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



 
                        MONETARY POLICY AND THE

                     STATE OF THE ECONOMY, PART II

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



                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 22, 2010

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-148





                  U.S. GOVERNMENT PRINTING OFFICE
61-852                    WASHINGTON : 2010
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001




                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 22, 2010................................................     1
Appendix:
    July 22, 2010................................................    27

                               WITNESSES
                        Thursday, July 22, 2010

Koo, Richard C., Chief Economist, the Nomura Research Institute, 
  Tokyo..........................................................     1
Meltzer, Allan H., the Allan H. Meltzer University Professor of 
  Political Economy, Tepper School of Business, Carnegie Mellon 
  University.....................................................     3
Mishel, Lawrence, President, the Economic Policy Institute.......     5

                                APPENDIX

Prepared statements:
    Koo, Richard C...............................................    28
    Meltzer, Allan...............................................    42
    Mishel, Lawrence.............................................    46


                        MONETARY POLICY AND THE



                     STATE OF THE ECONOMY, PART II

                              ----------                              


                        Thursday, July 22, 2010

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 1:30 p.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Maloney, Watt, 
Hinojosa, McCarthy of New York, Miller of North Carolina, 
Scott, Cleaver, Ellison, Foster; Bachus, Paul, Hensarling, and 
Jenkins.
    The Chairman. The committee will come to order.
    I am pleased to continue a tradition we have started 
whereby the testimony of the Federal Reserve's Chairman is not 
the only words spoken on that day or two. And I am glad to see 
an acknowledgement from Professor Meltzer that no matter what 
people's views are substantively, the notion that the Fed 
should speak from Mount High, and that should be it, really 
doesn't make a great deal of sense. So, I appreciate these 
three distinguished economists joining us.
    Obviously with the hearing we that we had today--we often 
try to have them on separate days to get a better membership, 
but yesterday, we were preempted by the signing ceremony. So we 
are now going to proceed. And I can tell you that these are 
monitored, even if they are not attended physically.
    We will begin with Richard Koo, who is the chief economist 
of the Nomura Research Institute.
    All testimony and supporting material that any of the 
witnesses want to insert in the record will, without objection, 
be made a part of the record.
    We will begin with Mr. Koo.

   STATEMENT OF RICHARD C. KOO, CHIEF ECONOMIST, THE NOMURA 
                   RESEARCH INSTITUTE, TOKYO

    Mr. Koo. Thank you, Chairman Frank, and members of the 
committee. I really appreciate this opportunity to present my 
case that what the whole world has caught is the same Japanese 
disease that Japan had to struggle with for the last 15, 20 
years.
    And I was grateful that I was in this room when the morning 
session took place. All the debate that took place here 
actually took place in Japan 15, 20 years earlier. That was 
about zero interest rates, liquidity injections, quantitative 
easing, capital injections, guaranteeing bank liabilities, 
fiscal stimulus, large budget deficits, problems with rating 
agencies, and small companies not getting the funds.
    We went through that debate in Japan 15 years earlier, and 
after going through this very difficult period, we came to the 
conclusion that this is a very different disease. It is a 
completely different disease compared to what we are used to. 
And in this disease, where the recession is caused by a 
bursting of a nationwide asset price bubble, financed with 
debt, when that bubble bursts, asset prices collapse, 
liabilities remain, and the private sector finds out their 
balance sheets are all underwater--or many of them are 
underwater. And when the balance sheets are underwater, if you 
have no income or revenue, of course you are out of business.
    But if you still have some income or revenue or cash flow, 
then the right thing to do is to use that cash flow to pay down 
debt, because if you have a business, you don't want to tell 
your shareholders that well, we are bankrupt. We are out of 
business. Here is this piece of paper. You don't want to tell 
the bankers that it is a nonperforming loan. You don't want to 
tell your workers that they have no more jobs tomorrow.
    So for all the stakeholders involved, the right thing to do 
is to use the cash flow to pay down debt. But when everybody 
does this all at the same time, we enter a very different world 
where the economy would be continuously losing demand until 
private sector balance sheets are repaired. And I see the same 
thing happening in this country.
    There was a lot of discussion about corporate holding cash 
in this economy. I don't think they are just holding cash; they 
are paying down debt. And when this happens with zero interest 
rates, we enter a very different world. Because there is no 
name for this type of recession in economics, I call it balance 
sheet recession. And it happens in the following way: In the 
usual economy, if you have $1,000 of income, and I spent $900 
myself and decide to save $100, the $900 is already someone 
else's income. The $100 that comes into the bank in the 
financial sector is lent to someone who can use it. That person 
then spends the money. That is $900 plus $100, and the economy 
moves forward. When there are too many borrowers, you raise 
interest rates. Some drop out. If too few, you bring rates 
down, and then someone will pick up the remaining sum, and that 
is how the economy moves forward.
    But in the recession that we found ourselves in, in Japan 
15 or 20 years ago, was that you bring rates down to zero, 
there are no borrowers because everybody is paying down debt. 
No one is borrowing money, even with a zero interest rate. And 
when that happens, when $900 is spent, $100 gets stuck in the 
banking system because there are no borrowers, even at a zero 
interest rate, then the economy shrinks to $900. That $900 is 
someone else's income. That person gets the money and decides, 
let us say, to save 10 percent. So $810 is spent, $90 goes into 
the banking system, and that $90 gets stuck. So if we do 
nothing about the situation, the economy will shrink from 
$1,000, $900, $810, $730 very, very quickly, even with a zero 
interest rate.
    That is what happened in Japan, and that is exactly what 
happened during the Great Depression in the United States 80 
years ago. Everybody was paying down debt. No one was borrowing 
money because their balance sheets were all underwater.
    When you face a situation like this, the only way to keep 
the economy going is for the government to borrow the $100 and 
put that back into the income stream, because the government 
cannot tell the private sector not to repair its balance 
sheets. The private sector must repair its balance sheets. The 
private sector has no choice. So government has to then take 
the $100, put that back into the income stream, and then you 
have $900 plus $100 against the original income, $1,000. Then, 
the economy will move forward.
    This government action will have to be kept in place for 
the entire period of private sector deleveraging because if you 
pull the plug at any moment when the private sector is still 
deleveraging, the economy will collapse very quickly. And we, 
in Japan, made that mistake in 1997 and in 2001. On both 
occasions, when the government pulled the plug, the economy 
collapsed; and the budget deficit, instead of decreasing, it 
actually increased massively. And it took us nearly 10 years to 
climb out of the hole.
    So when the private sector is deleveraging, my advice to 
those countries suffering from this problem is to keep the 
government spending in there until private sector balance 
sheets are repaired, until the private sector is strong enough 
to move forward. And until that point, I am afraid government 
will have to be in there, because that will be the cheapest way 
to save the economy at the end of the day.
    Our preliminary mistake, our premature fiscal consolidation 
in 1997 and 2001, prolonged the Japanese recession by at least 
5 years, if not longer, and added massively to our budget 
deficit because the economy collapsed on both occasions, and we 
had to pull those economies out of that hole. So I would very 
much like to make sure that this economy, the most important 
one in the world, will not make the Japanese mistake of 
premature fiscal consolidation while the private sector is 
still deleveraging.
    [The prepared statement of Mr. Koo can be found on page 28 
of the appendix.]
    The Chairman. Next, we have a familiar witness, and we 
appreciate his willingness from time to time to come meet with 
us. And if I read this correctly, Allan Meltzer is the holder 
of the eponymously named Allan Meltzer Chair, if I am reading 
that correctly. So we have Professor Allan Meltzer, who holds 
the Professor Allan Meltzer Chair at what is still the Tepper 
School of Business--that name has not yet been changed--at 
Carnegie Mellon University.

