of taxes paid in previous years.
    The payroll tax credit will be particularly effective, as the 
benefit will go to lower-income households that do not necessarily earn 
enough to pay income tax. These households are much more likely to 
spend any tax benefit they receive. There has also been concern that 
the tax benefit will do little to stimulate spending, that most of it 
will be saved or used to meet debt payments. Fueling this concern is 
the apparently small lift to consumer spending that occurred last 
spring and early summer, when households received more than $100 
billion in tax rebates as part of last year's stimulus plan. The 
consumer spending impact of that earlier tax stimulus was larger than 
generally believed, however, as higher-income households that did not 
receive that rebate significantly curtailed their spending at the same 
time that lower-income households spent their rebates.\xv\ Total 
consumer spending rose only modestly as a result. Households would also 
be more likely to spend the payroll tax benefit in the House stimulus 
plan, since it is a permanent reduction in their tax liability.
    The temporary tax incentives to support business investment and 
hiring in the House stimulus plan do not provide a particularly large 
economic benefit. Accelerated depreciation by large businesses and 
expensing of investment by small businesses lowers the cost of capital 
only modestly and is not a critical factor in businesses' investment 
decisions, particularly when sales and pricing are so weak. The carry-
back of business losses helps cash-strapped businesses, perhaps 
forestalling some cuts in investment and jobs, but it is unlikely to 
prompt much additional business expansion, as it does not improve 
businesses' prospects. However, including business tax cuts in the 
stimulus plan is not very expensive, and they do distribute the 
benefits of the stimulus more widely. This will be useful if it expands 
political support for the stimulus plan and thus accelerates its 
adoption. Moreover, the depreciation benefits included in last year's 
fiscal stimulus have expired, and extending them through 2010 would 
forestall a badly timed additional factor, however small,depressing 
business investment.

                      THE NATIONAL ECONOMIC IMPACT

    Implementing the House Democratic fiscal stimulus plan in early 
2009 would substantially benefit the economy. The stimulus will not 
keep the downturn from becoming the worst since the Great Depression, 
but it will ensure that it remains a recession and not a 
depression.\xvi\
    This assessment is based on simulations of the Moody's Economy.com 
macroeconomic model system. Assuming no added fiscal stimulus except 
for that provided by the automatic stabilizers already in place, real 
GDP would decline for eight straight quarters, falling by a stunning 
4.2 % in 2009 and another 2.2% in 2010. This would be more severe than 
the early 1980s recessions, which, combined, were the worst since the 
Depression. Some 8 million jobs would be lost from the peak in 
employment at the start of 2008 to the bottom in employment by late 
2010, pushing the unemployment rate to well over 11% by early 2011.
    The House plan would not forestall a sizable decline of 2.5% in 
real GDP in 2009, but it would ensure that real GDP returns to its 
previous peak by early 2011 (see Table 3). The stimulus limits the 
peak-to-trough decline in jobs to some 5.5 million, and the 
unemployment rate peaks at nearly 9.5% in summer 2010. With the 
stimulus, the unemployment rate falls back to its full employment rate 
of close to 5% by early 2013. Without the stimulus, the unemployment 
rate rises to well over 11% and ends 2012 at a still-extraordinary high 
of nearly 8% (see Chart 7).





    Despite the added federal government borrowing necessary to finance 
the stimulus, it will not lead to excessively higher long-term interest 
rates. Considering the current demands on the Treasury, total bond 
issuance with the stimulus will rise to a record of more than $2 
trillion in fiscal 2009 and about the same in fiscal 2010, but private 
bond issuance will remain extraordinarily depressed during this period. 
Now moribund, the flow of corporate, emerging market, and private-label 
mortgage and asset-backed debt will eventually revive. However, total 
credit market needs including the Treasury's issuance will remain 
modest, so that the 10-year Treasury yield would remain below 4% 
through 2010. It is now nearly 2.5%. Other long-term rates, including 
corporate bond and mortgage rates, would rise even less as credit 
spreads narrowed, reflecting the stronger economy and reduced credit 
concerns.

                 INDUSTRY AND REGIONAL ECONOMIC EFFECTS

    All major industries stand to benefit from the House Democratic 
stimulus plan. There are 3 million more jobs with the stimulus than 
without it by the fourth quarter of 2010, equal to 2.3% of the job 
base. The largest boost to employment from the stimulus is in the 
construction trades, with employment in the industry 6.6% higher with 
the stimulus by the end of 2010 than without it (see Table 4). 
Manufacturing employment is also significantly lifted by almost 2.4%. 
Construction and manufacturing benefit substantially from the plan's 
infrastructure spending.



    Employment in the retail and leisure and hospitality industries, 
including restaurants, is lifted by the stimulus. This comes in part 
directly from the individual tax cuts but more importantly from the 
indirect impact of increased employment and income that the stimulus 
provides in the rest of the economy. It is also important to note that 
part-time employment is much higher in retailing than in other 
industries, increasing the measured employment impact of the stimulus 
on retailing.
    State and local government and education and health services 
benefit significantly from the stimulus plan, but the lift to 
employment is not as pronounced as in other industries. Employment in 
these areas is approximately 1.4% higher with the stimulus than without 
it, about half the percentage boost to employment experienced in the 
broader economy. Some of the aid to state and local governments in the 
stimulus will fund activities--and thus jobs--in the private sector.
    All regions of the country will benefit from the fiscal stimulus, 
but some will benefit more than others. The most significant boost is 
provided to states now hit hardest by the housing and foreclosure 
crises such as Florida and Nevada, those that rely heavily on the 
financial services industry such as New York and New Jersey, and those 
that depend on the auto industry such as Michigan and Ohio (see Tables 
5 and 6). Without a fiscal stimulus, the job market would suffer 
significantly, inducing more foreclosures in those parts of the country 
where house prices have fallen most sharply and undermining demand for 
big-ticket items such as vehicles and discretionary activities such as 
travel and tourism. Layoffs on Wall Street will also intensify as 
financial markets and institutions are hammered.





