[Joint House and Senate Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 111-416
THE ECONOMIC OUTLOOK
=======================================================================
HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
OCTOBER 22, 2009
__________
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JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
HOUSE OF REPRESENTATIVES SENATE
Carolyn B. Maloney, New York, Chair Charles E. Schumer, New York, Vice
Maurice D. Hinchey, New York Chairman
Baron P. Hill, Indiana Jeff Bingaman, New Mexico
Loretta Sanchez, California Amy Klobuchar, Minnesota
Elijah E. Cummings, Maryland Robert P. Casey, Jr., Pennsylvania
Vic Snyder, Arkansas Jim Webb, Virginia
Kevin Brady, Texas Mark R. Warner, Virginia
Ron Paul, Texas Sam Brownback, Kansas, Ranking
Michael C. Burgess, M.D., Texas Minority
John Campbell, California Jim DeMint, South Carolina
James E. Risch, Idaho
Robert F. Bennett, Utah
Nan Gibson, Executive Director
Jeff Schlagenhauf, Minority Staff Director
C O N T E N T S
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Members
Hon. Carolyn B. Maloney, Chair, a U.S. Representative from New
York........................................................... 1
Hon. Kevin Brady, a U.S. Representative from Texas............... 3
Hon. Maurice D. Hinchey, a Representative from New York.......... 5
Hon. Sam Brownback, Ranking Minority Member, a U.S. Senator from
Kansas......................................................... 6
Hon. Elijah E. Cummings, a Representative from Maryland.......... 7
Hon. Ron Paul, a U.S. Representative from Texas.................. 8
Witnesses
Christina Romer, Chair, Council of Economic Advisers, Washington,
DC............................................................. 10
Submissions for the Record
Chart titled ``The Bush Economy Slowest Job Growth of Any
Administration in over 75 Years''.............................. 34
Prepared statement of Representative Carolyn B. Maloney, Chair... 35
Chart titled ``Federal Reserve v. Obama Stimulus Spending: Who
Did More to Strengthen the Economy?''.......................... 36
Prepared statement of Representative Kevin Brady................. 37
Prepared statement of Christina Romer............................ 39
Prepared statement of Representative Michael C. Burgess, M.D..... 61
THE ECONOMIC OUTLOOK
----------
THURSDAY, OCTOBER 22, 2009
Congress of the United States,
Joint Economic Committee,
Washington, DC.
The committee met, pursuant to call, at 10:04 a.m., in Room
210, Cannon House Office Building, The Honorable Carolyn B.
Maloney (Chair) presiding.
Representatives present: Maloney, Hinchey, Hill, Cummings,
Snyder, Brady, Paul, and Burgess.
Senators present: Klobuchar, Brownback, and DeMint.
Staff present: Paul Chen, Gail Cohen, Nan Gibson, Colleen
Healy, Andrew Wilson, Lydia Mashburn, Jeff Schlagenhauf, Ted
Boll, and Robert Quinn.
OPENING STATEMENT OF THE HONORABLE CAROLYN B. MALONEY, CHAIR, A
U.S. REPRESENTATIVE FROM NEW YORK
Chair Maloney. I would like to call the meeting to order.
Meetings should start on time, even though it is a very
difficult time and many people are involved in votes and
activities in other committees. And I know other members are on
their way. I welcome my colleague, Mr. Hinchey.
I most of all want to welcome Dr. Christina Romer, the
President's Chair of the Council of Economic Advisers, and
thank her very much for her hard work and her testimony today.
The Council of Economic Advisers and the Joint Economic
Committee were both created by the Employment Act of 1946 and
share an important history of providing the White House and
Congress with analysis of economic conditions and economic
policy.
Our hearing today is on the economic outlook. The current
Administration took office only 9 short months ago. And 9
months ago we have to remember that the economy was facing the
worst economic crisis since the Great Depression, with GDP
falling at its fastest rate in almost three decades. In January
alone, 741,000 jobs were lost, but job losses of about 600,000
or more per month had started in November of 2008. Those
punishing job losses continued for 5 straight months. However,
thanks to President Obama and to the American Recovery and
Reinvestment Act, we are finally seeing some signs of recovery.
For example, the $35 billion obligation to states so far for
education has saved 250,000 jobs for teachers in our nation's
schools.
However, I am deeply concerned about the state of the labor
market, as I have been since the start of this recession. GDP
growth is of little comfort to the millions who have lost their
jobs. The unemployment rate is at an unacceptably high 9.8
percent. I am particularly interested in Dr. Romer's outlook on
the labor market and additional measures that may be needed to
boost job creation.
As the economy recovers, we must continue our commitment to
the unemployed to ensure that working class Americans are not
once again left out of the economic recovery, as they were
under the Bush Administration. People are losing their
unemployment benefits at alarming rates. In my home state of
New York, close to half of the unemployed are losing their
state unemployment benefits; and the same story can be told in
states around the country. That is why I encourage the members
of the Senate to follow the House in passing a bill that
extends unemployment benefits.
As the 2001 recession subsided, the average American family
was left behind. Job creation and median family income never
recovered to the levels experienced during the Clinton
Administration. We must do more to ensure that as we recover
from this recession we do not see a repeat of the dismal job
record of the Bush Administration, and this is a chart on that.
One statistic I find striking is that, for every job opening,
there are six Americans applying for that one job opening.
[The chart titled ``The Bush Economy Slowest Job Growth of
Any Administration in over 75 Years'' appears in the
Submissions for the Record on page 34.]
Despite this fact, the Recovery Act is working. In fact, it
is softening the impact of the recession on workers. According
to a report that the Council of Economic Advisers released last
month, the Recovery Act reduced average monthly job losses by
169,000 in the second quarter of this year. In addition, the
U.S. economy had 1 million more jobs in August because of the
Recovery Act.
The report also notes that the Recovery Act has contributed
significantly to economic growth. Using the latest GDP numbers,
the Recovery Act raised GDP growth by 2.6 percentage points in
the second quarter. In the third quarter, analysts expect an
even larger, greater boost.
Next week, we will hold a hearing where the Bureau of
Economic Analysis will report advanced estimates of GDP for the
third quarter; and I am optimistic that the numbers will show
that the bold actions taken by Congress and the Obama
Administration are turning our economy around.
The Administration and Congress continue efforts to help
create jobs. Just yesterday, the Administration announced a
series of proposals to help small businesses, including tax
relief to small businesses and promoting access to credit.
Dr. Romer, we thank you for your testimony; and I look
forward to working with you as the committee continues our
focus on fixing the economy, helping struggling families, and,
above all, putting people back to work. Thank you for being
here.
[The prepared statement of Representative Maloney appears
in the Submissions for the Record on page 35.]
I recognize my colleague, Mr. Brady, for 5 minutes.
OPENING STATEMENT OF THE HONORABLE KEVIN BRADY, A U.S.
REPRESENTATIVE FROM TEXAS
Representative Brady. Thank you, Madam Chairwoman. I am
pleased to join you in welcoming Chairwoman Romer before the
committee this morning.
There are some encouraging signs that the recession may be
nearing its trough. Commercial paper and corporate bond markets
are functioning. The stock market is up. Housing prices may be
stabilizing. Industrial production edged up 2.8 percent during
the last 3 months. Job losses continue but are slowing.
In the October survey of economists, The Wall Street
Journal forecasts that real GDP will grow at an annualized rate
of 3.1 percent during the third quarter. Even if this forecast
proves correct, the U.S. economy still suffers from many
fundamental problems. In September, payroll jobs fell by
263,000, while the unemployment rate rose to 9.8 percent. The
same Wall Street Journal survey also forecasts that the
unemployment rate will rise to 10 percent by December.
Commercial real estate prices continue to fall. Because of
the collapse of the market for commercial mortgage-backed
securities, many property owners cannot rollover performing
commercial mortgage loans at maturity. Regional and community
banks are likely to suffer large losses on their commercial
mortgage loan portfolios that may impair their ability to
supply credit to families and small businesses.
I am concerned that any growth in the second half of this
year may prove transient; and, consequently, the unemployment
rate may continue to increase well into 2010.
Those in Washington should not kid themselves. A jobless
recovery is no recovery for American workers. During the last 4
months of 2008, the Federal Reserve injected more than $1.3
trillion of liquidity into the U.S. economy. With the
traditional lag between monetary actions and their effects
becoming apparent in the real economy, this liquidity injection
last fall supported real GDP in the second quarter and should
boost real growth in the second half of this year.
Compared to the Federal Reserve's $1.3 trillion adrenaline
shot, President Obama's stimulus spending pales. As of this
month, only $173 billion, or 22 percent of the program's total,
has been spent. To the view of many, too slowly, too
wastefully, and too unfocused on jobs. Like the hunter in the
party who takes credit for every bird that falls, stimulus
promoters should be wary of taking credit for the results of
unprecedented Fed actions that are casting a far greater
influence over the economy's performance.
[The chart titled ``Federal Reserve v. Obama Stimulus
Spending: Who Did More to Strengthen the Economy?'' appears in
the Submissions for the Record on page 36.]
But neither liquidity injections nor fiscal stimulus can
create a sustained expansion. As the chief executive and co-
chief investment officer of Pimco noted, these government
interventions are unsustainable sugar highs. If the United
States is to avoid slipping back into a W-shaped recession, the
private sector must once again become the driver of economic
growth.
It is unclear how this handoff will occur. The balance
sheets of U.S. families remain damaged from the collapse of
housing prices and the excessive debts accumulated during the
bubble years. The growth of personal consumption is likely to
remain constrained. The large inventory of foreclosed homes is
likely to dampen housing investment. Therefore, a sustained
expansion must depend upon business investment and net exports.
Here is a major concern going forward. Entrepreneurs and
business leaders make investment decisions based on their
expectations of risks and return. Government policies affect
these perceptions. Unfortunately, the Obama Administration and
congressional Democrats have simultaneously dampened the
expected returns and increased the risks associated with new
business investment through their actions and inactions.
Higher income tax rates, higher taxes on capital gains and
dividends are set to begin in 2011. The White House and
Congress are proposing job-killing energy and international tax
increases that will drive investment and jobs offshore.
Congress has not acted in a timely manner to extend the
research and development tax credit and the home buyers tax
credit, as well as an increase in the net operating loss
carryback period from 2 to 5 years.
Uncertainty about cap-and-trade and health care legislation
further depressed business investment. Firms fear the
additional energy costs associated with what many term the cap-
and-tax bill that passed the House this summer and are unsure
what the Senate may do. The various trillion dollar health care
bills leave firms, especially small businesses in my district,
confused and concerned about additional taxes and regulatory
burdens; and, as a result, many companies in my district and
around the country are delaying important investment decisions
and the job creation that goes with it.
In short, the government's uncertainty and interference is
quickly turning a rescue operation into an anchor around the
private sector's neck.
With U.S. consumer spending lagging, a key opportunity at
recovery lies in selling American goods and services overseas
to recovering markets. Yet America is sitting on the sidelines
while other nations are aggressively shaping these new markets.
The Doha round of negotiations remain stalled. Congress has
not acted upon three completed trade agreements with Colombia,
Panama, and South Korea, while competing countries reach
agreements that leave American companies and farmers at a
severe competitive disadvantage.
The United States is on an unsustainable fiscal course.
