[Joint House and Senate Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 111-533
THE IMPACT OF THE RECOVERY ACT
ON ECONOMIC GROWTH
=======================================================================
HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
OCTOBER 29, 2009
__________
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JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
HOUSE OF REPRESENTATIVES SENATE
Carolyn B. Maloney, New York, Chair Charles E. Schumer, New York, Vice
Maurice D. Hinchey, New York Chairman
Baron P. Hill, Indiana Jeff Bingaman, New Mexico
Loretta Sanchez, California Amy Klobuchar, Minnesota
Elijah E. Cummings, Maryland Robert P. Casey, Jr., Pennsylvania
Vic Snyder, Arkansas Jim Webb, Virginia
Kevin Brady, Texas Mark R. Warner, Virginia
Ron Paul, Texas Sam Brownback, Kansas, Ranking
Michael C. Burgess, M.D., Texas Minority
John Campbell, California Jim DeMint, South Carolina
James E. Risch, Idaho
Robert F. Bennett, Utah
Gail Cohen, Acting 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............... 2
Hon. Sam Brownback, Ranking Minority, a U.S. Senator from Kansas. 4
Hon. Maurice D. Hinchey, a U.S. Representative from New York..... 5
Witnesses
J. Steven Landefeld, Director of the Bureau of Economic Analysis,
U.S. Department of Commerce, Washington, DC.................... 6
Karen Dynan, Vice President, Co-Director of the Economic Studies
Program and Robert S. Kerr Senior Fellow, Brookings
Institution, Washington, DC.................................... 18
Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship,
MIT's Sloan School of Management, Senior Fellow, Peterson
Institute for International Economics, Cambridge, MA, and
Washington, DC................................................. 20
Mark Zandi, Chief Economist, Moody's Economy.Com, Philadelphia,
PA............................................................. 22
Kevin A. Hassett, Senior Fellow and Director of Economic Policy,
American Enterprise Institute, Washington, DC.................. 24
Submissions for the Record
Prepared statement of Representative Carolyn B. Maloney, Chair... 52
Prepared statement of Senator Sam Brownback...................... 52
Prepared statement of J. Steven Landefeld........................ 53
Prepared statement of Representative Michael C. Burgess, M.D..... 55
Letter from Representative Michael C. Burgess, M.D. to Karen
Dynan, Kevin A. Hassett, Simon Johnson, J. Steven Landefeld,
and Mark Zandi................................................. 56
Prepared statement of Karen E. Dynan............................. 61
Prepared statement of Simon Johnson.............................. 66
Prepared statement of Mark Zandi................................. 76
Prepared statement of Kevin A. Hassett........................... 93
Letter from to Senator Amy Klobuchar to Karen Dynan, Kevin A.
Hassett, Simon Johnson, J. Steven Landefeld, and Mark Zandi.... 117
Response from J. Steven Landefeld to Senator Amy Klobuchar....... 119
Responses from Mark Zandi to Senator Amy Klobuchar............... 121
THE IMPACT OF THE RECOVERY ACT
ON ECONOMIC GROWTH
----------
THURSDAY, OCTOBER 29, 2009
Congress of the United States,
Joint Economic Committee,
Washington, DC.
The committee met, pursuant to call, at 10:02 a.m., in Room
2237, Rayburn House Office Building, The Honorable Carolyn B.
Maloney (Chair) presiding.
Representatives present: Maloney, Hinchey, Cummings, Brady,
and Burgess.
Senators present: Brownback.
Staff present: Paul Chen, Gail Cohen, Nan Gibson, Colleen
Healy, Lydia Mashburn, Jeff Schlagenhauf, Ted Boll, and Robert
O'Quinn.
OPENING STATEMENT OF THE HONORABLE CAROLYN B. MALONEY, CHAIR, A
U.S. REPRESENTATIVE FROM NEW YORK
Chair Maloney. The meeting will come to order.
First, I would like to welcome all of the panelists today
and note we have a special delegation visiting with us from
China. They are professors and economic leaders in their
country, and they are part of a State Department leadership
program on economics. So I am delighted that they are joining
us here today.
Today's report from the Bureau of Economic Analysis on
third quarter gross domestic product provides welcome evidence
that the economy is moving from recession to recovery. When the
President took office in January, our economy was on the brink
of an economic disaster, and we were shedding 700,000 jobs a
month. There was no end in sight to the recession that started
in December 2007. The idea that the economy would achieve
positive growth so soon would have surprised many.
Today, it is clear that the economy is moving in the right
direction. GDP rose by 3.5 percent in the third quarter, after
having fallen for an unprecedented four straight quarters. This
is concrete evidence of the wisdom of the Recovery Act and the
positive effect it has had on the economy in just 8 short
months.
Last week, Dr. Christina Romer, the President's Chair of
the Council of Economic Advisers, presented us with compelling
evidence that the economy is rebounding largely because of the
Recovery Act. She testified that the Recovery Act added between
3 and 4 percentage points to economic growth in the third
quarter, far beyond what the opponents of the Recovery Act
thought possible.
Another piece of welcome news is that personal consumption
grew by 3.4 percent in the third quarter, largely due to
actions taken by Congress and the Administration. We are
finally seeing signs that consumers are spending more, which
could spur businesses to hire more workers to meet renewed
demand for their goods and services.
I expect that legislation that I worked tirelessly on to
end the most abusive practices of the credit card companies,
the Credit Card Holders' Bill of Rights, which Congress passed
on an overwhelming bipartisan basis, will help increase
consumers' demand for credit and encourage creditworthy
borrowers to spend.
The Financial Services Committee recently passed a bill I
also introduced to speed up the implementation date so that
these measures would go into effect on December 1st.
Despite significant legislative accomplishments that
brought us from economic downfall, I believe we still have a
long way to go before the economy fully recovers. The most
pressing economic issue for the nation is job creation. The
stimulus has helped Americans in need weather the storm, but we
must do more to get people back to work. I look forward to the
ideas that our distinguished witnesses have about translating
our economic growth into job growth and their suggestions about
any additional measures Congress can take to spur businesses to
create more jobs.
One group that I am particularly concerned about is the
long-term unemployed. The longer someone stays unemployed, the
harder it is for them to find work.
The long-term unemployed are stuck between a rock and a
hard place. First, they are suffering now, which is why the
House has already passed legislation expanding unemployment
insurance; and I am optimistic that it will soon pass in the
Senate. Second, the long-term jobless, those who have been
unemployed for 6 months or more, may suffer in the future. Even
when the economy recovers, workers who have been unemployed for
a long time may no longer have the skills necessary to be
competitive in the workforce. We must come up with creative
ways of helping the long-term unemployed maintain their skills
or develop new skills so that once we get back on track and
start creating jobs they will not be left behind.
I thank our distinguished panel of witnesses for their
testimony; and I look forward to hearing their thoughts on the
most important issues we face, sustaining our economic progress
and creating jobs for the American people.
[The prepared statement of Representative Maloney appears
in the Submissions for the Record on page 52.]
Chair Maloney. I now recognize 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 Dr. Landefeld and other
witnesses before the committee this morning.
In its preliminary report released today, the Bureau of
Economic Analysis estimates America's real gross domestic
product grew at an annualized rate of 3.5 percent during the
third quarter of this year. This is good economic news after
three quarters of contraction and is directly attributable to
the unprecedented $1.3 trillion injection of liquidity by the
Federal Reserve Board into the U.S. economy. And it should be
noted that most of the growth this quarter is attributable to
one-time events, the Cash for Clunkers program and the end of
inventory liquidation.
While some may promote the stimulus as the savior of the
economy, it is a claim only the Balloon Boy's dad would make.
Since the American Recovery and Reinvestment Act was signed
into law, 2.7 million payroll jobs have been lost, the
unemployment rate is far above White House promises, and 49 of
50 States have fewer jobs.
The size of the much-touted stimulus is minor when compared
to the massive injection by the Fed. And last week's honest
admission by the Chairwoman of the President's Council of
Economic Advisers that the stimulus will likely be contributing
little to further economic growth by mid-2010 only confirms the
critics were right. The stimulus is too slow, too wasteful, and
too unfocused on jobs.
Even with today's positive news, this is no time to be
conducting an end zone dance. Some economists may say the
recession is over, but most American families disagree. A
jobless recovery is no recovery. In fact, we may well be facing
a ``job loss'' recovery, as UCLA economist Lee Ohanian recently
warned.
To keep it in perspective, we all hope today's report
signals that the economy has hit bottom, but there is a real
possibility we could bounce along the bottom for some time.
Looking forward, a sustainable recovery will only occur if the
private sector, not the government, is the driver of economic
growth.
Unfortunately, each day we hear reports of more and more
American businesses who are delaying key investment decisions--
and the jobs that go with it--due to uncertainty over
Washington's actions on health care, cap-and-trade, burdensome
new regulations, and proposed higher taxes on income, energy,
and investment. Concerns are rife over the growing debt and the
excessive influence of labor unions on the decisions and
policies of this White House and Congress.
Amid this impulsive, government-centric environment, many
CEOs and small business owners will hesitate to risk major sums
of precious capital on projects whose returns could be limited
or nullified altogether by the unpredictable political winds
blowing through Washington on any given day. It is tough enough
to predict the marketplace. Predicting the marketplace in
Washington is overwhelming.
If we want a sustained economic recovery, it is time to let
the market work. In addition to restoring the primacy to the
free market here at home, a sizable and proven opportunity for
economic recovery lies in selling American goods and services
abroad. I would encourage the Obama Administration and Congress
to stop ignoring the one-fifth of the American workforce whose
jobs are tied directly to trade. Instead, I urge Democrats and
Republicans alike to become strong advocates for opening new
markets abroad and giving American companies and workers a
chance to compete and win on a level playing field throughout
the world. A good start is with the potential new customers in
Colombia, Panama, and South Korea.
America is falling behind in the international marketplace.
It is costing us sales, and it is costing us jobs.
As I conclude, let me tell Dr. Landefeld I appreciate the
Bureau's efforts to produce accurate, reliable, and timely
economic data that are more reflective of today's economy. In
many respects, our statistical measures were developed for an
earlier industrial economy, but private service-producing
industries account today for more than 68 percent of our GDP. I
am encouraged by your efforts so far to improve the
measurements of research and development spending and integrate
the R&D satellite account in the calculation of GDP by 2013. I
am interested in your efforts to improve the measurement of
other types of intangible expenditures, such as the development
of new business models, the creation of artistic or literary
originals, and the design of new products and services.
Investments in these nontechnical innovations can also generate
enormous income and wealth.
Turning to international statistics, I would also like to
hear what your Bureau, the Census Bureau, and the Bureau of
Labor Statistics are doing to improve the measurement of trade
and services.
Dr. Landefeld, I look forward to hearing your testimony.
Chair Maloney. The Chair recognizes the ranking minority
member, Senator Brownback.
OPENING STATEMENT OF THE HONORABLE SAM BROWNBACK, RANKING
MINORITY, A U.S. SENATOR FROM KANSAS
Senator Brownback. Thanks, Chairman Maloney. I appreciate
that. And sorry for coming in late.
I want to associate myself with Congressman's Brady's
comments. I think he does a good job of analyzing and putting
forward the information. Looking forward to the presentation,
Doctor, and also the panel afterwards, to hear that.
Before I go on--and I guess she is not in the room--but Nan
Gibson, I understand, is heading over to the Council of
Economic Advisers; and I want to recognize her for years of
contribution. That is quite a move for her, and it is going to
be a loss for the committee overall. She does a great job.
Madam Chairman, I think we need to look at the specifics of
what has taken place, and hopefully with the next panel we can.
Because the world community is yelling at us about our fiscal
policies, saying that, yes, we need to do some of these things
monetary-wise, although I think it is time we start looking at
raising of interest rates, as the Australians have done and
several other countries are looking at as a way of stabilizing
our currency. I think what the Fed has done has been good
overall, but it is time to start sending some signals in the
marketplace to support the dollar, and it will be interesting
to hear people coming up on that.
Also, I am delighted to see the positive economic growth
after having so many quarters of negative growth. But when you
parse it, a good portion of this is auto sales. And I was
supportive of the Cash for Clunkers program because I thought
this is an economic stimulus, not a government stimulus, which
is what I thought we needed. It was also $3 billion instead of
the $780 billion that was in it. And it seems to me we ought to
look at ways to pull back on the things that stimulate the
government and support the things that stimulate the economy as
we move forward to get our fiscal policy under control and to
stimulate the thing we want rather than the thing we can't
afford. And I would hope we could talk some as we move forward
on this, how we can get our spending down and get our economic
activity up, which is what we have got to do at the end of the
day.
I am delighted to be here, look forward to some of the
interaction and the testimony. Thank you, Madam Chairman.
[The prepared statement of Senator Brownback appears in the
Submissions for the Record on page 52.]
Chair Maloney. Thank you, and the Chair recognizes Mr.
Hinchey for 5 minutes.
OPENING STATEMENT OF THE HONORABLE MAURICE D. HINCHEY, A U.S.
REPRESENTATIVE FROM NEW YORK
Representative Hinchey. Well, just briefly, Madam Chairman,
thank you very much.
Dr. Landefeld, I look very much forward to hearing what you
are going to tell us. Because what you are going to say is, of
course, very important in describing the kind of circumstances
that we have to deal with. And we know that this economic
condition that we are dealing with is one of the most severe in
the history of this country. It is just secondary, and
secondary only because of the actions that have been taken to
the collapse of 1929. It is very close to being a deep
recession. So what is being done is very, very important.
No question about it that the Economic Investment and
Recovery Act is entirely significant in what has been taking
place. The economic conditions that we are experiencing would
be far worse if it had not been for that so-called stimulus
bill and the money that is being put out into this economy,
addressing the needs which have not been addressed adequately
for decades. And even though a fraction of that stimulus bill
has only been out there, roughly 25 percent, maybe it is up to
30 percent now, the movement of that bill forward is going to
continue to have significant positive effects.
Some of us believe that that stimulus bill is only about
half the size that it ought to be. There ought to be a lot more
stimulation going on in the context of this economy to deal
with the internal needs. And the main focus of attention has to
be the production of jobs, because it is the working people of
this country that determine the quality of the economy. The
gross domestic product is based upon, to a large extent, the
activities of working Americans, blue and white collar working
Americans. So we are going to continue to do everything that we
can to stimulate this economic circumstance, get it back to
normal, and do so in the context of creating as many jobs as
possible.
And in the context of that also, the efforts that are being
put forward now to stimulate new technology growth,
particularly technology growth that is going to drive this
country toward energy independence. All of these things are
critically important, and this government has to be very
carefully focused on the responsibilities that it has to
upgrade the quality of this economy and primarily upgrade the
quality of the working Americans.
So I thank you very much, Dr. Landefeld, for coming here;
and we very much anticipate what you are going to say.
Thank you, Madam Chairman.
Chair Maloney. Thank you very much.
I would like to introduce Dr. Landefeld. He is the Director
of the Bureau of Economic Analysis. And prior to becoming
Director in 1995, he served in a number of other capacities at
BEA, including Deputy Director and the Associate Director for
International Economics. While at BEA, Dr. Landefeld has led a
number of pioneering statistical and management initiatives
that have been recognized nationally and internationally.
Prior to his arrival at BEA, Dr. Landefeld served as Chief
of Staff for the President's Council of Economic Advisers. He
has authored numerous professional articles and has received
many national and international awards for his work, including
the President's Distinguished Executive Award. He holds a Ph.D.
in economics from the University of Maryland.
Welcome, and we look forward to your testimony. Thank you.
STATEMENT OF J. STEVEN LANDEFELD, DIRECTOR OF THE BUREAU OF
ECONOMIC ANALYSIS, U.S. DEPARTMENT OF COMMERCE, WASHINGTON, DC
Dr. Landefeld. Thank you, Madam Chair, Mr. Brownback, Mr.
Brady, and Mr. Hinchey. Thank you for inviting me to describe
the third quarter gross domestic product and related statistics
that the Bureau of Economic Analysis released this morning.
These advance statistics are, as always, based upon
preliminary source data that will be revised as more complete
and accurate data become available. Tracking an economy that is
changing as rapidly as the U.S. economy is changing right now
is a challenging task, but we are committed to producing
advance estimates that provide an accurate general picture of
economic activity. That picture will become clearer as more
comprehensive source data become available in the months to
come. These early snapshots are designed to provide public and
private decision makers with a reliable early read on the
evolving U.S. economy.
Let me walk you through the details of today's release, and
then I will be happy to answer any questions that you may have.
The advance estimates that we released this morning show
that in the third quarter of 2009, real GDP increased 3.5
percent at an annual rate. In the second quarter, the rate of
decline in real GDP moderated, decreasing 0.7 percent,
following a sharp 6.4 percent decrease in the first quarter of
this year. Real GDP has declined five out of the six quarters
from the fourth quarter of 2007, which NBER has determined was
the start of this recession, to the second quarter of 2009.
As you know, GDP is comprised of many different components.
I want to discuss the highlights of changes in these
components.
In the third quarter, consumer spending, inventory
investment by business, residential investment, exports, and
government spending all rose. These increases were partly
offset by a rise in imports.
The price index for gross domestic purchases, which is the
broadest measure of inflation confronted by consumers,
businesses, and government, increased 1.6 percent, following an
increase of 0.5 percent in the second. After falling for the
first two quarters of this year, energy prices rose sharply in
the third quarter. Excluding food and energy prices, inflation
actually slowed.
Motor vehicles, which show up in all the components of GDP,
from consumer spending to inventories, exports, and imports,
raised real GDP in the third quarter by 1.7 percentage points.
Excluding the effects of motor vehicles, real GDP increased 1.9
percent in the third quarter.
Consumer spending, which accounts for over two-thirds of
GDP, increased 3.4 percent in the third quarter, following a
decrease of 1 percent in the second. Motor vehicle purchases,
spurred by the Cash for Clunkers rebates in July and August,
accounted for a large share of this increase in the quarter,
although real spending on other durable goods, nondurable
goods, and services also rose.
Residential construction rose in the third quarter for the
first increase in 15 quarters, prior to which it had subtracted
almost a full percentage point from GDP growth over that
period.
Business nonresidential fixed investments--investments in
new plants, offices, equipment, and software, that is--fell in
the third quarter but at a slower pace than in the second.
Business spending on durable equipment and software rose in the
third quarter. And the rate of decline in investment in
nonresidential structures also slowed in the third quarter.
Business inventory investment provided a positive
contribution to the change in real GDP, as businesses drew down
their inventories at a slower rate than they had in the second
and first quarters. Therefore, more sales were of goods and
services produced in the third quarter than out of inventories.
Real exports of goods and services increased 15 percent in
the quarter. This is the first increase in real exports in five
quarters. Real imports of goods and services registered an even
larger increase than exports, rising 16 percent in the quarter.
The rise in imports partly reflects the strengthening of GDP,
but spending on imports is subtracted in the computation of GDP
because they do not represent U.S. production.