    The benefits of a fiscal stimulus are less pronounced in the 
nation's agricultural and energy-producing regions. These areas are 
boosted by more infrastructure spending and the increased federal aid 
to their state governments, but agricultural and energy prices will 
remain low, as they are determined in global markets and not materially 
changed by the fiscal stimulus.

            SUGGESTIONS TO IMPROVE THE HOUSE STIMULUS PLAN?

    The House plan will measurably boost the flagging economy, but 
policymakers may want to consider expanding it with more tax cuts. The 
most significant stimulus from the plan will likely occur during the 
first half of 2010, but the downturn will be at its most intense in 
2009. Tax cuts do not provide the same economic bang for the buck as 
increased government spending--some of the tax cuts will be saved or 
used to repay debt or to purchase imported goods--but they can help the 
economy this year.
    A refundable tax credit for a home purchased in 2009, payable at 
the time of the purchase to help with the downpayment, would quickly 
stimulate home sales and reduce the mountain of unsold homes weighing 
on house prices and exacerbating foreclosures and the crisis in the 
financial system. The current House plan does provide some direct 
support to the housing market by removing the current repayment 
requirement on the $7,500 first-time home buyer credit for homes 
purchased after 2008 and before termination of credit on June 30, 2009. 
The credit could be increased and expanded to all buyers of owner-
occupied homes, not just first-time homebuyers, in 2009.
    A payroll tax holiday for employees and employers in the third 
quarter of this year would also provide a large boost to lower- and 
middle-income households. Households with very high incomes will have 
already stopped making payroll tax contributions by this time during 
the year and would not benefit. It would also provide much-needed 
support to cash-strapped small businesses and reduce the cost of their 
workforces and perhaps stem some layoffs.
    The cost of these two tax cuts would bring the total cost of the 
House plan to just over $1 trillion. Since both proposed tax cuts would 
be temporary, however, they would not add to the nation's long-term 
fiscal problems.

                              CONCLUSIONS

    A long history of public policy mistakes has contributed to the 
financial and economic crises. Although there will surely be more 
missteps, only through further aggressive and consistent government 
action will the U.S. avoid the first true depression since the 1930s.
    In some respects, this crisis has its genesis in the long-held 
policy objective of promoting homeownership. Since the 1930s, federal 
housing policy has been geared toward increasing homeownership by 
heavily subsidizing home purchases. Although homeownership is a worthy 
goal, fostering stable and successful communities, it was carried too 
far, producing a bubble when millions of people became homeowners who 
probably should not have. These people are now losing their homes in 
foreclosure, undermining the viability of the financial system and 
precipitating the recession.
    Perhaps even more important has been the lack of effective 
regulatory oversight. The deregulation that began during the Reagan 
administration fostered financial innovation and increased the flow of 
credit to businesses and households. But deregulatory fervor went too 
far during the housing boom. Mortgage lenders established corporate 
structures to avoid oversight, while at the Federal Reserve, the 
nation's most important financial regulator, there was a general 
distrust of regulation.
    Despite all this, the panic that has roiled financial markets might 
have been avoided had policymakers responded more aggressively to the 
crisis early. Officials misjudged the severity of the situation and 
allowed themselves to be hung up by concerns about moral hazard and 
fairness. Considering the widespread loss of wealth, it is now clear 
that they waited much too long to act, and their response to the 
financial failures in early September was inconsistent and ad hoc. 
Nationalizing Fannie Mae and Freddie Mac but letting Lehman Brothers 
fail confused and scared global investors. The shocking initial failure 
of Congress to pass the TARP legislation caused credit markets to 
freeze and sent stock and commodity prices crashing.
    Now, a new policy consensus has been forged out of collapse. It is 
widely held that policymakers must take aggressive and consistent 
action to quell the panic and mitigate the economic fallout. An 
unfettered Federal Reserve will pump an unprecedented amount of 
liquidity into the financial system to unlock money and credit markets. 
The TARP fund will be deployed more broadly to shore up the still-
fragile financial system, and another much larger and more 
comprehensive foreclosure mitigation program is needed to forestall 
some of the millions of mortgage defaults that will otherwise occur. 
Finally, another very sizable economic stimulus plan is vitally needed. 
Although there will be much more discussion about the appropriate size 
and mix of government spending increases and tax cuts, the House 
Democratic plan is a very good starting point. This is important, for 
although such debate is necessary, it must be resolved quickly. Unless 
a stimulus plan is implemented beginning this spring, its effectiveness 
in lifting the economy will be significantly muted.
    The fiscal stimulus does carry substantial costs. The federal 
budget deficit, which topped $450 billion in fiscal 2008, could top 
$1.5 trillion in fiscal 2009 and remain as high in 2010. Borrowing by 
the Treasury will top $2 trillion this year. There will also be 
substantial long-term costs to extricate the government from the 
financial system. Unintended consequences of all the actions taken in 
such a short period will be considerable. These are problems for 
another day, however. The financial system is in disarray, and the 
economy's struggles are intensifying. Policymakers are working hard to 
quell the panic and shore up the economy, but considering the magnitude 
of the crisis and the continuing risks, policymakers must be 
aggressive. Whether from a natural disaster, a terrorist attack, or a 
financial calamity, crises end only with overwhelming government 
action.