STATEMENT OF ALLAN H. MELTZER, THE ALLAN H. MELTZER UNIVERSITY 
  PROFESSOR OF POLITICAL ECONOMY, TEPPER SCHOOL OF BUSINESS, 
                   CARNEGIE MELLON UNIVERSITY

    Mr. Meltzer. Thank you Mr. Chairman, and Congressman 
Bachus. It is a pleasure to be here. I have been coming since 
the esteemed late Chairman Wright Patman, who hired me to work 
for the committee back in 1959. So I am an old friend of this 
committee.
    The recession has ended, according to the statistical 
record, but unemployment remains high at between 9 and 10 
percent, with long-term unemployment at the highest level since 
the series began in 1948. Much of the public does not see 
improvement. Many will not believe that the recession is over 
until they and others are back at work.
    Why is this recovery slow and what can be done to increase 
growth and employment? Let us start with some of the problems. 
The fiscal stimulus helped very little. It didn't do nothing, 
but it didn't do much. And the best evidence that it didn't do 
much is the fact that the Administration is asking for a new 
fiscal stimulus, and many are urging that we do that. I think 
that is not what we need to do.
    Since the Eisenhower Presidency in 1961, the Federal budget 
has been in deficit almost every year. The deficits have gotten 
larger and larger, and the reported deficits are dwarfed by the 
present value of promises for health care and retirement.
    Uncertainty is the enemy of business investment and 
expansion, and what we have created is massive uncertainty. 
Here are some of the questions that businessmen worry about: 
What tax rate will apply in the future to income from 
investments made now? What new regulations will be imposed on 
businesses? How will existing and new regulations for 
pollution, financial services and health care be implemented, 
and what will they cost? What will employee health care cost? 
Will rules governing labor unions be changed to make 
unionization easier? How much will that add to production costs 
or increased outsourcing?
    If employers have no idea about future costs, they are 
reluctant to hire additional workers. They satisfy increases in 
demand by asking current employees to work overtime.
    Our current situation can be improved by reducing 
uncertainty and stimulating business investment. Here are some 
suggestions. Let me begin by saying that when Arthur Okun, the 
chairman of President Lyndon Johnson's Council of Economic 
Advisers, and a main architect of the Kennedy-Johnson tax 
program, analyzed the program after he left office, he 
concluded that the corporate tax cut which was part of the 
Kennedy-Johnson program was the most effective part of the 
program. Later work, including recent work, confirmed his 
conclusions.
    What can be done? Declare a 3-year moratorium on new 
regulations, including labor market rules and the new financial 
restraints, unless each new rule is approved by a supermajority 
in Congress.
    Develop and announced a precise, credible program of 
deficit reduction that specifies planned spending reductions 
and any tax increases.
    Eliminate uncertainty about future tax rates and where the 
tax burden will increase by announcing the program now, a 
definite program.
    Announce correct, believable costs of providing health care 
under the recently approved legislation. Recognize that many 
States are unable to pay additions to Medicaid. How much more 
will the government commit to the Medicaid program? How will 
these costs be paid?
    Use the remaining unspent funds in the January 2009 
stimulus program to reduce the corporate tax rate.
    Reduce the risk of future inflation by eliminating a 
gradual program to reduce excess reserves in the banking 
system.
    Some economists argue that the risk does not exist. The 
public doesn't believe them. Some economists actively urge more 
government spending and larger deficits. They neglect or 
denigrate concerns about the debt, the interest costs of 
servicing the debt, and the negative effect that large deficits 
and growing debt have on decisions to invest. Their arguments 
ignore the most important development in macroeconomics for the 
past 40 years: the careful integration of expectations about 
the future in dynamic economic models. A program that begins to 
lift uncertainty and reduce debt and deficits has a positive 
effect on private spending. It reduces uncertainty.
    Recent efforts in Britain and in the euro area to reduce 
spending and deficits have been followed by currency 
appreciation there and other evidence of relief and more 
favorable expectations, knowing many governments are willing to 
act against future calamity.
    Deflation has become a subject of much conversation. 
Deflation means a sustained decline in a broad-based price 
index. We do not suffer from deflation. Mention of deflation 
arouses memories of the Great Depression. That is a mistake. 
There have been 7 periods of deflation in the 97 years under 
the Federal Reserve Act. Some were large, 30 percent decline; 
some were small, 1 or 2 percent decline. Only one, 1929 to 
1933, brought the economy close to disaster. Recovery from the 
others, most recently 1960-1961, looks like any other recovery.
    We know that the 1929-1933 disaster was caused by 
inappropriate monetary policy. That policy reduced money growth 
by 50 percent. By 1933, prices had fallen less than 50 percent, 
so the expectation was prices will decline further.
    That is nothing like the situation that we are in now. We 
have massive excess reserves. The banks that report their 
forecasts to The Economist magazine do not predict deflation 
anywhere except in Japan, and there by 0.1 percent. For any of 
the developed economic countries that they monitor, they expect 
prices to rise modestly. Their current forecast for the United 
States in 2011 is 1.5 percent.
    Congress gave the Federal Reserve a dual mandate. It is 
inefficient and costly to concentrate on one objective at a 
time. That is what caused the great inflation of the 1970's. 
The Federal Reserve should not repeat that mistake as it is now 
doing. A small increase in interest rates would maintain 
negative real rates.
    [The prepared statement of Mr. Meltzer can be found on page 
42 of the appendix.]
    The Chairman. We have a vote, but there are only two votes, 
so we are going to ask Mr. Mishel to speak, and we will be back 
within no more than 15 minutes. I appreciate the indulgence of 
our witnesses. We will now hear from Lawrence Mishel, the 
president of the Economic Policy Institute.