According to the CBO, projected Federal deficits will swell,
publicly held Federal debt from 40 percent of GDP at the end of
the last fiscal year to nearly 70 percent at the end of fiscal
year 2019. And this CBO projection is before adding new health
care benefits and other costly initiatives. Moreover, the CBO
projects that the growth of existing entitlement programs will
drive Federal deficits and debt even higher over the long term.
Instead of resolving these imbalances and consequently
protecting both beneficiaries and taxpayers, President Obama
and congressional Democrats are seeking to create new
entitlement programs that would further damage our fiscal
position.
Finally, the United States could face the risk of a dollar
crisis in the future. Recent history in Asia and Latin
America----
I would just finish with this, Madam Chairman. There is
much to be concerned about in America's economy, and today is
no time to be taking false credit for economic indicators.
I would yield back.
[The prepared statement of Representative Kevin Brady
appears in the Submissions for the Record on page 37.]
Chair Maloney. Okay. The Chair recognizes Mr. Hinchey.
OPENING STATEMENT OF THE HONORABLE MAURICE D. HINCHEY, A U.S.
REPRESENTATIVE FROM NEW YORK
Representative Hinchey. Thank you very much, Madam
Chairman.
Dr. Romer, thank you very much. Thank you for being here.
Thank you for the leadership that you provide, and thank you
very much for the positive directions in which the economy is
now moving. And those positive directions are primarily based
on the Economic and Recovery Act and the way in which that
Economic and Recovery Act is being put into play.
And, as we know, the vast majority of it is still not in
play. Only about 25 or 30 percent of it has actually been out
there, and there is a lot more to come. We know how badly that
is needed. We can see it very clearly and then speculate about
it on the basis of this little chart that is up here, how
during the previous Administration we not only experienced no
growth, we actually saw the beginning of a serious decline in
this economy.
And one of the main reasons for a decline in the economy is
the failure of Administrations to invest in our own country. We
saw huge amounts of spending outside the United States, of
course, in the Bush Administration. On a monthly average, it
was something in the neighborhood of between 10 and $12 billion
a month spent in Iraq as a result of that illegal, illicit
invasion of that country and how that was costing us so much
money and degrading the economy here internally within the
United States.
So the Investment and Recovery Act, so-called stimulus
bill, is critically important. We need to keep moving on it in
a very positive and forward way; and, as a consequence of that,
we will see the economy continue to grow.
However, there are other aspects of the economic
circumstances that we are facing that really need to be
addressed as well. One of the things that we are confronting
right now is the fact that we see a concentration of wealth in
the hands of fewer and fewer people, more dramatically so than
we have seen probably since the 1930s. And the concentration of
wealth in the hands of a few multibillionaires and
multimillionaires means that there is less money in the hands
of blue and white collar working Americans.
Now, we know that the blue and white collar working
Americans drive the gross domestic product; and without their
ability to function effectively and have money, raise their
families, deal with all of those issues, then the general
economy suffers dramatically. And it will continue to suffer
dramatically unless we are able to change the circumstances
that were created during the Bush Administration with regard to
the way in which the tax system in this country has been put
together.
One of the others aspects of this, of course, was the
repeal of the Glass-Steagall Act by the Republican majority
here in the Congress of the United States and, unfortunately,
signed by the Clinton Administration, the Gramm-Leach-Bliley
bill; and this is something that really needs to be addressed.
Once again we are seeing huge banking operations, like Goldman
Sachs, for example, bringing in very substantial amounts of
money but also beginning to engage in the kinds of very
complicated investments that were engaged in prior to the
collapse of this economy and which stimulated that collapse.
So we are going to have to pay a lot of attention to that
situation and focus our attention on the consequences of the
repeal of that Glass-Steagall Act and on doing something to
bring back some set of circumstances that are going to bring
the banking system of America back into a rational position so
that they are functioning not just in the benefit of a handful
of people at the upper levels of those huge banks but also the
way the banking system is supposed to operate, in the best
interests of the general economy and the people of this
country. So all of these things are critically important.
We thank you very much for all the leadership that you are
providing, the positive things that you have done. We are very
grateful to President Obama for the changes that he has made in
the short time that he has been in office and the way in which
he has reversed these economic circumstances from a deep
decline to a situation now where it is being much more
effectively managed and it is beginning to grow.
So, Dr. Romer, thank you very much for being with us; and
we are looking forward to hearing your testimony and your
response to questions. Thank you very much, ma'am.
Chair Maloney. Thank you very much.
Senator Brownback.
OPENING STATEMENT OF THE HONORABLE SAM BROWNBACK, RANKING
MINORITY MEMBER, A U.S. SENATOR FROM KANSAS
Senator Brownback. Thank you very much. Thank you, Chairman
Maloney.
There we go. I had to give the button a little extra push.
Thank you for holding this hearing.
Let me first express my heartfelt condolences to your
incredible loss. It was just stunning. I just don't know what
to say other than you have been in my prayers and my thoughts.
Chair Maloney. Thank you.
Senator Brownback. Thank you, Dr. Romer, for being here
today. I look forward to the testimony.
I have got a lot of questions on this. I hope you have got
answers. Because I think there are a lot of questions to be
asked.
I was not favorable towards the stimulus. I saw it as a
government stimulus, not an economic stimulus; and it just
seems to me that the numbers have, unfortunately, borne that
out.
I want to clip through a couple of charts just if I can
with you about what has happened in several key areas: Heavy
and civil engineering construction, average monthly job loss
pre-stimulus, I see 6,200; post-stimulus, 11,800. State and
local government educational services average monthly job loss,
pre-stimulus 6,000; 19.3 post-stimulus. Stimulus savings in
creating jobs results from targeted sectors March to
September----
I mean, you are looking at the total job loss in these
categories; and it just doesn't seem like to me it has worked.
Now, I have been one on--for instance, Cash for Clunkers, I
thought when the money came out of the stimulus program I
thought that actually stimulated something. But that was $3
billion of the $750 billion. And if we are doing that with that
piece of it, what is happening with the rest of it?
We have got numbers coming in from my state on spending
versus job creation during that same period of time. It hasn't
been particularly favorable. I am hopeful of having those
before the end of the hearing.
But my point in saying all of that to you is that I think
we did end up getting a government stimulus, and it hasn't
created jobs. And you know the job numbers like anybody else
and the job loss. And while we may have some green shoots
showing up out there, people sure aren't going to feel like
there is anything of a recovery until we start seeing job
recovery taking place and that continues to happen in a very
aggressive, high fashion and looks through the end of this
year.
And, finally, I would hope you could address for us some
the growing deficit and looking like the debt is going to be
equal to GDP here in a short period of time. It seems to me
that we are on the exact same path that the Japanese took in
their lost decade of running up huge government debts, of not
stimulating growth, and at the end of the decade having this
massive debt that they wouldn't be allowed to join the EU if
they had asked because they had too much debt, that we are on
the same trajectory and building massive government projects
that aren't creating the jobs and the growth in the economy.
This just seems to me that we have learned this lesson
globally, and I would hope we would get back to an economic
stimulus and not a government stimulus, and you can respond to
some of those thoughts. Thank you.
Thank you, Chairman.
Chair Maloney. Thank you very much.
The Chair recognizes Mr. Cummings for 3 minutes. Then we
will be followed by Mr. Paul and then Dr. Romer.
OPENING STATEMENT OF THE HONORABLE ELIJAH E. CUMMINGS, A U.S.
REPRESENTATIVE FROM MARYLAND
Representative Cummings. Thank you very much, Madam Chair.
I just want to start off by saying, let's root for the home
team. Let's root for the home team. I get to a point where I
see people with no insurance, people losing their jobs, people
losing their savings, people losing opportunity, losing their
companies--we have got to root for the home team.
Ms. Romer, I thank you for what you have done and what the
President is trying to do. I am not coming here saying that all
is rosy. We did not start with a rosy picture. And we have come
a long, long way. And we need to all admit that, and we need to
support this President. He is the President of the United
States of America.
Let me go back and remind my colleagues that approximately
16 percent of this money was for tax breaks. We seem to forget
that. We seem to also forget that 22 percent, approximately,
was to assist states. Almost every single state has had
phenomenal problems, almost every one of them, even those who
act like they don't want to take the money.
We have kept people employed. We kept people serving other
people. I know it has happened in my state. I know it has
happened in South Carolina, where my parents are from. I know
it has happened all over the place.
I know it has happened in Texas. I heard the governor of
Texas complaining, but he was able to balance his budget with
$12.1 billion, while he was complaining, with stimulus money.
Duh?
So, you know, at some point I think--and is the recovery
slow? Yeah, it is slow. But just a week or two ago we had the
Bureau of Labor Statistics here, and they explained to us that
it is going to be a slow process, that the jobs are not going
to come just like that overnight. We have come a long way.
And I am not going to sit here and blame Bush or anybody.
What I do know is that I have got people in my district who do
not have a job, who don't have a job. And some kind of way----
And then I have seen others. We had Mr. LaHood, Secretary
LaHood come in, and just a wonderful gentleman. The head of
Transportation came into the Transportation Committee, which I
am a senior member of. He came in a few weeks ago and said, you
know what? After our friends on the other side of the aisle
were complaining about a stimulus package, he said, let me tell
you something. It is working. He said, when I travel throughout
this country, I see people that told me just a few weeks ago
they were drawing unemployment, and now they are working. That
is what LaHood said, Secretary LaHood.
So, again, you know, we say that we are this great country,
that we can accomplish anything. But then when it comes to this
kind of thing we say, oh, the sky is falling. We will never get
through. Well, we will get through. This is America, the
greatest country in the world.
And I thank you, Madam Chair, for your indulgence.
Chair Maloney. Thank you for your statement.
Mr. Paul is recognized for 3 minutes, and then we are going
to Dr. Romer.
OPENING STATEMENT OF THE HONORABLE RON PAUL, A U.S.
REPRESENTATIVE FROM TEXAS
Representative Paul. Thank you, Madam Chair. Welcome, Dr.
Romer.
I appreciate this opportunity to attend this hearing. I am
sorry I have to leave shortly to do some votes, but I did want
to make a couple points, and maybe you can follow up on this
later on.
In the several years that I have been here, I have never
met anybody that is not for a sound economy. Everybody is for
the economy. Everybody debates the issues and what we should
do. We have a Federal Reserve that dictates the money supply
and what the interest rates should be, and they want a sound
economy. Then the Congress writes the regulations. We have the
regulating agencies that are supposed to give us a sound
economy, and yet we have probably real unemployment close to 20
percent and still a lot of problems.
Although I find everybody wants a sound economy, nobody
talks about a sound dollar. And I know you are interested and
have worked in the monetary field. But we don't talk about what
sound money is, and I don't know how you can have a sound
economy without a sound dollar.
As a matter of fact, we talk too often about a weak dollar.
We allow the Fed to devalue the dollar by printing too much
money to accommodate the Congress. At the same time, we say,
well, the Secretary of the Treasury has the job of maintaining
a strong dollar at the same time the dollar keeps going down.
And this has a lot to do with our imbalance of payments and all
the problems that we face.
But a lot of people say, hey, this is great. A weak dollar
is good for exports. You know, if you look at it from an
individual level and you are a saver, who wants a weak dollar?
Who wants to have their dollar lose their purchasing power? And
yet we actually say, yeah, we should.