Turning to spending on goods and services by the Federal
Government, it increased 8 percent in the third quarter,
slowing from an increase of 11 percent in the second. The
slowdown in the rate of Federal spending was accounted for by
defense spending. Spending by State and local governments fell
1 percent in the third quarter, in contrast to an increase of 4
percent in the second.
Turning to the American household, real disposable personal
income, that is personal income less personal taxes adjusted
for inflation, was boosted in the second quarter by provisions
of the American Recovery and Reinvestment Act of 2009. Coming
off the tax reductions and government benefits included in the
Recovery Act, real disposable personal income declined in the
third quarter after increasing in the second. The third quarter
personal savings rate was 3.3 percent, compared to 4.9 percent
in the second.
Since the second panel at this morning's hearings will
address the effects of the Recovery Act, let me conclude by
describing how it is reflected in GDP and the national
accounts. BEA's national accounts include the effects of
Federal outlays and tax cuts included in the Recovery Act, but
because most of the outlays are in the form of tax reductions,
grants to State and local governments, and one-time payments
for retirees, their effects in GDP show up indirectly through
their effects on consumer spending, on State and local
government spending, and residential investment. Thus, BEA's
accounts do not directly identify the portion of GDP
expenditures that is funded by the Recovery Act. That is what
the second panel is going to provide you with.
I would now be glad to answer any questions that you may
have.
[The prepared statement of J. Steven Landefeld appears in
the Submissions for the Record on page 53.]
Chair Maloney. Thank you very much for your testimony.
Can you measure the direct impact of the Recovery Act on
the third quarter of GDP? Can you measure how it contributed to
the 3.5 percent?
Dr. Landefeld. Well, unfortunately, our job as the
producers of the national accounts is to produce estimates of
what did happen. And because most of what was in the Recovery
Act was in the form of things like one-time payments to Social
Security retirees, reductions in taxes, outlays to State and
local governments, certainly, for example, some of those State
and local governments had less sharp cuts than they otherwise
would have, but to know what the impact of that was requires
some kind of economic model which the second panel can tell you
about in terms of what the effect would be. So, to sum up, our
job is to tell you what happened, and the economist's job is to
tell you why it happened.
Chair Maloney. Well, would you be able to point out how
much of the increase in the GDP, when you are telling us what
happened, how much of it is due to increases in consumer
spending or government spending? Is there any way you can track
that?
Dr. Landefeld. Yes. Certainly we are able to tell you, for
example, that consumer spending rose at a rate of 3.5 percent
and that the largest single component of that was the Cash for
Clunkers program, or I should say the increase in auto sales
which were spurred by the July and August Cash for Clunkers
program.
Those are the kinds of things that we can tell you about in
terms of the effect on GDP. What the other factors were and how
much was precisely due to those transfer payments or tax
reductions is difficult to tell without sort of the
counterfactual as to what would have happened to, say, spending
on motor vehicles during the quarter without the Cash for
Clunkers program.
Chair Maloney. You noted that for the first time the
residential building and investment is increasing. Do you think
that that was the home buyer tax credit? Can you tie why that
is happening?
Dr. Landefeld. Well, certainly you would look to that as
one of the factors. Because we had residential investment which
had subtracted half a percentage point from growth in the
second quarter, added half a percentage point to growth in the
third quarter; and that is, as I said in my testimony, the
first time we have seen that happen in 15 quarters. So
presumably those lower interest rates and other factors are at
work there.
Chair Maloney. And what components of GDP contributed the
most to growth this quarter?
Dr. Landefeld. Well, the biggest increase was in the
personal consumption expenditures, which added 2.4 percentage
points to growth of that 3.5 percent growth rate in real GDP.
Other important components included the inventory
investment, slowdown in inventory investment, which added about
a point to real GDP growth. Exports rose, adding 1.5 percentage
points to real GDP growth. And government added about a half a
percentage point to growth.
And, finally, I would note, as I said in my testimony, that
imports rose, which is generally considered a sign of a healthy
U.S. economy. But they are a subtraction, so they subtracted 2
percentage points from real GDP growth.
Chair Maloney. Are changes in U.S. net exports consistent
with growth in Latin America and Asia?
Dr. Landefeld. It is hard to tell in any particular period
what is driving it. Certainly the factors include the dollar,
the growth in other countries, the growth rate in particular
domestic demand. That is, the financial needs of foreign
nations factor into those movements. So it is hard to tell.
Generally, you tend to find during downturns in the economy
the trade deficit tends to improve; and, as we are coming out,
we are seeing a little bit of a change in that. But pinning it
down to Latin America would require I think looking at the
changes in exports and imports from and to Latin America, which
is possible. We would be glad to provide you with that answer
if you would like that.
Chair Maloney. And you said that net imports subtracted
from GDP this quarter. Can you tell us if this is due to the
increase in oil prices or did consumers just consume more?
Dr. Landefeld. Well, that particular figure I cited, which
is a plus 2 percent for--I am sorry, minus 2 percent for
imports, plus 1.5 percentage points for exports, is in real,
that is, inflation-adjusted terms. So we have taken out of that
the increase in oil prices in terms of its effect on the
quantity of oil or barrels of oil. As I said, that is not a
factor in that number except to the extent to which there was a
reaction in terms of domestic demand to consume less as a
result of higher prices in the quarter.
Chair Maloney. And you testified that net exports
contributed to growth this quarter by 1.5 percentage. And what
goods or services contributed the most to this growth?
Dr. Landefeld. I don't have a decomposition of that handy.
Let me see if I can get that for you. I am sorry.
Chair Maloney. Thank you. If you could get that later.
Senator Brownback.
Senator Brownback. Thanks, Madam Chairman.
I wanted to go at this same export area, but I guess you
don't know what areas of exports grew for us?
Dr. Landefeld. Hold on. Thank you.
Senator Brownback. Because that is an impressive increase,
the 14.7 percent on exports.
Dr. Landefeld. I can tell you in terms--actually, I have
gotten some numbers here.
First of all, the increase was pretty widespread in terms
of exports. In terms of the largest increases, industrial
supplies and materials were first, contributing 5 points to
the--5 percentage points to the overall--well, that is the
biggest. Let me put it--it is a little complicated to explain
it in terms of the way the table runs. But industrial supplies
and materials were first. Automobile vehicles, engines, and
parts were second in leading the increase. But virtually all of
the categories showed increases in the quarter.
Senator Brownback. Now, is that--would that be reflective
of a decline in the dollar?
Dr. Landefeld. Having once been head of our international
group, it is very tricky to try to pin quarterly changes in
exports and imports to the dollar. It tends to be more of a
phased type of effect. But certainly that would be one factor
one would expect to be boosting U.S. exports.
Senator Brownback. The rising imports you cited could be
oil. But is that also Cash for Clunkers because of the
stimulation of the auto market and a lot of those were imports?
Dr. Landefeld. Part of that could be, because the
automotive vehicles, engines, and parts was the largest single
category in the rise in imports, followed by industrial
supplies and material, which exclude petroleum. And, actually,
the amount in real terms that petroleum contributed was
relatively small to the increase. But, you know, you have a
question of how much came in that quarter that was sold versus
went into inventories that quarter. So, once again, based on
our data, it would be difficult to tell stimulation associated
with Cash for Clunkers. But that is the largest category.
Senator Brownback. And the Cash for Clunkers, you are
saying without that, growth for the quarter is 1.9 percent.
Dr. Landefeld. Right.
Senator Brownback. So that one is a big impact in that
quarter.
Dr. Landefeld. Yes, it is very big, 1.7 percentage points
of the rise.
Senator Brownback. And you were saying it is hard then to
determine in anything else there of the stimulus program or
other items their impact on the overall quarter. But that one
you cite to as a policy.
Dr. Landefeld. We cite that as one of the factors. We don't
attribute the full increase to that. We cite it as a factor
that helped spur sales, but we don't cross that line, if you
will, to say that was the source.
Senator Brownback. It looks like you are pointing still to
problems in the commercial real estate sector, lack of
investment in offices, plants. That is still problematic.
Dr. Landefeld. Yes, that is still in decline, yes.
Senator Brownback. And you don't track credit, consumer
credit?
Dr. Landefeld. No, the Federal Reserve Board tracks those
as part of their flow of funds and balance sheet statements.
Senator Brownback. It seems to me that is one of the areas
we continue to have a consumer deleveraging, that the credit
continues to decline even though there is lots of money out
there, at least the Fed is putting a lot of money out there.
The lack of use or borrowing within the system is profound,
given the level of money that is out there.
Dr. Landefeld. I think Dr. Dynan on the next panel is an
expert in many of those financial aspects and their impact on
consumer spending and saving behavior.
Senator Brownback. Okay. Thank you.
Thank you, Madam Chairman.
Chair Maloney. Mr. Hinchey.
Representative Hinchey. Thanks, Madam Chairman. Thank you,
Dr. Landefeld.
Could you tell us how you would describe the alteration in
the general economic circumstances over the course of the last
6 months, particularly with regard to consumer spending and
employment?
Dr. Landefeld. Well, first, let me say, in terms of
employment, that is the purview of the Bureau of Labor
Statistics; and it is well-known there is a significant lag
between changes in real GDP, as has been much discussed, and
changes in employment. The last recession we had real GDP
turned up seven quarters before employment turned up there. So
I really can't discuss the employment effect.
Representative Hinchey. You can't talk about the
circumstances of the employment and the alteration of that
employment over the course of the last 6 months?
Dr. Landefeld. No, that is really the purview of the Bureau
of Labor Statistics in terms of trying to describe those
changes.
I can talk about consumption spending. And certainly the
picture, with a 3.4 percent increase in this quarter, is much
improved. You had big decreases in those categories,
particularly in the third and the fourth quarter. A lot of that
has been a function of households' very large loss in net worth
that they have had over time. That has had significant impact
on households, because they had previously relied on capital
gains to fund their increases in net worth. With the collapse
in housing and stock prices, households have embarked on
efforts to rebuild their balance sheets; and, not having
available some of those capital gains they had in the past,
they appear to be doing it much more out of saving out of
current income.
Our saving rate here declined to roughly 1 percent, a low,
from rates of like 7 percent in the mid-1990s to virtually 1
percent or zero recently. It bounced up in the second quarter
partly in response to the increase in personal income
associated with transfers in the Recovery Act to 4.9 percent in
the second quarter. It has come down a bit to 3.3 percent in
the current quarter, which is still low by historical standards
but relative to what we have seen in recent years is quite a
bit higher than what we have seen.
So that is an important factor to be borne in mind in terms
of why consumer spending became so weak, why we are seeing what
we have seen right now, which was basically the flip side of it
is that drop in the saving rate as we saw more consumption and
a little less income in the quarter. It is behind the evolution
of the consumer spending.
As I said, though, the mechanism by which that is going to
affect jobs is something BLS or the next panel can explain to
you. But, in general, what you see is that when the economy
begins to improve, businesses wait to hire until they see a
sustained recovery and an increase in capacity utilization to a
point at which they wish to expand operations.
Representative Hinchey. So if I am hearing you accurately,
the circumstances are more positive in the third quarter than
they were in the second quarter.
Dr. Landefeld. Absolutely, yes.
Representative Hinchey. What about the first quarter?
Dr. Landefeld. The first quarter was a very large decline--
I am sorry, we had a slight increase. I was thinking about the
decrease in GDP. We had a slight increase. Your bigger
decreases were in, actually, in the fourth quarter, where
consumer spending fell 3.1 percent. In the third quarter, where
it fell 3.5 percent, you saw a lot of effect in those two
quarters. So it is certainly much improved since the latter
half of last year.
Representative Hinchey. Just one last question. Do you have
any idea about what congressional actions taken over the course
of the last several months have had the most positive effect on
the economy, or are you unwilling to talk about that?
Dr. Landefeld. It is not in my mission. The Bureau of
Economic Analysis is a statistical agency and doesn't do
policy.
Representative Hinchey. Thank you.
Chair Maloney. Mr. Brady.
Representative Brady. Thank you, Doctor.
There is a concern that--a growing concern not only in the
jobless recovery but a job loss recovery, that we continue to
shed jobs at an alarming rate, that the growth numbers today
are won off a much smaller economic base than it was a year or
so ago in that most of the growth are one-time events or
Federal Government spending that can't be sustained. In the job
creation area, there has been a lot of conjecture and promotion
about the stimulus.
But the Associated Press today said that, after careful
review in looking at the 30,000 jobs the White House has
claimed from contracting through the stimulus, that those job
numbers are significantly overstated. The AP reports that in
some cases the job numbers were 10 times higher than the actual
jobs created. In other cases, one job was counted four times.
And in the case of a Georgia community college, the 280 jobs
that were claimed by the White House, actually none came from
the stimulus.
From the data you have, can you substantiate the claim that
the Obama stimulus bill has created or saved up to 1.1 million
jobs?
Dr. Landefeld. In brief, I think that is a question that
needs to be addressed to the next panel. Because if you want to
think about the difficulty of it, we saw, for example, state
and local spending fall 1 percent in real terms in this
quarter.
Representative Brady. Sure.
Dr. Landefeld. The question is, what would it have been
otherwise? I know my wife is a school teacher in Prince Georges
County, and they were confronting and released a budget with
much larger cuts than they ultimately enacted. And at least the
stated reason was offsets from----
Representative Brady. Can I ask you this? On the data that
you have--we have the numbers today based on one-time events
like cars and inventory, an increase in Federal Government
spending. But when you look at personal income, the driver of
future demand, personal income is down, current disposable
income is down, real disposable income is down 3.4 percent.
Looking forward, can you build a sustainable recovery based on
one-time events like Cash for Clunkers or temporary government
spending? Or are we going to need a private-sector recovery
driven by demand by U.S. consumers?
Dr. Landefeld [continuing]. In terms of the decrease, yes,
indeed, you did see that decrease. But partly what you were
seeing was an increase as a result of those one-time effects,
which began to diminish, although many of them still remain in
the third quarter number. Extension of unemployment benefits
and those kinds of things carries through to further quarters.
Once again, in terms of private versus public sector, that has
to be a question for the second panel.
Representative Brady. If personal income, disposable income
is going down, does demand normally go up at that point?
Dr. Landefeld. My only point was perhaps somewhat similar
to yours, is that that increase you saw and then the following
decrease was essentially coming off that bubble. So if I do
what might be a trend line of growth, it is not clear--you
might not see that decline. I don't know what the
counterfactual is. But I am just saying that part of the reason
for the decline was the one-time increase of $250.
Representative Brady. From an economic standpoint, is
continued decline in personal disposable income troubling?
Dr. Landefeld. Yes.
Representative Brady. All right. Thank you. Yield back.
Chair Maloney. Thank you.
Mr. Cummings.
Representative Cummings. Thank you very much.
Mr. Landefeld, in lay terms, can you explain how the change
in each component of the GDP shows itself to the general
public, especially during a recession?
Dr. Landefeld. Well, I would think the general public
should be heartened by not only the stronger consumer spending,
which as we have discussed earlier was in great part related to
motor vehicles, which was presumably related to the CARS
program, but the news on residential housing probably is good
news to many people in terms of their circumstances.
It is also heartening that businesses have slowed their
rate of running down their rate at which they are running down
their inventories. Because instead of selling out of
inventories, then more tends to come out of production, and
that requires people at some point to produce more products
when you are not having it come out of inventories.
The strengthening of investment also is good news, because
that indicates that businesses are beginning to get back into
expansion of their capacity, which means it has implications
for the labor markets and employment in the future.
Representative Cummings. So you see this as very positive,
this report?
Dr. Landefeld. I think the news today of 3.5 percent
increase and the components in it are hopeful news.
Representative Cummings. During a recession, are there
typical changes to the composition of the GDP that you can
identify?
Dr. Landefeld. Yes. Well, certainly you tend to have--well,
first, as I mentioned in answering one of the earlier
questions, you tend to have some improvement in net exports to
the trade deficit which tends to occur because of weakness in
U.S. and overseas demand and other factors that tend to occur.
You have households do tend to pull back a bit on their
spending, although that is difficult to do when your income is
declining. You have to still spend something on the basics. And
what tends to react very quickly will tend to be your
inventories on the part of businesses, because those are the
buffer stocks, if you will, to changes in demand.
Representative Cummings. And how does the composition of
the GDP compare in this recession versus previous economic
downturns?
Dr. Landefeld. In general--actually, I have a sheet here
which shows the compositional changes. I think consumer
spending is certainly one that tends to stand out, not with all
recessions, because every recession is a little different. But
certainly one of the things we are seeing in this downturn has
been the sharp fall of consumer spending.
For example, in the 2001 recession, you had actually
consumer spending continue to grow. Whereas we have had a
significant decline in consumer spending, which is related to
that phenomena of households having lost a lot in terms of
their investments and their net worth and now having to save
more out of current income to try and rebuild those.
Representative Cummings. And what relationship would the
job loss have to that?
Dr. Landefeld. Well, since consumer spending is two-thirds
of the U.S. economy, it is a very important determiner of what
is going to happen to both the U.S. economy and in turn then
their needs for employment.
Representative Cummings. And has loosening fiscal policy
always been a hallmark of governmental responses to recession?
Dr. Landefeld. You know, I would really rather not comment
on monetary policy. But that is one of the prescriptions, to
increase liquidity.
Representative Cummings. All right. That is okay. That is
okay.
We heard last week from Dr. Romer about the impact of the
Recovery Act on the economy. In her calculations about how much
of the change in GDP can be apportioned to the stimulus, do you
agree with the conclusions of Dr. Romer and the Council of
Economic Advisers?
Dr. Landefeld. As I said earlier, we present the basic data
that the Council of Economic Advisers and others use to attempt
to identify what those grants, tax reductions, and one-time
payments, what their effect will be. We can identify them, we
can tell you where they are in showing up in incomes, but we
can't tell you how much it stimulates demand.
Representative Cummings. Just a moment ago you talked about
the fact that the--I guess you were talking about the Cash for
Clunkers program, and you seemed to be able to do some
relationship analysis with regard to consumer spending. Did I
misunderstand you?
Dr. Landefeld. What I was trying to say--and I may have
been inarticulate in that regard--is that during a quarter when
the Cash for Clunkers was in effect in late July and August, we
saw a very sharp rise in motor vehicle sales. And I can tell
you with precision how much motor vehicles contributed to the
rise in consumer spending and how much the overall contribution
of motor vehicles was to GDP, but exactly how much is a result
of the Cash for Clunkers is something that is for CEA. And I do
believe they did an analysis of how much of the Cash for
Clunkers was a stimulation of demand versus a rearrangement of
demand over time.
Representative Cummings. And from this report is there any
way that we can determine whether these positive numbers are an
anomaly or a true upward trend?
Dr. Landefeld. Again, our job is not prediction, but it is
heartening to see across-the-board improvement in so many
components of GDP in this quarter.
Representative Cummings. I see my time is up. Thank you,
Madam Chair.
Chair Maloney. Thank you so much.
Congressman Burgess.
Representative Burgess. Thank you.
Thank you, Dr. Landefeld, for being here.