 STATEMENT OF LAWRENCE MISHEL, PRESIDENT, THE ECONOMIC POLICY 
                           INSTITUTE

    Mr. Mishel. Thank you very much, Mr. Chairman, and Ranking 
Member Bachus, for this opportunity to address the committee. I 
welcome the opportunity to talk about the jobs situation, and 
it brings me no pleasure to report that I believe that the 
unemployment rate a year and a half from now will be very 
comparable to what it is today, and that we won't return to 5 
percent unemployment for many years to come, perhaps 2015 or 
beyond.
    I consider this an unacceptable outcome, and that means we 
should not accept it. I fear, however, that many of our elected 
leaders and the chattering class generally are implicitly 
accepting the unacceptable by doing very little to alter this 
future. We can do much better. We need to do much better. We 
can and need to pursue a vigorous jobs agenda to quickly lower 
unemployment and fill the huge jobs hole that has been created.
    Let us talk about the job situation. Economic growth is 
scheduled to slow down, and it will unlikely do better than to 
absorb the natural growth of the labor force over the next year 
and a half. That means we will have roughly the 9.5 percent 
unemployment we have today and 1 out of 6 people underemployed; 
that is nearly 1 out of 10 unemployed, and 1 out of 6 
underemployed. That means for minority workers, 1 out of 4 
unemployed or underemployed. And over the course of a year, 
because there are flows in and out, I expect this year that we 
will have 1 out of 3 workers unemployed or underemployed at 
some point during the year, with that being around 40 to 45 
percent for minorities. And we are likely to experience that 
again in 2011, and that means that we will have had around 2\1/
2\ years of really horrific 9 percent to 10 percent 
unemployment, which is unacceptable.
    Our problem is that we have a dramatic shortfall of demand 
for goods and services. We still have less final demand in the 
economy than we had before the recession, despite the fact that 
it is 2\1/2\ years later.
    A lot of the risks are, in fact, that there will be further 
shortfalls in demand because of premature deficit reduction or 
even withdrawal of stimulus that is expected to pass; that the 
fact that the State and local governments could even have a 
tougher time than we now expect from austerity in Europe and 
from the declining wage growth, which gets worse and worse, 
which challenges the ability of households to increase their 
consumption.
    Given the situation, it is necessary to do more to generate 
jobs, especially given the real risk of a double-dip recession. 
I am not saying there is going to be a double dip, but there is 
a risk. If we get there, we will be in a bad place without 
ammunition.
    Deficits: In order to create jobs, we are going to have to 
raise the deficit in the short run. I wrote an op-ed with David 
Walker of the Peterson Foundation in February arguing that, in 
fact, the immediate priority needs to be jobs. That requires a 
higher deficit. We have a deficit problem in the future. We 
need to address that, and we should. But we should not let the 
higher deficit problem in the medium and long term keep us from 
generating jobs in the short term. These are, in fact, 
complementary strategies. The first steps towards getting the 
deficit down is surely to create jobs and create more 
taxpayers.
    How are we going to generate these jobs? First of all, it 
is going to be the responsibility of Congress. The Recovery Act 
was important. It created millions of jobs. I don't really know 
how people explain the fact that we were losing three-quarters 
of a million jobs a month early last year, and now we are 
creating jobs. If not for the Stimulus Act, except for the 
inventory cycle, I don't think I have heard many explanations 
of why that occurred.
    The fact that we haven't yet gotten to a place that we want 
to be, I think reflects how awful the place was before this 
Stimulus Act even took effect. In March 2009, we had an 8.6 
percent unemployment rate, we had already lost more than 4 
percent of our employment base--that is more of a loss of jobs 
than we even suffered in the 1980's recession--and we were 
still declining rapidly. It takes an awful lot to both stop a 
decline and to make up a lot of ground so that people feel 
prosperous.
    How can we create jobs? I think there are the kinds of 
things that have been going on. We need to provide support for 
the unemployed. We need to provide relief to the States for 
both health and education. I think we need robust support for 
infrastructure, school modernization and transportation 
investments. I think we need to do something like the Miller 
bill to create local jobs throughout the country.
    Let me just end by saying a few things about the recent 
debate we have had over unemployment insurance, which I felt 
was quite misguided. CBO, many economists believe that is the 
most effective thing you can do to stimulate the economy. It 
not only helps people, but it actually generates jobs. The 
reason is you are giving money to people who are desperate, and 
they are going to spend the money. So extending and expanding 
unemployment insurance is a ``twofer.'' It helps people. It 
creates jobs.
    We have calculated, using CBO parameters and the stimulus 
multiplier from economy.com, that the unemployment insurance 
system was providing around 1.7 million full-time equivalent 
jobs in early 2010. Now what happened? The bill that was passed 
is going to make sure that there is going to be more jobs and 
provide help for people in the last half of the year. But 
removed from that was $25 per week in benefits, COBRA 
subsidies, and other things, so that, in fact, the unemployment 
insurance system will be supporting fewer jobs in the last half 
of the year than in the first half.
    Now, given the fact that when you do something that 
stimulates the economy, the Treasury gets back a lot of revenue 
and has to spend less, jobs created through unemployment 
insurance only cost 37,000 jobs. I thought that was a pretty 
good deal. I am sorry people didn't take it up.
    [The prepared statement of Mr. Mishel can be found on page 
46 of the appendix.]
    The Chairman. We will recess and be back. There are only 
two votes. So we will say maybe another 10 minutes on the first 
vote. We will vote very quickly and then come back. We thank 
you for your patience.
    [recess]
    The Chairman. We will reconvene. I am going to ask my 
questions, and then I have to go to another meeting. The 
gentleman from North Carolina will preside, the chair of the 
subcommittee.
    For all three of the witnesses, we have some agreement that 
the statistics show that things were on an upward path starting 
last year. I read from the Republican Budget Committee summary 
that said that after a long and deep recession, things began to 
get better in the second half of 2009, and that the credit 
markets and the financial institutions were getting more 
normal, that the economy was starting to get back. And then 
they said by the early part of 2010, by 2010, they said, most 
economists saw a modest recovery. And then they said, but a new 
crisis threatens that.
    So my question is, what could that new crisis be? It is 
probably my question to you, Mr. Meltzer. You talk about 
uncertainty, but I don't understand why there would be more 
uncertainty today than there was a year ago, 3 years ago, or 5 
years ago. In fact, to some extent we have passed some 
legislation that may have diminished it. During the period of 
transition from Clinton to Bush or from Bush to Obama, there 
was clearly uncertainty about public policies. One 
Administration with a very different view replaces another, and 
that happens in a democracy.
    So I guess it is a combined question. What happened in 
April or May of this year? The Fed's estimate goes from more 
optimistic in April than it is today. The Republican Budget 
Committee comment that I talked about said things were going 
well in 2010, but now a new crisis threatens. What is the new 
crisis, and when did it arise?
    Mr. Meltzer, let me start with you and ask each of you to 
talk about it for a minute or so.
    Mr. Meltzer. I think it grew gradually. It didn't come one 
day; it came slowly over time. People became--the stimulus 
didn't seem to be doing much. It made people a bit nervous 
about why not. The programs for control of health were 
expensive, and you don't know what it costs to hire an 
employee. So as legislation began to come through--I don't say 
the legislation is wrong or bad or--
    The Chairman. But let me ask you this, Mr. Meltzer, 
because, again, the Republican Study Committee, the Budget 
Committee says, things are going well in the second half of 
2009, and there was a moderate recovery under way, and then it 
ran into a problem.
    Mr. Meltzer. It is still under way.
    The Chairman. But the health care bill--questions about--
the things you have just explained were constant. So how did 
things start to get better despite them, and then they got 
worse because of them?
    Mr. Meltzer. There is a heck of a lot of stimulus. My 
friend Professor Mishel says, well, what could possibly account 
for it? We have $1 trillion worth of excess reserves in the 
banking system. There has been a heck of a lot of monetary 
stimulus. The Fed bought $1 trillion worth of mortgages to hold 
the mortgage rate down. The government had a program for 
stimulating housing. It was actually a program I recommended at 
one time. So those were things which were helping.
    There were things which were hurting; and the thing which 
was hurting was, in my opinion, pervasive growing--
    The Chairman. All right. I appreciate that. But again, the 
timing still puzzles me. I don't see an explanation of why they 
suddenly emerged. But let me ask Mr. Koo and then Mr. Mishel to 
each address that.
    Mr. Koo. My idea of the situation is that once the bubble 
burst, the economy began to weaken because of all these balance 
sheet problems that I mentioned. But we had one accident in 
between, which was, in my view, totally unnecessary, and that 
was the Lehman shock. The fact that Lehman Brothers was allowed 
to fail when so many other financial institutions had the same 
problem at the same time, that caused a massive panic, which 
was, in my view, totally unnecessary.
    The Chairman. But I am talking about after that. Then, 
again, the argument was, we began to recover from that in a 
number of ways, and that somehow sometime around this spring, 
April or May, it stalled out--or it didn't stall out, but it 
slowed down. Lehman in 2008 couldn't explain April of 2010.
    Mr. Koo. Without Lehman, the economy would have went this 
way; with Lehman, the economy went that way. And then with 
massive monetary stimulus and all the other actions taken by 
the Federal Reserve, Treasury, and all the other governments 
around the world, we were able to bring it back. But all the 
problems on the balance sheets are still with us.
    The Chairman. Mr. Mishel?
    Mr. Mishel. My view is this is just a boldfaced political 
argument against the policy activism of the Obama 
Administration and Congress. You don't have to go very far to 
explain the lack in investment or the lack of hiring. It has to 
do with the fact that there is no demand, that we have plenty 
of excess capacity. If you track investment compared to 
capacity over the history--
    The Chairman. Thank you. My time has expired.
    The gentleman from Alabama.
    Mr. Mishel. Let me try very briefly.
    The Chairman. I am sorry. If you want it to come out of 
your time, okay. It is great. We are going to have votes.
    The gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman.
    Mr. Koo, you talked about the Great Depression, and you 
said some of what is happening now is similar to what happened 
in the Great Depression when people stop spending.
    Mr. Koo. Stop borrowing.
    Mr. Bachus. Stop borrowing and spending.
    During the Great Depression, the ratio of household debt to 
disposable personal income was in the 30 to 40 percent range. 
Currently, that ratio is above 120 percent. So, that is quite a 
difference. People have much more debt today, 3 or 4 times as 
much debt as they did then. So one of the reasons that they may 
not be borrowing money is because they simply can't afford to 
pay any more debt. Would you agree?
    Mr. Koo. Yes. And when that process is going on, we are in 
a very different world, because these people would be 