                                ENDNOTES

    \i\ The House Democratic stimulus plan can be found at: http://
appropriations.house.gov/pdf/RecoveryReport01-15-09.pdf
    \ii\ Federal Reserve Chairman Bernanke has recently labeled the 
central bank's policy, which some would describe as quantitative 
easing, as ``credit easing.'' For a more complete description of how 
the Fed is responding to the crisis, see ``The Crisis and the Policy 
Response,'' a speech at the London School of Economics, January 13, 
2009. http://www.federalreserve.gov/newsevents/speech/
bernanke20090113a.htm
    \iii\ A foreclosure mitigation plan that includes mortgage write-
downs that I have proposed is the Homeownership Vesting Plan. See 
``Homeownership Vesting Plan,'' Regional Financial Review, December 
2008.
    \iv\ The London interbank offered rate is the interest rate at 
which major banks lend to one another.
    \v\ Currency swings have been wild enough to prompt discussion of 
coordinated government intervention. This seems unlikely, in part 
because the currency moves until recently have been largely welcome. A 
stronger U.S. dollar means global investors still view the U.S. as a 
haven, which is important as the Treasury ramps up borrowing. Nations 
whose currencies are falling against the dollar are hopeful that this 
will reduce pressures on their key export industries.
    \vi\ When all the GDP revisions are in, they are expected to show 
that real GDP also fell in the first quarter of 2008. Second quarter 
growth was supported by the tax rebate checks as part of the first 
fiscal stimulus package.
    \vii\ State recessions are determined using a methodology similar 
to that used by the business cycle dating committee of the National 
Bureau of Economic Research for national recessions.
    \viii\ For a more thorough discussion of the wealth effect, see 
``MEW Matters,'' Zandi and Pozsar, Regional Financial Review, April 
2006. In this article, the housing wealth effect is estimated to be 
closer to 7 cents while the stock wealth effect is nearer to 4 cents.
    \ix\ This was part of a failed effort to rein in the double-digit 
inflation of the period.
    \x\ This spend-out rate would be consistent with the 
Administration's commitment of a 75% spend-out rate by the end of 
fiscal year 2010 as stated in a January 22, 2009 letter from OMB 
Director Peter Orszag to House Budget Committee Chairman John Spratt.
    \xi\ The model is a large-scale econometric model of the U.S. 
economy. A detailed description of the model is available upon request.
    \xii\ The slump in consumer confidence after the recession in 1990-
1991 may have been due in part to the first Bush administration's 
initial opposition to extending UI benefits for hundreds of thousands 
of workers. The administration ultimately acceded and benefits were 
extended, but only after confidence waned and the fledgling recovery 
sputtered.
    \xiii\ The economic bang for the buck estimates measure the change 
in GDP one year after spending actually occurs; they say nothing about 
how long it may take to cut a check to a builder for a new school.
    \xiv\ Spending safeguards proposed in the House stimulus plan 
include requiring governors and mayors to certify that expenditures 
under their jurisdiction are appropriate; program managers will be 
listed online so the public can hold them accountable; and a special 
board will monitor spending.
    \xv\ This analysis is based on a calculation of personal saving 
rates by income group using data from the Federal Reserve Board's Flow 
of Funds and Survey of Consumer Finance. Saving rates for those in the 
top quintile of the income distribution, most of whom did not receive a 
rebate check, rose significantly during this period as these households 
were already responding to their declining net worth. Saving rates for 
those in the bottom four quintiles did not increase significantly 
during this period suggesting they spent most of the tax rebate their 
received.
    \xvi\ There are no formal definitions of recession and depression, 
but the current period will likely be considered a depression if the 
nation's jobless rate rises into the double digits for more than two 
quarters.

    Chairman Spratt. Dr. Meyer, Laurence Meyer.

               STATEMENT OF LAURENCE MEYER, PH.D.