I want to stay on that point that Mr. Cummings was raising
a moment ago. Because you said, if I heard you right, that the
3.5 percent increase in GDP--and you talked about the
components within that 3.5 percent, but also Cash for Clunkers
is indeed one of those components, so I guess the anxiety that
we have here on this side of the dais is what happens? There is
no more Cash for Clunkers. Was this the equivalent of pouring
Red Bull into the economy and now we are going to have to come
down from that caffeinated sugar high that we were able to
provide in the summer?
Dr. Landefeld. Well, again, you know, I can't look to the
future. I think it is worth noting that you would still have
had a 1.9 increase in real GDP, which is welcome, is a positive
growth rate, given how long it has been since we had one.
The other thing I think is useful to look into in
considering this is that you did have real spending on durable
goods, other durable goods, nondurable goods, and services also
increased. So that provides some----
Representative Burgess. I don't think there is any
question, and I think you have got it in your testimony, that
the savings rate during the downturn took a--was markedly
different from where it had been before. When you look at
something like a Cash for Clunkers infusion into the economy,
what is ahead, what is next as far as the decisions that people
are likely to make as far as that accumulated money they have
in that savings? Cash for Clunkers obviously was a way to get
them to sort of shake them loose and bring them back into the
marketplace.
You also have to worry about people who perhaps got back
into the marketplace who shouldn't have gotten back into the
marketplace and did we create a subprime loan problem within
the automotive industry that will manifest itself in 6, 8, 12
months time, whenever those notes come due and people have not
gotten employment or are not able to repay those loans.
Dr. Landefeld [continuing]. Again, I am going to defer to
the next panel. I know many of them have looked at out quarters
through 2010 and beyond in terms of the effect of the stimulus
act and other governmental actions in terms of longer-term
effects.
Representative Burgess. Well, let me see then if I can ask
you something that perhaps you can answer.
The analogy that we heard back in 2007, early 2007, in
regards to the Iraq war, we had kind of the competing visions
long hard slog, last throes of the insurgency. So I heard on
one of the news shows this morning that we should be playing
Happy Days Are Here Again, and someone else said maybe those
green shoots are just the weeds growing in the parking lot that
has no cars in it. So what is your concept of the end of the
recession at the Bureau of Economic Analysis? What does
economic recovery really mean to your Bureau?
Dr. Landefeld. First of all, our Bureau doesn't do that.
The National Bureau of Economic Research is the official
arbiter of the end of recessions. In general, though, in terms
of real GDP, it is interpreted as several quarters of sustained
growth in real GDP.
Representative Burgess. So if we see even that 1.7 percent
growth of GDP which could be sustained without Cash for
Clunkers, then as a technical matter the recession is over,
even though 10 percent of our population, or 17 percent of our
population, depending upon who you want to read, is still out
of work.
Dr. Landefeld. Some people would use it, but I think they
would look at it as several sustained quarters of real GDP
growth, not just one.
Representative Burgess. Several sustained quarters being
more than one?
Dr. Landefeld. Yes.
Representative Burgess. Okay. Let me just ask you briefly,
because you have referenced trade and the trade balance in your
testimony. What is the effect of having--we have had several
free trade agreements that are pending but not enacted. Panama
comes to mind. I think North Korea is another one. What is the
effect of having this undone work out there? Is it at this
point hurtful or helpful to our overall recovery?
Dr. Landefeld. I think pinning that to an event in a
particular quarter would be extraordinarily difficult, even if
I were in the business of trying to do so.
Representative Burgess. But over the next year, the effect
on the economy of--would we be helpful if we would pass these
pending free trade agreements? I mean, Congress has sort of
languished on Colombia for many months.
Dr. Landefeld. As an economist, we are all in favor of free
trade.
Representative Burgess. You are in favor of free trade.
Dr. Landefeld. Historical experience and most people in the
postwar era and sources of growth, free trade is part of that.
As to any particular legislation----
Representative Burgess. Let the record show that was an
affirmative answer. Thank you.
[The prepared statement of Michael C. Burgess, M.D. appears
in the Submissions for the Record on page 55.]
[A letter from to Representative Michael C. Burgess, M.D.
to Karen Dynan, Kevin A. Hassett, Simon Johnson, J. Steven
Landefeld, and Mark Zandi appears in the Submissions for the
Record on page 56.]
Chair Maloney. Thank you. I would like to thank you very
much for your work and for your testimony today.
I would now like to introduce our second panel and ask them
to come forward.
First, Dr. Karen Dynan is Vice President and Co-Director of
the Economic Studies Program and the Robert S. Kerr Senior
Fellow at the Brookings Institution, where she focuses on
macroeconomics and household finance issues. She joined the
Brookings Institution in September 2009, after 17 years at the
Federal Reserve Board. She also served as a Senior Economist at
the White House Council of Economic Advisers. She has published
research papers; and they cover a range of issues, including
household consumption and savings decisions, household
financial security, mortgage servicing, and the efforts of
financial innovation on economic vitality. She received her
Ph.D. in economics from Harvard University in 1992.
Dr. Simon Johnson is a Ronald A. Kurtz Professor of
Entrepreneurship at MIT's Sloan School of Management. He is
also a Senior Fellow at the Peterson Institute for
International Economics in Washington, DC; a co-founder of
http://baselinescenario.com, a widely cited Web site on the
global economy; and a member of the Congressional Budget
Office's panel of economic advisers. Mr. Johnson appears
regularly on NPR's Planet Money podcast in the Economist House
Calls feature and is a weekly contributor to the
newyorktimes.com's Economix, and is very active in many ways.
Professor Johnson is an expert on financial and economic
crisis. As an academic and in policy roles and with the private
sector over the past 20 years, he has worked on severely
stressed economic and financial situations around the world. He
received his Ph.D. from MIT.
Dr. Mark Zandi is the Chief Economist and Co-Founder of
Moody's Economy.Com, where he directs the company's research
and consulting activities. Moody's Economy.Com, a division of
Moody's, provides economic research and consulting services to
businesses, governments, and other institutions. His research
interests include macroeconomic, financial, and regional
economics. Recent areas of research include studying the
determinants of mortgage foreclosure and personal bankruptcy,
an analysis of the economic impact of various tax and
government spending policy, and an assessment of the
appropriate policy response to bubbles in asset markets. Dr.
Zandi received his Ph.D. at the University of Pennsylvania.
Welcome.
Dr. Kevin Hassett is the Director of Economic Policy
Studies and a Senior Fellow at the American Enterprise
Institute. His research areas include the U.S. economy, tax
policy, and the stock market. Previously, he was a senior
economist at the Board of Governors of the Federal Reserve
System, a professor at the Graduate School of Business at
Columbia University, and a policy consultant to the Treasury
Department during the George W. Bush and Clinton
Administrations. He also served as a top economic adviser to
the George W. Bush and John McCain Presidential campaigns. He
holds a Ph.D. in economics from the University of Pennsylvania.
I welcome all of you; and, beginning with Dr. Dynan, you
are recognized for 5 minutes. And let's proceed with testimony.
STATEMENT OF KAREN DYNAN, VICE PRESIDENT, CO-DIRECTOR OF THE
ECONOMIC STUDIES PROGRAM AND ROBERT S. KERR SENIOR FELLOW,
BROOKINGS INSTITUTION, WASHINGTON, DC
Dr. Dynan. Chair Maloney, Vice Chairman Schumer, Ranking
Members Brady and Brownback and members of the committee, I
appreciate the opportunity to appear before you today to
discuss the outlook for consumer spending and the broader
economic recovery.
Beginning with the outlook for consumer spending, the
available information suggests that the fundamentals will
support only moderate growth over the next couple of years. One
factor that should restrain consumption will be tepid growth in
households' labor income. Although the rate of decline in
payroll employment has abated in recent months, we are unlikely
to see substantial gains in the near future. If employment and
average hours worked rise only slowly, labor income could
advance rapidly only if compensation per hour rose rapidly.
However, with the unemployment rate at its highest levels since
the early 1980s, compensation is likely to continue to move up
quite sluggishly.
Under current law, consumption will also be restrained by a
significant increase in tax payments over the next few years,
as several key tax provisions expire. The temporary higher
exemption limits for the AMT are scheduled to expire at the end
of 2009. If allowed to do so, this tax will apply to many more
taxpayers. In addition, the 2001 and 2003 tax cuts, along with
the Making Work Pay tax credit, are scheduled to expire by the
end of 2010.
Other forces should damp consumption growth relative to
after-tax income growth. The most powerful would be the massive
declines that we have seen in household wealth. In a recent
study, I estimated that the ratio of nonpension wealth to
income for the median household is now below any levels seen
during the past quarter century. This should induce households
to reduce their consumption and increase their saving in order
to rebuild their wealth.
Statistical studies suggest that one fewer dollar of wealth
leads to a permanent decline in the level of household
consumption of about three to five cents, with the effect
occurring gradually over a few years. Based on these results,
declines in wealth should damp consumption growth this year by
between 2 and 3.5 percentage points and hold down next year's
consumption growth by between half and 1 percentage point.
Consumption will probably also be held down by greater
precautionary saving, as the severe recession may have led
households to revise upward the amount of risk they see in
their economic environment. For some households, the
precautionary response will take the form of reduced borrowing.
Borrowing should also be crimped by a more restrictive supply
of credit, as lenders see higher risk in lending to households
and regulatory actions restrict lending.
All told, I expect that consumer spending will move up at a
modest pace in coming quarters. Moreover, none of the other
major components of private demand seem poised for a sharp
recovery.
In the housing sector, a strong rebound in construction is
unlikely. The stock of unsold new homes remains high, and
housing demand will be damped by the weak financial situations
of many households and tight mortgage lending for people not
qualified for government-supported loans.
Moreover, the sharp rise that we have seen in foreclosures
poses a downside risk to this already weak housing outlook.
Although the rate at which lenders initiate foreclosures may
ease with improving economic conditions and new foreclosure
prevention programs, the rate at which distressed properties
are coming to market is still building.
In addition, neither business investment in equipment and
structures nor net exports are poised to contribute
significantly to the near-term recovery. Thus, I share what
seems to be the consensus view that we are not likely to see
the rapid snapback in activity that has followed many previous
recessions.
As a consequence, many analysts are exploring policy
actions that might spur demand. Pushing back the date at which
the personal tax provisions expire would provide more support
for consumer spending. However, it is imperative that
policymakers form a plan to bring revenues back in line with
spending over the longer run.
Among more targeted policy changes, additional aid to State
and local governments would reduce the need for cutbacks in
employment by those governments. Even if one thinks that State
governments should restrain their activities over time, the
abrupt cutbacks forced by falling tax revenue in this recession
have not served the broader economy well.
Another way to encourage job creation is to offer tax
credit for firms that hire new workers. Designing effective tax
incentives for hiring is difficult, though, as a tax credit for
all job creation tends to distribute money to many firms that
would have done the same hiring anyway.
There are several possibilities that would help households
who have lost their jobs sustain their spending and thereby
bolster the overall recovery. First is extending unemployment
insurance for those who are scheduled to exhaust their benefits
by the end of this year. Second would be temporary assistance
for meeting the mortgage obligations of laid-off workers. This
would help support their spending and, by making mortgage
defaults less likely, reduce the downside risks to the housing
outlook.
Another way to support the housing market would be to
extend the first-time home buyer tax credit, which is scheduled
to expire on December 1st. This would spur some new home sales,
but it might be a costly way to accomplish this goal, as most
of the home buyers who would receive the credit would probably
have bought homes without it.
Thank you very much.
[The prepared statement of Karen Dynan appears in the
Submissions for the Record on page 61.]
Chair Maloney. Thank you very much.
Dr. Johnson.
STATEMENT OF SIMON JOHNSON, RONALD A. KURTZ PROFESSOR OF
ENTREPRENEURSHIP, MIT'S SLOAN SCHOOL OF MANAGEMENT, SENIOR
FELLOW, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS,
CAMBRIDGE, MA, AND WASHINGTON, DC
Dr. Johnson. Thank you.
Until August of last year, I was the Chief Economist at the
International Monetary Fund; and I would like to put my remarks
in a cross-country comparative perspective. I would like to
speak specifically about the Recovery Act and then very briefly
make the comparison with Japan, its experience in the 1990s,
which many people think is relevant to the United States today,
and conclude by talking about the adjustment process in the
United States and how we are doing in that regard.
So on the fiscal points, first of all, I would say that I
am usually a skeptic with regard to fiscal policy. I think
discretionary fiscal policy earned a bad reputation for good
reason in most industrialized countries; and I share the view
and the IMF shared the view that, until about 2007, this was
not a good way to respond to impending recession.
However, I think that circumstances were very different in
2008 and the beginning of this year. We were facing an
extremely severe financial crisis.
I think Mr. Brady made very good points about the actions
of the Federal Reserve in counteracting the crisis. But it is
important when you face a major disaster--remember, it is a
global financial disaster that we are looking at--to also react
with discretionary expansional fiscal policy. Particularly in
the United States, there are automatic stabilizers. The
increase in payments to people who lose their jobs and the
reduction in taxes are weaker than in almost any other
industrialized country. So I think the Recovery Act was well
designed.
And as you may recall, I testified before this committee
about this time last year in favor of a major fiscal stimulus;
and I think that it had a positive effect in terms of reducing
the job losses, in terms of sustaining confidence, which has
obviously been shaken very badly, as we just heard.
And I would emphasize in terms of its global impact. You
must remember at the G-20 summit in April, President Obama and
his Treasury team were able to take a leadership role and were
able to corral support from across the world--G-20 represents
90 percent of world GDP--in favor of supportive fiscal policy
and as well support for the IMF and other measures that have
turned out to be very timely and appropriate.
Having said this, I would stress I am not in favor of two
more stimulus. I think Chairman Maloney put her finger on the
key problem we face right now, which is jobs. I think output is
actually going to recover faster than the consensus. Again, the
experience from many crises across many different kinds of
countries is when you go down sharply you can come back
sharply. This is not going to be one of the fastest recoveries
on record, for sure. But the key issue is going to be the link
between output and jobs, and there I would also strongly
support extension of unemployment insurance.
I think measures to address the problems of long-term
unemployed--Chairwoman Maloney, as you were speaking, I was
thinking we should look more carefully at the experience of
Australia and the United Kingdom, who introduced some serious
innovations in this area. I can share those with your staff. I
didn't put them in my written testimony. I think that is the
key issue.
Further investment in providing skills to people who have
not done well in this country over the last 20 years--they
can't stay up with the modern globalized economy, with
information technology and so on--is very important, even more
important now. These are going be to the long-term unemployed,
and I think supporting community colleges is one way to do that
specifically.
So my second point--my second set of points is about Japan,
and I think it is very important to distinguish and be very
clear on the differences between Japan in 1990 and the United
States today. Now, we both had credit booms and we both
obviously had a massive amount of overborrowing. But in Japan
it was the corporate sector, and in Japan it wasn't associated
with a big current account deficit. They were not spending
beyond their means. They just went crazy with investment.
The Japanese corporate debt at the moment of collapse and
crisis was 200 percent of GDP. And they put that money into
real estate, but they also put it into crazy amounts of
manufacturing capacity. It took them 10 years to work that off.
That is a very different problem from what we are facing,
which is much more about the household sector and an adjustment
at the country level--and I think Senator Brownback said this--
to overspending. There has to be an adjustment process; and the
right way to do this adjustment process, as I think you all
know, is to have a downward movement in consumption, to have a
movement in the real exchange rate, to have the kind of
increase in our exports that we are beginning to see in the
data. And this reorientation of the economy will come with a
fall in our income and then we can get back onto a rapid growth
path.
I think, seen in those terms, our adjustment process is
proceeding well. The Japanese strategy through the course of
the 1990s was to try and buffer themselves against having to
make their kind of adjustment, slightly different situation,
with a repeated fiscal stimulus and very easy monetary policy.
That wasn't a good choice for Japan particularly. They should
have taken the adjustment much more in terms of the balance
sheets of the corporate sector, they should have more
bankruptcies, and they should have more explicit up-front
recapitalization of their banking system.
And the United States I think is in the same boat. We
should make this adjustment, and we are making this adjustment.
I think the Recovery Act should be seen as a large one-time
buffer against this very big financial shock; and, seen in
those terms, it implemented well.
My final points are about what can prevent this adjustment.
What held up Japan and what has prevented other countries from
adjusting appropriately in a timely fashion to this kind of
shock?
And let me take up also Mr. Brady's points about small
business and the importance of an entrepreneurial, private-led
recovery, which I completely believe in. That is the
experience.
The major problem we have right now, major problem Japan
had actually over the past 20 years, major problem we have now
is in the financial sector. We didn't recapitalize the banks
fully. The banks I think have done an enormous amount of
damage--the biggest banks have done a enormous amount of damage
to small banks and to small business, and that problem still
remains. That is a problem that has been building for 20 or 30
years in this country. It can't be fixed in 6 months.
But that is a macroeconomic issue, the imbalances and the
poor incentives and the problems, including around credit
cards. Chairman Maloney, as you said, these are first-order
macroeconomic issues.
So while maintaining the path or the process of
macroeconomic adjustment while allowing the dollar to
depreciate in real effective terms--and here, of course, the
Chinese renminbi is something of an issue which we can come
back to talk about, because that is not helpful, again, in the
global picture. But if we proceed down this path of
macroeconomic adjustment, the major risks we face in the future
are going to come out of the financial sector.
Thank you.
[The prepared statement of Simon Johnson appears in the
Submissions for the Record on page 66.]
Chair Maloney. Thank you. Dr. Zandi.
STATEMENT OF MARK ZANDI, CHIEF ECONOMIST, MOODY'S ECONOMY.COM,
PHILADELPHIA, PA
Dr. Zandi. Thank you for the opportunity to be here, Madam
Chairwoman and the rest of the committee. My remarks are my own
and not that of the Moody's Corporation. These are my views.
I would like to make three points in my remarks.
First, the recession is over. The great recession is over,
and the recovery has begun, and that is largely due to the
monetary and fiscal stimulus that has been provided to the
economy.
I don't think it is any accident that the recession has
ended at the same time that the stimulus provided the maximum
benefit to the economy. My estimate is that the stimulus
package that was passed in February has contributed somewhere
between 3 and 4 percentage points to growth, which would
suggest that, without that stimulus, the economy would still be
in negative territory, still contracting.
In terms of jobs, I do think it has resulted in over a
million additional jobs. The number of jobs in the economy
would be a million less than is currently in the economy if not
for that stimulus. In my view, the most efficacious aspects of
the stimulus have been the aid to unemployed workers and the
aid to State government. That has gotten into the economy very
rapidly and has forestalled very significant cuts in spending,
government programs, and forestalled tax increases, which would
have been very debilitating at this time.
The other aspects of the stimulus, including the first-time
home buyers' tax credit, Cash for Clunkers, also very
important. But the UI and State government help, the most
important things. So that is point number one.
Point number two, the recovery that we are now in will be
tentative and fragile through all of 2010. Unemployment will
continue to rise. It will probably hit 10 percent when we will
get that report next week. It will be in the double digits all
of next year.
The recovery has a number of very significant head winds.
Let me just name a few of them.