minimizing debt instead of maximizing profits. And that is why 
we have to be super careful with this disease compared with 
ordinary recessions.
    Mr. Bachus. And I can understand when people have trouble 
paying back what they owe, they are not going to borrow, or 
they are not going to spend a lot. I think that is true of 
individuals today. For businesses, however, I think it is a 
totally different picture. They are sitting on record amounts 
of cash, and yet they are not hiring, and they are not 
investing.
    I have to believe that Professor Meltzer is correct when he 
says that is obviously based on uncertainty. There has to be an 
amount of uncertainty or a lack of confidence. Otherwise, 
normally the business judgment is not to sit on cash; it is to 
invest it or to hire people. So what has changed? Because 
companies are not hiring, and they are not investing.
    Mr. Koo. No. I think business is also very afraid whether 
they will be in demand in the future or not. As Jack Welch said 
in one of those TV programs that right now with so much 
monetary stimulus, so much fiscal stimulus, this is where we 
are. Just imagine what is going to happen next year when both 
of them may be gone. Then the economy will be much weaker, and 
you will look very stupid investing at this moment.
    Industrial production is still at the level of 2004, 
meaning there are excess capacities everywhere, and you see so 
many workers unemployed. If I were running one of those 
businesses myself, I think I would be very careful going 
forward as well.
    Mr. Bachus. But isn't a part of that, that they don't know 
what the government--I hear people say, I don't know what the 
government is going to do. I even have one of my children who 
keeps saying, I am thinking about buying a house, but I am 
going to wait and see what the government--if they will--they 
didn't because of the tax credit. And then they kept saying, do 
you think it will be--there are just a lot of government 
mandates. There are a lot of new government regulations. 
Professor Meltzer said they don't know what tax rate they are 
going to pay. They don't know whether--and Chairman Bernanke 
today said we may start up some new lending programs. We might 
start borrowing. We could borrow loans, we could borrow bonds. 
And it appears as if people are making decisions not based on 
sound business judgment or commercial decisions or economic 
decisions. They are really trying to figure out what the 
government is going to do. And there is a certain amount of 
hesitation because of it and what Mr. Meltzer said.
    In fairness to Mr. Mishel, there is a lot of uncertainty 
out there, right?
    Mr. Mishel. Yes. There is always economic uncertainty. I 
guess the question is, when some straightforward economic 
explanation explains something, why go to an unusual thing like 
uncertainty? And the usual explanation is what Richard Koo was 
saying, is that there are not good prospects for growth. There 
is very slow growth in demand. People have a lot of excess 
capacity. They do have more cash. They had $1.2 trillion of 
cash before the recession; they have more cash now. That is 
what happens in a recession. When you have a lot of excess 
capacity, there is no need to be spending the money on building 
new factories or building new facilities.
    Mr. Bachus. All right. Let me just end with this. What do 
each of you think? Do you believe that the tax cuts that 
expire--that if taxes increase at the start of the year, that 
will further constrict the economy?
    Mr. Watt. [presiding] The gentleman's time has expired.
    Mr. Bachus. Could they answer the question?
    Mr. Watt. You didn't finish the question before your time 
expired.
    The gentlelady from New York, Mrs. McCarthy, is recognized 
for 5 minutes.
    Mrs. McCarthy of New York. I am sorry that I was detained 
and wasn't here to hear your testimony, though we did go 
through the testimony when we received it.
    I guess the question I have is actually for all three of 
you. This morning, listening to Chairman Bernanke's testimony, 
highlighted very important factors that could jeopardize 
economic growth: bank lending; employment rates; the housing 
market; and retail commercial activity. We have taken many 
legislative steps here in Congress to move those areas 
mentioned in the Chairman's testimony towards positive 
development; however, some feel that the tax cuts alone are the 
solution.
    In reading your testimonies, I know there is even confusion 
here--or not confusion, but difference of opinions. So I 
guess--probably to continue on some thoughts of the questions 
already--that I would like to hear your thoughts and views on 
the success of the measures currently enacted as well as any 
future measures we should be thinking about. Mr. Koo, could you 
start?
    Mr. Koo. I have argued that this is a very special type of 
recession that happens only after the bursting of a nationwide 
debt financed bubble as the asset prices collapsing, 
liabilities remaining, private sector balance sheets 
underwater. And in this type of recession, I believe the 
government will have to be in there spending to keep the GDP 
from falling so that people have income to repair their balance 
sheets. This action will have to be maintained until private 
sector balance sheets are repaired, and then you reverse 
course. Once the private sector is ready to borrow money, 
healthy again, then the government must reduce its deficit and 
at that time as quickly as possible.
    But we are still in the entrance part of this recession 
with all these people repairing their balance sheets. So I 
would hope that government will maintain fiscal stimulus, and 
that, of course, different types of fiscal stimulus--there are 
the tax cuts, and there is government spending. Tax cuts, I am 
afraid, are not very efficient. It is far better than nothing, 
but it is still inefficient in the sense that when people are 
trying to repair their balance sheets, and they get the tax 
cut, they use that to pay down debt, which means it doesn't add 
to the demand in the economy. So if the government spends the 
money directly, that will add more demand to the economy for 
the same amount of budget deficit. But if you cannot get people 
to agree on spending, then I will say at least keep the tax 
cuts from expiring because that is still better than nothing.
    Mrs. McCarthy of New York. Mr. Meltzer?
    Mr. Meltzer. Yes. I listed in my testimony about five 
things that you can do. I say quite explicitly that I don't 
expect you are going to do them.
    But let me say, as I agree with Mr. Mishel, uncertainty is 
always there, but there are different degrees. And right now, 
it is enormous. Businessmen do not have an idea of what it is 
going to cost them to hire another worker. That is why they 
don't hire another worker.
    So you could do a lot without doing anything fiscally or 
monetarily by simply saying, we are going to end all new 
regulations for the next 3 to 5 years unless Congress, by a 
supermajority, decides it is absolutely essential for the 
country. That would remove a great burden hanging over people, 
because they don't know what health care is going to cost, they 
don't know what financial services are going to cost, they 
don't know what cap-and-trade is going to do or if there is 
going to be cap-and-trade.
    If you are sitting there trying to decide on an investment, 
and you are sitting on all this cash, you are not concerned 
about the things that they are talking about. You are not 
concerned about what is going to happen the next quarter. That 
investment is going to have to pay off over 3 to 5 more years. 
That is what you are worried about. What is it going to be 
like? You don't know. If you don't know, the sensible thing to 
do is wait. Put your money in government bonds, earn 3 percent, 
and wait to see how it settles down.
    So what you could do that would be helpful would be 
announce a program of dealing with the deficit. Remove that 
uncertainty. Tell them what tax rates are you going to be 
facing 5 or 10 years from now, because you are not going to 
solve the deficit problem in a year or a week or a day; it is 
going to take years. Therefore, tell people what the 
environment is you are going to be working in, and that will 
help them a great deal to decide what is feasible and what 
isn't. That begins to work against the deficit, but it doesn't 
do draconian measures immediately.
    Add to that a reduction in corporate tax rates. Tell 
businessmen, look, we are going to make it profitable, more 
profitable for you to invest. This country has an enormous 
international debt. To service that debt, it has to export. In 
order to export, it has to invest. So let us get started making 
investments.
    Mr. Watt. The gentlelady's time has expired.
    The gentleman from Texas.
    Dr. Paul. I thank the chairman.
    So far, I don't think our recovery has gone too well. As a 
matter of fact, I remain pessimistic, just as I remained 
pessimistic before the crisis hit, because it was easily 
anticipated that bubbles had formed and had to be corrected.
    But we have invested with fiscal and monetary policy $3.7 
trillion in the last 2 years. Unemployment has gone up. There 
have been 8.5 million jobs lost. And if you take the $3.7 
trillion that we have spent, invested to try to preserve this 
economy, it turns out that we have invested about $435,000 per 
unemployed. You could have taken about one-fourth of that and 
given them each $100,000. They certainly would have been a lot 
better off. But instead, we are still thinking about tinkering 
on the edges, and taxes, and regulations, and what are we going 
to do with monetary policy.
    But I have a question dealing with monetary policy for Dr. 
Meltzer. The 1930's have been well described by many of the 
monetarists explaining that there was the allowance of 
deflation, and that is why we stayed in the Depression too 
long. And those who have studied that have very much to say 
about policy today, and there is no shrinkage of the monetary 
base. It has been doubled, and more than 2 times as high, and 
things aren't working.
    So what would you advise now on monetary policy? They are 
talking about even more quantitative easing, but is that 
necessarily going to do much good? Certainly, we prevented the 
deflation of the monetary base of the 1930's. But if anybody 
cared about M3 anymore, which we don't record, but we do record 
it in the private sector--M3 was growing at 18 percent at the 
beginning of this recession. It is decreasing at the rate of 6 
percent right now. Real M3 now is down a little bit over the 
last 2 years, $100 billion. So that sounds to me like 
deflation, according to what the monetarists say.
    And so what do you think quantitative easings--they are 
even talking about buying municipal bonds, which I suspect and 
I predict they will, because conditions are going to get bad. 
Is this really going to be it? Or have we exhausted all our 
effort with monetary policy by dealing with the monetary base?
    Mr. Meltzer. As you well know, we have $1 trillion worth of 
excess reserves. People can create--banks can create all the 
money they want. Adding more excess reserves to that stock is 
not going to do anything positive for the country. As a matter 
of fact, the Federal Reserve does not have a serious program 
for getting rid of those excess reserves over time, and that is 
a risk that adds to the uncertainty.
    People like me worry about the fact that they don't know 
how they are going to bring that sum down. There is no central 
bank anywhere in the world in a developed country that has more 
than half of its balance sheet in illiquid long-term 
securities. None. There has never been a Federal Reserve with 
$1 trillion worth of excess reserves measured in real terms or 
any terms you want.
    So we don't suffer from a need for more monetary policy. We 
suffer from a need to reduce the uncertainty that hangs over, 
that is deterring businesses because they don't know what their 
costs are going to be in the future. They don't know the 
inflation rate.
    The other day I had dinner with two of the shrewdest and 
most successful investors. I asked them, who do you think is 
buying U.S. Government bonds at 2.8, 2.9 percent? The answer 
they gave me is an answer I just don't like to believe. They 
said, basically, it came down to the greater fool theory. The 
greater fool theory can't work for everybody. There has to be a 