    Mr. Meyer. Thank you, Mr. Chairman.
    Mr. Chairman, members of the committee, thank you for 
giving me this opportunity to share with you Macroeconomic 
Advisers' forecast of the economy over the next 2 years.
    Chairman Spratt. Would you pull the mike up?
    Mr. Meyer. Our forecast incorporates a fiscal stimulus 
package that we designed to resemble very closely the plan that 
was proposed by the President-elect's then transition team. We 
think the effects of the House plan would be very similar.
    Before proceeding further, let me remind you of what I am 
sure you already appreciate: Forecasting in the best of times 
is very challenging, and it is even more so today, given the 
uncertainties associated with the unprecedented shocks to the 
financial and real sector, uncertainties about the timing, 
aggressiveness and effectiveness of further non-conventional 
monetary policy actions and uncertainty about the size, timing 
and aggressiveness of the fiscal package.
    Notwithstanding this uncertainty, we have to sort of begin 
in a disciplined fashion by trying to assess what the economy 
would most likely look like in the absence of fiscal stimulus 
and then offer a disciplined analysis of that stimulus, and 
that's what I hoped to offer today.
    We are today almost certainly in a very deep recession, 
possibly the worst of the postwar period. We expect that real 
GDP declined at a 5\1/2\ percent rate last quarter. It is 
declining at about a 4 percent rate this quarter. In the 
absence of the fiscal stimulus, we expect that growth will 
remain weak for the rest of this year and then the economy will 
grow somewhat more strongly next year. The unemployment rate, 
which is now 7.2, would peak out at above 9 percent in the 
middle of next year and still be close to 9 percent at the end 
of next year.
    By the way, we are viewed as optimists.
    The economy is being weighed down by three powerful and 
interrelated shocks. The first is the housing correction, 
including the sharp decline in home prices. The second is a 
dramatic deterioration in credit conditions, including a sharp 
rise in credit risk spreads in the corporate bond and mortgage 
markets and a tightening in bank lending standards. The third 
is the very weak state of the banking system, with large 
losses, pressure on balance sheets and a potentially diminished 
flow of credit to households and businesses. The impact of 
these three weights has been amplified by the accompanying 
sharp decline in equity prices.
    Now I would like to say we know why the economy will 
recover, we just don't know when. The recovery story has two 
parts. The first is an overwhelming policy response, fiscal as 
well as monetary. The second is diminished drag from the three 
weights discussed above: stabilization and then a rebound in 
housing from an extraordinarily low level, gradually improving 
credit conditions and some improvement in the health of the 
banking system.
    The fiscal package we incorporate this forecast assumes a 
cumulative stimulus of $775 billion by the end of next year, 
including an increase in discretionary spending of about $250 
billion and a cumulative increase in mandatory spending of 
about $200 billion and a cut in tax revenues of more than $300 
billion.
    To incorporate the fiscal stimulus into our forecast, we 
have had to assume spend-out rates for the various spending 
provisions, determine whether households and businesses will 
perceive the tax cuts, and indeed spending increases, as 
temporary or respond as if they are permanent, and let the 
model determine the expected effects on spending, employment 
and inflation.
    We set the spend-out rates consistent with what we believed 
the transition team was aiming for. At the time, we didn't have 
the CBO spend-out rates. So we will certainly assess the spend-
out rates in our forecast in light of the CBO's analysis, and 
presumably we will stream them out a little longer.
    The effects on aggregate spending determined by the model 
are often described in terms of multipliers, that is, the 
increase in real GDP per dollar of spending or revenue loss. I 
note, however, that because almost all of the provisions in the 
fiscal stimulus package are temporary, it has a peak effect on 
the level of GDP, in 2010 in our forecast, and then the fiscal 
effects of the stimulus begins to slow growth relative to what 
otherwise would have been.
    The effect of the fiscal stimulus, based on the assumed 
size, spend-out rates and model multipliers, is to raise the 
level of real GDP by about 3 percent by the end of 2010, to 
lower the unemployment rate by about 1\3/4\ percentage points 
by the end of 2010, and to create 3.3 million jobs. This is at 
the upper end of the range that Doug Elmendorf talked about.
    The projected stronger growth this year and next year 
allows the unemployment rate to peak at about 8\1/2\ percent at 
the end of this year and then to decline to about 7\1/2\ 
percent by the end of next year. While this is still well above 
estimates of the sustainable rate of full employment, the 
effect of the fiscal stimulus is still to speed the return to 
full employment and protect against the possibility that the 
economy will slip into deflation as early as next year.
    Thank you.
    Chairman Spratt. Thank you very much for your excellent 
testimony.
    [The prepared statement of Laurence Meyer follows:]

 Prepared Statement of Laurence H. Meyer, Vice Chairman, Macroeconomic 
                                Advisers

    Chairman Spratt, Ranking Member Ryan and, and Committee members: 
Thank you for giving me this opportunity to share with you 
Macroeconomic Advisers' assessment of the near-term outlook for the 
economy. The forecast incorporates a fiscal stimulus package that we 
believe closely resembles the plan initially set out by the then 
President elect's transition team and we believe the plan being 
considered by the House would have a very similar impact. I have 
submitted for the record two reports that provide detail on our 
forecast and our analysis of the prospective fiscal stimulus.