And I hear comments that come across and say, well, it is
okay to have a weaker dollar as long as it is orderly. Well, if
a weak dollar is bad, if it goes down and suddenly you are
orderly, you are still hurt and you are penalized. But there
should be no place in economics that argues the case that it is
good to have a weakening dollar and see your purchasing power
dried up. So my concern is that we don't talk about the value
of money.
On the books still and the Constitution says that there is
a definition for a dollar in terms of a weight of something
that governments can't create, of precious metals. But, at the
same time, under the law, the law says a Federal Reserve note
is legal tender, and everybody has to obey all the laws doing
it because a Federal Reserve note is a dollar.
But you ask them what is a dollar? Oh, we don't know what a
dollar is. But there is nothing on the books that says the
Federal Reserve note is a dollar.
This is like building a building with a measuring rod that
constantly changes. I cannot see how you can ever have a sound
economy without a sound dollar and getting back to defining
what a dollar really is. Our Founders knew about this. They
advised us. We have ignored it, and we are in a mess.
I yield back.
Chair Maloney. Thank you very much.
Now I would like to introduce Dr. Romer. She is the Chair
of the Council of Economic Advisers. Prior to joining the Obama
Administration, she was a professor of economics at the
University of California, Berkeley; and before teaching at
Berkeley, she taught economics and public affairs at Princeton
University. Until her nomination, she was co-director of the
Program on Monetary Economics at the National Bureau of
Economic Research and served as vice-president of the American
Economic Association, where she was also a member of the
Executive Committee. She is also a fellow of the American
Academy of Arts and Sciences.
She is known for her research on the causes and recovery of
the Great Depression and on the role that fiscal and monetary
policy played in the country's economic recovery. Her most
recent work, with her husband David Romer, also an economist,
shows the impact of tax policy, a report she did on government
and economic growth.
Chair Romer is the recipient of a John Simon Guggenheim
Memorial Foundation Fellowship, an Alfred P. Sloan Research
Fellowship, the National Science Foundation Presidential Young
Investigator Award, and the Distinguished Teaching Award at
Berkeley. She received her Ph.D. from MIT.
Thank you so much for being here. We look forward to your
remarks; and I apologize that some members of this committee
will be going in and out for votes, including myself. Thank you
so much for being here and for your many contributions.
Dr. Romer is recognized for as much time as she may
consume.
STATEMENT OF THE HONORABLE CHRISTINA ROMER, CHAIR, COUNCIL OF
ECONOMIC ADVISERS, WASHINGTON, DC
Dr. Romer. Thank you.
Chairwoman Maloney, Ranking Members Brady and Brownback and
members of the committee, it is an honor to be with you today.
There is no question that the past year has been one of
enormous challenges for the American economy. The recession
that began in December of 2007 has been the worst that this
country has faced since the Great Depression. The suffering
that it has brought to American workers and their families has
been terrible, and the toll that it has taken on American
businesses has been great across the spectrum.
In my testimony this morning, I want to discuss the
economic crisis and the efficacy of the policy response. I also
want to talk about the outlook for the U.S. economy and
describe what I see as the key risks to the forecast. And,
finally, I want to discuss some of the policy challenges that
are likely to face us going forward.
Let me start by talking about the shocks that hit our
economy in this recession, and I think one way of describing
the severity of the crisis that we faced that I find striking
is to observe that the shocks that hit the U.S. economy last
fall by almost any measure were larger than those that
precipitated the Great Depression.
So this first figure shows you just some measures that
economists use of the shocks hitting the system, and it
compares them. The dark blue bars are what happened in the late
1920s; the light blue bars are the most recent episode.
So that first sign, a key causal factor in both downturns,
was a decline in household wealth that lowered consumer
spending. Now, in 1929, household wealth fell 3 percent. In
2008, it fell 17 percent, more than five times the decline in
1929.
Another factor creating uncertainty and restraining
spending in both periods was volatility in financial markets.
The variance of daily stock returns is shown there in the
middle column; and what you see is that that variance, measured
using the S&P stock index, was more than one-third larger in
the current episode than in the last 4 months of 1929.
Now, if falling and volatile asset prices were important in
both 1929 and 2008, the defining feature of the crisis in both
cases was a full-fledged financial panic; and one frequently
cited indicator of the depth of the panic in September of 2008,
if you remember, was the skyrocketing of credit spreads. Well,
one spread that we can actually analyze going all the way back
to the 1920s is that between the Moody's AAA and BAA bonds.
Well, in the fall of 1929, the spread barely moved at all. By
December of 1930, after we have had the first wave of banking
panics, it had risen some 87 basis points, as you see. In
contrast, this spread rose 187 basis points between August and
December of last year.
Well, the result of these shocks, as we all know, was a
rapidly contracting economy. Real GDP fell at a 5.4 percent
annual rate in the fourth quarter of 2008 and at a 6.4 percent
rate in the first quarter of 2009. Employment, which had been
falling by less than 150,000 jobs per month before September,
fell by an average of 622,000 jobs per month from October to
March.
What kept the American economy from heading into a second
Great Depression in 2008 and 2009 was the strong and timely
policy response. The Federal Reserve, as has already been
mentioned, began cutting interest rates in late 2007; and by
December of 2008 it had brought its target for the Federal
funds rate essentially to zero. As credit market after credit
market froze or evaporated, the Federal Reserve created many
new programs to fill the gap and maintain the flow of credit.
Now, Congress' approval of the--I think it is fair to say--
not-always-popular TARP program was another crucial step.
Creating a program that could be used to shore up the capital
position of banks and take troubled assets off banks' balance
sheets has proven both necessary and valuable. Similarly,
Congress's willingness to release the second tranche of TARP
funds last January gave the new Administration the tools that
it needed to further contain the damage and to start repairing
the financial system.
Now, a key piece of the policy response, again, as has
already been described, was the American Recovery and
Reinvestment Act of 2009. And in a report issued on September
10th, the Council of Economic Advisers provided estimates of
the effect of the ARRA on GDP and employment. What this table
shows you is our estimates of the impact of the Recovery Act on
real GDP growth in the second and third quarters of 2009, along
with estimates from a number of government and private
forecasters.
Well, what these estimates suggest is that the Recovery Act
added 2 to 3 percentage points to real GDP growth in the second
quarter and three to four percentage points to growth in the
third quarter. This implies that much of the modification of
the decline in GDP growth in the second quarter and the
anticipated rise in the third quarter is directly attributable
to the Recovery Act.
Now, this next table shows the Council of Economic
Advisers' estimates of the effect of the Recovery Act on
employment relative to what otherwise would have occurred
without the Act, again in the second and third quarters of 2009
and again along with the estimates from a number of other
forecasters. What these estimates indicate is that, as of
August, the Recovery Act had raised employment relative to the
baseline by between 600,000 and 1.5 million jobs.
All right, well, the other thing I wanted to talk about
this morning is the economic outlook. Because of the
unprecedented policy response, the economic outlook has
improved markedly in recent months.
This next figure shows you the growth rate of real GDP
since the end of 2007. Together, the light blue lines are the
Blue Chip consensus forecast for GDP growth from 2009 quarter
three through the end of 2010. The path of actual GDP growth
emphasizes just how severe the current recession has been.
Equally notable is the improvement of GDP performance in the
second quarter of this year. Though still declining, the
moderation in the rate of decline was the second largest
improvement in real GDP growth in 25 years. The Blue Chip
forecast shows that GDP growth is anticipated to be positive in
the third quarter and each subsequent quarter through the end
of 2010.
There is a substantial range of uncertainty around any
forecast. However, if GDP growth for the third quarter is
indeed positive, as anticipated, this would be strong evidence
that economic recovery is under way.
This next picture shows the quarterly behavior of the
unemployment rate, beginning with the business cycle peak in
2007 quarter four; and it again continues with the Blue Chip
forecast. Consistent with the recent cyclical pattern, the
unemployment rate is predicted to continue rising for two
quarters following the resumption of GDP growth. Whether this
happens and how high the unemployment rate eventually rises
will obviously depend on the strength of the GDP rebound.
Leaving aside timing issues, the unemployment rate
typically falls when GDP growth exceeds its normal rate of
roughly 2.5 percent per year and rises when GDP growth falls
short of this rate. With predicted growth right around 2.5
percent for most of the next year and a half, movements in the
unemployment rate either up or down are likely to be small. As
a result, unemployment is likely to remain at its severely
elevated level.
This figure shows the quarterly average of the monthly
change in payroll employment. The enormous declines over the
last four quarters are graphic evidence of how horrible this
recession has been for American workers.
Now, because the Blue Chip forecast does not exist for
employment, we continue the graph here with a survey of
consensus forecasts from the Survey of Professional
Forecasters. These forecasts suggest that payroll employment
loss will slow substantially in the fourth quarter of this year
and that payroll employment will likely turn positive in the
first quarter of next year. Importantly, as you can see from
these numbers, employment growth is expected to be quite low,
below about 100,000 per month through the end of the forecast
in the third quarter of 2010.
All right, well, all forecasts are subject to substantial
margins of error; and the errors are often particularly large
at times like the present, when the economy is near an
inflection point. For this reason, I think it is important to
consider the risks to the forecast.
First, there are reasons to think that GDP growth could be
either weaker or stronger than the consensus forecast. On the
weaker side, one concern is the leveling out of fiscal
stimulus.
Fiscal stimulus has its greatest impact on growth around
the quarters when it is increasing the most strongly. When
spending and tax cuts reach their maximum and level off, the
contribution to growth returns to roughly zero. Now, this does
not mean that the stimulus is no longer having an effect.
Rather, it means that the effect is to keep GDP growth above
the level that it would have been in the absence of stimulus
but not to raise growth further.
Most analysts predict that the fiscal stimulus will have
its greatest impact on growth in the second and third quarters
of 2009; and, by mid-2010, fiscal stimulus will likely be
contributing little to further growth.
Related to this, continued tightness in credit markets is a
concern. Quantity measures of lending and issues of corporate
debt remain low, and small business owners in particular report
significant credit tightness. On the other hand, as has been
mentioned, credit spreads are down dramatically from the fall
of 2008, suggesting some easing of conditions. While tight
credit market conditions are a factor that could hamper
recovery of private sector demand and tamp down further GDP
growth.
On the positive side, surveys of consumer and business
confidence have risen substantially in recent months; and the
stock marked has increased as well. For example, the Conference
Board's CEO Confidence Survey and the Business Roundtable's CEO
Economic Outlook Survey show that business leaders have become
more optimistic in both the second and third quarters of this
year. The S&P 500 has increased some 62 percent from its low
point in March.
If such measures continue to rise strongly, private demand
could rise more strongly than anticipated, which would raise
GDP growth. Now, typically, risks to the GDP growth would
translate into risks to the forecast for employment and
unemployment. If GDP growth falls substantially short of 2.5
percent per year, the unemployment rate would likely continue
to rise and employment to decline. If GDP rises strongly, labor
market indicators could improve more quickly. In addition, one
has to worry about separate risks to the employment forecast.
So this figure shows you productivity growth going back to
1988. What you see is that--and the gray bars are recession
periods. And what you see is that in the recoveries from the
last two recessions productivity has risen strongly. This,
together with slow GDP growth, resulted in unusually weak labor
market improvement for several quarters following the business
cycle troughs in the last two recessions.