greater fool. So they think we will invest in 2.9 percent 
bonds, but we will get out of them in time. Maybe, maybe. 
Otherwise, we are out some losses.
    Dr. Paul. You suspect that the multiplier effect will kick 
in soon or never? Or does it depend on our fiscal policies and 
what we do in the Congress?
    Mr. Meltzer. I believe it depends upon increasing--let me 
say, velocity is way down. I have a chart published. It comes 
out of my history of the Fed. It shows base velocity from 1919 
annually through 2007. The current numbers are on that chart. 
That is, we have very low interest rates. We have very low base 
velocity. That is not terribly surprising. Maybe it is off a 
little bit, but it isn't off a great deal.
    So what we need is the confidence to get investment up. 
That is what we need. And at the risk of repeating, you have to 
do things to give businessmen a belief that they know what 
their costs are going to be for the next 5 years.
    Mr. Watt. The gentleman's time has expired.
    Dr. Paul. Thank you.
    Mr. Watt. I will recognize myself for 5 minutes, although I 
don't expect to take 5 minutes.
    Mr. Meltzer. I am sorry, Mr. Chairman.
    Mr. Watt. I guess I am kind of struck by what there seems 
to be some consensus about, yet it took the Senate so long to 
act on. Mr. Mishel testified to something that I have heard 
over and over and over again, that unemployment benefits going 
to the people who really don't have any alternative but to 
spend it has a stimulative effect. Do you argue with that, Mr. 
Meltzer?
    Mr. Meltzer. I am not against increasing unemployment--
    Mr. Watt. I didn't ask you whether you were against it or 
not. I am just asking you whether as an economist, you argue 
with the stimulative effect of it.
    Mr. Meltzer. There is a stimulative effect.
    Mr. Watt. Do you disagree with that, Mr. Koo?
    Mr. Koo. No.
    Mr. Watt. I guess my frustration is that politics has taken 
over something that is so simple that partisanship and politics 
don't allow us to do even the most basic direct thing that is 
in the country's interest. I don't understand that. I guess you 
all didn't come to explain that to me. I will have to figure it 
out on my own.
    I will yield back the balance of my time and recognize the 
gentleman from Texas for 5 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Unfortunately, I was on the Floor, and I missed the 
testimony. But I did want to come back, particularly to Dr. 
Meltzer, and be able to speak with you. I was able to read your 
testimony. Frankly, Dr. Paul asked the very first question that 
I really had, and that was, what tools are left in the monetary 
toolbox? I think the conclusion is, frankly, none. And that 
indeed, speaking of Fortune 500 CEOs speaking to small business 
people in rural east Texas, frankly the anecdotal evidence is 
overwhelming that we have a massive quantity of uncertainty 
about the future that is keeping jobs from being created in the 
economy. And certainly the suggestions you make, Dr. Meltzer, I 
look upon those favorably. I fear this Congress will not.
    Let me ask you this question, Dr. Meltzer. I think recently 
we saw that the 2-year Treasury bond yield dipped below 3 
percent, which on the one hand you may say we still continue to 
be the flight to safety, if you will, particularly when you 
look at what is happening in the euro zone. Perhaps that is a 
good thing. But on the flip side, we know that, according to 
the Federal Reserve, we have public companies sitting on 
roughly $2 trillion of cash and cash equivalents. I assume they 
have brought up a lot of these treasuries.
    Given the massive amount of cash that corporate America is 
sitting on, is that another manifestation of the uncertainty? 
Is that also an investment? Is that also their flight to 
safety, in your opinion?
    Mr. Meltzer. Three percent isn't terribly good for a 
corporation, but it is better than taking a loss. So that is 
what they do, they wait. And prudent people know, as they say, 
there is a time to hold and a time to fold. And this is the 
time to hold, and that is what they are doing. They would like 
to see a program from the Administration and the Congress that 
spoke to their problems, just as many of the people are waiting 
to buy houses would like to see a program from the 
Administration or Congress that spoke to their problems.
    Mr. Hensarling. I was looking to the gentleman from North 
Carolina, but he is no longer in the chair. I was on the Floor 
for much of the unemployment insurance debate. I didn't hear 
anybody on either side of the aisle debate the proposition or 
actually come out against an extension of unemployment 
insurance. What I thought I heard was people on my side of the 
aisle thought that it ought to be paid for today, preferably 
out of unused stimulus funds, unused TARP funds. The other side 
of the aisle did not concur in that opinion. That is the debate 
I thought I heard.
    And as far as the stimulative effect, I think again about 
Milton Friedman's permanent income theory. I sense the 
stimulative effect is negligible. It is not why I support 
unemployment insurance. If so, why don't we just create more 
jobs by creating more unemployment checks? If it is such a good 
stimulative impact upon the economy, the logic gets rather 
circular.
    So the reason to vote for unemployment insurance, in my 
humble opinion, is not because of any significant stimulative 
effect. And I certainly respectfully disagree with the Speaker 
of the House, who had a quote recently that seemed to be very 
much to the contrary.
    Mr. Mishel. Could we have a dialogue on that point?
    Mr. Hensarling. When I am done. I am sorry. I have limited 
time here. I have another question I wanted to ask.
    Dr. Meltzer, I have been looking at some academic studies 
concerning fiscal stimulus, and recently there have been 
several articles written about it, including, I think, 
Professor Taylor at Stanford had written about that. I think a 
bit of that had ended up in The Wall Street Journal.
    Mr. Meltzer. Even Ms. Romer has a study in The American 
Economic Review.
    Mr. Hensarling. That she does.
    I understand that Frank Smith with the European Central 
Bank has said that the stimulus has had almost no impact. 
Professor Robert Barro of Harvard said, ``When I attempted to 
estimate directly the multiplier associated with peacetime 
government purchases, I got a number insignificantly different 
from zero.'' The IMF uses their global integrated monetary and 
fiscal model, which says, ``For every 1 percent increase in 
government purchases, you get a maximum of 70 basis points 
increase in GDP, and then it quickly fades out,'' which caused 
Professor Taylor of Stanford to say, ``My analysis of 
government spending is that it had little to do with the 
turnaround in the economic activity.''
    Mrs. McCarthy of New York. [presiding] The gentleman's time 
has expired.
    Mr. Hensarling. We will speak about these matters later.
    Mrs. McCarthy of New York. If the members could keep their 
questions short, so the witnesses can answer, that would be a 
great help.
    Mr. Hinojosa?
    Mr. Hinojosa. Madam Chairwoman, I am going to pass. I yield 
back.
    Mrs. McCarthy of New York. I recognize the gentleman from 
North Carolina.
    Mr. Miller of North Carolina. Thank you, Madam Chairwoman.
    This morning, Mr. Bernanke said that the housing market 
remains weak with the overhang of vacant and foreclosed homes 
weighing on home prices and construction. That seemed to be the 
kind of understatement that you would have expected from his 
predecessor. In 2005, housing starts were 2,068,000; last year, 
there were 554,000. Some have said that 2 million was way too 
many, that was part of the bubble. But from 1996 through 2002 
or so, new housing starts were at 1.5 million to 1.6 million, 
and the estimate this year is that it is going to come in less 
than last year.
    That seems to be an enormous burden on the economy. That is 
a huge employer. Home building has been 16 percent of our GDP, 
and if it is a quarter of what it has been, it is hard to 
imagine how we are going to come out of the recession in a very 
strong way. And usually it is housing that has led us out of 
downturns in the past.
    There is some debate about what the problem is. Some have 
said we just have too many houses for our population. Others 
have said that it is really tied to the recession; that demand 
is down because of recessionary forces, the liquidity trap; 
that people aren't buying houses because nobody is buying the 
stuff that their employer is making, so their wages are down, 
or they are unemployed.
    And there is also the foreclosure crisis that continues to 
push down home values, which continues to be a huge 
disincentive to building new houses. There is a large number of 
houses that are foreclosed or destined for foreclosure that are 
either in the inventory or part of the shadow inventory.
    Mr. Mishel, what is your sense of what the demand is for 
housing now? If we got the economy functioning halfway 
normally, how many new housing starts could we expect in a 
year? And how much of this is because of foreclosure? How much 
of this is because of recessionary factors?
    Mr. Mishel. I don't fashion myself as a housing expert, but 
I will offer what I can, which is I think we are still in the 
aftermath of the bursting of the housing bubble, and the prices 
haven't yet fully dropped to sort of reach the equilibrium. So 
there is not a lot of incentive to build more houses.
    The problem in the housing sector, which is one reason why 
I don't think monetary policy is what got us the recovery from 
early 2009 to now, because one of the main reasons you would 
expect monetary policy to lead to growth would be through 
restoring durable goods and construction, and that really 
hasn't happened. Other than that, I don't want to venture any 
other advice.
    Mr. Miller of North Carolina. Mr. Koo, we had a raging 
debate in this country a year and a half ago about whether the 
biggest banks were solvent and what to do about them if they 
weren't. From our distance from Japan, one of the explanations 
given for Japan's lost decade, now apparently going on two lost 
decades, was that there were zombie corporations and 
particularly zombie banks that were really insolvent, but no 
one was quite willing to pull the trigger at taking them into 
receivership. So they continued not to function normally. They 
continued to hoard cash so they could remain solvent on paper.
    And looking at the behavior of America's largest banks in 
the last year and a half, some of their behavior appears to be 
consistent with what is attributed to zombie banks. They are 
not lending normally. They are not making wholesome loans to 
people who are going to pay them back. They are emphasizing 
proprietary trading, which can kind of create a quicker profit 
when a bank is trying to get themselves back in the game. But 
most of all, their failure to make what appear to be 
economically sensible modifications of mortgages for people who 
can pay a mortgage on the house they are in, but not the one 
they have, for whatever reason.
    Does it appear to you that American banks are behaving 
normally, or are they behaving the way the zombie banks in 
Japan behaved in the 1990's?
    Mr. Koo. After the bursting of a major nationwide asset 
price bubble, banks are hit very badly as well, and that is 
what happened in Japan. That is what is happening in this 
country as well. Commercial real estate prices in Japan fell 87 
percent from the peak. And just imagine Washington, D.C., down 
87 percent. What kind of banking system do you think you would 
have left?
    That is the challenge we faced in Japan. And when all the 
banks have the same problem at the same time, we have to go 
slowly. There is no way we can go quickly, because if they 
tried to sell the nonperforming loans, there won't be any 
buyers. Asset prices would collapse even further, and that 
makes the situation far worse.
    Mrs. McCarthy of New York. The gentleman's time has 
expired.
    I remind the members that if you keep your questions 
shorter, you can actually get some answers.
    Mr. Scott from Georgia.
    Mr. Scott. Okay. Let us talk about jobs. And I asked 
Chairman Bernanke this morning about jobs. We are not doing 
enough in that area. What more can we do, from each of your 
perspectives? And cannot the Federal Government be utilized 
more effectively in helping to retain jobs? We have many 