First, hiring. All the improvement in the job market--and
there has been improvement in the sense that the job losses are
abating--all of that is due to fewer layoffs. There is no
hiring. The reasons for that are numerous, but let me just
mention two.
First is a lack of credit, particularly for small business.
They rely on credit cards and small banks, and they are not
getting credit. And second is confidence. Businesses have been
put through the proverbial wringer, and they experienced life-
threatening events 6, 9, 12 months ago, and it is going to take
a while before they feel comfortable going out and hiring. So
hiring is a problem.
Second, the foreclosure crisis. It continues unabated. This
suggests that house prices, which have stabilized this summer,
are going to fall again beginning next year. Nothing works well
in our economy if house prices are falling. It is a corrosive
on household wealth. No bank is going to extend credit freely
as long as house prices are falling.
Third, commercial real estate. That is a really substantive
problem. Prices have fallen even more in commercial real estate
than in housing. You mix that with a lack of liquidity, the
only lenders are a few life companies, and the fact that many
mortgage loans are coming due, we are going to have many
commercial loan defaults. That is, of course, going to hurt
commercial construction, but it also hurts many of the small
banks that have very large commercial loan portfolios. And that
is another reason why they are not extending credit to small
business, which is key to the job machine.
And then, finally, State and local government, they did
receive help. It has been very important, as I mentioned, but
their fiscal year 2011 budgets are going to be just as bad. Tax
revenues continue to plummet. If they don't get more help, they
have got a very large problem. They are going to have to cut
programs, jobs, and raise taxes beginning this time next year.
So, in my view, I think we will avoid falling back into a
recession, but the risks of recession are uncomfortably high.
And if we fall back into a recession, that would be
particularly worrisome. It is not going to be easy to get out
of it. We have got a zero percent interest rate, and we have
got a $1.4 trillion deficit. We just cannot go back into
recession.
Finally, point number three, what should policymakers do
about this? Let me say two things.
First, I think at the very least you should extend a number
of the provisions in the ARRA that are expiring this year. That
would include the aid to unemployed workers. That is a slam
dunk. The higher conforming loan limits, that should be
extended. The first-time home buyer tax credit, that should be
extended. Bonus depreciation, net loss carryback, that should
be extended; and net loss carryback should be expanded. SBA
lending, some provisions in the ARRA that made it a little bit
easier will expire at the end of this year. They should be
extended, and the SBA program should be adjusted. A couple of
things you could do to make it much more effective.
Then, finally, the second thing I would do is, if we got
into next year and the economy is not engaging, if we don't get
the more sanguine view that Dr. Johnson expressed and the
economy is not engaging, I would consider a number of different
things. Certainly aid to state and local government, very, very
important. Work share programs, I think that is a very
innovative way of helping to make the UI program more
effective. And I would also consider expanding foreclosure
mitigation. The current loan modification plan is not working
well. And then, finally, perhaps a payroll tax holiday with a
job tax credit twist. I think that would also be very helpful.
But I would wait until we got into next year before considering
that, given the costs that are involved.
Thank you very much.
[The prepared statement of Mark Zandi appears in the
Submissions for the Record on page 76.]
Chair Maloney. Thank you for sharing your testimony.
Dr. Hassett.
STATEMENT OF KEVIN A. HASSETT, SENIOR FELLOW AND DIRECTOR OF
ECONOMIC POLICY, AMERICAN ENTERPRISE INSTITUTE, WASHINGTON, DC
Dr. Hassett. Thank you, Madam Chairman, Ranking Members
Brady and Brownback and members of the committee.
My written testimony is rather long. You might be able to
save yourself a trip to the gym if you carry it around for the
rest of the day. I will try to go through the highlights as
quickly as possible.
The first part of my testimony concurred with the analysis
of Dr. Zandi. I discuss time series models of recessions that
have proven very effective in the past at dating them in a
manner consistent with the judgments ultimately given by the
National Bureau of Economic Research. I think the best of those
is by a macroeconomist at the University of California named
Marcelle Chauvet, and she has informed me that the recession
ended in July and maybe August. But that is I think a call that
one could have a great deal of confidence in.
I think that as we look forward that means that we can
expect many quarters of positive growth, but we should be
anxious because of the concerns raised by my fellow panelists
that that growth will be disappointing. Accordingly, I think
that we need to think about, well, what are we going to do now?
With that in mind, I think looking back at the stimulus and
thinking about how well it worked is very important because we
might well find ourselves in a circumstance where we want to
reconsider those issues.
Now, most of the advocacy for stimulus involves simulations
from computer models. The empirical literature that looks at
what actually happens and data is very mixed. There is a wide
range of multiplier estimates. Countries that have big deficits
can sometimes actually achieve stimulus through non-Keynesian
policies. There is big literature on this that actually reduced
the debt with tax increases and reductions of government
spending. And higher government spending actually reduces
growth in the long run as well, which is a concern as we think
about what we are going to do next.
I think these disappointing results are consistent with the
balance of the literature, as summarized in my written
testimony; and they are rather bad news for the U.S.
Government--debt has expanded so rapidly during the government
bailout that one might expect the high debt results to apply
for us. And, in that case, the short-run positive effects that
we saw last year might be minimal and might even be worse going
forward.
Now, the large expansion of government spending also
creates something of a problem for policymakers. I guess that
is you. If you unwind the spending all at once, then you may
even optimistically only postpone some subset of the recession
from this year. If the government spending spike is not
unwound, then the long-run negative growth effects of large
government kick in.
Now the consumption stimulus--and now my remarks focus on
the part of my testimony regarding mailing checks to people--is
viewed by proponents as a macroeconomic success if it leads to
a short-run increase in consumption. A neoclassical skeptic
would emphasize that the increased saving or reduced
consumption by those who anticipate future taxes might offset
the increased consumption by Keynesian consumers who rush out
to spend the checks that we mailed them last spring.
I have two figures in my testimony that shed some light on
how we might think about the scale of those effects which might
cast some doubt on assertions of big-growth effects in the most
recent quarter.
Figure one suggests that--and there I assume that the
deficits that we have received in 2009 and 2010 are ultimately
going to have to be paid for by future taxes, which are
increased according to the current distribution of taxes. And
so, you know, if you pay this percent--an income group that
pays this percent right now, we are going to expect that in the
future we will get that much of the current deficit from them--
and you can see that the future tax increases associated with
deficits, which many occur because of the economy, not because
of explicit policies that you have made, those tax increases
are very large relative to the stimulus checks. That suggests
that people who are really rational and thinking ahead would
rationally save a lot of money this year in anticipation of
future tax hikes.
And it might be that, even though we see that low-income
people who of necessity consume the money we mailed them
because they need it right now, might consume more right now
because of the stimulus checks over the previous quarter, that
high-income people might save more, and that might offset it.
The second chart in my testimony, which is taken from an
analysis by John Taylor of Stanford and Hoover, suggests that
the macroeconomic data lead one to conclude that these factors
might be present and should make us a little cautious about
what has happened when we mailed checks in the past and what
would happen were we to do so again.
For policy alternatives, the biggest problem with the
approach that we have taken so far is that we have taken fixing
things off the table this year. We have focused our policy
efforts on temporary measures. Yet our Tax Code is so broken
that there are ample opportunities to improve the current
economy without creating hangover effects associated with the
removal of Keynesian stimulus. These policies would make
permanent changes to provide an immediate boost to the economy
and would run a smaller risk of creating a hangover.
And I give two examples in my testimony that I think
probably don't pass any reasonable partisan test of being
associated with either party. I think probably everybody in
both parties might oppose both of them. But I give an example
of the kind of thing that I think Congress should be thinking
about.
First, the indexing formula for Social Security could be
changed from wages to prices. A recent analysis by the Social
Security Administration found that over a 75-year time horizon
this would improve the long-run budget condition by $4.5
trillion in present value. If some fraction of that revenue
were recycled, say through a reduction in the payroll tax, as
suggested by Mr. Zandi, then one might see both a consumption
increase and a positive fiscal consolidation effect that would
lead us to a higher growth trajectory.
Alternatively, the government--this is the second policy
that I speculate about in my written testimony--the government
could announce today that the corporate tax rate would
gradually be reduced from 35 percent to 25 percent, while again
covering any expected revenue loss from that with the
introduction of a value-added tax that did not take effect for
a number of years. The declining corporate tax would act like
an investment tax credit today, giving investors an incentive
to pull their deductions forward into the high-tax period. The
future-value-added tax would induce individuals to consume
today before the consumption is taxed in the future. In
addition, the move toward a consumption tax would improve the
long-run efficiency and vitality in the economy and help fix
the deficit problem.
Such policies would, the literature suggests, stand a much
better chance of providing significant and sustained growth
than those that have already been adopted. To the extent that
the high level of unemployment motivates additional policies, I
would urge you to consider permanent changes that can have a
big kick now.
[The prepared statement of Kevin A. Hassett appears in the
Submissions for the Record on page 93.]
Chair Maloney. Thank you so much.
We have been called to a vote on three different items, but
I would quickly like to ask, since many of you noted that job
creation is a major challenge now in our economy and in our
country, what components of GDP should we focus on as far as
job creation is concerned? Anyone to comment. What components
of GDP?
Dr. Hassett. He is the leading expert on this.
Dr. Zandi. Well, I think the key thing is probably business
investment would be the thing to watch. Obviously, businesses
have to make decisions about hiring and investment; and if they
are investing and if investment spending is picking up, that
would be suggestive of better credit conditions, of more
confidence, that they feel like they can go out and expand. And
that would also mean that they are probably also going to begin
to hire.
Now, on that front, we have got some reasonably good news.
Investment spending in the third quarter in equipment and
software turned positive after just completely cratering late
last year and early this. So that would suggest that we are
moving in the right direction. But the increases are very small
and also suggestive of relatively modest hiring going forward.
If I were going to pick a component of GDP to focus on to gauge
the direction of hiring, it would be equipment and software
investment.
Chair Maloney. And what can Congress do to spur that?
Dr. Zandi. I would suggest two things. I am sorry. Two
things. One is, I would provide more incentive to the SBA
program, because this is a way to get credit to small
businesses that are a key to the job engine.
Just one quick statistic. Establishments that employ fewer
than 20 employees account for 25 percent of all of the jobs in
our economy, but they accounted for 40 percent of all the job
creation in the last economic expansion. The key impediment to
hiring and investment among small businesses is the lack of
credit. The SBA program could play a big role.
Three suggestions: One, increase the size of the maximum
SBA loan, which the President has already proposed, a very good
idea. Second, increase the loan guarantee in the current ARRA.
The loan guarantee is 90 percent. I would raise that to 95 or
97.5 percent, temporarily. And then third, and most
importantly, there is an interest rate cap on the rate that the
small business lenders can provide. It is 275 basis points over
prime. That means that the current maximum loan rate is 6
percent or below. No one is going to make a loan at 6 percent
in this credit environment. You should increase that. You
should double that. And if you did those three things, credit
would start to flow more freely to small business; and that
would be very, very helpful.
Chair Maloney. Thank you.
We have 8 minutes left in our votes, so we are going to
have to--Dr. Johnson--but then we are going to adjourn to go
vote. Why don't you stay? Absolutely. Yes, but Dr. Johnson has
a point to make, and I think you should continue.
Senator Brownback. I won't do anything untoward.
Chair Maloney. Pardon me?
Dr. Johnson. Just to answer your question on sectors, I
think the export sector is really critical. Part of the
counterpart of the statement that we have been overspending, we
are living beyond our means is we have been unable to compete,
unable to generate enough revenue from exports to pay for what
we import. That is an adjustment that we are going to have to
make.
And I think the key longer term issue there is skills. We
know how the U.S. stacks up in terms of education, not of the
most educated people in our society, we do well in that
dimension, but in terms of the least educated 50 percent and in
terms of the practical skills they have. Do they have
technology skills, as Mr. Hinchey said?
There is a bright future for this country in terms of
technology generation. But who are the workers? Who is going to
use that? You need to have competitive workers with good
skills. Otherwise, those jobs are going to go straight
offshore.
Chair Maloney. Thank you.
Mr. Brownback is recognized.
Representative Hinchey. I just wanted to ask a brief
question of Dr. Dynan. What do you think that we might do to
improve the economic benefits of working class people across
this country? Because, as we know, they drive about two-thirds
of the GDP. So the main focus of our attention should be on the
middle-income working class people. What do you think the most
effective thing is that we could do to upgrade the quality of
their economy and the quality of their lives and, therefore,
the quality of the economy?
Dr. Dynan. As I said in my remarks, I think that
extending--as Mark just said, I think that extending UI
benefits is a slam dunk. I think that is very important to
support the spending of those that have lost their jobs.
And I think also, on the topic of people that have lost
their jobs, I think that current foreclosure prevention
programs aren't doing a very good job of helping homeowners who
are struggling to make their mortgage payments because they
have lost their job and have experienced a sharp decline in
income. So I would offer assistance to those households to help
them make their mortgage payments until they could find another
job.
Representative Hinchey. Mr. Johnson.
Dr. Johnson. I think it is about skills. The reason median
income hasn't gone up much--perhaps it has even declined over
the past 20 years in this country--is because the least
educated people, people who haven't finished high school or
just finished high school with barely any college, are not
competitive in the world economy; and they are not going to
become competitive unless they have opportunities to increase
their skills. And that is what you have got to focus on. The
community colleges are the most obvious place to help these
people, but there are other ways forward as well.
Representative Hinchey. Thanks very much.
Senator Brownback [presiding]. Thank you.
You are all mine. I have been looking forward to this. I
have got a bunch of questions here. So if you guys got a little
bit of time, I have some questions here.
Dr. Johnson, I want to start with you and your testimony,
because you say things it looks like to me that I have been
thinking for some period of time. I wanted to ask and see if I
am getting this right.
The Chinese exchange rate has been pegged to the U.S.
dollar, effectively giving them the advantage to come into this
marketplace without what would normally happen in a situation
like what we had. We had this huge trade imbalance, and their
currency should appreciate versus ours depreciating. Is it time
to take the club out to get that exchange rate down? And,
clearly, it should be different in these two economies and that
that would help get that imbalance in our trade imbalance down.
But absent taking the club out--we have jawboned it for a long
time. Is it time to take the club out on that?
Dr. Johnson. I would hesitate to use the word ``club'' in
this context. There are mechanisms. It is a huge problem. It is
a huge problem. It has been with us a while. It has been put on
the back burner by this Administration. I think that is a
mistake.
Senator Brownback. For credit purposes, I take, more than
anything.
Dr. Johnson. Well, I think for purposes of not wanting to
destabilize the global system and not wanting to have a big
trade rally. When you say take the ``club'' out, the key issue
is what exactly are you going to do. If you threaten trade
sanctions unilaterally, that is going to raise the issue of
retaliation. If you go through the IMF, which is what the
previous Administration tried to do, it is a sensible approach,
but it didn't work. The IMF has completely been unable----
Senator Brownback. What should we do?
Dr. Johnson [continuing]. I think the WTO should have the
responsibility for overseeing exchange issues just like it does
for unfair trade practices.
Senator Brownback. They don't have that now.
Dr. Johnson. They do not currently at this time, that is
right. But they could get it. It has to be negotiated. Many
other countries other than ourselves are very uncomfortable
with the Chinese exchange rate arrangement, particularly now as
the dollar depreciates. As you said, the renminbi should be
appreciating. Against the dollar it is pegged so it doesn't
move against the dollar, and against the euro or other major
currencies it is actually depreciating, which makes no sense.
The Chinese foreign exchange reserves, which passed 2
trillion this year, are on their way to 3 trillion, probably
the middle of next year. That is 20 percent of the U.S.
economy.
Senator Brownback. It seems this is a real mercantilist
strategy on the Chinese part, that they stimulate and keep
their economy going. We get the cheap goods, but that doesn't
work on a long-term basis for us. Do any of the rest of you
have another strategy or a tool here, absent us just using the
blunt instruments that we have?
Dr. Johnson. Well, the WTO is not a blunt instrument. The
WTO is a very well-calibrated instrument with a lot of
legitimacy that we use for----
Senator Brownback. I understand. But we don't have--we
can't take a currency case to the WTO.
Dr. Johnson [continuing]. No. I know this Administration
could launch an initiative to bring currency cases under the
auspices of the WTO. As I say, lots of other countries around
the would support us in that initiative. That is a much safer,
much better way to proceed than unilateral----
Senator Brownback. I thought you said they didn't have the
authority, the WTO didn't have the authority to bring a
currency case.
Dr. Johnson [continuing]. They have to get that authority
from the membership. I am saying that is a doable thing. That
is a sensible course for us to take up.
Senator Brownback. Nobody else has a better idea?
Dr. Zandi. I take a different perspective. I think you are
correct that the yuan is significantly undervalued, probably 25
to 30 percent undervalued vis-a-vis the dollar, and that it
would be appropriate for the yuan to appreciate in value. But I
think the most desirable way for that to occur is over time. So
3, 5 percent appreciation over time.
Senator Brownback. Any WTO case would take time.
Dr. Zandi. In fact, beginning in 2005, the Chinese started
to allow their currency to appreciate.
Senator Brownback. Pretty modest relative to the imbalance.
Dr. Zandi. Three to 5 percent every year. I think that
would be the most appropriate path going forward. If they stick
to that, I think that is what we should plan for.
Senator Brownback. Dr. Johnson, I want to ask you on a
separate issue here. You put in your testimony that the largest
banks need to be broken up. Excess risk-taking should be taxed
explicitly. I couldn't agree more with it. The Federal Reserve
Chairman out of Kansas City, Tom Hoenig, has testified in front
of this panel and he has a proposal that we are working with
now to get in statutory form to allow a process put in place to
move away from the too big to fail policy.
Have you looked at any of the outlines, what he or others
have put forward on this too big to fail?
Dr. Johnson. I may not be aware of his latest proposal. I
certainly talked to him earlier this year. I testified before
the committee at the same time. We were absolutely on the same
page. It has very much a bipartisan issue. The too big to fail
banks are a major risk to our current economic situation, and
there are various mechanisms that you can consider how to
implement it. I am very open to proposals. I think we should be
flexible and try them all. It is a very serious problem.
Senator Brownback. Is there any disagreement in the panel
on this?
Dr. Zandi. I disagree in the sense that I think it makes no
sense to try to work to break up large banks, that we have to
embrace the fact that we are going to have institutions that
are too large to fail and therefore design policies with that
in mind. I think it is a privilege to be too large to fail
because they are getting a taxpayer benefit, these
institutions, and therefore they should pay for it in the form
of higher capital ratios, more stringent liquidity ratios,
greater regulatory oversight, perhaps even higher deposit
insurance premiums. The mechanism proposed to levy fees on
these institutions, if in fact one of their colleagues fails
and it costs taxpayers money, then all these institutions
should pay for compensation.
Senator Brownback. Dr. Zandi, if you did that, don't you
then push business to these guys? Because you are basically
saying, Now we have an official government policy of too big to
fail, and we are not going to let you fail. And their risk
ratios, I would think, would be different from the level just
below them and certainly several levels below them. It seems
you almost push business to them.