Now, in the current recession productivity has increased
substantially. If GDP growth comes in as expected in the third
quarter, the rise in productivity will be particularly large. A
continuation of this behavior could lead to weaker than
expected employment gains and possibly continued job loss.
On the other hand, because productivity has risen
substantially during the recession, it is possible that firms
have pushed the productivity of current workers about as far as
possible. In this case, GDP growth gains could translate
particularly strongly into employment increases.
Now, while it is natural to focus most closely on real
economic variables such as GDP and employment, much recent
discussion has focused on the possibility of inflation. Some
have expressed concern that the unprecedented monetary actions
taken by the Federal Reserve and the similarly unprecedented
fiscal actions taken by the Congress and the Administration
have created conditions likely to result in inflation. Such
concerns in my opinion are unwarranted in the near and medium
term.
Historically for the United States, the main determinant of
movements in inflation is the relationship between output and
the economy's productive capacity, with additional influences
from oil price movements and other supply disturbances. When
output and employment are high relative to the economy's
comfortable capacity, inflation rises, as it did in the late
1960s and the late 1970s. When output and production and
employment are low relative to capacity, inflation falls, as it
usually does during and after recessions.
Economic theory and evidence suggests that there is a
relationship between monetary expansion or budget deficits and
inflation, but it operates through the demand for goods. Rapid
money growth and large budget deficits lead to inflation when
they fuel growth in demand beyond the economy's normal
capacity. Well, the behavior of inflation so far over this
recession and forecasts of it going forward fit with this view.
This last figure shows inflation measures using both the
Consumer Price Index, which is highly influenced by the
behavior of food and energy prices, and the GDP Price Index,
which is less influenced by those volatile components. What the
figure shows is that both measures of inflation have fallen
over the course of this recession.
Furthermore, measures of expected inflation, whether from
professional forecasters, as shown in the dashed lines in the
picture, surveys of consumers, or inferences based on interest
rates on inflation-protected securities all show that
expectations of inflation remain subdued.
All right, well, likely economic conditions I think present
policymakers with many challenges going forward. First, the
switch from decline to growth may lead to calls for the end to
rescue operations. As the immediate crisis fades, there may be
a tendency to wish to return to more normal policy positions.
Such a premature end to stimulus would be misguided. The
forecasts that I have described are largely predicated on
continued fiscal ease and the Federal Reserve's announced
policies that, quote, economic conditions are likely to warrant
exceptionally low levels of the Federal funds rate for an
extended period. Excessive moves towards fiscal policy
tightening could lead to a return to output decline and a
reacceleration of job losses. The current policies that have
generated a dramatic turnaround in the economy need to be seen
through to their completion.
A second challenge, as has been mentioned, that we face is
clearly the budget deficit. The final numbers just released
shows that in fiscal 2009, the deficit reached $1.4 trillion,
or about 10 percent of GDP. The mid-session review released in
August predicted a similarly large deficit in 2010 and
substantial structural deficits even once the recession is over
and the economy is fully recovered.
Such long-term deficits are unacceptable, and they need to
be dealt with. Over the long run, sustained deficits crowd out
private investment and reduce long-run growth.
Given the current precarious state of the economy,
substantial near-term spending cuts or tax increases to reduce
the deficit would threaten the recovery. However, the current
efforts for health insurance reform present a critical
opportunity to improve the long-run fiscal situation
dramatically. Health reform that is at least revenue neutral in
the short run and that genuinely slows the growth rate of costs
in the long run is a crucial precondition for reducing the
long-run budget deficit.
A third policy challenge that we face is the likelihood
that labor market conditions will remain painfully weak through
2010. The suffering and potential permanent damage that a
sustained period of high unemployment will bring is likely to
spur calls for further action to stimulate employment growth
and cushion the effects of unemployment.
As policymakers consider the options, rigorous evaluation
of alternatives must be conducted. Particularly in the context
of large budget deficits, the efficacy of different options
must be considered. Whether expiring programs are continued or
new programs are instituted should be decided on the basis of
their efficacy in putting people back to work and in improving
the future strength of the economy.
Well, as I described, the last year has been one of extreme
challenge and aggressive policy response. That many analysts
believe the low point of the recess session has been reached is
perhaps the most concise evidence that the policies are
working. A recession that showed no signs of ending last
January appears to be firmly entering the recovery phase.
Unfortunately, despite this dramatic turnaround, the U.S.
economy still faces many challenges. We enter the fourth
quarter of 2009 with the unemployment rate nearing 10 percent
and likely to remain severely elevated. The Congress and the
Administration will need to continue their excellent record of
policy coordination to not just start the process of recovery
but to finally finish it.
Thank you.
[The prepared statement of Christina D. Romer appears in
the Submissions for the Record on page 39.]
Representative Hinchey [presiding]. Dr. Romer, thank you
very much. Thanks for that very comprehensive presentation of
the situation that we are confronting, and we appreciate the
opportunity now to ask you a few questions.
I just wanted to start briefly and talk about a few obvious
things. One, of course, is the Economic Investment and Recovery
Act and the way in which that money has been outlaid so far.
If you look at the way in which the money has been put out
and made available and then attach to it the additional funding
that has been obligated but not yet put out, we are looking at
something in the neighborhood of $280 billion out of the $787
billion. So we are talking about a fraction, small percentage
of the available funding. Can you give us some indication of
what you think of the way in which the effectiveness of the
outcome of that spending, and what you anticipate to be the way
in which the remaining funding will be allocated and for what
specifically as much as possible? As much specifically for
which it will be allocated?
Dr. Romer. Absolutely. You do point out that I think the
Office of the Vice President that has been in charge of the
Administration side of getting the money out the door has done
a remarkable job in getting the money obligated, outlaid. I
think you were also the one--or perhaps Mr. Cummings was
pointing out that a tremendous fraction of what has already
occurred are the tax cuts. That was one of the first things
that we could get out the door.
Another thing that was very fast was the state fiscal
relief. I think both of those have been incredibly important.
We hear from the state governments over and over how crucial a
lifeline that state fiscal relief has been.
We know the other thing that has gotten out quickly is a
lot of the money to cushion the impact of the recession for
those directly hurt. The increases in unemployment
compensation, for example, have been absolutely important.
You know, our analysis, as I suggested, does indicate that
it has been incredibly effective. In the report that we put out
in September, we looked at various pieces of it. We looked, for
example, at the state and local--the state fiscal relief and
found that that showed evidence that it was very much working,
it was affecting employment at the state level.
We also have done an analysis, as was mentioned, of the
Cash for Clunkers program, which we think was something that
was added or sort of a rearrangement of some of those Recovery
Act funds that we think did add significantly to growth in the
third quarter of this year. So absolutely we think that it has
been important.
I think, going forward, one of the things that we can look
forward to--and I described what had gotten out quickly, the
tax cuts, the state fiscal relief. What is coming out sort of
next is a lot more of the direct government investment. And
that is important because we do think that the direct
government investment has a bigger bang for the buck in terms
of employment and GDP growth. And so that is one of the reasons
why, even though levels of quarterly spending and tax cuts are
kind of up or reaching their maximum level, the composition we
think is moving towards something that is going to be even more
effective.
Representative Hinchey. Well, thank you very much.
The additional spending of this money, the very important
amount that is still pending is going to be critically
important. You talked about that. And we hope and pray that
that is going to be handled effectively.
One of the weaknesses of this Investment and Recovery Act
has been the way in which it was engaged here in the Congress
to try to get enough support from a variety of other people. I
think it could have been much more effective if it had been
specifically adopted to the kinds of spending that we need to
create additional jobs. That is the most important thing.
Now, one of the things that we have in the context of this
economy, which has been negative for some time, is investment
outside of this country; and I am wondering to what extent your
recommendations or others may be focused on this particular
issue. How are we going to reduce the investments that are
engaged in outside of this country? How are we going to change
the tax rates that are in play so that the taxes that are owed
are actually going to be paid internally here to deal with the
circumstances that we are confronting? And how that would bring
about the creation of a substantial number of jobs in this
country.
Dr. Romer. No, you are absolutely right. When we think
about what generates growth, what generates job creation,
investment is incredibly important. I mean, one of the things
that--the Recovery Act did two things that I think are so
important, right? Obviously, it did public investment. So
rebuilding our roads and bridges, putting in some very forward-
looking investments in health information technology, in
broadband, in the smart electrical grid. All of those are
things that increase our productivity over time but also
increase jobs right now as we put those into place.
But we also had in the Act incentives for private
investment, right? So a lot of the tax treatment of investment,
of research and development investment. We think those are
incredibly important, again, for encouraging firms to do the
investments right here and for creating the jobs right here.
Also, the Recovery Act just had unprecedented incentives
for investments in particular areas like alternative energy and
weatherization and those kind of things, which again we think
are likely to be job creators and a direction that our country
needs to go.
So I couldn't agree with you more that fostering investment
is both good in the short term for job creation but is one of
those fundamental things that it is a win-win because it makes
us richer in the future.
Representative Hinchey. Well, thank you very much. I
appreciate what you are saying. Perhaps we might be able to
work closely with you and with the way in which the Vice
President is operating this to engage in this more specifically
and perhaps, in the context of that, more effectively. In any
case, Dr. Romer, thank you very much for everything you have
done.
I would like now to recognize Mr. Brady.
Representative Brady. Thank you, Mr. Chairman.
Dr. Romer, while I respectfully disagree with your economic
analysis, I am always appreciative of how open you are and how
accessible you are to this committee. So thank you for being
here today.
You know, I believe the stimulus benefits are widely
exaggerated. Forty-nine out of fifty states have lost jobs
since the stimulus took effect. The unemployment rate is far
above the 8 percent we were all promised it would be. When you
look at this chart, this is the comparison to the White House
promises on what would occur with the stimulus. And you can't--
it can't be claimed that the economy is worse than anticipated,
because at the time we warned from this panel that the economic
projections of the Administration were far too rosy. And these
exaggerations I think have become especially clear when
compared to the Fed's actions that show, whether you agree with
their unprecedented actions or not--and there is wide
disagreement--I think economists widely agree that the Fed's
monetary actions have been far more influential on this economy
than the stimulus.
[The chart was not available at the time of publication.]
But the negative impact of spending the money in the
stimulus and this budget and the continuing appropriations
which just blow through any notions of fiscal responsibility is
the deficit. The deficit this year is nine times greater than
when control of Congress moved from Republican to Democrat
control; and it gets worse over the next decade, more
dangerous.
Today, this morning, Moody's has warned the United States
may lose its AAA credit rating unless the Federal Government
significantly reduces its budget deficit below current
forecasts over the medium term. Since Alexander Hamilton was
Secretary of the Treasury, the U.S. Government has been the
world's most creditworthy borrower. So the question is, what is
President Obama's fiscal exit strategy to bring the budget into
balance over the medium term?
Dr. Romer. All very good points. Let me actually respond to
several of them.
First, your chart about the Federal Reserve--as I made very
clear in my testimony, I am a big fan of their actions. I think
in terms of the recovery, I am very happy to share credit, that
I do believe actions the Federal Reserve took, especially last
fall, were very important.