cities, many municipalities who are losing jobs because they 
can't afford to keep people working. Could we not be more 
helpful in assisting to make sure money gets down?
    The whole issue of getting this economy back on track is--
the principle applies the same, whether you are dealing with 
the top of the economy or the bottom of it. Now, we responded 
to the top of this economy. We threw a bunch of money up at 
Wall Street, $700 billion--actually it has been over $1.5 
trillion if you count the bailouts and all of that--without 
hesitation almost. But when it comes down to the basic bottom 
third of the economy, where the workers are concentrated, all 
of a sudden there is a different approach to this. We have to 
do monetary policy. We have to throw it up to the big eagles 
and hope that enough crumbs will fall down to the sparrows to 
eat. There is just not that same deal. And I mentioned to him, 
during the Depression we learned from that, and that is the way 
we got out of that Depression, by creating a massive influx of 
capital flow into that lower part.
    We are a country of mass consumption, not a country of rich 
people going and buying a car. We are a country based upon a 
bunch of people, a lot of people going and buying cars, buying 
stuff. And if we get that money down at that lower level where 
the impact is the most, they spend it. They put it back. They 
turn out the other jobs.
    So my point is, how are we going to get to that point of 
getting the same energy that we had in responding to Wall 
Street to respond to this serious problem of job loss?
    My final point, and I will leave time for you to answer, as 
the chairman said. I will leave time for questions. But I had 
to get all this out. We are at a rate now that is so bad, that 
in order for us just to keep up with the population growth, we 
have to create 150,000 jobs every month. Just to even start the 
curve going back down and bringing the unemployment down, we 
have to keep it at least 250,000 a month. That ought to be the 
centerpiece of our plan. I believe we have to put that money 
down to do it. So what do you suggest we do with job creation?
    Mr. Meltzer. Who are you asking?
    Mr. Scott. I want to get each of your opinions.
    Mr. Mishel. He filibustered a bit. I will just say I very 
much agree with your analysis of the problem, and that we need 
a very vigorous job policy, and I think it will take actual--it 
is going to take some government spending, some more spending, 
some more deficits. The actual deficits we will have to 
undertake will be a short-term nature for a year or two, add a 
very small bit of debt that will be an enormous benefit to the 
Nation. We are going to borrow it at cheap rates, and we are 
going to create jobs and income for a lot of people. We should 
do things like the Miller jobs bill to help local governments. 
We need that State relief. My friend is also an incubator of 
that bill. We need State relief in the form of FMAP, and we 
need to work on the education part. We need a very vigorous 
infrastructure program, including school modernization. We need 
to start that right now.
    Mr. Meltzer. You can't just stop there. Because these 
people are not blind and they are not stupid. And when they see 
you increasing their spending, they are going to say, who is 
going to pay for it? How is it going to be paid? You have to 
take that into account. Mr. Mishel does not want to take that 
into account. But your constituents, the market people do.
    I share your view that we did much too much for the 
bankers. You just had the opportunity to end ``too-big-to-
fail.'' You didn't take it. That was a mistake.
    Mr. Scott. Mr. Koo?
    Mr. Koo. I think the demand has to be there for us before 
job creation can happen, and I think it would be a good idea 
for people in this room to tell the public that this is a 
different disease. If we do nothing about the situation, the 
economy will contract very, very quickly because everybody is 
still leveraging. When everybody is still leveraging and 
interest rates are zero, you know the private sector is very 
sick, and the public sector has to come in to keep the demand 
from falling. Once the private sector balance sheets are 
repaired and deleveraging is over, then you promise the people 
that then we will fix our balance sheets--the government will 
fix the balance sheets.
    Mr. Meltzer. Why should they believe you?
    Mr. Scott. Is that what you meant by balance sheet 
recession?
    Mr. Koo. Yes, that is correct.
    Mrs. McCarthy of New York. The gentleman's time has 
expired.
    Mr. Cleaver from Missouri.
    Mr. Cleaver. Thank you, Madam Chairwoman.
    Excuse me, gentlemen, it is my time. It is my time. Thank 
you.
    Mr. Koo, Mr. Mishel--Mr. Koo, you mentioned in your opening 
comments in your testimony today, you quoted Paul Krugman, 
Nobel Laureate. Mr. Krugman, at the beginning of this crisis, 
or the response to it, suggested that we needed a $1 trillion 
stimulus for a variety of reasons, including the fact that a 
trillion dollars sounds like it might have been too much for 
the public to consume, but the President lowered it down to 
$840 billion.
    So the first question for either of you is: Do you agree 
with Mr. Krugman's analysis? And, if so, do you think that we 
still have time--my concern is about the contraction of the 
economy, doing nothing. Do we have time to put things in place, 
particularly jobs, that could prevent that? First, though, was 
Mr. Krugman correct?
    Mr. Koo. Mr. Krugman is correct about lack of demand. And 
he is saying we have to do something to make sure that demand 
doesn't fall. But Mr. Krugman doesn't seem to offer why the 
demand is so weak, even with zero interest rates, even with all 
the work you have down in this town. And I am offering that 
piece in my argument by saying that because private sector 
balance sheets are in such a sad shape, they are in need of 
help because the private sector cannot stop paying down debt. 
They have to repair their balance sheets or their credit rating 
goes down, their credibility goes down, and everything just 
gets worse and worse and worse.
    So, the private sector has no choice. They have to repair 
their balance sheets. But when everybody does that all at the 
same time, we fall into a fallacy of composition, with the 
economy weakening very, very continuously. That is why I think 
the government has to be in there, to keep that from happening. 
And it can be done.
    As I indicated earlier, Japan experienced an 87 percent 
decline in asset prices nationwide, and the wealth we lost in 
Japan was over 3 years' worth of GDP. The amount of wealth the 
United States lost during the Great Depression was just 1 
year's worth of 1929 GDP. We lost 3 years' worth of 1989 GDP. 
But Japan was still able to keep the GDP from falling. 
Unemployment never went higher than 5.5 percent because of the 
fiscal stimulus to keep the economy from falling. That allowed 
the private sector to repair the balance sheets. It took us 15 
years because we made a few mistakes--premature fiscal 
consolidation twice, which then lengthened the recession by 
very many years, I am afraid. But at the end of the day, 
private sector balance sheets are repaired in Japan and then 
people are ready to talk about reducing the budget deficit. Of 
course, the whole world caught the Japanese disease and that is 
why Japan is still struggling.
    Mr. Cleaver. Mr. Mishel?
    Mr. Mishel. I think Dr. Krugman was correct in that the 
economy required a larger stimulus than we got. I actually give 
the stimulus package very high grades because I think it 
utilizes about as many vehicles as we actually had to put money 
into the economy as were available. It could have been somewhat 
bigger and it could have been less oriented toward some of 
these tax cuts, especially the AMT relief. But I think it was a 
lot.
    I think it is responsible for a lot of the forward movement 
in the economy we have had, and I find it dispiriting that--an 
unwillingness to go forward to provide employer assistance to 
the economy, because I think that is what it needs, and I find 
the complacency of Mr. Bernanke this morning quite disturbing 
to say that we are going to expect unemployment to drop 
essentially 1 percent over a 12-month period in the next 2, 
2\1/2\ years, to be an unacceptable outcome for the economy 
that requires emergency action.
    Mr. Cleaver. Mr. Meltzer, if we don't extend TANF, 
Temporary Assistance for Needy Families, by September 30th, the 
end of the fiscal year, on October 1st, we will have an 
additional 200,000 people out of work. What do you think that 
will do psychologically to the same corporate leaders that you 
have been talking about who are afraid to hire?
    Mr. Meltzer. It won't do anything good, for sure. But let 
me just say where I disagree with Mr. Koo. He talks about the 
Japanese case. I am sure he knows a lot about the Japanese 
case. But American corporations have billions of dollars of 
cash on their balance sheet. They are not suffering from debt 
deflation. They pay back their debts, many of them, and they 
are holding on to cash.
    Mr. Cleaver. Yes, that is a fact.
    Mr. Meltzer. So they don't suffer from the problem that he 
is talking about.
    Mrs. McCarthy of New York. The gentleman's time has 
expired.
    Mr. Mishel. It wouldn't be good for business. We wouldn't 
like losing all those customers. We need to support TANF 
renewal.
    Mrs. McCarthy of New York. Mr. Ellison from Minnesota.
    Mr. Ellison. Let me thank the gentlelady for this hearing 
and thank all three witnesses for their comments.
    I guess my first question is this: In the Congress and in 
the country, we are having this raging debate. On the 
Republican side, they are saying the debt, the deficit, no more 
spending unless it is accounted for. On our side of the fence 
we are saying, look, in the absence of private sector 
investment and expenditure, the public sector has to jump in 
and do something.
    Who is right?
    Mr. Mishel. The answer is I think we need the public sector 
to step in because the private sector looks like it won't be 
for a while when it needs public sector expenditure. The reason 
why having unemployment insurance that is paid for doesn't make 
sense is because you are putting spending into the economy with 
one hand and taking it out with the other. So I think that is a 
very different policy.
    I look forward to talking to Mr. Bachus about the tax cuts. 
I want to understand why tax cuts are seen as important if it 
is not really about the same kind of factor as putting money 
into the economy. So I don't know what the logic is, why tax 
increase hurts, but putting money into the economy is not good. 
These seem to be two things that are about demand.
    Mr. Ellison. Mr. Meltzer, do you want to take a whack at 
this?
    Mr. Meltzer. I like your question, but I don't think it is 
an either/or case. I am not against the public sector. But most 
of the jobs that we are going to create, certainly permanent 
jobs, good jobs, are going to be in the private sector. So what 
can the public sector do that will help the private sector, 
encourage them to create more jobs? Do things which encourage 
them to be less uncertain. Put a moratorium on regulation for 3 
to 5 years. Tell them something about what the health care 
costs are going to be. Announce a program for dealing with the 
deficits. Not cut the deficits tomorrow, but announce a program 
about how you are going to do that.
    Mr. Ellison. What do you think about the President's 
Deficit Reduction Commission? Is that a step in that direction?
    Mr. Meltzer. It is if the Congress is willing to pay--will 
be willing to pay attention to it. But they will recommend 
things that are not costly in terms of dollars. They will say, 
extend the date on which you can get Social Security. We did 
that in the Greenspan Commission. We need to do it again. You 
have to do something about health care funding. But you have to 
make these things explicit. Businessmen are not stupid. But 
they like to know what their costs are going to be. And you; 
that is; the Administration, this Administration, more than 
most, has deprived them of that information. And they are 
waiting.
    Mr. Ellison. Mr. Koo?
    Mr. Koo. At this juncture, I must say government has to be 
involved and in a sustainable way with a substantial amount 
until private sector balance sheets are repaired. I am not 
always for fiscal stimulus. I started my career at the New York 