Dr. Zandi. No. First, you have to raise the cost of being
big. So, as you get bigger, there are costs involved. And so
their costs of capital isn't a competitive advantage against
smaller institutions.
Second, don't identify institutions as too big to fail.
Senator Brownback. The marketplace will.
Dr. Zandi. Not necessarily. They are not Fannie Mae and
Freddie Mac. They are not guaranteed by the Federal Government.
Who knows whether a $10 billion bank or a $5 billion bank or a
$15 billion bank is too big to fail? Lehman Brothers was a
small broker-dealer and they were too big to fail.
So I don't think if you identify them before the fact that
the market will figure it out, or at least to the point where
it makes a big difference.
Senator Brownback. Dr. Johnson.
Dr. Johnson. I completely agree with you, Senator
Brownback. In fact this is legislation that is being discussed
today. If you want to go this route of regulating them ex ante
and putting these extra costs on them, the market is going to
see this. If they have a limit on their capital ratio or a hard
leverage ratio, for example, of course you can figure out which
ones are in this too big to fail privilege category.
You can't have it both ways. You can't create a privileged
category and make that secret. The list has to be known. Mervyn
King, the Governor of the Bank of England, spoke to this
directly last week, he said there are two ways forward,
regulate the big guys or break them up. King said regulating
them is not going to work. They are going to always get ahead
of the regulators. They are far too big and powerful and pay
their people a lot of money to do that. You have to break them
up.
Dr. Zandi. You don't have to identify them. As they grow in
size, when they hit certain size benchmarks, they then get
different fees and restrictions imposed on them. So at $5
billion in assets it is one thing, $10 billion, another; $15
billion. It is not like you are saying you passed over some
benchmark and therefore you are too big to fail. You wouldn't
do that.
Senator Brownback. This will be an extended debate, and
several of us are going to try to make sure we have it because
I think we need to have this as an actual debate and an actual
policy issue. I sure tend to look at it that the market will
identify it.
But I appreciate your arguments, and we are going to try to
put this bill forward, the Hoenig bill in the Senate, get a
number of cosponsors if we can on it and try to get policy
debate moving forward.
Dr. Hassett, you talked about permanent changes in the Tax
Code so you don't create the hangover. I like that thought.
Maybe it has the Red Bull analogy; the same way. You juice the
thing then there is a fallback on it. I take it your permanent
changes are suggesting that you favor capital formation and you
discourage consumption, would be the overarching policy move
that you would say in taxes at the Federal level.
Dr. Hassett. That is the right objective in the long run.
In the near term you can achieve that long-run objective if you
do something that causes people to transfer future consumption
to today, like putting in a value added tax in the future is
one example. People won't rush out to spend money today, but
ultimately we would have the benefits of a consumption tax,
which would stimulate additional capital formulation.
I think that given the massive imbalance we have right now
we have to take these permanent measures seriously. If when we
had passed the stimulus package we had made this minor
adjustment to the benefit formula that I mentioned in my
testimony for Social Security benefits, then the long-run
fiscal balance of the U.S. would be significantly better and we
would have had a stimulus bill, and one would guess that that
would have made the stimulus bill more effective.
Senator Brownback. Seems to me that that is something we
are going to have to do long term to maintain economic
competitiveness for us, is just to try to stimulate capital
formulation and probably tax more on the consumption side of
the equation.
Do any of you disagree with that policy bent for the U.S.?
I say that partially, too, because we are so consumer driven as
a society and it does not look like to me that is long-term
sustainable, the level of consumerism that we are dependent on.
Dr. Dynan or Dr. Johnson.
Dr. Dynan. I agree with you. I think one component is
personal savings needs to rise. I identified a number of things
in my testimony that are going to cause the personal saving
rate to be substantially higher than it was prior to the
crisis. I think it does put--I think the downside of that is
that it will lead to a more modest recovery. It is going to
take longer to get back to full employment. It is going to
leave----
Senator Brownback. But we will be different when we get
back.
Dr. Dynan [continuing]. Yes. It will be more solid and
sustainable.
Senator Brownback. I guess that is the thing I look at. We
are going to go through pain here. We are going through pain,
but let's get on the other side and show something for it.
Dr. Dynan. I think it will be more solid and sustainable
both at the household level and at the national level.
Senator Brownback. Dr. Johnson.
Dr. Johnson. I agree on the consumer side. I think you have
an increase in the household savings rate, as Dr. Dynan is
saying. The issue at the national level is going to be what
happens to the government saving or dissaving. Here, the big
issue coming is obviously Medicare. The United States is not
unique in this. All industrialized countries face a substantial
fiscal adjustment, between 4 and 8 percentage points of GDP,
assuming you go back to near full employment, in order to
stabilize the public debt levels at 40 to 60 percent, whatever
you think is reasonable in these countries, in the face of
rising health care costs.
The only reason we are a bit more upfront about it in this
country is because the CBO has a more honest accounting
projection of future health care costs than does the European
Union, for various interesting reasons. But if you put those
numbers on a comparable basis, we and the European Union and
all the rest of the OECD are in the same very difficult boat,
and this is about where do you get the revenues to finance that
or what other spending do you cut in order to finance these
commitments that are coming down the road. That is the big deal
breaker on savings and on public finances and on
sustainability.
Dr. Zandi. Can I say I think Dr. Hassett's two suggestions
are fantastic. I think they are wonderful ideas. I think
indexing Social Security to wages as opposed to inflation is an
entirely appropriate thing to do.
Secondly, reducing the corporate tax rate and making that
up through some form of VAT is also an excellent idea. I think
it highlights a very important point, and that is while we are
talking about stimulus and the fact that that does add
temporarily to the near-term budget deficit, it is also very
important for policymakers to have another track for policy,
considering things to do about the long-term fiscal situation.
Because if you are able to credibly address that through these
kind of suggestions, then that will buy you more freedom and
latitude to run near-term budget deficits and try to get this
economy moving.
Senator Brownback. I am not a VAT--I don't like a VAT for
the way it is so hidden. I like taxes to be apparent and people
know I am paying this so they know what the cost to their
government is. I know other people maybe don't look at it that
way. But I can see a lot more tax on the consumption side and
production, particularly us going forward and trying to be a
more productive country and more export-oriented and less maybe
consumption-oriented.
With that, I want to conclude on this one question. The
dollar has been declining. Is it likely to decline over the
next year or so relative to other major currencies, and is that
something that we should be fighting back aggressively against?
Dr. Johnson. I think we probably agree the hardest thing to
predict in economics is exchange rates. They really have a
tendency to go the opposite way from what economists say. My
answer is definitely yes. There is a tendency to depreciate,
given our policy stance and given the fact we are providing
cheap funding to big financial institutions that are allowed to
go off and plow this money into a speculative private equity in
China, for example. We have created a big carry tray out of the
U.S. dollar. That is a downward pressure on the dollar. Of
course, if there are major shocks around the world, any time
there is a disaster, people come into dollars, because we are
the ultimate safe haven. That is why it doesn't quite go
definitely in the direction I am saying, but the economic
dynamics are very much supporting dollar depreciation, and you
shouldn't resist it. The dollar depreciation at this stage is
helpful for us.
Senator Brownback. Do you all agree with that, you
shouldn't resist the dollar depreciation? I don't see anybody
disagreeing. I see a couple of people don't want to be on the
record.
Dr. Zandi. I think so far the dollar decline is what you
would expect, given relative growth rates across the global
economy. There are negatives. We are paying more for oil
because of the fall in the dollar. But as we saw today, it is
helping to lift exports.
Senator Brownback. Looks like to me it is going to help us
a substantial amount on exports over a longer term. My state is
an export state. We are grain, aviation. So you get a cheaper
dollar, our products are cheaper overseas. We generally tend to
do better. But a lot of people really don't like the falling
dollar.
Dr. Zandi. I think what concerns them is they are worried
if the dollar starts to decline in a disorderly way, that would
be symptoms of bigger problems. It would mean interest rates
are rising, that would mean stock prices would be falling. It
is that, I think, concern that this weakening in the dollar
might lead to something more serious, large declines that are
indicative of a broader economic problem.
Senator Brownback. I can see that. It sure looks like to me
we could start to raise interest rates some here and that the
Australians were rewarded for doing that. The Fed fund rate, I
am talking about. To support the dollar. But each of you are
saying we shouldn't resist this fall.
Dr. Johnson. I wouldn't move the Federal funds rate to
support the dollar. I think the issue is what is happening----
Senator Brownback. The Aussies were rewarded for that.
Dr. Johnson [continuing]. Right, but I am saying I don't
think we should be aiming to support the dollar. I don't think
that is the right policy goal here. The big constraint on
raising the Federal funds rate, and I agree with you, we may
get to the point where that is a good idea, because I am
expecting a stronger recovery than my colleagues here, is that
the banks are not well capitalized. So the recapitalization of
the banks, the strategy being used now is the same strategy
used in the early 1980s when Mr. Volcker was chairman of the
Fed, which is keep short-term interest rates low, allow
recapitalization through the yield curve, which the strategy
can work, but in order to do it you have to keep the yield
curve positively sloped for a number of years--2 years, 3
years, 5 years. If you fear raising interest rates because of
what it will do to your banking system and because of how that
will lead to further failures or further problems, with any
kind of banking system that is an issue. I think that is where
we are on monetary policies right now. That is a very
unfortunate constraint that comes from weakness and the lack of
capital.
Senator Brownback. Are the banks that weak they need us to
provide that yield curve for them to do that?
Dr. Johnson. Absolutely. If you look at the impact of the
discussion around GMAC right now, look at how that has affected
credit default swap spreads, for example, of the major banks,
including Goldman Sachs, including Bank of America. People are
very surprisingly nervous, given the way the world economy is
coming back. The global economy outside the United States and
outside the European Union is very strong right now. People are
extremely worried about the financial system because our banks
don't have that much capital. I know we taught ourselves after
the stress test that everything is well capitalized; don't
worry. Unfortunately, that is not how the market sees it.
Senator Brownback. So the fact that these banks are sitting
on large wads of cash right now, not lending it out, they are
basically playing this yield curve right now and it is a way to
heal and that they just need to sit there and sleep for a
while. Is that what you are recommending to our banks; kind of
like you got the flu, so why don't you just lay and rest and
drink lots of Fed funds for a while?
Dr. Johnson. My recommendation is quite different from
that. It includes breaking them up and includes recapitalizing
them.
Senator Brownback. Effectively, that is what you are
saying, because they are not loaning money. The amount of
credit that they are putting out is pitifully small and we are
all looking at this thing saying, wait a minute, we shot big
wads of money out here. I voted against a bunch of it, but it
happened. I agreed with what the Fed has done, but now you are
basically saying they need to kind of just sit there and play
this Fed fund yield curve.
Dr. Johnson. Remember, as Dr. Dynan said, consumers don't
want to worry so much. That is the counterpart of this increase
in household savings, is they are cutting down on their
borrowing. So in a sense I don't think a bank should be--their
feet should be held to the fire particularly for this. I think
that is coming from the demand side. There are many other
things you should be taking to the banks, including the lack of
the capital, the way they are going back to very high risk
strategies on a low capital base.
Lehman Brothers, the day it failed, according to a
conference call 2 days before they failed, had 11.6 percent
Tier 1 capital. Okay? That is what the major banks in the U.S.
are holding right now. People don't think that is enough
capital, and they are right, given the strategies of these
banks, given the way they are managed, given the fact they are
too big to manage properly, let alone too big to fail.
Dr. Dynan. I will just echo what Simon said. It is true
household credit has been falling quite impressively in the
last few quarters, but it is very difficult to separate the
effect of demand on supplies; very natural when consumer
spending contracts to see a contraction in household borrowing
because they just need less credit to finance their spending.
There are measures that show that banks are less willing to
lend than they were previously. That also is a normal response
to a lot of risk being out there in the economy. With the
unemployment rate close to 10 percent, it is normal for banks
to be less willing to lend.
Senator Brownback. The guy that is kind of new, I wouldn't
put him a rock star, but he is a radio star in the Midwest, is
Dave Ramsey. He has got billboards up in the Kansas City area
that say: Act your wage. And he is all about burning credit
cards and doing things on debit cards and just how it is that
you get your own kind of fiscal house in order.
And people love the guy. They listen to him and say oh,
okay, this is kind of very practical. But you can see people in
their efforts to kind of unwind their credit position that they
are in and just say, okay, I had a near-miss here, or we almost
had this or that. I am kind of scared of this. How do I get
backed away from that credit ledge?
Sure, it is kind of an interesting social phenomenon to
see. And you see the numbers in personal savings rates, and
looks like all the government transfers--we are doing a big
portion of that--are going just to heal personal balance
sheets. Just wise. It doesn't benefit the economy.
Cash for Clunkers, the auto dealers I was talking to were
saying, We had a different person come in that bought in this.
The person that came in generally bought with cash. So it was
somebody that doesn't normally buy new. They usually by
something already partially depreciated because they don't want
to pay the new price. But when they did the calculus on this,
they said, I can do this. So they brought the old Ford Explorer
in and traded it in on a newer one, and the numbers and dollars
worked. And it was a different customer that came in. That is
what they were telling me. I don't know if that is backed up in
the data or not.
You all are kind to be here. This was fun for me. I am told
the Chair wants to come back and query a little more. If you
don't mind, I will put us into a short recess until the Chair
can return for further--if you need to go, I am certain she
would understand. I am very appreciative of you being here, and
thanks for entertaining me with the dialogue and the
discussion.
We are in recess.
[Recess.]
Chair Maloney [presiding]. I would like to call us back
into order and apologize that we had this vote called. And go
back to job creation. I hope our other members will join us. I
rushed back. Maybe they are on their way.
Dr. Dynan, you testified earlier that you were somewhat
skeptical about the employer tax credit because many economists
believe that the credit would be taken by many firms and that
they would have created the jobs anyway. Others believe that
because job creation is such a challenge right now, that these
worries are misplaced.
I would just like to ask all of you whether you think that
an employer tax credit is a good idea, yes or no. And then
also, if there are other measures that Congress should consider
to bolster job creation in both the short term and the long
term. I know, Dr. Zandi, you testified to that earlier. But if
we could just get a sense whether you think the employer tax
credit is a good idea, yes or no.
You have already testified, Dr. Dynan, that you think this
is a bad idea.
Dr. Johnson, do you think it is a good idea or bad idea?
Dr. Johnson. I think, unfortunately--it is tempting--I
think it is a bad idea.
Chair Maloney. Dr. Zandi.
Dr. Zandi. I think it is a second-best idea.
Chair Maloney. Dr. Hassett.
Dr. Hassett. I think it can be a good idea if well
designed. I think Ned Phelps of Columbia University has written
a whole book on how an employer tax credit might be a vastly
superior way to assist low-income workers than increasing the
minimum wage, and I find those arguments pretty convincing.
Chair Maloney. I would just like to go down the panel if
anyone has other ideas of how we can bolster job creation. That
is a huge challenge right now.
Starting with Dr. Dynan.
Dr. Dynan. As I said in my remarks, I think there are
strong advantages to providing for assistance to state and
local governments; not so much they can create jobs, it is just
they are not forced by declining tax revenues to cut jobs.
Chair Maloney. I would like to focus just on creating jobs.
We did do that. We are looking at doing it again, possibly. But
how do we create jobs? We can't continue to just be subsidizing
jobs. We have to be creating jobs in our economy.
Any ideas of how to create jobs and help us with our
economic growth?
Dr. Dynan. I will defer to the other panelists.
Dr. Johnson. I think in terms of broad creation, the
broader adjustment process we were talking about before the
break, that is working and it will come through. The issue I
would focus on is what you highlight in your opening remarks,
Congresswoman, which is the long-term unemployed.
So the experience from other industrialized countries is
very clear, exactly what you said, which is that people out of
work for 6 months, 9 months, start to lose the skill, start to
lose the culture of work and it is very hard to get them
reemployed. So even if output comes back, as I am expecting,
you will have that unemployment.
So the experience and the measures taken in Australia that
I mentioned earlier are to take the process of managing the
long-term unemployed out of the hands of government agencies
and to set up--to give out contracts to private companies that
have incentives to get these people back into work, get them
into decent jobs, and have them stay in jobs.
What that experience indicates--and this has been taken up
to some degree also in the U.K. and in other parts of Europe--
is that you get much more tailored solutions. It tends to be a
one-size-fits-all, which can be appropriate in some
circumstances, but not to the problem you are identifying. What
the private sector tends to come up with is much more tailored
counseling and tailored job-related skill creation on an
individual basis, with a lot of counseling and a lot of
psychological counseling as well to get people back into
understanding what it is to work and how you hold a job.
I think that is what you need to look at to address the
problem you rightly identified at the beginning.
Chair Maloney. One of the problems that we have in this
country is for every job opening, there are now six applicants.
And you read stories about a job being posted and 500 people
showing up. What I am hearing from my constituency, some of
whom are incredibly well educated with higher degrees in many
different areas, is that the jobs are not there.
Americans work hard. They are very dedicated people and if
the jobs were there, I believe that our unemployment number
would not even exist. People would take those jobs.
So it seems to me that the biggest challenge that we have
is how do we create these jobs. You can have a job program that
tailors for medical services or whatever, but if the jobs are
not there, there is no place for them to go.
Dr. Zandi, do you want to talk more about some of your
ideas on job creation?
Dr. Zandi. Let me rank order things in terms of what I
would do to support the job market. First is extend the UI
benefits. I think that is absolutely necessary.
Second, State and local government aid, I think that is
very important.
Third, expand SBA lending, going to the point that small
businesses are key to the job machine and they can't get
credit.
Fourth, I would extend and expand the net loss carryback
provision in the ARRA. I would expand it to not all businesses
but certainly much larger businesses than are currently allowed
to under the ARRA. That would provide a very significant cash
infusion in 2010, which is very, very important to many of
these businesses.
Fifth, I would look at a payroll tax holiday, broad-based
payroll tax holiday. I think I would add a job tax credit part
to it. And what I would do there is I would say I have got X
billion dollars to spend on the job tax credit; first come,
first served. That way, you create an impetus for businesses to
take advantage. Because the key problem with the job tax credit
is that businesses are not going to take advantage of it
because it is demanding credit that is their biggest problem.
But if you give them an impetus, they may come forward and they
may take advantage of it.
So, say I have got $15 billion, first come, first served,
only to those businesses that can show that they expanded their
wage and salary bill compared to what it was the year before.
You get the credit. I would think that would jump-start
creation quickly.
Chair Maloney. Dr. Hassett.
Dr. Hassett. I would disagree quite strenuously with my
friend Dr. Zandi's recommendations. I don't think that we need
more temporary fixes. I think what we need to do is fix things
that are broken. The fact is if you look at the bipartisan
support right now in California for reducing the corporate tax,
because it is about the highest corporate tax State in the
country--in the world, really, if you add California and the
U.S. Federal tax. If you think about that and the plight at the
Federal level, then there are a lot of opportunities right now
for making businesses more optimistic about the future than
they are right now.