I think the important thing to keep in mind is, once the
Fed had gotten interest rates basically down to zero, that is
when they lose a fair amount of their ability to affect the
economy; and that is precisely because the Fed, we felt, was
out of firepower, that we thought it was incredibly important
to augment that with the other tool that we have, which is
fiscal policy.
The second thing is to talk about your graph about where we
are versus where we had predicted. I will be the first to admit
that I didn't have a crystal ball back in December and in
January. I think it is actually very misleading to say that
because the unemployment rate is higher than we predicted that
is a sign that fiscal stimulus isn't working.
I used an analogy back in August that if you go to a doctor
with a strep throat and he gives you medicine and the next day,
maybe even after you have taken the first pill, your fever
spikes, you don't say, ah, see, the medicine didn't work.
Right? You probably say, my goodness, I was sicker than my
doctor and I thought; and it is very good that we got to the
doctor and started taking the medicine. And I feel that is
exactly the situation that we are in.
The third thing about the budget deficit, I agree it is
large and it is a problem. I think we need to keep in mind why
it is large now. It was large really for three reasons. One is
simply the recession. We know that nothing is as bad for
revenues as an unemployment rate approaching 10 percent. It is
also high because of actions that were taken in the last 8
years that we did not pay for, things like the expansion in the
prescription drug program, the wars, as has been described, and
tax cuts.
And then, of course, there is--so, anyway, so we
certainly--and then there are the actions--the unprecedented
actions that we have had to take to try to get us out of the
recession. And the important point there is, you know, as big
as the fiscal stimulus sounds or as big as the TARP money
sounds, the truth is those are one-time programs. And when you
look at what they are contributing to the budget deficit over
the 10-year horizon, they are actually a very small fraction of
it.
What are we going to do to get it under control?
Well, the first thing we have to do is get the economy
recovered. And that is precisely why we have focused so
thoroughly on putting people back to work, that that is good
for people, it is good for the economy, and it is good for the
budget deficit.
And then, as I mentioned, we are in the middle of probably
the most important thing we could do on the deficit, which is
to pass responsible health insurance reform that doesn't add a
dime to the deficit, as the President said, and in fact over
the longer run genuinely slows the growth rate of costs so that
it improves the deficit.
Representative Brady. Thank you, Doctor.
As I turn it back to Chairman Hinchey, I ask, will the
Administration be bringing a fiscal exit strategy to Congress
this year?
Dr. Romer. Certainly, it is something--we are going to have
to provide our 2011 budget. And in every year we have been
thinking about, as we did last year, what is the path that we
are on?
Again, I very much want to hesitate--I like your term of
``exit strategy.'' I think the thing that worries me the most
is when people talk about exits. Because in the situation that
we are in, as I mentioned, I think a move to fiscal tightening
while the unemployment rate is high and rising would be very
bad for the economy. But, absolutely, we need to have a
strategy going forward; and it is something that I am sure we
will be working very closely with the Congress to put in place.
Representative Brady. Thank you, Dr. Romer. Yield back.
Representative Hinchey. Thank you, Dr. Romer.
Mr. Cummings.
Representative Cummings. Thank you very much, Dr. Romer,
for your testimony.
I would like to talk to you about Social Security briefly.
The latest Social Security Administration calculations show
that the average individual monthly benefit is $1,012, which
works out to about $12,744 annually. We saw the President
endorse a flat $250 cost of living increase for Social Security
retirees and beneficiaries. That works out to 1.96 percent on
the average. And, you know, when you think about it, just the
cost of medicine has gone up probably more than that. I just
want to know your feelings on that and what is the thinking
behind that. What do you see?
Dr. Romer. All right. Well, you surely know that Social
Security benefits are indexed to inflation. And as the numbers
that I showed you--maybe it would even help to put them back
up. We see the Consumer Price Index there, and what had
happened was it had certainly gone up substantially in 2008,
and that is why Social Security benefits last year got a very
hefty cost of living adjustment.
And then what you actually see is that the Consumer Price
Index, which includes things like gasoline, it would have
prescription drugs in there, but on net has fallen
dramatically. And that is why, the way the law is written,
seniors would not get any cost of living increase. We don't--
the law is written, when prices go down, we don't reduce
benefits, obviously, but it would have caused for it to be
flat.
The Administration's thought was that, given we were in a
recession, given that we do know seniors are facing many
special challenges, given how hard this recession has been for
everyone, we thought a responsible way to deal with the fact
that there was no cost of living increase called for by the law
was to do an extension or a repeat of the one-time payment that
we did last year, sort of the equivalent of the making work pay
tax cut that we did last year for working families.
We think that that is a reasonable compromise. One of the
reasons--so, anyway, we think that is both more fiscally
responsible than putting, say, an ad hoc cost of living
adjustment but a way of acknowledging that seniors are
suffering--everyone is suffering--and a way of getting a little
more spending going in the economy.
Representative Cummings. Do you think that Social Security
should consider moving to a different type of index?
Dr. Romer. I think right now the law is certainly very
clear. And there is always discussion of are there other price
indices that might be more accurate, but that is certainly
something that I am sure the Bureau of Labor Statistics could
tell you much more than I.
Representative Cummings. Let's talk about unemployment
benefits for a moment.
As we know, states have borrowed some $19 billion from the
Federal Unemployment Trust Fund to finance benefits. Going out
on a limb, do you think this borrowing has had a negative
impact on state bonding ratings?
Dr. Romer. Well, certainly we know that state governments
in general have been very hard hit by the recession; and many
states, including my own of California, have had a very hard
time with what is going on. I think it is part of a general
problem, right?
So state revenues are down dramatically. State spending in
general on programs to help deal with people suffering through
the recession, that spending goes up. I think all of those
things have contributed to the problems that they faced, and a
piece of that would be what they are having to pay for
unemployment insurance.
Representative Cummings. And conversely, I take it that you
are of the belief that the whole state fiscal stabilization
funds in the stimulus have had a very positive impact. Is that
right?
Dr. Romer. Oh, absolutely no question.
Representative Cummings. And how do you determine that?
Dr. Romer. Well, so, actually, we did a very interesting
study in our office. Because one of the problems that you have
is states that were in more trouble tend to get more state
fiscal relief, right? So there were rules put in place like if
you had a higher unemployment rate. So it is a hard statistical
exercise to figure out how state fiscal relief is affecting
employment.
But what we did in our office is to look at, you know, a
piece of the state fiscal relief was determined by just your
FMAP, your Medicaid matching rate and what it had been before
the recession. And so that got some variation across states in
how much money they got. And then we went and looked at, well,
what had happened to their employment state by state? And we
absolutely found that states that got a little bit more money
were doing a little bit better on employment relative to
otherwise. We thought that was very strong evidence.
And I will tell you it is on the CEA Web site if anyone
wants to look at the study.
Representative Cummings. The new-hire tax credits, what is
your feeling on those?
Dr. Romer. I think again, as I suggested, given how high
the unemployment rate is, I know there is a lot of discussion
in Congress, I know there is a lot of discussion within the
Administration that do we need to do more; and, if we do more,
what should it look like? An employment tax credit is something
that the President had certainly talked about back in the
campaign. I think it is one of the options that should
certainly be on the table as something that might have a
particularly large impact on employment. But you would be
weighing that against more state fiscal relief, against what we
might want to do on infrastructure, as was mentioned earlier,
investment in the economy. So there are a range of things, but
I think the important thing is that we talk about them and
figure out which one has the biggest job bang for the buck.
Representative Cummings. Thank you, Mr. Chairman.
Representative Hinchey. Thank you, Mr. Cummings.
Mr. Brownback.
Senator Brownback. Thank you, Mr. Chairman.
Dr. Romer, I want to give you kind of some input from the
field of what I am seeing and hearing people say. Kevin Brady
and I obviously have great skepticism about the impact of the
stimulus, and the numbers aren't what the Administration
projected they would be. But I understand your position on it.
What I am getting from people as I am traveling around is
they can't get credit. If you are a small business, a mid-sized
business, you can't get credit. If there is anything associated
with real estate in any fashion, you not only can't get credit,
there is not a market if it is commercial real estate. So that
people are just sitting on assets, and even banks are sitting
on assets, that they don't put them on the market because they
can't sell them. And if they did put them on the market, it
would scare and mark down the entire region.
The biggest complaint I get is that people can't get
credit, and anything that the Administration can do to get the
credit to go towards small and mid-sized businesses--you have
done a lot of work on getting it to big business, and I think
some of that is reflective in the stock market's impact.
But if you look at syndicated borrowing numbers--I am sure
you have--these numbers are a fifth of what they were during a
normal time period. And this is where your mid- and certainly--
mid- and some small businesses get money.
As I mentioned, too, to you, anything in commercial real
estate is just dead. Even well-financed deals with a good
percentage down, it is not happening. And it is certainly my
belief that until you fix that piece of it, you are not going
to have much in the way of job creation. You may slow your job
loss level, but you are not going to have much job creation,
because, generally, your engine of job creation has been the
small and mid-sized businesses.
And then, on top of it, the discussions here of these major
policy initiatives, whether it be on health care or cap-and-
trade, have a dramatic impact on people's willingness to take
risk in such an unknown tax atmosphere. So I mean you have an
intangible impact here that is not good either.
So that to the degree you can start to clear through your
policy agenda and let people kind of get back to being normal
and knowing what the environment is going to be, I think the
cap-and-trade idea is one you ought to pull away from and say,
in this economy, at this time, we are not going to do it. We
are going to do things maybe like the renewable energy
standard, we will do incremental, but we are not going to do
these big dramatic things that have an impact of raising
people's prices.
And the difficulty to project what your price is going to
be in the future then just holds people back. And in an economy
where we need to get things going, you are having the impact of
stalling things when you have these huge policy debates and
discussions.
The health care does it too. As people are trying to
calculate, okay, what do I do? This? Do I do that? Is it going
to have an effect? Is it not? And it stalls everything.
So the banks aren't lending, the people are scared to get
out on it, syndicated borrowing is not happening, and the total
of it is that you just get a very lethargic private sector in
the economy. And as many jobs as the public sector may try to
create or sustain, it is not long term sustainable because of
the debt we are running up.
And you have noted your difficulty with the debt numbers. I
mean, they are striking to you. They are certainly striking to
me.
And you travel across Kansas, and people are just appalled
by it. Because they just go, you know, these things have been
building. And now it is up to nearly $12 trillion in debt, and
we are looking at going to 100 percent of debt to GDP within a
5-year time period. That just is going to further strain
credit, and it is going to raise interest rates. It is likely
to lower the dollar, which will drive oil prices up and
gasoline up, which I think was one of the key triggers of the
recession in the first place, is gas prices getting so high.
People didn't have any money left in their pocketbook.
So I would really urge you to look at those pieces of it. I
know you are here to defend what has taken place to date. But
as I am out traveling around, those are the things that I think
are going to long term make this very lethargic and likely to
just have this government bubble be a sustained decade like
Japan had where you just don't get much happening outside of
the government putting in money. And the government is not
going to really cause much growth overall to take place.
So that is what I am hearing from a lot of people, and I am
certain you are getting it from points. But I wanted you to
hear what I get across Kansas.
Thank you, Mr. Chairman.
Representative Hinchey. Thank you, Mr. Brownback.
Dr. Romer. So let me--I mean, you make so many points. Let
me try to respond to some.