Fed. I believe the monetary policy, all the market stuff. 
Occasionally, once in every several decades, the private sector 
does go crazy, and that is called a bubble. And once the bubble 
bursts, I am afraid there is this long period where they will 
have to do their balance sheets repair. And when the private 
sector is in that mode, the public sector must come in.
    Mr. Ellison. Now let me say I agree with you and Mr. 
Mishel, but I also find myself agreeing with Mr. Meltzer a 
little bit because they are not necessarily inconsistent. 
Fiscal stimulus and trying to give some--I am not sure I agree 
with his specific proposals for giving some certainty to the 
business community, but giving some predictability I think does 
have some merit. I am here to learn. What do you all think 
about that?
    Mr. Koo. I fully agree with Mr. Meltzer's point that 
certainty is important. But having a big demand, I think, when 
the demand is so deficient at the moment, is equally important, 
if not more so.
    Mr. Ellison. Let me say that, am I right about this, that 
first quarter profits this year were up--after-tax profits were 
up 43 percent. Is that right?
    Mr. Mishel. In fact, corporate profits in the first quarter 
were higher than they were before the recession began. So the 
only recovery we have seen is for corporate profits.
    Mr. Ellison. Here is the $64,000 question. Why don't they 
use that money they have to hire some people?
    Mr. Mishel. It is a question about the cash you are sitting 
on. They had made a lot of profits. The reason they are not 
using the money to invest is because they don't expect to be 
able to make a lot of profitable sales. And if they can produce 
goods and services with the workers they have now and the 
capacities they have now, there is no reason to expand their 
capacity. So it is a shortfall in demand. It is just that 
simple. And there is no reason to stretch for these other 
explanations.
    Mrs. McCarthy of New York. The gentleman's time has 
expired.
    Mr. Ellison. That was fast.
    Mrs. McCarthy of New York. It goes fast.
    Mr. Foster from Illinois.
    Mr. Foster. Thank you, Madam Chairwoman. Just one comment 
about why businesses are not reexpanding. As a former 
businessman, when you have gone through layoffs, it is such a 
searing experience that you will do anything to protect 
yourself against the possibility of having to repeat that 
quickly. I think a big part of that is just psychological. And 
one of the joys of economics is that it is not as predictable 
as physics.
    One of the things I wanted to ask your opinions on is part 
of the balance across the paradox of thrift that we have to get 
through with consumers is the balance between spending resuming 
and savings resuming. The numbers that I saw in this book that 
we just got today from Chairman Bernanke show that actual 
personal consumption has--consumer spending has now exceeded 
pre-crisis levels by a small amount for the first time, which I 
regard as a very good sign, and that similarly the savings has 
increased. It now just looks like for the last year been 
averaging some number about 4 to 5 percent, which is 
significantly above where it was in the bubble years.
    And I was wondering if you feel that is a reasonable 
balance point for consumer behavior or whether we are still out 
of balance, that consumers are spending too much, saving too 
much. Or is that pretty healthy behavior?
    Mr. Koo?
    Mr. Koo. I think consumers were shell-shocked after the so-
called Lehman crisis because the whole economy collapsed and 
then everybody thought they would be losing jobs left and 
right. But that was countered very strongly by what the Federal 
Reserve has done, Treasury, everybody. According to the IMF, 
the amount of money the governments in the world threw in was 
something like $8.9 trillion. If you threw in $8.9 trillion to 
a problem, which is basically due to a policy mistake of 
allowing Lehman to fail, then people say, oh, we don't have to 
worry about so much after all. So they are coming back, which 
is good. That is the V-shaped recovery we saw from March of 
2009 to the present period.
    But whether we can extend this going forward, I am a little 
more skeptical, because all the balance sheet problems in the 
private sector, the consumers are still with us. And house 
prices are not recovering back to the bubble levels. They are 
still falling. And so these people will still have to worry 
about their balance sheets. Many of them will continue to 
deleverage. And if that is the case, just because we recovered 
to this point doesn't mean we can stay here or that this 
recovery will continue. I think we have to be very vigilant.
    Mr. Foster. I am very struck by your testimony from earlier 
in the year--I guess it was the snowed-out testimony--where you 
had drawn a curve that looks remarkably like the curve of 
household net worth that shows the $17.5 trillion drop in the 
18 months to maybe the first quarter of 2009, followed by the 
approximately $5 trillion rapid recovery in household net worth 
and a much slower recovery since then, which seems like you had 
called that almost perfectly almost a year ago.
    If we could go to Mr. Meltzer, whether consumer behavior 
seems appropriate or out of balance?
    Mr. Meltzer. Consumers are uncertain about what the future 
outlook for jobs is going to be. So as long as they are 
uncertain about the future outlook for jobs, they are not going 
to spend for durables, for houses, in the rates at which we 
have become accustomed.
    Now, as a country, we have a major problem, many problems, 
but one is that we owe the foreigners--the Japanese and the 
Chinese--billions and trillions of dollars' worth of debt. To 
service that debt, we have to export. That is the only way we 
are going to be able to service that debt. So we have to become 
a big exporter. And that means we have to invest more.
    So I believe that what we are seeing is a gradual 
transition in that direction toward more investment, and less 
growth and consumption. That is going to be a hard adjustment 
for Americans who have gotten used to very rapid growth of 
consumption, and it is going to be hard as the devil on the 
rest of the world, which has gotten used to the idea they can 
make their economies grow by selling consumer goods to us. But 
that is an adjustment that has to be made.
    So I would like to see much more emphasis on getting 
investment up, because that is where our future has to be.
    Mrs. McCarthy of New York. The gentleman's time has 
expired.
    Mr. Green from Texas.
    Mr. Green. Thank you, Madam Chairwoman. I thank the 
witnesses for appearing today. I have but one area of concern 
that I would like to address very briefly. We have three, 
perhaps many more, but three significant factors that impact 
unemployment: fiscal policy; regulation; and global demand. And 
what I would like to do--and perhaps, Mr. Meltzer, you would be 
the ideal person to move into this because you were just 
talking about global demand to a certain extent. I would like 
to know to what extent is global demand impacting the 
unemployment. Is it the most significant of the factors? Is it 
having have very little impact? To what extent is global demand 
impacting unemployment?
    And, Mr. Meltzer, you indicated that we needed to get more 
exports moving so that we can pay off debt. Accepting that as a 
basic premise, will you start, please, by explaining to us to 
what extent you believe global demand is having on our 
unemployment within our country?
    Mr. Meltzer. I can't give you a quantitative estimate. I am 
sorry. It is certainly a factor. If it were higher, especially 
from Europe, it would be--but our principal markets have been 
in the past Latin America. Latin America is doing well and we 
are exporting a lot to Latin America. But the quantitative 
impact in dividing it up between what is causing what, I am 
sorry, I can't say.
    Mr. Green. I understand. I am sorry that this was not a 
question I submitted to you so that you might review and find 
studies. But, in your opinion--and I will ask the other two 
witnesses to respond--but in your opinion, Mr. Meltzer, would I 
be able to find studies that have looked into this? Do you 
believe that someone has tried to quantify this?
    Mr. Meltzer. I am sure that people have tried to quantify 
it.
    Mr. Green. Okay. Whether they have or not may be debatable, 
all right.
    Let's start with Mr. Koo, please.
    Mr. Koo. Of the three, I am sure global demand is a factor. 
Given this type of recession, what I call balance sheet 
recession, is happening in so many parts of the world at the 
same time, this is going to continue to be a challenge in that 
if the United States tries to export, everybody else has the 
same problem. Everybody wants to export at the same time. So I 
don't know how much mileage we can get out of global demand, 
because everybody is in the same boat at the same time.
    The U.K. is now talking about increasing exports, Germans 
are talking about increasing exports. Everybody is talking 
about increasing exports. It is not going to happen. So I think 
at the end of the day, given that everybody has the same 
problem at the same time, I think we all have to put in the 
necessary fiscal stimulus to keep our GDP from falling, because 
otherwise, if everybody tries to export their way out, we fall 
into the 1930's type so-called competitive devaluation world, 
which will not be in the interest of anybody.
    Mr. Green. Thank you.
    Yes, sir?
    Mr. Mishel. If I interpret your question as what is our 
trade position and how has that changed and how has that 
affected our economic growth, one would say, I think, so far we 
actually are increasing our exports faster than our imports 
were increasing. But I think that recently has flipped and 
that, moving forward, imports are going to grow faster and that 
will actually be a drain on the recovery moving forward. Part 
of that has to do with exchange rate problems we have with 
China and other countries.
    I just want to echo the fact that the hope that somehow 
exports are going to lead us out would only be true if we could 
export to Mars or the Moon because there is no one on this 
planet who is going to buy in sufficient quantity that will 
allow us to fuel a recovery.
    Mr. Meltzer. We have to export or we are going to default 
on the debt. It is not pay back the debt, it is just pay the 
interest on the debt.
    Mr. Green. If I may, Mr. Meltzer, because my time is about 
to expire. How would you address the premise that this is a 
common solution seen by many, all trying to implement it at the 
same time?
    Mr. Meltzer. We are the inventive and productivity leader 
of the world, and the iPhone is selling all over the world. We 
have to have more iPhones. We get that by investment. We are an 
ingenious people with a free and flexible market. That is a 
great advantage.
    Mr. Mishel. Too bad the iPhones are not made here.
    Mr. Green. Mr. Koo, your response as well?
    Mr. Meltzer. Some are made here.
    Mr. Green. Let me hear from Mr. Koo.
    Mr. Koo. I believe the United States must export its way 
out. So in that sense, I am not against Professor Meltzer. I 
actually worked very hard in Japan trying to bring U.S. 
products in. I worked with Walter Mondale and Ambassador 
Armacost trying to open the Japanese market. I did a lot in 
that regard. But this is a very special moment. When all of the 
other countries have the same problem that we do, all in 
balance sheet recession, no one wants to increase fiscal 
stimulus, everybody wants to export, and when everybody has 
this problem at the same time, I think addressing the global 
imbalance problem should be put aside a little bit.
    Mrs. McCarthy of New York. The gentleman's time has 
expired.
    Mr. Green. My time has expired, Mr. Meltzer. Thank you very 
much, Madam Chairwoman.
    Mrs. McCarthy of New York. All time has expired. The Chair 
notes that some members may have additional questions for this 
panel which they may wish to submit in writing. Without 
objection, the hearing record will remain open for 30 days for 
members to submit written questions to these witnesses and to 
place their responses in the record.
    I thank the gentlemen for appearing before this committee. 
We thank you for the information that you have given us.
    This hearing is closed.
    [Whereupon, at 3:30 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             July 22, 2010