    Before proceeding further let me remind you of what I am sure you 
already know: Forecasting the macro economy in the best of times is 
challenging, but this is even more so today, given the unprecedented 
nature of shocks to the financial and real economy and uncertainties 
about the aggressiveness and effectiveness of non-conventional monetary 
policy options being pursued by the Fed and about the size, 
composition, and effectiveness of a prospective fiscal stimulus 
package. Nevertheless, in deciding whether to implement a fiscal 
stimulus package and how to calibrate its appropriate size, the point 
of departure should in our view be a disciplined assessment of how the 
economy would likely behave in the absence of the fiscal stimulus, 
followed by a disciplined analysis of the impact of the fiscal 
stimulus. This is what I hope to offer the Committee this morning.
    We are today, almost surely, in a deep recession, possibly the 
worst in the postwar period. We expect that real GDP declined at about 
a 5\1/2\% annual rate in the fourth quarter of last year and will fall 
at about a 4\1/4\% rate in the current quarter. In the absence of 
fiscal stimulus, we expect the economy would continue to decline 
slightly in the following two quarters, and begin to move to stronger 
growth next year. The unemployment rate, which is currently 7.2%, would 
peak at above 9% in the middle of next year and still be close to 9% at 
the end of next year. And, by the way, we are viewed as optimists.
    The economy is being weighed down by three powerful and 
interrelated shocks. The first is the housing correction, including the 
sharp decline in home prices. The second is a dramatic deterioration in 
credit conditions, including a sharp rise in credit risk spreads in the 
corporate bond and mortgage markets and a tightening in lending 
standards at banks. The third is the very weak state of the banking 
system, with large losses, pressure on balance sheets, and potentially 
a diminished flow of credit to households and businesses. The impact of 
these three weights has been amplified by the accompanying sharp 
decline in equity prices.
    I like to say we know why the economy will recover, we just don't 
know when. The recovery story has two parts. The first is an 
overwhelming policy response, fiscal as well as monetary. The second is 
diminished drag from the three weights discussed above: stabilization 
and then a rebound in housing from an extraordinarily low level; 
gradually improving credit conditions; and some improvement in the 
health of the banking sector, reflected in an and improved flow of 
credit to households and businesses.
    Even with the assumed fiscal stimulus and diminishing drags, we 
expect a tepid recovery in the second half of this year, but a rebound 
to above trend growth in 2010. The unemployment rate in this case is 
expected to peak at about 8\1/2\% at the end of this year and decline 
to about 7\1/2\% at the end of 2010.
    The fiscal package we incorporate into the forecast assumes a 
cumulative stimulus of $775 billion by the end of next year, including 
increase in discretionary spending of about $250 billion through 2010, 
a cumulative increase in mandatory spending of about $200 billion, and 
a cut in tax revenue of more than $300 billion.
    To incorporate the fiscal stimulus into our forecast, we had to 
assume spend out rates for the various spending provisions, determine 
whether households and businesses will perceive the tax cuts (and 
indeed spending increases) as temporary or respond as if they are 
permanent, and then let the model determine the expected effects on 
spending, employment and inflation.
    We set the spending pay-out rates consistent with what we believed 
the transition team was aiming for. We will reassess this in our next 
forecast round, in light of CBO's apparently lower assumed spend out 
rates for discretionary spending.
    The effects on aggregate spending determined by the model are often 
described in terms of ``multipliers'', that is, the increase in real 
GDP per dollar of spending or revenue loss. Note however that, because 
almost all of the provisions in the fiscal stimulus package are 
temporary, it has a peak effect on the level of GDP, in 2010 in our 
forecast, and then the fiscal ``stimulus'' begins to slow growth 
relative to what it otherwise would have been for a period of time. I 
will be happy to elaborate on the multipliers for our model during the 
discussion that follows the opening statements, if the Committee 
wishes.
    One important consideration in affecting the size of the 
multipliers is whether households and firms treat the tax cuts (and 
indeed spending increases) as transitory or permanent. We assume 
households respond to the increases in spending and to the cuts in 
personal taxes as if they were permanent, while businesses respond to 
the business tax cuts as if they were transitory. Given time, I would 
be happy to explain our treatment, but the decision here will have an 
important effect on the effectiveness of the stimulus package.
    The effect of the fiscal stimulus, based on the assumed size, 
spend-out rates, and the model multipliers, is to raise the level of 
real GDP by about 3\1/4\% by the end of 2010, to raise the growth rate 
over each of the next two years by about 1\1/2\ percentage points, to 
lower the unemployment rate by about 1\3/4\ percentage points by the 
end of 2010, and to create 3.3 million jobs (that is, comparing the 
level of employment at the end of 2010 with what it would have been in 
the absence of fiscal stimulus).
    The projected stronger growth both this year and next allows the 
unemployment rate to peak at about 8\1/2\% at the end of this year, and 
then to decline to about 7\1/2\% by the end of next year. While this is 
still well above estimates of the sustainable rate at full employment, 
the effect of the fiscal stimulus is still to speed the return toward 
full employment and protect against the possibility that the economy 
will slip into deflation as early as next year.