One, I share--I mean, I share many of your points,
especially, you know, in thinking about the role of the
government and the government stimulus, right? The whole reason
that we are here, the whole reason we did something like the
American Recovery and Reinvestment Act was precisely because
the private sector wasn't spending, right? We did see a
dramatic decline in demand, you know, investment, consumer
demand.
And I agree completely we are all working toward the place
where that private sector demand comes back and the government
doesn't need to be there. That is I think what we all want to
happen. And the question is how and when we get to that place.
Your point on small businesses and credit is a message we
get loud and clear as well, and I can't tell you how often the
President gets--you know, he reads letters from people that
write to him and, you know, we meet with him every day, and he
said, what are we doing about small business credit?
And that is part of what--the event yesterday, where we
announced two initiatives, one working with you all to try to
up the SBA loan limits. We hear from our small businesses that
there is a gap, that the current programs are missing the
people that need the somewhat bigger loans, but they are not
yet the really big companies.
The other is a program to get more capital into the small
community banks. Because we do know the main people that do a
lot of the lending to small businesses are the small local
banks. And we have had, as you mentioned, important recovery
measures for the big banks and trying to use some of the funds
that we have. If small banks have a plan for doing more
business lending, if we can get a way to get them more capital
so that they are able to do that and grow their businesses, we
think that would be a win.
The other thing, you mentioned the idea of we need to get
credit flowing before we will get the private recovery, and to
a degree that is true. But I think that the causation also goes
the other way. The more we can get the economy going again, I
think the better that is going to be for the health of all of
our banks, the health of the financial system. And so it does
go both directions.
And, in fact, I love one of the things that Secretary
Geithner sometimes says. He says, I don't think the Recovery
Act gets enough credit for the financial rescue, the sense that
by buoying up demand by getting the economy growing again, by
getting stock prices growing again, that has been very healthy
for the financial system, for getting credit.
Again, it is still limited, but it is a lot less limited
than it was 6 months ago.
And, finally, your point on uncertainty and the big policy
initiatives, and it is a reason why we need to get moving. I
hear this, for example, on financial regulatory reform. That,
again, you know, we are putting in place I think some very
important new rules of the road. The sooner we can do that, the
more people know what the institutional framework they are
going to be operating in.
Likewise, in health care, now this is one where I would
think we would probably, if we are talking to the same small
businesses, they tell us that what they are worried about is
the rising cost of health care and the difficulty that they are
having providing health insurance for their workers. And one of
the great strengths I see of all the bills that have been
working their way through the House and the Senate is how
focused they are on making it work for small businesses. The
exempting businesses from the--small businesses from the pay or
play, setting up an insurance exchange. Because we know small
businesses pay something like 18 percent more for the same
coverage that a big firm would pay. Setting up a small business
tax credit to make it more affordable for them.
I think, again, the sooner we can do that and the sooner we
are careful to make sure that anything we do on health care
does protect and help small businesses I think we will get, as
you mentioned, those engines of growth going again.
Senator Brownback. Senator DeMint may have a series of
questions that he would like to submit for the record.
Representative Hinchey. Absolutely.
Senator Brownback. Thank you.
Representative Hinchey. Thank you very much.
Mr. Snyder.
Representative Snyder. Thank you, Mr. Chairman.
Dr. Romer, I have several questions I will ask quickly, if
you will give quick answers.
Arkansas unemployment rate over the last 5 months has gone
up from 7.0 to 7.2 to 7.4; and in the last 2 months it dropped
to 7.1 and then most recently stayed at 7.1. Are we like the
canary that shows that things are going in the right direction
or--how should we interpret what seems to be a trend in the
right direction?
Dr. Romer. I would love to interpret you as a canary.
I think one of the things that is important is we do know,
just as there are measurement issues even with the national
unemployment rate, when you get down to the state level they
are even bigger. So one of the things I have learned in my
short 9 months in the job is to not read too much into any one
number and certainly into any one state's number. But certainly
the fact that we are seeing a few states turning the right
direction, I think that is wonderful. And, again, if we see at
the end of next week that the GDP numbers for the third quarter
are positive, as we had anticipated, that would be another sign
in a very good direction.
Representative Snyder. My second question, again a
parochial question, I think Arkansas has gotten on people's
radar screen internationally in terms of international
investment. We have had several international companies
involved in wind power. That LM Glasfiber is now manufacturing
windmill blades in Little Rock. Some Indian companies have
gotten interested and made substantial investments in central
Arkansas. Governor Beebe has been very aggressive the last
several years about looking for opportunities for international
investment.
We always think about our companies investing overseas, but
it is working the other way. How important do you think
international investment can potentially be as we see some
areas around the world that are recovering faster than we are
as a potential source of investment and job creation?
Dr. Romer. I think it certainly is important. I think it
does get to some of the things that we have been talking about,
how, in general, keeping our trade in both goods and services
and in financial flows like investment. Working and operating
and on a fair, level playing field I think is very important.
So you have talked about the direct foreign investment, and
that is--as we build factories here, that is great.
And we are also looking the other direction, of making sure
we open up markets for our products overseas so that, if our
firms that are already here produce, make sure that they have a
place to sell. And, in that context, the recovery in the rest
of the world is so important, right? As we see China and a lot
of the Asian countries coming back, that is so important for
making sure there is a market for our products, because net
exports are something that can help to buoy up our demand and
help us to grow.
Representative Snyder. And one specific message I don't
want you to comment on. I hope you will take a message to the
President we in Arkansas would love to see more opportunities
to sell products in Cuba, and we don't understand why we
haven't been more aggressive about that. We have got a lot of
agricultural products we would like the good people of Cuba to
eat.
I have a different take than Senator Brownback does on the
energy policy. He suggests we pull back from doing big things
with regard to what we are going to do about greenhouse gases.
I don't understand how pulling back and not doing something
somehow gives business predictability for the future.
Probably the best example of that is I am one of those
people who strongly believes we need to expand nuclear power
expansion and construction in this country. In Arkansas,
Entergy, our big power company, they have a nuclear power plant
in Arkansas. They want to expand nuclear power plants. They
were a strong supporter, as were a lot of nuclear power
companies, a strong supporter of the Waxman-Markey bill in the
House. And I think the reason is because until we resolve this
issue of what we are going to do about greenhouse gases,
because of the incredible expense of nuclear power plants and
how long it takes to recoup that money, they don't have the
predictability.
So I take a different position than Senator Brownback. If
anything, what is going on right now points out the need to
resolve what we are doing as a Nation.
Would you comment on that specifically with regard to
nuclear power?
Dr. Romer. Absolutely. When you think about cap-and-trade,
right, so the discussion was how that was causing uncertainty.
But, of course, your point is we have got a looming problem
with both energy independence and with greenhouse gases and so
there is inherently uncertainty. So I think what you are saying
is getting to a point where we deal with this is going to
provide certainty for everyone. So I think that that is
absolutely true.
And the President has very much been of the view that, you
know, at a time of economic crisis you can still be focusing on
the more fundamental, longer-run problems.
And certainly, you know, nuclear energy is one of the ways
that we can increase our energy independence, can get--and your
point that getting certainty, you know--and, again, that is
going to be an issue as we think about how we--you know, I know
certainly the Senate is going to be thinking about its own
version of the Waxman-Markey or the cap-and-trade and energy
bill and thinking about what can you do within that to get more
certainty about, you know, the price of energy going forward
exactly so that you do have the right incentives to make the
big investments.
Because we want to not only do nuclear, but there is also
so much we want to do in encouraging renewable energy of other
kinds and those kind of investments also in just the
technologies for energy conservation and new factories.
Representative Snyder. And natural gas is doing very well
in Arkansas, too.
Thank you, Mr. Chairman.
Representative Hinchey. Mr. Snyder, thank you very much.
Mr. Hill.
Representative Hill. Thank you, Mr. Chairman; and, Dr.
Romer, thank you for being here this morning.
My question will be brief. The projections that you have
with the growth in GDP, are they based upon the fact that
stimulus money will be spent or is it not based upon stimulus
money being spent?
Dr. Romer. Well, the numbers that I showed you from the
Blue Chip consensus forecast--it is a survey of about 50
professional forecasters--I am sure that they--so each one of
them will have some assumption about what is going to happen to
interest rates, what is going to happen to fiscal stimulus. And
given the law that is there, they are all predicated upon the
fiscal stimulus that at least has been passed stays and follows
through in the path that say the Congressional Budget Office
has projected.
Representative Hill. So if it would be taken away, then
those growth percentages would not be realized.
Dr. Romer. Oh, you would see their forecasts plummet. I am
certain of it.
Representative Hill. The one other question I have, there
is talk among some Members of Congress--I am not one of them
that are sounding the alarm bells, but there are several
Members of Congress, and I have talked to some commercial real
estate developers about this as well, that the second shoe that
is going to be dropping that is going to drastically affect the
economy is the collapse--or not collapse but foreclosures on
commercial real estate loans that are being made and that many
banks are going to go belly up because the commercial real
estate developers are not going to be able to pay their loans.
Have you got any thoughts that you can share with us about
that?
Dr. Romer. It is something that we certainly hear as well,
and I know that the Federal Reserve and the Treasury we are all
concerned about what we do see happening in commercial real
estate.
I think, as I understand it, part of the--or certainly one
of the things that is somewhat different from what we went
through, say, last fall, this is a more slower evolving
problem, so it is one that we will have the time and the
ability to deal with. But it is something that is looming
there.
It is another--I mean, we have had, you know, when I say we
faced challenges, right, this is not a normal recovery in the
sense a normal recession is caused, you know, in post-war
history was tight monetary policy to get inflation down, and
then there was an obvious way that you ended it. You just
loosened monetary policy, interest rates came down, and the
economy came bouncing back.
Where this started with interest rates low, we had a severe
financial crisis, and that means coming out of this we have
just got lots of things working against us. We know credit is
still tight. We still have trouble in our banking system. We
are--as you mentioned, the commercial real estate loans are
going to be another thing that is going to be holding back how
much banks want to lend and be something else we are fighting
against.
So, in my mind, it just makes it clear how hard this is and
how important it has been that we have taken the very
aggressive actions that we have taken and that we are going to
have to be vigilant and keep working at this.
Representative Hill. Thank you, Mr. Chairman.
Representative Hinchey. Thank you, Mr. Hill.
Senator Klobuchar.
Senator Klobuchar. Thank you very much, Mr. Chairman. Thank
you, Dr. Romer.
In late September, you said that the recession--you said,
to say the recession is over is a big difference than to say we
are recovered. You said, I don't want the ``mission
accomplished'' banner. We have so much more to do.
Could you talk about what you think, number one, is
happening in terms of the Recovery Act--I think it was forecast
to save 3.5 million jobs over 2 years--whether we are on track
for that? And, secondly, what other tools that you may have in
the economist toolbox that we could use?
Dr. Romer. Absolutely. So, no, I did--that statement that I
made, I do think is important. Because when economists talk
about the recession is over or if you look at the--I cite in my
testimony, if you ask the Blue Chip consensus, 81 percent of
them say the recession is over. What that means is you have hit
the bottom and you have turned the corner. There is a huge
difference between that and when you are back to something
normal.