[GRAPHIC] [TIFF OMITTED] 61852.001

[GRAPHIC] [TIFF OMITTED] 61852.002

[GRAPHIC] [TIFF OMITTED] 61852.003

[GRAPHIC] [TIFF OMITTED] 61852.004

[GRAPHIC] [TIFF OMITTED] 61852.005

[GRAPHIC] [TIFF OMITTED] 61852.006

[GRAPHIC] [TIFF OMITTED] 61852.007

[GRAPHIC] [TIFF OMITTED] 61852.008

[GRAPHIC] [TIFF OMITTED] 61852.009

[GRAPHIC] [TIFF OMITTED] 61852.010

[GRAPHIC] [TIFF OMITTED] 61852.011

[GRAPHIC] [TIFF OMITTED] 61852.012

[GRAPHIC] [TIFF OMITTED] 61852.013

[GRAPHIC] [TIFF OMITTED] 61852.014

[GRAPHIC] [TIFF OMITTED] 61852.015

[GRAPHIC] [TIFF OMITTED] 61852.016

[GRAPHIC] [TIFF OMITTED] 61852.017

[GRAPHIC] [TIFF OMITTED] 61852.018

[GRAPHIC] [TIFF OMITTED] 61852.019

[GRAPHIC] [TIFF OMITTED] 61852.020

[GRAPHIC] [TIFF OMITTED] 61852.021

[GRAPHIC] [TIFF OMITTED] 61852.022

[GRAPHIC] [TIFF OMITTED] 61852.023

[GRAPHIC] [TIFF OMITTED] 61852.024

[GRAPHIC] [TIFF OMITTED] 61852.025