If we continue to be the highest taxed place on Earth,
other than pockets of Japan, then I don't know why people would
want to build a plant here. The average OECD tax rate is
something like 10 percentage points less than the one that we
have here. And it is optimism of businesses that is going to
kickstart the economy and create jobs.
Chair Maloney. Thank you. President Obama just issued a
statement asking Congress to extend or pass three measures
related to housing. I would like the panelists to comment on
them; if they think they will work, yes or no, and why or why
not.
First, to extend the homeowner tax credit with strong
antifraud protections. Secondly, to extend the loan limits for
mortgages and fund the Housing Trust Fund, which aids low-
income families.
Again, I would like to go down the panelists. Do you
support these measures, yes or no, why or why not? What
alternatives do you have? I must say I would also like to ask
what percentage you think housing is of our economy. I have
heard ranges from 25 to 40 percent. Housing really created this
problem, in many ways; the subprime mortgage crisis.
If you have other ideas of how we can get this segment of
our economy working in a way that would move us forward.
So starting--why don't we start with you, Dr. Hassett, and
go down the other way for a change?
Dr. Hassett. I think that one of the biggest problems with
the Tax Code is that we have built in this heavy subsidy for
housing and that the fraud in the first-time home buyer credit
is evident. That fraud is something that is going to be very,
very hard to manage because if grandpa says he just bought a
house for the first time, we don't know if he owned a house
back in 1960. It is going to be very hard to tell.
I think what we need to do is recognize that part of the
problem previously was that we stimulated a lot of house
purchases by distorting people's consumption decisions by
giving a big tax-favorable treatment to housing, and that we
need to move away from that gradually.
Next year, as the Tax Code opens up again, then I think
that Congress is rightly going to want to consider a proposal
like that that was floated by President Obama's team this year
to limit the value of itemized deductions for high-income
people. That will move us away from subsidizing housing. And I
think that we have to do that if we want to address our long-
run problems. There is a lot of money that can be had there.
So I think throwing another short-term fix at housing is a
bad idea; in particular, the first-time homeowner credit really
should not be extended.
Dr. Zandi. Well, I agree that the housing sector is
oversubsidized, and those subsidies should be reduced, but this
is no time to do it. The housing market is on life support. If
we take it off, it will crater and take the rest of the economy
with it. So I think this is no time to do that.
With that in mind, and just to reinforce a point, you asked
what percent of the economy is related to housing. I don't know
the answer to that, but what I do know is that if the housing
market isn't functioning properly, meaning if house prices are
still falling nothing in our economy works.
It undermines household wealth and the willingness and
ability of people to spend. It is still the largest asset in
the vast majority of Americans' balance sheet. No bank is going
to extend credit as long as house prices are falling. So we
have to end this or the recovery will not gain traction.
And that gets to what to do. I think the first-time home
buyer tax credit is an inefficient form of tax subsidy, but it
is in place and it would be a mistake to let it lapse. It would
exacerbate conditions in the housing market. So I would extend
it through at least mid next year as has been proposed.
The higher conforming loan limits which also the President
is advocating for Fannie Mae and Freddie Mac, that is very
straightforward. It should be done. If it is not done, that is
going to undermine some key housing markets across the country
in California, in Florida, in New York. That has to be done. In
fact, I would even advocate increasing the conforming loan
limit for more markets across the country. It is very limited
right now.
The third thing I would do and the broader thing I would
consider doing is--this goes to the foreclosure crisis. The
President's loan modification plan is not working well. There
is not a significant amount of takeup on the plan, largely
because it is not significantly reducing the probability of
default.
The plan provides incentives to reduce monthly mortgage
payments, but unfortunately most of these homeowners are so
deeply under water that if anything goes wrong they will
default. I spring a leak in the roof. If I have got to put 5K
to patch the roof to live in it, I am not going to do that if I
am $30, $40, $50,000 under water.
So the loan modification plan should be changed or at least
adjusted to incent principal write-down, and I think there will
be money there to do it because the President has allocated
money from the TARP for the loan modification plan. He is not
going to get the takeup he thinks. So there will be extra money
sitting there, and that money should be used to provide
incentive for principal write-down for a very specific group of
homeowners that you can identify who shouldn't have gotten the
loans in the first place. It was a regulatory failure that they
got them.
So I think if we don't address the foreclosure crisis head
on and more aggressively, there is a very likely possibility
that house prices will continue to weaken into next year.
Again, the economy doesn't work well with falling housing
values.
Chair Maloney. Dr. Johnson.
Dr. Johnson. I think the first-time homeowner tax credit
should be phased out. I agree with Dr. Hassett it is a very
inefficient way to try and help people. I published an article
on Monday where we go through the alternative estimates. It is
not a good way to stimulate the economy either. There are much
better ways to spend that money. But I agree with Dr. Zandi
that you don't want to shock the housing market at this point;
particularly, reasonable estimates are house prices are still
somewhat overvalued relative to their medium-term fundamentals.
Of course, Dr. Zandi is right, that if you hit people's wealth
in this way, you are going to make them more uncertain. They
are going to want to save more and consumption is going to
decline.
So phasing it out is the way I would frame that. I agree--
we are all agreeing there is too much subsidies for home
ownership in this country relative to rent. I think Dr. Hassett
is right; it is a longer term issue that needs to be taken on.
In terms of specifics, I think in this regard I would
emphasize that Fannie Mae and Freddie Mac now work for the
government. These are branches of the government. They were
taken over, as you know.
In terms of loan modification in terms of how do you deal
with people who are losing their homes, Fannie and Freddie have
a lot of very good people who can be put to work, more focused,
I would argue, on making sure that people get an opportunity to
rent when they have fallen behind on their mortgages. So
converting from home ownership to renting.
I think this fascination with home ownership and trying to
boost the home ownership has got us into a lot of trouble, and
we should back away from that. You need to even the playing
field.
Chair Maloney. Ms. Dynan.
Dr. Dynan. Starting with the importance of housing to the
economy, it was of course very important during the boom. I
think, looking ahead, I agree with the other panelists, the
main channel through which it is potentially going to affect
the economy and be a downside risk to the economy is not
through construction. Construction is so small now that any
boost or any drag on construction is not going to be very
important to GDP. But the channel is through house prices.
I think house prices further declining could have very
important effects on the economy, and we want to protect
against that.
With regard to the President's proposals, I agree with the
other panelists that extending the first-time home buyer tax
credit will spur new sales, but it is a very expensive way to
do it because you are going to be paying many people who would
have bought a house anyway, and it doesn't address the
fundamental problem of oversupply in the housing market.
On the conforming loan limits, I agree with Mark that that
is a very good idea.
I am not so familiar with the third thing he was
suggesting. I do think it is related to something to mitigating
the costs of foreclosures. And here I want to go back to what
Mark said about the Administration's plan to reduce
foreclosures.
I think it will help many homeowners avoid foreclosure, but
I do agree with Mark that it is a limitation that it doesn't
address principal write-downs. Now, personally, I am not
supportive of a program that would pay for large principal
write-downs. I think it is a very expensive way to try to spare
households from foreclosure. I think dollars could be better
used trying to mitigate the cost of foreclosures that need to
occur--people who are deeply under water, for whom it would be
difficult to get them back in a sustainable position with
regard to their mortgages.
So I think you could take the money and put it towards
offering homeowners assistance to relocate, to offering
communities assistance in terms of dealing with vacant
properties, and in other challenges that tend to hurt the
neighborhood and bring house prices down.
Chair Maloney. Well, actually, the third point that the
President suggested is exactly what you are supporting, and
that is a grant to States to fund construction and maintenance
of affordable rental housing and vacant lots and so forth.
Dr. Dynan. I do support that.
Chair Maloney. I would like to ask Dr. Zandi, in your
testimony you talked about work-share programs. Can you give
more detail about expanding funding of work-share programs and
what can Congress do to encourage businesses and states to
participate in the program?
Dr. Zandi. The work-share idea is a really interesting
idea. I believe it is 17 states now that have work-share as
part of their UI benefits. The idea is that if a business
doesn't lay off workers and reduces hours for a broad base of
workers, the UI would be used to compensate those workers in
part for those lost hours.
So what that would do is it would reduce the number of
layoffs that would occur. It would keep people employed, just
at reduced hours, and they would get some compensation from the
UI program. This, of course, will help reduce or mitigate a
whole lot of costs. For example, when a business lays off a
worker. There are all kinds of severance costs. They have to
rehire that worker back or hire another worker, there are
training costs. Of course, it eliminates all kinds of costs for
the workers themselves; the pain and suffering going through
unemployment.
So I think it provides significant benefits to the employer
and to the employee, and it is a way of keeping people on
payrolls and not going out into the darkness of unemployment
and not being able to get back.
Work share is a very effective idea. If you look at the
data from ETA, the folks that collect this data, you can see in
different states like California--and New York--that it is
saving a lot of jobs. I think in New York I saw Governor
Paterson's office just released a press release showing that it
has helped to preserve 13,000 jobs, I want to say, but there is
a release that they just put out a day or two ago. Saved in the
sense that these are workers that would have been lost, and
they have been put on work-share up to this point.
So the problem is to expand this more universally across
the country. At this point, States are in no financial position
to do it. They need some money to really set up the program, to
get it going, to get the process going. I think that would be a
reasonable thing for Federal policymakers to do. Perhaps an
element of state and local government aid: Here is some seed
money, set up this work-share program. Let's get going and we
will help you with it, at least early on, because it seems to
be working quite well.
Chair Maloney. Dr. Hassett.
Dr. Hassett. I would encourage you, given your remarks and
your focus on job creation, to study the German experience,
because it has really been quite remarkable in this episode
that unemployment in Germany hasn't really gone up at all
during this recession because their work-sharing program is so
extensive.
I think we have kind of an old-fashioned unemployment
insurance system and we are seeing other countries pursue
policies that really are more effective. And we need to study
them and perhaps, again, if we are going to take another bite
of the apple of stimulus, that we should really consult experts
on the German program before we decide what to do with
unemployment insurance.
Chair Maloney. Thank you. I would like both of you to give
us more information on it. I will certainly take it to my
colleagues on both the German experience and the work-share
program and look at possibly expanding it to a national program
in the context of future aid to our states.
I have been told that other members are coming back, some
of them.
I would like to get back to the small businesses and
helping them generate jobs and certainly support the efforts of
the SBA, and your ideas. What I am hearing from my
constituents, businesses large and small, is a lack of access
to credit. The government has taken steps to help SBA expand.
You mentioned, Dr. Zandi, ways we could strengthen that. Do
you have any other ideas of ways to expand access to credit,
which even very established profit making businesses are
telling me they are having a terrible time.
Any comments on how to expand access to credit?
Dr. Zandi. Well, the other thing I suggested that would
buy--in my view, the credit problem is a problem of time. We
need to give the banking sector some time to get its capital
where it needs to be and to get the confidence necessary to go
out and extend credit.
So if we can buy some time, I think the credit will start
to flow by this time next year. So we need about a year.
So what would really be helpful, I think, would be an
expansion of the NOL carryback. These businesses that are
really cash constrained and credit constrained are losing
money. Through the NOL carryback they can take that loss and
use it as a deduction against past profits and get a tax
refund. So they will get a check. For a number of small,
midsized, even reasonably large businesses, this is real money.
It is not insignificant.
It is costly in the first year. In fact, through my
calculation, if you did it for all but the very largest
businesses--businesses that employed over a thousand employees,
let's say we cut it off there, because I don't think they are
credit constrained, but a thousand and below--it would probably
cost you about $60 billion in fiscal year 2010.
Now that wouldn't be the cost over the 10-year budget
window because what you are doing is tax shifting. So you are
shifting the tax burden out into the future and so their tax
burden would rise and so the net cost over the 10-year budget
window would be somewhere close to $15 billion.
But you would be putting a cash infusion into the economy
to these businesses at just the right time, and you would be
buying time. You would be buying time.
Chair Maloney. Thank you. Another grave challenge that we
have right now that some of you mentioned was the commercial
real estate industry. It is staggering. A lot of commercial
real estate have told me that they are carrying buildings that
are paying for themselves. So that they have the money coming
in to sustain their business, yet they have balloon mortgages
that are coming due in the next 2 years and the banks are
calling them.
And it is next to impossible to get a loan on commercial
real estate now. I am told you cannot--you can have a building
worth $80 billion or $80 million, they are not going to give
you a loan on it. I have heard it over and over again.
So it is dried up, the credit market for commercial real
estate. Yet, it seems to me if we have buildings that are
carrying themselves, should we have a temporary program that
just kicks the can down the street a while instead of buildings
that are carrying themselves that we ask the government to
require that the banks not call these balloon loans? Any other
idea that you have on the commercial real estate side?
Again, Dr. Zandi, you pointed out that most of these
commercial loans are with small and regional banks. So it is
going to be a big, huge blow to the banks. In hearings that we
have had at this committee and others, the Treasury Department
has testified that they are not willing to look at any program
to help commercial real estate. Their focus is keeping the
heart of the economy moving, keeping the financial services--
banks and institutions operating, and propping up these
commercial--these smaller banks and regional banks that may
face extreme challenges because of the commercial real estate
challenge.
It seems to me if we could figure out some way to just
soften the blow it would help not only the banking system, but
certainly the real estate industry, the overall economy.
So I would like to open that up to anyone, and start with
you, Dr. Zandi.
Dr. Zandi. You are right, I think it is a very significant
problem; not directly through the loss of--the defaults in
commercial mortgages and its impact on construction. That is a
negative, but it is a small negative. The real impact is
through the impact on the banking system and then the provision
of credit to everybody else, including, and most importantly,
small business.
So I think it is a very large problem that should be
addressed. I will give you a couple ideas. Unfortunately, the
government doesn't have an easy tool. It is not like the
residential mortgage market, where the government can step in
through the FHA or through Fannie and Freddie or even through
the Fed and do it.
But one thing you could do is Fannie Mae and Freddie Mac do
make multifamily mortgage loans. So commercial real estate
mortgage debt outstanding is $4 trillion. To give you context,
there is $10 trillion in residential mortgage debt, $1 trillion
is multifamily debt. Fannie Mae and Freddie Mac could be
empowered to be more aggressive in extending out credit to
multifamily property.
Moreover, you could empower Fannie Mae and Freddie Mac to
provide some loans into other types of commercial real estate.
Maybe into retail, office space. That might be a natural
extension.
Unfortunately, this will take time to do properly, but this
problem is not going away. It is going to be with us for a
couple or 3 years.
The other thing that I think would be important but is in
the purview of the Federal Reserve is the other source of
credit for commercial real estate is the commercial mortgage
securities market, the CMBS market. At the peak of the CMBS
market back 3 years ago, it was $300, $400 billion in mortgage
credit every single year. It is literally zero today.
The Federal Reserve has established, through the TALP
program, a mechanism to providing cheap loans to investors to
buy CMBS, but that program is not working at all. There have
been no CMBS TALP deals.
So there would be a way to provide more--the Treasury could
provide more backstop to the CMBS TALP activity to promote more
CMBS deals, or at least get some of them going again.
Chair Maloney. Thank you.
Dr. Johnson.
Dr. Johnson. I am very uncomfortable with all of these
proposals. I think that we can find many ways to put taxpayer
money into the economy and we can create many justifications
for it, but you have to draw lines. The impact on the banking
system, I think, as Dr. Zandi said, that is what you are
worried about. Not all small banks have this kind of experience
in commercial real estate. We have a very competitive small
banking sector.
The idea that healthy small businesses who are creditworthy
and who want to borrow won't be able to borrow now obviously
because of the disruptions, we agree with that, but won't be
able to borrow in 6 months or 12 months, I am very skeptical of
that.
I think there are major problems in the financial system. I
emphasize them all the time. But they are in a different place
than down here. CIT Group, just to be very concrete, 3 or 4
months came to the government for a bailout and said, If you
don't bail us out, all the small- and medium-size businesses we
work with will have their credit disrupted. According to the
evidence I have seen on this, they were turned down for a
bailout. They are going through a renegotiation process with
the creditors, which is what the commercial real estate
developers should do, too, and what they will do if you don't
give them a bailout.
My understanding is that some of the CIT Group customers
are getting credit from other people, some are facing a 20, 25
basis point increase in the cost of the credit. There is no
evidence that I have seen that what has happened at CIT has
caused this kind of massive disruption through the rest of the
credit system.
So I am sure Fannie and Freddie could be induced into this
market. They probably would be happy to have this kind of
opportunity. This is how we got ourselves into trouble the last
time around. I think you should be careful about expanding
their mandates in this subsidized fashion. Once you are in, it
is very hard to get out.
Chair Maloney. I want to thank all of you for your
responses and recognize my dear friend and colleague from the
great state of New York, Congressman Hinchey.
Representative Hinchey. Thank you very much. I am sorry I
missed some of this because of the votes that we had, but I
want to thank all of you very much for being here and for
everything that you said in the context of the testimony that
you presented.
I wanted to ask at least one additional question having to
do with this economic crisis that we are now confronting, and
including in that the potential that it could get worse at some
time over the course of the next few years, and it could get
worse unless appropriate action is taken to prevent that
situation from getting worse.
The main cause of the economic recession that we have been
experiencing was the deregulation of the banking industry,
which initially came about in the context of the late 1980s
into the 1990s by the Federal Reserve and the then-Chairman of
that Federal Reserve and then ultimately the repeal of the
Glass-Steagell Act in the legislation which was passed in 1999.
So we see on that basis that there was a big conscientious
movement over a long period of time to achieve those
objectives, and the achievement of those objectives was not
based on anything that was positive for the country. It was
based upon what was interpreted as being positive for the
people who are regulating the banks. And so when you had the
repeal of Glass-Steagall, we experienced that situation where
there was no longer a separation of commercial and investment
banks. Also, the congressional ban on the regulation of credit
default swaps was a major part of that.
So I think that this is something that should be on all of
our minds. We see with the effect of the stimulus bill creating
some positive effects, all of that. But, nevertheless, unless
this situation is corrected, as it was done in 1933 in the
context of the Great Depression and how that provision
established in 1933 had such a positive effect on the long-term
operation of the commercial investment regulatory system in
this country, up until recently.
So I wonder what you might think about this. What do you
think that we should do, Dr. Johnson?
Dr. Johnson. I think the way you have articulated the
problem is exactly right. This is a major risk to the recovery.
And even if we can get a good 2 or 3 years of solid growth and
get our jobs back, it is still going to be a major problem.
I think you also identified exactly the two major
tendencies, the deregulation of restrictions around banks and
the Commodities Future Modernization Act, and everything that
led up to that.
I think we need to break up the biggest banks. I would not
try to reimpose Glass-Steagall. I think that is trying to make
fish out of fish soup, which is a pretty hard thing to do. Once
you have made the fish soup, you are pretty stuck with it.
But I think you can take these very big banks that are able
to take these massive risks and put the downside onto us--
create this big, long-term unemployment issue. You can take
them out of the picture. You can downsize them.
Goldman Sachs, just to take one example, was a $200 billion
bank in 1998. Now it is a trillion-dollar bank. People are
telling you, you couldn't possibly downsize the banks. They are
essential to the global economy. That I would contest on
absolutely every detailed point that the people make.