And just--you know, one of the ways that I described this
is we have lost 7.2 million jobs since the business cycle peak
back in December of 2007. Normally, we would have added about
100,000 jobs every month. So if you think about the job
deficit, we are at probably over 9 million. So that says, even
once you turn the corner, you have so much work to do.
In terms of the Recovery Act, it is--as all of our
estimates suggest, it is on track. So, you know, that was a
number that said, as of the end of 2010 we expected it to have
raised employment relative to the baseline by about 3 and a
half million. And it does look like we are going to meet that.
So the one million that we saw at the end of August is very
much on that trajectory.
The economist tool bag, we do still have tools, all right?
So that is part of--you know, despite the high budget deficit,
there is still--you know, I think as long as we have a credible
plan for getting it under control over the long term, health
care reform is going to be a big part of that. Announcing a
sensible plan for once we are recovered of how we are going to
rein in spending or deal with revenues, that is all important
for making sure we retain credibility, that everyone
understands that the United States is the safest country to put
your money in to buy their government debt.
But there are things you can do, whether it is more state
fiscal relief, whether it is more investments in
infrastructure, whether it is another tax cut, whether it is
tax incentives for businesses to hire, all of those are things
that I think should be looked at.
I know that the Federal Reserve is thinking about--they are
always saying, what are the tools that we have? We are thinking
about, in terms of homeowners and mortgages and foreclosures,
what could we do to make that program work better so that we
don't see a big rise in foreclosures pushing down house prices?
All of those should be on the table and things we are thinking
about.
Senator Klobuchar. Thank you. I do appreciate that. We have
heard a lot of concerns in Minnesota with small businesses,
that the President came out on that. I have been working with
Senator Warner, Mark Warner, on this.
Because it seems that, while the Dow is doing fine now, or
getting better, at least, there are some huge problems for
small businesses not being able to share in that credit that is
starting to get out there and our small community banks.
On the fiscal responsibility note, I went on a letter, nine
of us did, to try to push for a process. I was on a bill a year
ago with Senator Conrad to try to put a process, a bipartisan
process together with suggestions on Social Security and other
ways to bring down our deficit. And I think it is now more
important than ever that we do that.
But my question in my remaining time here is about
unemployment benefits. The House produced a bill that extended
unemployment benefits, which is good, but it only included
unemployment benefits for states that had 8.5 percent
unemployment. Our concern on the Senate side, as someone so
nicely put it in a letter a month ago to me, even though our
state may have 8 percent unemployment, in my household it is
100 percent unemployment.
It is very difficult for me to explain to the people in
northern Minnesota, where they border Wisconsin, why their
unemployment benefits would be cut off and people just across
the border--we have a lot of issues sometimes between Minnesota
and Wisconsin, including Brett Favre, but to have to explain to
them that we got Brett Favre but you don't have the
unemployment benefits would be difficult.
So I just wonder if you had any views on the issue of
trying to make sure we extend unemployment benefits across the
line for all households and the need that we have for this
despite the fact that we are seeing some glimmers of hope with
the economy.
Dr. Romer. Yes. I mean, it absolutely goes to the big issue
of, you know, even--your first question, even if we are
starting to recover, we do know that there are still over 15
million people who are unemployed. We do know that there are
people who are expiring their benefits. There is still just a
tremendous amount of suffering and that the recovery back to
normal levels of unemployment is unfortunately going to be, you
know, something that takes a long period of time; and we have
an obligation as a country to cushion that blow for people.
So, absolutely, I mean, one of the things, of course, we
all know is how much the Recovery Act did on this front, right,
the unprecedented increase in the size of payments, the length
of payments, and completely appropriate given the suffering
that was going on and given that we needed the aggregate demand
stimulus. It was just a sensible program. I think it is one of
the ones that Mark Zandi says has the biggest bang for the
buck. Because you give people their unemployment check; they
spend it. So that is incredibly important.
I think my main plea going forward is to think hard about
what is--I mean, it is exactly your question. How do we devise
this, right? What is the right length of extension? What is the
size? I think all of that is something we should think about
sort of as a coherent whole and figure out, you know, sort of
what is the right thing to do.
I think it is true, you know, economists do sometimes worry
about incentive effects. I think one of the main lessons is
when the unemployment rate is 10 percent we are not really
worried about people not getting a job if it were there, right,
that it is very much--we know that people are looking as hard
as they can, and we are trying to do the best that we can to
make the jobs be there for them but for now cushioning the
blow. So the details of how we deal with Wisconsin versus
Minnesota and those, I think that is something we are going to
be having to working about and working together and thinking
about. But I will certainly take that back with me.
Senator Klobuchar. Thank you very much.
Yeah, look at the Senate bill. We like it.
Representative Hinchey. Senator, thank you very much.
Dr. Romer, I think just to emphasize something that you
said in response to a question a little while ago, we have the
National Federation of Independent Businesses, which sometimes
makes correct analysis. This week they said that their survey
found that it is not credit problems, but it is the lack of
customers that is the biggest problem for small businesses. And
we know that that is true. It is lack of customers. And we
wonder if we shouldn't be focusing on increasing consumer
spending. But how do you increase consumer spending other than
by creating jobs?
A lot of the consumer spending has dropped off because
consumers don't have money to spend, and they don't have money
to spend because they have lost their jobs or people close to
them have lost their jobs, people working with them have lost
their jobs, and if they haven't lost their jobs, they are
worried about the possibility of losing their jobs. That is one
reason why we see some increase in private savings that have
gone up across this country, because people are saying to
themselves, I don't know what is going to be in this for me; I
better take care of myself a little bit and start saving as
much money as I can.
So that is part of the problem. Spending has gone down, and
spending has gone down for those two reasons. People are
worried about their future, and other people have just lost
their jobs. They don't have any money to spend.
With that in mind, I can't help but focus on something that
Paul Volcker has been saying; and he has got some attention in
The New York Times yesterday and in The Wall Street Journal.
And one of the things that he is talking about is the
commercial banks and how the commercial banks should be
restricted to commercial banking so that in the context of
commercial banking they could be exhilarating the economy and
that they shouldn't be engaged in the Wall Street situation.
And, of course, that takes us back to the repeal of the
Glass-Steagall Act, where banks that had their main focus of
attention on commercial spending and commercial investments and
job creation have stopped doing that. They stopped doing that
just after 1999.
So what do you think about this? Isn't this something that
we should deal with? Isn't there something that we should--some
way in which we should focus attention on the huge amounts of
money, trillions of dollars, that are in the hands of growing
banks, including the specific banks that have come together and
made themselves larger and increased the amount of money that
they have?
But that amount of money is not being put out into
investments. It is being put out into other operations which
are designed to try to bring in as much money to them as
possible not over the long term but quickly. And if that is the
case, then we are facing the potential of another economic
decline, another serious economic recession sometime over the
course of the next several years.
What do you think?
Dr. Romer. Many points there.
First, your report from the NFIB about lending and what is
holding back small business. I think the answer is probably a
mixture. We do hear from them that they are having trouble
getting credit. But we also hear the other side of, well, maybe
they don't want to be expanding very much because they don't
have the customers.
That is sort of why I think a multifaceted approach makes a
lot of sense, the kind of measures we announced yesterday to
try to get lending going more to small business. But all of the
other things that we are doing exactly--the tax cuts, the UI
extension--all of those things are things designed to get
people back to work and buying things, a lot of those from
small businesses. So I couldn't agree with you more that there
is a mixture, and both of them need to be done.
The discussion--your discussion of Glass-Steagall and where
we go from there and Paul Volcker, I think it all brings to the
fore just how important regulatory reform is, right? We are in
the middle. The President has said, and I feel so strongly,
that we need to use the pain that we have been through to some
good. And what we saw in the Great Depression, they had the
good sense to take that horrible crisis and say at least out of
this let's put in place a framework that makes us healthier
going forward. And that is why we have the introduction of
deposit insurance and the creation of the FDIC, so many of the
laws about how our stock markets work, the Securities and
Exchange Commission. So important.
We have seen that there are gaps in our regulatory
framework. That is what we learned last fall and how important
it is that we do a comprehensive fix, right? And that is really
what is starting this process that is going on in the House and
in the Senate. So incredibly important.
The particular form, whether, you know, as Paul Volcker
would say, can we go back somewhat to the old-fashioned world
where banks were one thing and, you know, investment banks or
hedge funds were another thing or has somehow the world changed
enough that they are kind of all--it is hard to draw the lines.
I think that is something we will have to work out with the
Congress.
I think the important thing is to make sure everybody is
regulated, make sure everybody has good, strong capital
requirements so that they have money on the line.
We hear so much talk about executive compensation and
making sure that regulators work with the institutions they
regulate to say, you know, do you have pay practices that are
encouraging risky behavior? All of that is going to be part of
coming up with a system that, you know, I hope will buy us
another 80 years without a major financial crisis. I think that
would be an important legacy for our children.
Representative Hinchey. Well, I perfectly agree with you;
and I think that is exactly what we should be doing, trying to
make sure that this economy is strong and stable for as long as
possible and not going back to the way we were prior to the
1930s, when we had serious recessions and depressions every 10
or 15 years.
Dr. Romer. And financial crises.
Representative Hinchey. Yes, and an array of financial
crises during that period of time. But the installation of
those changes, which occurred in 1933, stabilized this economy
for a long time; and it seems to me that this is something that
we need to do.
Nevertheless, there is a resistance to that; and the
resistance to that is coming largely from the big banks. And
that resistance coming from the big banks is having some effect
on some of the decision makers in the context of this set of
circumstances that we are dealing with, and that may include
even the way in which this Congress is working.
There is a very important bill that is coming out of the
Financial Services Committee here in the House of
Representatives, and we are hoping that that is going to do it
in a way that is going to be effective. And I can't help but
believe that the only way to make it effective is to enable
different kinds of banks to be engaged in the kinds of things
that they were initially set up to do and not enabling them to
sort of manipulate the set of circumstances that they have
available to them that is available for their own interests.
Now, that is just a human nature thing. That is just
something that people are going to do unless there is some way
to stop it. If you have the power and ability to do things, the
main focus of attention is going on yourself; and that is true
of the banks as well as it is of individuals.
So this is something we have got to deal with, and we have
got to deal with it effectively. We know very well that this
deep recession came about largely, almost exclusively, as a
result of the repeal of that Glass-Steagall Act and the
economic manipulation that came about immediately after that.
Because so many people had been pushing for that for a long
time, and they knew how effective it was going to be, and they
engaged in that effectiveness right away.
We have a big responsibility here not just to stabilize
this economy over the course of the next few months or few
years but to stabilize it, as you were saying, for at least the
next 80 years; and I hope that that is something that we can
do.
We have four minutes to vote. I just want to mention before
closing that I wanted to return to a point that was made
earlier about the special relations between the JEC and the
CEA. It is so special, in fact, that Dr. Romer, the chairman,
has asked our executive director, Nan Gibson, to come over to
be in the executive branch, to be her chief of staff at the
President's Council of Economic Advisers. Once again, Doctor,
you are showing us that you are making the best possible
decision. We very much appreciate it.
Dr. Romer. Well, I very much appreciate you. My current
chief of staff is 2 weeks away from having a baby and wants to
stay home with her baby, and I could not be more thrilled. And
I am sorry to steal Nan from you, but I feel very, very lucky
that she is coming over to help us so that we can continue to
help you.
