[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

                               __________

          Printed for the use of the Joint Economic Committee




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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

                              ----------                              

                                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.
  

                                  
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