But ask yourself this: Why is a trillion dollars the right
side for Goldman Sachs? If they were a perfectly fine bank at
$200 billion, $250 or so in 1998, why isn't that the right size
for banks now? Lehman was a small broker-dealer back in 1998.
It was a $600 billion bank. The bankruptcy was $640 billion
when it failed.
That is too big to fail safely. That is what we have got to
avoid. That is what we have got to get rid of.
Representative Hinchey. The allegation is it is too big to
fail safely. And that is one of the reasons why there is this
initiative to try to create these big banks so that people who
are creating them can say, Look, I know we did a lot of bad
things. We made a lot of mistakes. The whole place is in deep
trouble. But, look, we are too big. You can't just collapse
this.
Dr. Johnson. Absolutely. So the latest data we have, the
CIT group was allowed to fail, go through its own bankruptcy.
$80 billion assets. GMAC, which is currently on the table--I
would suggest prepackaged bankruptcy for them, by the way, not
a bailout, but prepackaged bankruptcy, arranged with the help
of the government--this is over $200 billion in assets.
So I think they may well get a bailout. If they do, that is
going to give you the dividing line. You want more things like
CIT Groups, fewer things like GMAC if we are going to have a
safe financial future.
Representative Hinchey. Anyone else? One of the things that
we have just seen, we have lost about 110 banks this year
alone. That is likely to continue. As it continues, all of
these banks, which are so important in communities,
particularly small communities all over the country, it is
going to have a very negative effect on the economic conditions
there in those areas, and that is something that we need to try
to stop, because those small banks are critically important to
everything that goes on in those communities.
There is another aspect of the economic circumstances that
I find troubling, and that is the concentration of wealth in
the hands of fewer and fewer people. We now have a set of
circumstances that if you look at the top 1 percent, you have
the same amount of wealth in the hands of the top 1 percent,
the wealthiest 1 percent of the people, that you did in 1928
and 1929, right now. And if you look at the top 10 percent, you
have a little bit more in the hands of the top 10 percent right
now than you did in 1928, 1929.
Now that is something else that is having the effect of
downgrading the whole economic circumstances of this economy
all across this country. Isn't there something we should be
doing about that?
Dr. Johnson. I couldn't agree more. I think it is a symptom
of the kind of economy that we have created. And I think that
has to be addressed through--specifically, I would say taking
on the financial sector. The big banks are your major problem.
It is obviously affecting the concentration of wealth.
I think breaking them up would not undermine the dynamism
of the economy in any way. I think we were discussing perhaps
when you were out of the room there is a major fiscal
adjustment that is going to be required in not just this
country but all industrialized countries. If you want to
stabilize public debt as a percentage of GDP, given health care
costs that are coming to us and all other OECD countries, the
state-of-the-art forecasts are a 4 to 8 percentage point
adjustment in structural fiscal positions across all of these
countries that have to be new taxes or spending cuts. That is
not even economics, that is just the arithmetic of stabilizing
debt levels.
I think in that context you need to ask who benefited on
what basis and what are the ways. The tax on excessive risk-
taking is an idea taken up at the G-20 level. It was in their
communique from Pittsburgh. Buried in the fine print, but
definitely there.
This is something that would probably generate no more than
half a percentage point of GDP in the United States. These
issues are before us now.
Representative Hinchey. Well, thanks very much. Madam
Chairman, thank you very much.
Chair Maloney. Thank you. I have one final question on
credit. Some economists believe that the supply of credit has
fallen because of actions that Congress has taken and the
Administration and the Fed to restrict certain predatory
practices in the mortgage and credit card markets.
Before this committee Professor Stiglitz testified this
past spring that predatory practices reduced the demand for
credit. And, on balance, I would like to ask any or all of you,
do you think that restricting these practices will increase or
decrease the amount of credit in the market? Anyone?
Dr. Johnson.
Dr. Johnson. I would put it this way. Predatory practices
in the credit industry have massively damaged this economy. Why
so many people spend beyond their means is they were lured,
duped into various kinds of loans they couldn't afford. If
there is a reduction in credit coming out of the kind of
proposal you propose, I welcome it. I think those predatory
practices are appalling from a moral point of view and very bad
economics. They have added up to a first order macroeconomic
disaster that we are now trying to extricate ourselves from.
Chair Maloney. It might create economic stability in the
financial sector.
Dr. Zandi. I certainly agree with Simon. It is almost hard
to understand that if you limit predatory practices that will
restrain credit. I think that is just silly on the face of it.
But I do think the uncertainty created by the debate with
regard to regulatory reform is probably playing a role in the
provision of credit, that until the rules are defined, at least
a little bit more clearly, these institutions don't know how to
do the math. When they don't know how to do the math, they
don't do anything.
So basic kinds of stuff like: Will there be a CFPA, what
will it look like, what are the rules of that going to be?
Things with regard to the securitization process, how much
``skin in the game'' do investors need or institutions need to
be able to issue securities? A whole range of issues.
So I think one of the key reasons credit--there are many
reasons, and this isn't the most important one, but one of the
key reasons for the lack of credit is the still very high level
of uncertainty. As soon as you can get that nailed down, or
closer to getting it nailed down, I think the more likely
credit will start to flow.
Dr. Johnson. One reason there is so much uncertainty is
because the credit industry has been pushing back so hard
against the consumer protection initiatives. They are fighting
this tooth and nail, right, in this building and around here
and that is creating an enormous amount of uncertainty. So it
is not something descended from heaven. It is really created by
the opponents of sensible reform.
Chair Maloney. Thank you.
Dr. Hassett.
Dr. Hassett. Speaking of opponents of sensible reform, I
think that reform will move forward if we recognize that the
morality of the previous episode is really quite challenging in
every direction. There were predatory lenders, there were
predatory borrowers. There were people who didn't really think
they were going to pay stuff back. There were a lot of people
that got tricked into doing things and other people that did
things that are incorrect.
I think that if we look at some of the positions of
lenders, that they come from a defensiveness that is created by
a climate that is one-sided and doesn't recognize that they
have to deal with people that don't want to pay them back at
times, too.
Chair Maloney. Thank you.
Dr. Dynan, you have the last word.
Dr. Dynan. Thank you. I want to say I do think there were
excesses in the middle part of the decade, no doubt, and I do
think it is appropriate that we have regulation that protects
against predatory policies.
We do need to make sure that we don't overreact. We need to
remember that prior to the excesses earlier this decade, there
were many--credit supply was increasing. And there were many
advantages to that.
That said, I agree with Dr. Johnson in that the goal of
regulation should be to prevent credit cycles like these and
meltdowns like these and ultimately, by lending that security
to the economy, it is going to be a good thing.
Chair Maloney. Thank you. I want to thank all of you for
your hard work, for your testimony today. You gave us a great
deal to think about and gave us some new ideas and explained
others. Thank you so much.
[Whereupon, at 12:45 p.m., the committee was adjourned.]
SUBMISSIONS FOR THE RECORD
Prepared Statement of Representative Carolyn Maloney, Chair, Joint
Economic Committee
Today's report from the Bureau of Economic Analysis on 3rd quarter
gross domestic product (GDP) provides welcome evidence that the economy
is moving from recession to recovery.
When the President took office in January, our economy was on the
brink of an economic disaster.
There was no end in sight to the recession that started in December
2007.
The idea that the economy would achieve positive growth so soon
would have surprised many. Today, it is clear that the economy is
moving in the right direction.
GDP rose by 3.5 percent in the third quarter, after having fallen
for an unprecedented four straight quarters.
This is concrete evidence of the wisdom of the Recovery Act and the
positive effect it has had on the economy in just eight short months.
Last week, Dr. Christina Romer, the President's Chair of the
Council of Economic Advisers, presented us with compelling evidence
that the economy is rebounding largely because of the Recovery Act.
Indeed, she testified that the Recovery Act added between three and
four percentage points to economic growth in the third quarter, far
beyond what the opponents of the Recovery Act thought possible.
Another piece of welcome news is that personal consumption grew by
3.4 percent in the third quarter, largely due to actions taken by
Congress and the Administration.
We are finally seeing signs that consumers are spending more, which
could spur businesses to hire more workers to meet renewed demand for
their goods and services.
Moreover, I expect that legislation that I worked tirelessly on to
end the most abusive practices of credit card companies, the Credit
Card Holders' Bill of Rights, which Congress passed on an
overwhelmingly bipartisan basis, will help increase consumers' demand
for credit and encourage creditworthy borrowers to spend.
The Financial Services Committee recently passed a bill I also
introduced to speed up the implementation, so that these measures would
go into effect on December 1st.
Despite significant legislative accomplishments that brought us
from economic abyss, I believe we still have a long way to go before
the economy fully recovers.
The most pressing economic issue for the nation is job creation.
The stimulus has helped Americans in need weather the storm, but we
must do more to get people back to work.
I look forward to the ideas that our distinguished witnesses have
about translating our economic growth into job growth, and their
suggestions about any additional measures Congress can take to spur
businesses to create more jobs.
One group that I'm particularly concerned about is the long-term
unemployed.
The longer someone stays unemployed, the harder it is for them to
find work.
The long-term unemployed are stuck between a rock and a hard place.
First, they are suffering now, which is why the House has already
passed legislation expanding unemployment insurance.
I am optimistic that the Senate will pass this soon.
Second, the long-term jobless--those who have been unemployed for
six months or more--may suffer in the future.
Even when the economy recovers, workers who have been unemployed
for a long time may no longer have the skills necessary to be
competitive in the workforce.
We must come up with creative ways of helping the long-term
unemployed maintain their skills or develop new skills so that once we
get back on track and start creating jobs, they will not be left
behind.
I thank our distinguished panel of witnesses for their testimony,
and I look forward to hearing their thoughts on the most important
issues we face--sustaining our economic progress and creating jobs for
the American people.
__________
Prepared Statement of Senator Sam Brownback, Ranking Republican
Thank you Chairman Maloney for scheduling today's hearing on ``The
Impact of the Recovery Act on Economic Growth,'' and thank you Dr.
Landefeld and other witnesses for taking the time to join us this
morning.
Before making my opening comments, I'd like to pause to recognize
Nan Gibson, the committee's Executive Director, to thank her for her
years of service to the committee--even if it was on the wrong side of
the aisle, and to wish her the best as she leaves us to join the staff
of the Council of Economic Advisers.
This morning's report on GDP provides uplifting news that our
economy has finally returned to positive growth. Despite the
significant turnaround in growth, from an annual rate of -0.7% in the
2nd quarter to an annual rate of 3.5% in the 3rd quarter, I would like
to point out that our economy has only grown by $113 billion in
``real'' 2005 dollars (at an annual rate), and that total GDP remains
$128 billion below where we were at the end of 2008.
While the turnaround in GDP is positive news to us here in
Washington, it provides little solace for the more than seven million
workers who have lost their jobs since the start of recession and the
hundreds of thousands of workers who will lose their jobs over the
coming months. Proponents of the stimulus claimed that it would prevent
the unemployment rate from rising above 8% or 9%, and yet it is already
at 9.8% and will most likely be over 10% by the end of the year.
I voted against the $787 billion stimulus package because I viewed
it as a largely wasteful use of taxpayers' dollars, not to mention a
means to permanently increase the size of government. I am deeply
troubled by the massive run-up in our national debt. Whereas we used to
argue over millions of dollars, and then billions, we are facing annual
budget deficits in excess of $1 trillion for the foreseeable future and
our gross national debt will approach 100% of GDP within the next ten
years. These figures are astounding and they should cause every one of
us great concern and apprehension about the future we are leaving for
our children and grandchildren. Our generation has been afforded the
benefit of relatively low taxes despite high levels of government
spending, but our children and grandchildren will pay for our fiscal
negligence through excessive tax rates that confiscate more than half
of their hard-earned incomes. Meanwhile, we will be enjoying retirement
benefits far in excess of our contributions.
Of the $787 billion in appropriated stimulus funds which were
purported to be spent quickly and efficiently, only $195 billion--about
25%--was spent through the 3rd quarter of 2009. When the stimulus was
passed, promises were made that the money would go out the door
quickly. As the figures show, this has not been the case.
The $195 billion in stimulus money that has been spent to date has
no doubt caused a boost--even if temporary and artificial--to GDP
growth, but in the long run, GDP will be lower as a result of this
massive government spending package. Furthermore, it seems, based on
comments by Administration officials which indicate that the greatest
impact of stimulus was felt in the 2nd and 3rd quarters of 2009, that
there is little benefit left to be realized by the nearly $600 billion
in remaining stimulus funds.
The Administration and other forecasters who advocate Keynesian
notions of government spending have provided some very rosy estimates
of the effects of the stimulus on GDP growth. These estimates have been
countered with less favorable estimates of relatively small stimulus
impacts on GDP growth. The overly optimistic estimates imply that the
stimulus alone is responsible for the turnaround in growth. This is to
suggest that the massive actions taken by the Federal Reserve and the
Treasury--to the tune of trillions of dollars, and most of which were
initiated long before the fiscal stimulus took effect--contributed very
little to the turnaround in growth. Regardless of whether or not one
believes these massive interventions by the Federal Reserve were
appropriate, they have no doubt contributed significantly to
stabilizing and improving the functioning of our deeply troubled
financial system. Were it not for these actions by the Federal Reserve
and Treasury, there is little doubt that today's report would not
indicate the highly positive economic growth that it does, and credit
for the recovery should be given where credit is due.
__________
Prepared Statement of J. Steven Landefeld, Director, Bureau of Economic
Analysis, U.S. Department of Commerce
Madame Chairman and other Members of the Committee:
Thank you for inviting me to describe the third-quarter gross
domestic product (GDP) and related statistics that the Bureau of
Economic Analysis released this morning. These ``advance'' statistics
are--as always--based on incomplete and preliminary source data that
will be revised as more complete and accurate data become available.
Tracking an economy that is changing as rapidly as the U.S. economy is
changing right now is a challenging task, but we are committed to
producing advance estimates that provide an accurate general picture of
economic activity. That picture will become clearer as more
comprehensive source data become available in the months to come. These
early snapshots are designed to provide public and private decision
makers with a reliable early read on the evolving U.S. economy. Let me
walk you through the details of today's release, and then I'll be happy
to answer any questions that you may have.
The advance estimates that we released this morning show that in
the third quarter of 2009, real GDP increased 3.5 percent at an annual
rate. In the second quarter, the rate of decline in real GDP moderated,
decreasing 0.7 percent, following a sharp 6.4 percent decrease in the
first quarter. Real GDP declined in 5 out of the 6 quarters from the
fourth quarter of 2007, which NBER determined was the start of this
recession, to the second quarter of 2009.
As you know, GDP is comprised of many different components, and I
would like to discuss highlights of the major components. In the third
quarter, consumer spending, inventory investment by businesses,
residential investment, exports, and government spending all rose.
These increases were partly offset by a rise in imports.
The price index for gross domestic purchases, which is the broadest
measure of inflation confronted by U.S. consumers, businesses, and
government, increased 1.6 percent, following an increase of 0.5 percent
in the second quarter. After falling for the first two quarters of the
year, energy prices rose sharply in the third quarter. Excluding food
and energy prices, the price index for gross domestic purchases
increased 0.5 percent in the third quarter after increasing 0.8 percent
in the second.
Motor vehicles, which show up in all the components of GDP--
consumer spending on autos and trucks, business and government
investment in autos and trucks, investment in inventories by motor
vehicle manufacturers and dealers, and exports and imports--raised real
GDP growth in the third quarter by 1.7 percentage points. Excluding the
effects of motor vehicles, real GDP increased 1.9 percent in the third
quarter after decreasing 0.9 percent in the second quarter.
Consumer spending, which accounts for over two-thirds of GDP,
increased 3.4 percent in the third quarter, following a decrease of 0.9
percent in the second. Consumer spending on durable goods increased
22.3 percent. Motor vehicle purchases, spurred by ``cash for clunkers''
rebates in July and August, accounted for most of this increase,
although, real spending on other durable goods, nondurable goods, and
services also increased in the third quarter.
Residential construction rose by 23.4 percent in the third quarter,
the first increase in 15 quarters. Prior to the third quarter increase,
residential investment fell at an average annual rate of 20.9 percent
since the fourth quarter of 2005.
Business nonresidential fixed investment--investments in new
plants, office buildings, equipment, and software--fell 2.5 percent in
the third quarter, compared with a decrease of 9.6 percent in the
second. Business spending on durable equipment and software rose 1.1
percent in the third quarter after falling 4.9 and 36.4 percent in the
second and first quarters of 2009, respectively. The rate of decline in
investment in nonresidential structures decreased 9.0 percent after
decreasing 17.3 and 43.6 percent in the second and first quarters,
respectively.
Business inventory investment provided a positive contribution to
the change in real GDP, as businesses drew down their inventories at a
slower rate than they had in the second quarter. Therefore, more sales
were of goods and services produced in the third quarter and less out
of inventories. Inventories fell about $131 billion in the third
quarter, compared with a decrease of about $160 billion in the second
quarter and a decrease of about $114 billion in the first.
Real exports of goods and services increased 14.7 percent in the
third quarter, in contrast to a decrease of 4.1 percent in the second.
This is the first increase in real exports in 5 quarters. Real imports
of goods and services increased more than exports, rising 16.4 percent
in the third quarter, in contrast to a decrease of 14.7 percent in the
second.
Spending on goods and services by the federal government increased
7.9 percent in the third quarter, compared with an increase of 11.4
percent in the second. The slowdown in federal spending was accounted
for by defense spending. Spending by state and local governments fell
1.1 percent in the third quarter, in contrast to an increase of 3.9
percent in the second quarter.
Turning to the American household, real disposable personal income,
that is personal income less personal taxes adjusted for inflation,
declined 3.4 percent in the third quarter after increasing 3.8 percent
in the second. The third-quarter decline reflected the pattern of tax
reductions and government social benefits provided for by the American
Recovery and Reinvestment Act (ARRA) of 2009, including the Making Work
Pay Credit and the one-time payments of $250 to recipients of social
security and other benefits. Excluding these tax reductions and
government social benefits from ARRA, real disposable personal income
decreased 2.0 percent in the third quarter after decreasing 0.9 percent
in the second. The third-quarter personal saving rate was 3.3 percent,
compared with 4.9 percent in the second quarter and 3.7 percent in the
first.
Since the second panel at this morning's hearing will address the
effect of the ARRA, let me conclude by describing how it is reflected
in GDP and the national accounts. BEA's national accounts include the
effects of the federal outlays and tax cuts included in the ARRA.
Because most of the outlays and tax reductions from ARRA during the
last three quarters were in the form of grants to state and local
governments, tax reductions for individuals and businesses, and one-
time payments to retirees, their effects on GDP show up indirectly
through the effects on GDP components such as consumer spending,
residential investment, and state and local government spending. Thus,
BEA's accounts do not directly identify the portion of GDP expenditures
that is funded by ARRA. During each of the second and third quarters,
the Making Work Pay Credit lowered personal taxes and raised disposable
personal income about $50 billion (annual rate). During the second
quarter, ARRA provided payments of $250 to beneficiaries of social
security and other programs that raised disposable personal income
about $55 billion. ARRA also provided special government benefits for
unemployment assistance, for student aid, and for nutritional
assistance; these special benefits raised disposable income about $49
billion in the third quarter and about $35 billion in the second
quarter. ARRA also funded grants (such as Medicaid) and capital grants
(such as highway construction) to state and local governments of about
$75 billion in the third quarter and $85 billion in the second quarter.