    Chairman Spratt. Our fourth witness is Kevin Hassett from 
the AEI.
    Thank you very much for coming in. The floor is yours.

              STATEMENT OF KEVIN A. HASSETT, PH.D.

    Mr. Hassett. Thank so much, Mr. Chairman. It is surely an 
honor to be here. I have submitted written remarks, and I will 
dance quickly to the highlights, knowing that it is a late 
hour.
    I think that the headline of my remarks might be that I 
agree quite a bit with Mr. Blumenauer and with Ms. Rivlin, and 
I am going to explain why.
    The NBER told us that the recession began in December of 
2007. I think that we need to begin our discussion of where we 
are and where we might go from here with an acknowledgment that 
it is quite likely that that is a little bit early. And indeed, 
as I lay out in my testimony, I think that a model that has 
been really reliable in the past has called every recession 
correctly and never given a false signal suggests that the 
recession might have begun a little bit later.
    The NBER itself has acknowledged that when in its 
announcement it said, and I quote now, ``The committee found 
that the economic activity measured by production was close to 
flat from roughly September, 2007, to roughly June, 2008.''
    The reason that I mention June as a potential start for a 
recession is that when we are in a recession you kind of know 
what to expect. Mr. Chairman, you have been through some. And 
maybe a good one will last a year or a little bit less and a 
bad one will last a year and a half. I think that your mental 
clock should run from June, not from last December, as we look 
ahead.
    Now if the recession truly began in June, then even if we 
receive a favorable draw, then we are talking something that is 
going to last well into the fall.
    There is a strong reason to believe that we should count 
ourselves fortunate if this recession resembles anything like 
the typical recession, though. A new study by an economist at 
the IMF, which is cited in detail in my testimony, gathered 
data on 122 recessions in OECD countries between 1960 and 2007. 
The authors found that there had sadly been many historical 
precedents for the current crisis if you look at other 
countries. The recessions have been preceded by credit crunches 
before. Recessions have also been preceded by home price 
collapses and by equity price collapses. As you can see in 
figure 2 in my testimony, it has usually been the case that 
these negative forces have occurred in isolation.
    Of the 18 recessions that followed credit crunches, three 
saw coincident housing price collapses and one saw a coincident 
equity price collapse and four saw all three negative factors, 
which is what we are looking at right now.
    The key finding in the paper, however, is the significance 
of these factors in determining the outcome. Figure 3 shows how 
credit crunch recessions have differed over time from normal 
recessions, and news is not good. The typical decline and 
output during severe crunches and this episode again certainly 
qualifies as severe.
    The last 4.3 quarters, which would take this one, if you 
believe it began in June, close to the end of the summer and 
post the GDP decline of more than 12 percent. Now these numbers 
might be large because of outliers. If one uses the median 
rather than the mean as the guide, then the average crunch 
lasts a little less than a year and posted about a 6 percent 
decline in GDP.
    While this outlook is sobering, it is, if anything, a rosy 
scenario compared to other analyses. For example, a recent 
paper by economists Carmen Reinhart and Kenneth Rogoff focused 
exclusively on what could be called severe financial crises. 
Their key results are depicted in the next two charts.
    Figure 4 looks at the typical unemployment experience for 
countries that have been through severe financial crises, and I 
think ``severe'' is probably an accurate description of the 
current one here. On average, the unemployment rate increased 7 
percent and the downturn lasted a whopping 4.8 years.
    If this chart characterizes the experience we are likely to 
have, then the unemployment rate in the U.S. would increase to 
about 12 percent. Employment is often slow to respond to 
improving economic conditions. Jobless recoveries are far too 
common. Thus, the unemployment rate may tell too negative a 
story.
    However, figure 5 indicates that the record of GDP growth 
after financial collapses is also startlingly negative, with a 
typical decline in GDP being 9.3 percent and the typical 
downturn associated with financial crisis lasting almost 2 
years.
    And, again, figure 6 shows that this bad economic news has 
been very bad news for budget authorities. On average, a 
financial crisis has led to almost a doubling of outstanding 
government debt. It would take the 40 percent of GDP up to 80 
percent almost or 70, 75 if we were to have a typical 
experience.
    In this most recent budget outlook discussed by Mr. 
Elmendorf this morning, the CBO forecasts that GDP will decline 
2.2 percentage points. I think that, given the history of 
financial crises, it seems that this estimate is probably more 
like a best-case scenario. Accordingly, I do encourage the 
members of this committee to be cognizant of the fact that the 
budget outlook is likely to deteriorate significantly as the 
year progresses and that it is going to look a lot worse maybe 
than the estimate right now by the end of the year.
    Now that realization should not discourage this body from 
supporting fiscal policy action, but it is important to note 
that the average experience discussed above, those really bad 
numbers we just walked through, it is taken from a sample of 
countries that were governed by highly motivated policymakers 
dedicated to do everything they could to soften the economic 
downturn. Stimulus packages were probably passed in every data 
point that we saw there; and even with the shrewdest policy 
action the governments were able to devise, the experience was 
a lengthy and deep downturn far worse than what we see in the 
current CBO forecast.
    I think there is a genuine concern that the economy will 
continue to be soft past the time when this year's stimulus 
efforts have had their effect and that deficits could be much 
larger than those currently forecast. We have not yet reached 
the point where skyrocketing debt levels have caused heightened 
concerns among investors in U.S. Treasuries, but I think that 
there is a chance that we could push the envelope on it.
    I am concerned that--and I am not one of those who thinks 
Keynesian stimulus has no effect and so on. But I am concerned 
that we might replace something like a slightly longer version 
of last year, where I do believe the second quarter GDP was 
stimulated by the stimulus package, that it did slow the onset 
of recession, but then the second half of the year we had a 
recession nonetheless. I am concerned that we could replay a 
similar episode, perhaps stretched out a little longer, and 
wake up and find the economy is still weak, given past history 
that would suggest the risks are significant.
    So what does that make me want to do? I don't want to go 
into specific policy proposals. It is beyond the purview of my 
testimony. But I would like to say that I think and I agree 
with Ms. Rivlin that we shouldn't take long-run changes off the 
table, and the really obvious place to start is to give people 
some sense that in the long run we are going to return to 
fiscal discipline. But, also, there are other changes that one 
could make; and these are not things that I want to advocate in 
a way that creates a contentious conversation. But there are 
also permanent changes that one could make that could be good 
in the near term and the long term.
    Now I will list two and close my testimony.
    The first is that if you were to announce that a few years 
from now that you are going to have a value-added tax in the 
U.S.--this is a hypothetical--then today consumption might go 
up because people want to consume before the value-added tax 
happens. And in the long run you have extra tax revenue, given 
how high government spending to GDP is likely to be. It is 
probably the case that you will be looking for new sources.
    Chairman Spratt. Leave enough leave time and those who are 
opposed to it will all rally to support those who voted for it, 
and that day will never come.
    Excuse me. Go ahead.
    Mr. Hassett. The second one, and then I will finish, sir, 
is if you were to announce that the corporate tax were going to 
be reduced in the future, something perhaps you wanted to head 
towards a target, as was in Mr. Rangel's bill last fall, of 31 
percent, then if you were to reduce the corporate tax gradually 
over time, say a percent or two a year, then firms would deduct 
their capital spending today at the high rate and get their 
profits tomorrow at the lower rate. You would get a double 
positive effect from a long-run change.
    And so I encourage you to think that, well, if this thing 
lasts longer than a few more quarters, then what would we wish 
that we had done? And I think that putting longer run things on 
the table, as Ms. Rivlin and I have suggested, is something 
that you might want to consider.
    Thank you, sir.
    [The prepared statement of Kevin Hassett follows:]

 Prepared Statement of Kevin A. Hassett, Senior Fellow and Director of 
         Economic Policy Studies, American Enterprise Institute