Representative Hinchey. We are going to miss her, but we
are going to look for that help as well. Thank you very much.
Representative Brady. And, Mr. Chairman, let me add my
bipartisan congratulations to Nan as well on her new venture.
Representative Hinchey. Mr. Brady, thank you very much.
Dr. Romer, thank you so much for being with us. Thank you
for your testimony and your very clear and competent responses
to all of the complex questions that you received here today.
We very much appreciate it, and we are very happy to be able to
continue to work with you. Thank you so much.
Dr. Romer. Thank you. It has been wonderful to be with you.
[Whereupon, at 11:45 a.m., the committee was adjourned.]
SUBMISSIONS FOR THE RECORD
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Prepared Statement of Carolyn Maloney, Chair, Joint Economic Committee
I want to welcome Dr. Christina Romer, the President's Chair of the
Council of Economic Advisers, and thank her for her testimony here
today. The Council of Economic Advisers and the Joint Economic
Committee were both created by the Employment Act of 1946 and share an
important history of providing the White House and Congress with
analysis of economic conditions and economic policy.
Our hearing today is on the economic outlook. The current
Administration took office only nine short months ago. Nine months ago,
the economy was facing the worst economic crisis since the Great
Depression with GDP falling at its fastest rate in almost three
decades. In January alone, 741,000 jobs were lost, but jobs losses of
about 600,000 or more per month had started in November of 2008. Those
punishing job losses continued for 5 straight months. However, thanks
to the American Recovery and Reinvestment Act, we are finally seeing
signs of recovery. For example, the $35.4 billion obligated to states
so far for education has saved 250,000 teacher jobs.
However, I am deeply concerned about the state of the labor market,
as I have been since the start of this recession. GDP growth is of
little comfort to the millions who have lost their jobs. The
unemployment rate is at an unacceptably high 9.8 percent. I am
particularly interested in Dr. Romer's outlook on the labor market and
additional measures that may be needed to boost job creation.
As the economy recovers we must continue our commitment to the
unemployed to ensure that working class Americans aren't once again
left out of economic recovery, as they were under the Bush
Administration. People are losing their unemployment benefits at
alarming rates. In my home state of New York, close to half of the
unemployed are losing their state unemployment benefits, and the same
story can be told in states around the country. That is why I encourage
the members of the Senate to follow the House in passing a bill that
extends unemployment benefits.
As the 2001 recession subsided, the average American family was
left behind; job creation and median family income never recovered to
the levels experienced during the Clinton years. We must do more to
ensure that as we recover from this recession we do not see a repeat of
the dismal jobs record of the Bush Administration. One statistic I find
striking is that for every job opening there are six people applying.
Despite this fact, the Recovery Act is working. In fact, it is
softening the impact of this recession on workers. According to a
report that the Council of Economic Advisers released last month, the
Recovery Act reduced average monthly job losses by 169,000 in the
second quarter of this year. In addition, the U.S. economy had 1
million more jobs in August because of the Recovery Act.
The report also notes that the Recovery Act has contributed
significantly to economic growth. Using the latest GDP numbers, the
Recovery Act raised GDP growth by 2.6 percentage points in the second
quarter. In the third quarter, analysts expect an even bigger boost.
Next week, we will hold a hearing where the Bureau of Economic Analysis
will report advance estimates of GDP for the third quarter, and I am
optimistic that the numbers will show that the bold actions taken by
Congress and the Obama Administration are turning the economy around.
The Administration and Congress continue efforts to help create jobs.
Just yesterday, the Administration announced a series of proposals to
help small businesses, including providing tax relief to small
businesses and promoting access to credit.
Dr. Romer, we thank you for your testimony and I look forward to
working with you as the committee continues our focus on fixing the
economy, helping struggling families, and, above all, putting people
back to work.
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Prepared Statement of Kevin Brady, Senior House Republican, Joint
Economic Committee
I am pleased to join in welcoming Chairwoman Romer before the
Committee this morning.
There are some encouraging signs that the recession may be nearing
its trough. The commercial paper and corporate bond markets are
functioning. The stock market is up. Housing prices may be stabilizing.
Industrial production edged up 2.8 percent during the last three
months. Job losses continue, but are slowing. And the October survey of
economists in The Wall Street Journal forecasts that real GDP will grow
at an annualized rate of 3.1 percent during the third quarter.
Even if this forecast proves correct, the U.S. economy still
suffers from many fundamental problems. In September, payroll jobs fell
by 263,000, while the unemployment rate rose to 9.8 percent. The same
Wall Street Journal survey also forecasts that the unemployment rate
will rise to 10.0 percent by December.
Commercial real estate prices continue to fall. Because of the
collapse of the market for commercial mortgage-backed securities, many
property owners cannot roll over performing commercial mortgage loans
at maturity. Regional and community banks are likely to suffer large
losses on their commercial mortgage loan portfolios that may impair
their ability to supply credit to families and small businesses.
I am concerned that any growth in the second half of this year may
prove transient, and consequently the unemployment rate may continue to
increase well into 2010. Those in Washington shouldn't kid themselves:
A jobless recovery is no recovery for American workers.
During the last four months of 2008, the Federal Reserve injected
more than $1.3 trillion of liquidity into the U.S. economy. With the
traditional lag between monetary actions and their effects becoming
apparent in the real economy, this liquidity injection last fall
supported real GDP in the second quarter and should boost real growth
in the second half of this year.
Compared to the Federal Reserve's $1.3 trillion ``adrenaline
shot,'' President Obama's stimulus spending pales. As of this month,
only $173 billion, or 22 percent of the program's total, had been
spent--to the view of many, too slowly, too wastefully, and too
unfocused on jobs. Like the hunter in the party who takes credit for
every bird that falls, stimulus promoters should be wary of taking
credit for the result of unprecedented Fed actions that are casting a
far greater influence over the economy's performance.
But neither liquidity injections nor fiscal stimulus can create a
sustained expansion. As the Chief Executive and Co-Chief Investment
Officer of Pimco Mohamed El-Erian noted, these government interventions
are unsustainable ``sugar highs.'' If the United States is to avoid
slipping back into a ``w-shaped'' recession, the private sector must
once again become the driver of economic growth.
It is unclear how this hand-off will occur. The balance sheets of
U.S. families remain damaged from the collapse of housing prices and
the excessive debts accumulated during the bubble years. The growth of
personal consumption is likely to remain restrained. The large
inventory of foreclosed homes is likely to dampen housing investment.
Therefore, a sustained expansion must depend upon business investment
and net exports.
Here is a major concern going forward: Entrepreneurs and business
leaders make investment decisions based on their expectations of risk
and return. Government policies affect these perceptions.
Unfortunately, the Obama Administration and congressional Democrats
have simultaneously dampened the expected return and increased the risk
associated with new business investment through their actions and
inaction.
Higher income tax rates and higher taxes on capital gains and
dividends are set to begin in 2011. The White House and Congress are
proposing job-killing energy and international tax increases that will
drive investment and jobs offshore. Congress has not acted in a timely
manner to extend the research and development tax credit and the
homebuyer's tax credit as well as an increase in the net operating loss
carry-back period from two to five years.
Uncertainty about cap-and-trade and healthcare legislation further
depresses business investment. Firms fear the additional energy costs
associated with what many term the ``cap and tax'' bill that passed the
House and are unsure what the Senate may do. The various trillion-
dollar healthcare bills leave firms, especially small businesses,
confused and concerned about additional taxes and regulatory burdens.
As a result, many companies in my district and around the country
are delaying important investment decisions--and the job creation that
goes with it.
In short, the government's uncertainty and interference is quickly
turning a ``rescue operation'' into an anchor around the private
sector's neck.
With U.S. consumer spending lagging, a key opportunity to recovery
lies in selling American goods and services overseas to recovering
markets. Yet America is sitting on the sidelines while other nations
are aggressively shaping these new markets. The Doha Round negotiations
remain stalled. Congress has not acted upon three completed trade
agreements with Colombia, Panama, and South Korea while competing
countries reach agreements that leave American companies and farmers at
a severe competitive disadvantage.
The United States is on an unsustainable fiscal course. According
to the Congressional Budget Office (CBO), projected federal deficits
will swell publically held federal debt from 40.8 percent of GDP at the
end of the last fiscal year to 67.8 percent at the end of fiscal year
2019. And this CBO projection is before adding new healthcare benefits
and other costly initiatives.
Moreover, the CBO projects that the growth of existing entitlement
programs will drive federal deficits and debt even higher over the long
term. Instead of resolving these imbalances and consequently protecting
both beneficiaries and taxpayers, President Obama and congressional
Democrats are seeking to create new entitlement programs that would
further damage our fiscal position.
Finally, the United States could face the risk of a dollar crisis
in the future. Recent history in Asia and Latin America warns us that
currency crises occur suddenly with devastating consequences. If the
fear that fiscal irresponsibility may force the Federal Reserve to
monetize federal budget deficits were to cause foreign investors to
shun Treasury debt, the foreign exchange value of the dollar could
collapse, sending prices soaring. Fortunately, the risk of a dollar
crisis is still very small. However, this risk may grow if Congress
does not begin to control federal spending.
There is much to be concerned about in America's economy. Today is
no time to be taking false credit for economic indicators--but rather
outlining the Administration's strategy going forward to address these
challenges.
Dr. Romer, I look forward to hearing your testimony.
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Prepared Statement of Michael C. Burgess, M.D.
The economic outlook is bleak and we are going to go down as the
most job-killing Congress in history. Since the stimulus passed--which
I did not vote for--unemployment has skyrocketed from 6% to nearly 10%.
At the same time, the Democrats have increased taxes; moved on cap-and-
tax . . . I mean cap-and-trade; Democrats are going to pass a health
care bill which costs nearly a trillion dollars and doesn't do anything
to make the actual cost of service lower.
A trillion dollars is a funny thing. It's a hard thing to
understand but let's put this in relation to time. One million seconds
comes out to be about 11\1/2\ days. A billion seconds is 32 years. And
a trillion seconds is 32,000 years.
I feel like it's been 32,000 years since this new Administration
started instead of nine months.
Our national deficit for this year alone is $1.5 trillion. This is
a trillion more than this time last year. The Obama Administration has
been saying this is because they inherited a financial mess and used
that excuse to pass a $787 billion stimulus bill which only 22% has
been handed out. That's like telling someone in the mist of the Mt.
Saint Helens volcanic eruption to use a swimming pool to put the fire
out.
Why has only 22% of the stimulus money been handed out? We are
shedding jobs at a scary rate--and all we seem to be doing is give out
more unemployment dollars.
Furthermore, the second quarter GDP numbers show that private
investment went negative while the federal, state and local spending
went up, thus showing better GDP. What is the federal government's exit
strategy from shoring up the private sector?
Already, the consequences are immense. I already talked about the
deficit. Then we have to consider the diminished value of the dollar.
These are serious concerns, in a tough time, and it's curious that
we are hearing conversations about yet another stimulus. If things are
going so well, if GDP is allegedly up 3.1% this third quarter; if the
Obama stimulus has created the million plus jobs that they are touting,
then why is there even talk of yet another stimulus bill?
I look forward to hearing from Ms. Romer to hear how the Obama
Administration will finally stop borrowing money to spend on programs
which aren't creating jobs.
Thank you.