My colleagues and I now would be glad to answer your questions.
__________
Prepared Statement of Representative Michael C. Burgess, M.D.
It's easy for all of us sitting here to talk about any alleged
economic growth brought about by the February $787 billion stimulus
bill. We're all employed. But the reality is twofold.
First, while I did not vote for this stimulus bill, $787 billion
was made available for spending to stimulate the economy, but as of
today, only $173.2 billion has been spent. Why hasn't the other $613.8
billion been spent?
We should have Jared Bernstein here, who oversees the stimulus
efforts for the Vice President, to inform us why a mere 22% of stimulus
dollars have been spent.
Second, President Obama sold the stimulus on the idea that it would
stop unemployment and Members of Congress voted for this stimulus bill
to stop the tide of job losses, so unless you can show that
unemployment has gone down, there is no economic growth.
And the jobs just aren't there.
Since the stimulus passed, 15.1 million Americans are unemployed.
This is nearly DOUBLE the number of unemployed Americans since before
the stimulus passed last February.
15.1 million Americans unemployed is nothing compared to the same
Bureau of Labor Statistics report which states that 17 percent of all
American adults--or one out of every six civilians--are (1) not working
or looking for work but say they want and are available for a job; (2)
discouraged workers; or (3) workers who want to work full-time but due
to the economy had to settle for part-time work. This is the ``U-6''
report by the Department of Labor and it's this 17% unemployment number
which has all of us deeply concerned.
How many Americans are taking their law degrees and going to work
picking up garbage? For some this might sound like a promotion, but the
reality is there are many hardworking Americans who want to work and so
take a part time job in the hopes of finding a better job.
So knowing that 35.6% of unemployed have been without work for more
then 27 weeks is unacceptable when there was legislation passed by this
Congress less then eight months ago to stimulate the economy with 72%
of its funds not spent.
What's being spent apparently isn't working.
If it's not being spent, then don't spend anymore.
At a time when our national deficit is skyrocketing and our
national debt is beyond our ability to even comprehend, we need some
perspective. With the stimulus bill, we could have paid off the $550
billion in outstanding student loan debt in the U.S. and still have
$237 billion left over.
There are currently 1,509,180 elementary school teachers in the
U.S. With the stimulus bill, we could have paid every elementary school
teacher's salary in the U.S. for ELEVEN YEARS.
But instead, we used the stimulus bill to lose nearly seven million
jobs.
That's not economic growth no matter how you try to qualify it, and
we shouldn't have to pay for incompetence.
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Prepared Statement of Karen E. Dynan, Brookings Institution \1\
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\1\ Robert S. Kerr Senior Fellow, Vice President, and Co-director,
Economic Studies Program. The views expressed are my own and do not
necessarily reflect the views of other staff members, officers or
Trustees of the Brookings Institution.
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Chair Maloney, Vice Chairman Schumer, Ranking Members Brady and
Brownback, and members of the Committee, I appreciate the opportunity
to appear before you today to discuss the outlook for consumer spending
and the broader economic recovery.
the outlook for consumer spending
I will begin with the outlook for consumer spending on goods and
services, as it is the largest component of GDP, and it played an
important role fueling the economic expansion earlier in the decade.
The available information suggests that the fundamental determinants of
consumption will support only moderate growth in consumption over the
next couple of years.
One factor that will probably restrain consumption will be tepid
growth in households' labor income. As you know, the sharp decline in
aggregate demand for output has led to one of the largest percent
declines in employment since the Second World War. Payroll employment
has fallen by more than 7 million since the recession began, and,
although the rate of decline has abated in recent months, we are
unlikely to see substantial gains in employment in the near future.
When labor demand picks up again, firms are likely to increase workers'
average hours--which fell noticeably during the downturn--before
increasing the number of workers they employ. Firms tend to pursue this
strategy because raising hours is less costly and easier to reverse
than hiring new workers if the recovery proves transient. Of course,
longer workweeks would increase workers' earnings, but the magnitude of
this response is also likely to be muted.
If employment and average hours worked rise only slowly, labor
income could advance rapidly only if compensation per hour rose
rapidly. However, compensation has been moving up quite sluggishly in
recent quarters, and, with the unemployment rate at its highest level
since the early 1980s, it is likely to continue to do so.
Of course, one caveat to this perspective is that household income
is not independent of consumer spending. If, for example, the other
fundamental determinants of consumption were to change in a favorable
way, then consumer spending would likely grow more rapidly, which
would, in turn, feed back into greater strength in income. However, as
conditions stand now, the most likely outcome is for lackluster income
growth over the next couple of years.
Under current law, consumption will also be restrained by a
significant increase in tax payments over the next few years, as
several key tax provisions expire. First, the temporary higher
exemption limits for the Alternative Minimum Tax (AMT) are scheduled to
expire at the end of 2009; if allowed to do so, many more taxpayers
will be subject to the AMT. Second, the tax cuts provided by the
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and
the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA),
along with the Making Work Pay tax credit enacted in the American
Recovery and Reinvestment Act (ARRA), are scheduled to expire by the
end of 2010.
Moreover, additional forces should damp consumption relative to
after-tax income. Compared with the situation prior to the crisis,
saving is likely to represent a markedly higher share of after-tax
income, and consumption is likely to represent a markedly lower share
of after-tax income.
The most powerful of these forces is the massive declines that we
have seen in household wealth. In the years leading up to the financial
crisis, the saving needs of many households were met by substantial
capital gains on homes and on holdings of corporate equities. However,
the sharp reversals in the prices of these assets over the past couple
of years have changed the picture dramatically. I recently studied data
from surveys of household finances done in 1962, 1983 and then every
three years since 1989. I estimated that recent declines in asset
prices have reduced the ratio of non-pension wealth to income for the
median household below the levels seen over the past quarter-century
and similar to the level seen in the early 1960s. \2\ Households above
the median have been left with about as much wealth relative to income
as their counterparts in the late 1980s and only slightly more than
their counterparts in the early 1960s. Meanwhile, households at the
25th percentile have seen their wealth-to-income ratio fall to the
level recorded in the early 1960s, and households at the 10th
percentile have negative wealth for the first time in at least half a
century.
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\2\ See Karen E. Dynan, ``Changing Household Financial
Opportunities and Economic Security,'' forthcoming in the Fall 2009
issue of the Journal of Economic Perspectives. The comparison is based
on data from 1962 Survey of Financial Characteristics of Consumers; the
1983, 1989, 1992, 1995, 1998, 2001, 2004, and 2007 Surveys of Consumer
Finances; and an imputation of the wealth of respondents to the 2007
Survey of Consumer Finances as of the end of 2008. Since the end of
2008, movements in home prices and equity prices have had opposing
effects on household wealth.
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The recent declines in wealth should have the opposite effect of
the earlier increases in wealth--they will likely induce households to
reduce their consumption and increase their saving in order to rebuild
their wealth. Indeed, the weight of evidence from statistical studies
over the years suggests that one fewer dollar of wealth leads to a
permanent decline in the level of household consumption of about three
to five cents, although this range does not encompass the conclusions
of every researcher. For the most part, the evidence in these studies
also suggests that households move toward their new lower levels of
spending gradually over a period of one to three years.
Applying the results of these studies to the declines in wealth
that households have seen over the past couple of years, I estimate
that wealth effects should damp consumption growth this year by between
2 and 3\1/2\ percentage points and hold down next year's consumption
growth by between \1/2\ and 1 percentage point. In doing this
calculation, I assumed that household wealth rises at about the same
rate as disposable income through the end of next year. The negative
wealth effects could be even larger if stock prices turn down again or
house prices continue to fall (a topic to which I will return later in
my remarks).
The personal saving rate will probably also be boosted by factors
beyond wealth. Earlier this decade, many analysts came to the view that
the economy had entered a ``Great Moderation,'' a marked long-run
reduction in economic volatility. The experience of the past couple of
years has presented a substantial challenge to that view. Many
households have likely revised upward the amount of risk they see in
their economic environment. Accordingly, one would expect households to
reduce their spending so as to raise their precautionary savings.
Part of this increase in precautionary saving may occur as a
reduction in borrowing. Households have just had a vivid lesson about
the risks associated with high leverage, and many will be more
reluctant to take on large amounts of debt to fund spending.
Households' borrowing to finance consumption is also likely to be
crimped by a more restrictive supply of credit. Since the financial
crisis and economic downturn began, lenders have sharply reduced their
willingness to extend credit to households. With unemployment rates
remaining very high in coming quarters, lenders are likely to continue
to see heightened risk in lending to households for some time to come.
Further, the supply of credit seems unlikely to return to the levels
seen earlier this decade even after the economy returns to full
strength, as lenders, like households, have probably marked up their
expectations of economic volatility over the long run. Regulatory
actions should serve to reinforce the greater restrictiveness of
lenders; indeed, the Federal Reserve and Congress have already taken
steps to restrict some types of mortgage lending and certain practices
among credit card lenders.
All told, I expect that consumer spending will move up at a modest
pace in coming quarters because of weak income growth as well as higher
saving and lower borrowing. Although this outlook contributes
importantly to my expectation of a relatively weak overall recovery, I
should note that higher household saving and lower household borrowing
have the important positive aspect of leaving the economy in a more
solid and more sustainable position. At the household level, the
restructuring of balance sheets will leave households less vulnerable
to disruptions to their incomes and to unexpected spending needs. At
the national level, higher saving will help to correct what many
analysts believe are unsustainable imbalances in trade and capital
flows between countries.
the outlook for the broader economy
Turning to the broader economy, I share what seems to be the
consensus view that we are not likely to see the rapid snapback in
activity that has followed many previous downturns. As with consumer
spending, the most probable outcome seems to be a moderate expansion of
economic activity over the next couple of years.
To be sure, the consensus view may not turn out to be correct. Two
years ago, for example, most analysts did not foresee the deep
recession that we have experienced. Similarly, the recovery could well
be stronger or weaker than most forecasters now expect.
That said, although the economy appears to have reached a turning
point, none of the major components of private aggregate demand seem
poised for a sharp recovery. As I have just described at length,
consumer spending is unlikely to expand robustly over the next year or
so. Indeed, consumer spending has rarely led the way out of downturns
in the past. All recoveries are different, of course, but, on average,
the saving rate has tended to move sideways after the economy hits
bottom, implying that consumer spending has generally increased as
rapidly as income and overall economic activity.
In the housing sector, the long contraction appears to have come to
an end, with residential construction, home sales, and homes prices all
showing signs of firming in recent months. Indeed, homes are much more
affordable than they were a few years ago, with national home prices
now down more than 30 percent from their peak in 2006 and interest
rates on conforming mortgages roughly 1.5 percentage points below their
average over the past decade. However, a strong rebound in construction
seems very unlikely. The stock of unsold new homes remains very high,
particularly when measured relative to sales. In addition, housing
demand will likely be held back for some time by the weak financial
situations of many households. Moreover, many households that are not
qualified for government-supported mortgages--either with backing from
the government-sponsored enterprises or through the Federal Housing
Authority or the Department of Veterans Affairs--are finding it
extremely difficult to obtain a mortgage.
One downside risk to this already soft outlook stems from the
foreclosure crisis. In 2008, lenders initiated more than 2\1/4\ million
foreclosures, up from a pace of 1\1/2\ million in 2007 and an average
of less than 1 million over the preceding three years. With various
foreclosure moratoria expiring in early 2009, the rate at which
foreclosures were initiated shot up to an annual pace of 3 million. \3\
Foreclosure starts generally affect housing markets with a substantial
lag, as the foreclosure process can take many months or even years to
complete. Thus, although improvements in economic conditions and this
year's government initiatives to prevent foreclosures may damp the
foreclosure start rate, the rate at which distressed properties are
coming to market is likely still building. We lack good estimates of
how large the influx will be and how it will affect the housing market,
but one cannot dismiss the possibility that these properties will
depress housing construction and home prices yet further.
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\3\ See Larry Cordell, Karen E. Dynan, Andreas Lehnert, Nellie
Liang, and Eileen Mauskopf, ``The Incentives of Mortgage Servicers and
Designing Loan Modifications to Address the Mortgage Crisis,'' in
Robert W. Kolb, ed., Lessons from the Financial Crisis (forthcoming).
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Business investment in equipment and structures is likely to be
held down by the large amount of excess capacity. Falling demand for
manufactured products over the past two years has left capacity
utilization in that sector extremely low relative to historical norms.
Outside of manufacturing, the financial sector, which traditionally has
invested heavily in high-tech equipment, has shrunk markedly and is
likely to stay much smaller than its pre-crisis size. More broadly,
weak demand for output should damp business investment in many sectors.
Business spending on structures is likely to be particularly sluggish,
amid high vacancies in the office sector and very tight financing
conditions for firms that do wish to start new projects.
Business investment in inventories is probably contributing to
growth in the second half of this year. The sharp reduction in demand
for goods led businesses to liquidate their holdings of inventories at
a staggering rate in the first half of the year. But, with the recent
stabilization of demand, the pace of destocking should be slowing, and,
at some point, firms will begin to rebuild inventories. This pattern
appears to have been boosting production of late and should continue to
do so for several quarters. However, inventory investment cannot be
counted on as a source of sustained growth as its effects on production
tend to be neutral once inventories are brought in line with sales.
Foreign growth has picked up of late, particularly in many Asian
nations. This recovery has led to an increase in demand for U.S.
exports. However, imports have also turned around with the firming of
domestic demand. On balance, net exports appear to be contributing
little to the U.S. recovery at this point.
In sum, economic activity is on track to expand over the next
couple of years but only at a modest pace. As a result, the economy is
unlikely to see full employment for many years, prolonging the current
economic distress for millions of households.
policy options
In light of the expected slow pace of the recovery, many policy
analysts and other observers are considering possible policy actions to
spur demand for output and employment. Some of these policy actions
would be broadly stimulative, while others would have narrower,
targeted effects.
As I noted earlier, under current law, households' disposable
income will be reduced by the expiration at the end of this year of the
higher exemption limits for the Alternative Minimum Tax and the
expiration by the end of next year of the 2001 and 2003 tax cuts and
the Making Work Pay tax credit. According to the Congressional Budget
Office (CBO), these developments will depress disposable personal
income in 2011 by a projected $300 billion or nearly 3 percent. \4\
Pushing back the date at which these provisions expire would provide
more support for consumer spending.
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\4\ See Congressional Budget Office, ``The Budget and Economic
Outlook: An Update,'' August 2009.
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That said, policymakers should be mindful of the long-term need for
fiscal discipline. Even with the expiration of these tax provisions,
CBO projects that U.S. budget deficits will be more than 3 percent of
GDP five to ten years from now and that federal debt held by the public
will be rising relative to GDP. High budget deficits reduce saving and
investment and, in turn, damp economic growth; they also risk inducing
a crisis in which the holders of U.S. debt lose their appetite for that
debt. Thus, while it may make sense for Congress to take steps that
reduce taxes on households in the short run, it is imperative that
policymakers form a plan to bring revenues back in line with spending
over the longer run.
More targeted policy changes can generally be divided into those
that bolster job creation and those that provide other relief to
households that have suffered job losses. In the former category,
additional aid to state and local governments would reduce the need for
cutbacks in employment by those governments and by related private-
sector entities. Even if one thinks that state governments should
restrain their activities and employment over time, the abrupt cutbacks
enforced by falling tax revenue in this recession have not served the
broader economy well.
As another strategy for encouraging job creation, some analysts
have proposed offering tax credits for firms that hire new workers.
Designing and implementing effective tax incentives for hiring is
difficult, however. One challenge is that, in the dynamic U.S. job
market, many firms are creating jobs even in tough economic times.
Therefore, a tax credit for all job creation tends to distribute money
to many firms that would have done that same hiring anyway. On the
other hand, restricting a tax credit to employment increases that would
not otherwise have occurred is hard.
With regard to initiatives that provide other types of relief to
households that have suffered job losses, several possibilities would
help households sustain their spending and thereby bolster the overall
recovery. For example, the efforts that Congress is making to extend
unemployment insurance for those who are scheduled to exhaust their
benefits by the end of this year would be helpful. Likewise, an
extension of the subsidy of COBRA health-insurance premiums for laid-
off workers would also be helpful.
Policymakers could also adopt policies to help homeowners who have
lost their jobs meet their mortgage obligations. The Administration's
loan modification program, the Home Affordable Modification Program,
should help many borrowers for whom a moderate permanent adjustment to
mortgage payments would make those payments sustainable over the long
run. However, the program is not well-suited to cases where homeowners
have suffered large temporary declines in income, because the required
modifications will often be too costly to qualify for the program. \5\
Nor do costly permanent modifications make sense for these cases, as
they should not be needed once the homeowners have found other jobs.
Instead, temporary assistance for meeting mortgage obligations would
help support the spending of laid-off workers, and, by making mortgage
default less likely, reduce the downside risks to the housing outlook
that I noted above.
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\5\ For more discussion of the Home Affordable Modification Program
and its limitations, see Larry Cordell, Karen E. Dynan, Andreas
Lehnert, Nellie Liang, and Eileen Mauskopf, ``Designing Loan
Modifications to Address the Mortgage Crisis and the Making Home
Affordable Program,'' Federal Reserve Finance and Economics Discussion
Series Paper No. 2009-43, October 2009.
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Another way to support the housing market would be to extend the
first-time homebuyer tax credit, which is scheduled to expire on
December 1st of this year. This approach would likely spur some new
home sales. However, as my colleague Ted Gayer at the Brookings
Institution has argued, the tax credit may be a costly way to
accomplish this goal, as most of the homebuyers expected to receive the
credit would probably have bought homes without the credit. In
addition, to the degree that the tax credit simply shifts additional
households from renting to owning, it does not address the fundamental
problem of oversupply in the housing market. \6\
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\6\ See Gayer, Ted ``Should Congress Extend the First-time
Homebuyer Tax Credit?'' at http://www.brookings.edu/opinions/2009/
0924_tax_credit_gayer.aspx.
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conclusion
Recent economic data point to a decided firming of economic
activity. A great deal of uncertainty surrounds the question of the
strength and speed of recovery, but the most likely course for the
economy seems to be gradual expansion. Consumer spending on goods and
services, the largest component of aggregate demand for output, is
likely to be held to a modest upward trajectory over the next of couple
years by weak income growth, higher saving, and lower borrowing.
Likewise, the fundamental determinants of other major components of
private demand appear to be supportive of only moderate growth in these
categories. Policymakers have some options that would bolster the
recovery and increase the speed with which the economy returns to full
employment; considerations of such actions should be mindful not only
of the short-run benefits but also of the potential long-run costs,
particularly in terms of the budget deficit.
Thank you very much.
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