    Chairman Spratt, Ranking Member Ryan and other members of the 
Committee, it is an honor to be afforded the opportunity to appear 
before you today at this critical moment in our nation's history.
    The purpose of my presentation is to review the state of the 
economy, and to draw historical lessons from the academic literature to 
help sketch out the range of possibilities going forward.
    It is always a perilous thing to opine on the state of the economy. 
The data that we use to assess the economy are published with 
significant lags. While we can now feel fairly certain about the 
character of the fourth quarter of 2008, the current quarter is still 
underway, and economies can and do change direction rapidly.
    Accordingly, discussion of the current state of the economy should 
be cautious. However, there is one thing that is well established at 
this point. There is no debate among economists that we are currently 
in a recession. The National Bureau of Economic Research is the 
official arbiter of such matters, and they have dated the beginning of 
this recession to December 2007.
    This determination is important, because economists have 
established that the economy tends to proceed in a ``nonlinear'' 
fashion; that is, we can think of history as having consisted of 
discretely different ``good'' times and ``bad'' times. When we are in 
good times, good quarters tend to follow good quarters. When we are in 
bad times, bad quarters follow one another.
    The fourth quarter of last year was one of the worst quarters in 
memory. It is likely that GDP declined at an annual rate of around 6 
percentage points. While there is little data in hand for the current 
quarter, a decline of a similar scale seems to be in order.
    Bad times are here. But it is worth noting that declines of 
approximately this scale have been posted before. The economic data 
available do not suggest that we are in something fundamentally 
different from past recessions. It would not be unprecedented for GDP 
to decline six percentage points a quarter or two from the beginning of 
a recovery. For example, in the first quarter of 1958, GDP declined 
well over 10 percent at an annualized rate. In the second quarter of 
1980, GDP declined by an annual rate of 7.8 percent.
    How long will the recession continue this time? Is the outlook so 
negative that policy action is urgent and necessary?
    At first glance, the history of recessions might provide some cause 
for optimism. The typical recession in post-war U.S. history lasted 
about 10 months. The worst two recessions, that of 1973 and that of 
1981, both lasted about 16 months. If the recession truly began in 
December 2007, then one might expect that the recovery would be near.
    There is cause, however, to be reluctant to accept such a rosy 
view.
    The first cause is an important qualification to the NBER 
announcement. There is a good deal of uncertainty surrounding the 
precise start date of this recession. An alternative econometric 
approach pioneered by University of California economist Marcelle 
Chauvet, uses economic data to estimate the real-time probability that 
we are in a recession.\1\ Her estimates clearly indicate that we are 
now in recession, but the start date may have been much later.
---------------------------------------------------------------------------
    \1\ See Figure 1.
---------------------------------------------------------------------------
    This latter possibility was acknowledged by the NBER when it 
announced that a recession had begun, writing that, ``The committee 
found that economic activity measured by production was close to flat 
from roughly September 2007 to roughly June 2008.'' \2\
---------------------------------------------------------------------------
    \2\ http://www.nber.org/cycles/dec2008.html
---------------------------------------------------------------------------
    But if the recession truly began as late as June, then even if we 
receive a favorable draw and have an average recession by historical 
standards, then we can expect it to last into the summer. If this 
recession matches in duration the two worst post-war recessions, then 
it will last until October 2009.
    There is a strong reason to believe that we should count ourselves 
fortunate if this recession resembles anything like a typical 
recession. A new study by economists at the IMF gathered data on 122 
recession episodes in OECD countries between 1960 and 2007.\3\
---------------------------------------------------------------------------
    \3\ Claessens, Stinj, M. Ayhan Kose and Marco E. Terrones. ``What 
Happens During Recessions, Crunches and Busts.'' IMF Working Paper, WP/
08/274, December, 2008, http://www.aei.org/docLib/20081212--IMF.pdf.
---------------------------------------------------------------------------
    The authors found that there have, sadly, been many historical 
precedents for the current crisis. Recessions have been preceded by 
credit crunches before. Recessions have also been preceded by home 
price collapses, and by equity price collapses as well. As can be seen 
in figure 2, it has usually been the case that these negative forces 
have occurred in isolation.
    Of the 18 recessions that followed credit crunches, three saw 
coincident housing price collapses, one saw a coincident equity price 
collapse, and four saw all three negative factors. The key finding of 
the paper is the significance of these factors in determining the 
outlook. Figure 3 shows how credit crunch recessions have differed over 
time from normal recessions.
    The news is not good. The typical decline in output during severe 
crunches, and this episode certainly qualifies as severe, lasts 4.33 
quarters, and posts a GDP decline of 12.38 percent. These numbers may 
be large because of outliers. If one uses the median, rather than the 
mean, as a guide, then the average severe crunch recession lasted 3 
quarters, and posted a 6.15 percent decline in GDP. In comparison, the 
four recessions containing a house price bust, equity price bust and a 
credit crunch had an average duration of four quarters and a decline in 
GDP of 9.15 percent.
    While this outlook is sobering, it is, if anything, a rosy scenario 
compared to other analyses. For example, a recent paper by economists 
Carmen Reinhart and Kenneth Rogoff focused exclusively on what could be 
called ``severe financial crises.'' Their key results are depicted in 
the next two charts.
    Figure 4 looks at the typical unemployment experience for countries 
that have seen severe financial crises. On average, the unemployment 
rate increased 7 percentage points, and the downturn lasted a whopping 
4.8 years.
    If this chart characterizes the experience we are likely to have, 
then the unemployment rate in the United States will increase to about 
12 percent.
    Employment is often slow to respond to improving economic 
conditions. Jobless recoveries are far too common. Thus, the 
unemployment data may tell too negative a story. However, figure 5 
indicates that the record of GDP growth after financial collapses is 
also startlingly negative, with the typical decline in GDP being 9.3 
percent, and the typical downturn associated with financial crisis 
lasting 1.9 years.
    Figure 6 shows that this bad economic news has been very bad news 
for budget authorities. On average, a financial crisis has led to 
almost a doubling of outstanding government debt.
    In its most recent budget outlook, the CBO forecasts that GDP will 
decline 2.2 percentage points. Given the history of financial crises, 
it seems that this estimate is probably more like a best case scenario. 
Accordingly, I encourage the members of the committee to be cognizant 
of the fact that the budget outlook is likely to deteriorate 
significantly as the year progresses.
    That realization should not discourage this body from supporting 
fiscal policy action. But it is important to note that the average 
experience discussed above is taken from a sample of countries that 
were governed by highly motivated policymakers dedicated to doing 
everything they could to soften the economic downturn. Even with the 
shrewdest policy action that governments were able to devise, the 
typical experience was a lengthy and deep downturn.
    There is a genuine concern that the economy will continue to be 
soft past the time when this year's stimulus efforts have had their 
effect, and that deficits could be much larger than those currently 
forecasted.
    We have not yet reached the point where skyrocketing debt levels 
have caused heightened concerns among investors in U.S. Treasuries. If 
this Committee wishes to avoid testing those waters, it should consider 
tying stimulus efforts with genuine steps toward long run deficit 
reduction.
Figure 1.




