[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

                               __________

          Printed for the use of the Joint Economic Committee











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                        JOINT ECONOMIC COMMITTEE

    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

HOUSE OF REPRESENTATIVES             SENATE
Carolyn B. Maloney, New York, Chair  Charles E. Schumer, New York, Vice 
Maurice D. Hinchey, New York             Chairman
Baron P. Hill, Indiana               Jeff Bingaman, New Mexico
Loretta Sanchez, California          Amy Klobuchar, Minnesota
Elijah E. Cummings, Maryland         Robert P. Casey, Jr., Pennsylvania
Vic Snyder, Arkansas                 Jim Webb, Virginia
Kevin Brady, Texas                   Mark R. Warner, Virginia
Ron Paul, Texas                      Sam Brownback, Kansas, Ranking 
Michael C. Burgess, M.D., Texas          Minority
John Campbell, California            Jim DeMint, South Carolina
                                     James E. Risch, Idaho
                                     Robert F. Bennett, Utah

                 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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \4\ See Congressional Budget Office, ``The Budget and Economic 
Outlook: An Update,'' August 2009.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
                               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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