    Copyright (c) 2008 CREFC--Center for Research on Economic and 
Financial Cycles. All rights reserved worldwide
Figure 2.



    Associations between Recessions, Crunches and Busts (number of 
events in each event category) Claessens, Stinj, M. Ayhan Kose and 
Marco E. Terrones. ``What Happens During Recessions, Crunches and 
Busts.'' IMF Working Paper WP/08/274, December, 2008, http://
www.aei.org/docLib/20081212--IMF.pdf.
Figure 3.



    Recessions Associated with Credit Crunches (percent change unless 
otherwise indicated) Claessens, Stinj, M. Ayhan Kose and Marco E. 
Terrones. ``What Happens During Recessions, Crunches and Busts.'' IMF 
Working Paper, December, 2008, http://www.aei.org/docLib/20081212--
IMF.pdf.
Figure 4.



    Reinhart, Carmen M. and Kenneth S. Rogoff. ``The Aftermath of 
Financial Crisis.'' National Bureau of Economic Research Working Paper 
14656. January, 2009, www.nber.org/papers/w14656.
Figure 5.



    Reinhart, Carmen M. and Kenneth S. Rogoff. ``The Aftermath of 
Financial Crisis.'' National Bureau of Economic Research Working Paper 
14656. January, 2009, www.nber.org/papers/w14656.
Figure 6.



    Reinhart, Carmen M. and Kenneth S. Rogoff. ``The Aftermath of 
Financial Crisis.'' National Bureau of Economic Research Working Paper 
14656. January, 2009, www.nber.org/papers/w14656.

    Chairman Spratt. Well, you gave us some very dire 
descriptions of the current economy. Where do you stand or 
would you stand if you had a vote to cast tonight on the 
stimulus legislation before us?
    Mr. Hassett. Without having read the whole thing, sir, I am 
sorry, I can't say. I support and agree that a Keynesian 
stimulus right now would have a positive effect.
    Chairman Spratt. Your testimony was a little elliptical, 
but I kept sensing you were coming around to that point of 
view. Thank you for your testimony.
    Mr. Blumenauer has a couple of questions.
    Mr. Blumenauer. Actually, I just wanted to follow up 
particularly on what Ms. Rivlin mentioned but also Mr. Zandi 
and our final witness.
    We have got a situation now where the notion of having 
entitlement reform, if we are going to, for example, tying the 
notion of a tax holiday, a payroll tax holiday, but 4 or 5 
years out we will lift the ceiling. We will make some other 
adjustments so that it looks like we are moving.
    The other that I would welcome your thoughts and perhaps 
follow up at a later date, because I don't want to keep you 
trapped here, deals with a package for funding long-term 
infrastructure. We have a Highway Trust Fund that is in deficit 
for the first time in its history. There seems to be a growing 
consensus from the private sector and the public sector for 
making some adjustments for road-related or transportation-
related fees,that we might be able to use that to enact and 
have a long-term reauthorization that might be twice the size 
that it is now but paid for, for transportation. Do a couple of 
bites of the entitlement reform tied with a tax, a payroll tax 
holiday. Any sense on the transportation package or tying those 
two together moving forward?
    Ms. Rivlin. Well, let me take a stab at it.
    I hadn't thought of tying entitlement reform to the payroll 
tax holiday, although I favor both, so I think this is a good 
idea. The payroll tax holiday I think gets money to the right 
people quickly and is clearly reversible because, unless you 
are going to go to some totally different way of financing 
Social Security, you need to get it back. And so for that 
reason I think it is a very good idea.
    And I think you could tie it to long-run entitlement reform 
in the form of the package of things that I mentioned that 
would be out in the future, some of them quite far in the 
future. We haven't finished with the reforms we did in 1983. 
And so I think that is a good idea. Now the payroll tax holiday 
makes it necessary to do even more on the long-run changes.
    Funding for long-term infrastructure, I am one who thinks 
we need something like a carbon tax. And, again, we don't want 
to raise taxes. Right now would be a bad moment. But I have 
thought for years that doing something that was a scheduled 
long-term increase--I had been thinking in terms of the gas 
tax--but whatever tax scheduled out in front would be a very 
sensible thing to do, because we want to encourage conservation 
over time.
    And the other piece of that I think can be a serious effort 
to fund metropolitan transportation infrastructure with 
congestion fees.
    Mr. Blumenauer. Mr. Chairman, I appreciate your courtesy. I 
look forward to following up with some of our panelists how 
this might be packaged. Thank you very much.
    Chairman Spratt. We now have a series of votes, four votes, 
unfortunately; and I am not going to ask you for further 
forbearance.
    I want to thank you for coming. I assure you that what you 
said will be put to use. In fact, if you listen to the debate 
tonight and tomorrow, you may hear yourself repeated without 
acknowledgment. Who knows? In any event, you have helped us 
understand the situation of the choices before us; and we look 
forward to working further with you on the solutions to the 
problems that confront us. Thank you very much for your 
patience.
    I ask unanimous consent that members who did not have an 
opportunity to ask questions of witnesses be given 7 days to 
submit questions for the record. You don't have to answer them.
    Thank you very much indeed.
    [Whereupon, at 2:10 p.m., the committee was adjourned.]

                                  
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