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



                                                        S. Hrg. 111-523
 
    THE CHALLENGE OF CREATING JOBS IN THE AFTERMATH OF ``THE GREAT 
                              RECESSION''

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

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           DECEMBER 10, 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. Vic Snyder, a U.S. Representative from Arkansas.............     4
Hon. Michael C. Burgess, M.D., a U.S. Representative from Texas..     5
Hon. Elijah E. Cummings, a U.S. Representative from Maryland.....     7

                               Witnesses

Statement of Honorable Joseph E. Stiglitz, Nobel Laureate, 
  Professor, Columbia University, Former Chairman, Council of 
  Economic Advisers, New York, NY................................     8
Statement of Dr. Russell Roberts, Professor of Economics, George 
  Mason University, and the J. Fish and Lillian F. Smith 
  Distinguished Scholar at the Mercatus Center, and a Research 
  Fellow at Stanford University's Hoover Institution, Fairfax, VA    13

                       Submissions for the Record

Prepared statement of Chair Carolyn B. Maloney...................    36
Prepared statement of Senator Sam Brownback, Ranking Minority....    36
Prepared statement of Representative Kevin Brady.................    37
Prepared statement of Joseph E. Stiglitz.........................    39
Prepared statement of Russell Roberts............................    64
Chart titled ``Current Recession Characterized by Precipitous 
  Fall in Private Sector Job Creation''..........................    69


    THE CHALLENGE OF CREATING JOBS IN THE AFTERMATH OF ``THE GREAT 
                              RECESSION''

                              ----------                              


                      THURSDAY, DECEMBER 10, 2009

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The committee met, Pursuant to call, at 10:08 a.m., in Room 
210, Cannon House Office Building, The Honorable Carolyn B. 
Maloney (Chair) presiding.
    Representatives present: Maloney, Hinchey, Cummings, 
Snyder, Brady, Burgess, and Campbell.
    Staff present: Paul Chen, Gail Cohen, Colleen Healy, 
Elisabeth Jacobs, Michael Neal, Barry Nolan, Annabelle 
Tamerjan, Andrew Tulloch, Andrew Wilson, Rachel Greszler, Lydia 
Mashburn, Jane McCullogh, Ted Boll, Gordon Brady, Dan Miller, 
and Robert O'Quinn.

OPENING STATEMENT OF THE HONORABLE CAROLYN B. MALONEY, CHAIR, A 
               U.S. REPRESENTATIVE FROM NEW YORK

    Chair Maloney. The committee will come to order.
    I am Congresswoman Maloney, and I recognize myself for 5 
minutes.
    For the first time since the recession began 2 years ago, 
the labor market appears to have stabilized. After month after 
month of punishing losses, November's employment picture was 
relatively stable. Less than a year ago, job losses were 
growing more and more severe. Last November, the economy shed 
600,000 jobs. Losses increased until January, when they hit a 
post-Great Depression record of 741,000 jobs lost, the last 
month President Bush was in office.
    But we turned a corner. Job losses have steadily fallen for 
the last six months. Yet there is no escaping the cruel math of 
recoveries. The recovery of the job market lags behind the 
recovery of the broader economy. Businesses must have more 
customers before they add employees.
    Although the labor market appears to be stabilizing, too 
many Americans remain out of work. More than 15 million workers 
are unemployed. While we have brought the economy back from the 
brink, we are not yet where we need to be in terms of job 
creation.
    The mission is to create high-quality private-sector jobs. 
Congress has already done a great deal of work on this front. 
The $700 billion Recovery Act included a tax cut for 95 percent 
of American families and created jobs while investing in clean 
energy technologies, infrastructure, and education. We see 
those investments paying off in the steadily improving labor 
market figures. The effect of the stimulus on job creation has 
been verified by the nonpartisan Congressional Budget Office.
    Just last month, we extended the $8,000 first-time 
homebuyers credit that will spur construction jobs.
    We extended tax relief to small businesses. We are boosting 
funding for small business loans via the Small Business 
Administration. These two initiatives should spur hiring.
    Earlier this week, President Obama announced a new job 
creation agenda with three key initiatives to accelerate job 
growth. First, we need to focus on small businesses. Small 
businesses are the engine of the American economy. By helping 
small businesses expand investments and access credit, they can 
fuel job growth. Second, we need to invest in our future by 
rebuilding America's crumbling infrastructure. Finally, we need 
to focus on green jobs. Smart, targeted investments in energy 
efficiency can help create jobs while improving energy security 
and saving consumers money.
    Congress and the President will work together to 
aggressively pursue a job creation agenda that speeds the labor 
market recovery. Of course, some of those initiatives will 
require new spending, and we are committed to transparency 
regarding the cost of our initiatives.
    But let me be clear: While putting Americans back to work 
today may require deficit spending, the dangers of inaction are 
even more costly. If we do not invest in job creation, we will 
pay later in the form of higher payments to unemployment 
insurance, food stamps, welfare, and other entitlements for a 
ballooning number of out-of-work Americans and their very hard-
hit suffering families.
    Nearly 6 million Americans have been unemployed for 6 or 
more months. Over 3 million Americans have been unemployed for 
over a year. Research shows that the longer a worker is out of 
work, the harder it is for him or her to gain employment. We 
must invest in these workers with aggressive job creation 
policies, coupled with targeted job training initiatives. 
Otherwise, we face a long-term cost burden far more expensive 
than smart spending on job creation investments today.
    Our challenge today is immense. While the economy may be on 
the road to recovery, the labor market remains on shaky 
footing. We Americans are a hard-working, resilient people, but 
the millions who have been battered by the economic storm need 
our help today in getting back to work, and I am confident that 
we are up to the task.
    I am thrilled that we are joined today by Dr. Joseph 
Stiglitz, one of America's brightest economic minds, who is 
here to help us learn more ways to accomplish our goal of a 
rapid and complete labor market recovery. And I welcome also 
Dr. Roberts. Thank you both for being here.
    I now recognize Mr. Brady for 5 minutes.
    [The prepared statement of Representative Maloney appears 
in the Submissions for the Record on page 36.]

    OPENING STATEMENT OF THE HONORABLE KEVIN BRADY, A U.S. 
                   REPRESENTATIVE FROM TEXAS

    Representative Brady. Thank you, Madam Chair.
    I would like to ask unanimous consent to insert the opening 
statement of Senator Brownback into the record.
    Chair Maloney. Without objection.
    [The prepared statement of Senator Brownback appears in the 
Submissions for the Record on page 36.]
    Representative Brady. I join the chairwoman in welcoming 
Dr. Stiglitz and Dr. Roberts and look forward to hearing the 
views of these two distinguished economists.
    The economy remains the number one issue for Americans and 
my constituents in Texas. They are apprehensive, in some cases 
frightened, about the direction the economic policy has taken 
in Washington.
    A new Bloomberg survey of the American public reveals the 
vast majority of the Nation, 60 percent, believe the stimulus 
has had no effect or is actually hurting the economy. More 
troubling, nearly half say they feel less financially secure 
today than they did when President Obama first took office. And 
their pessimism grows about the willingness and the ability of 
the government to reduce the staggering deficit.
    The recent hastily arranged job summit and calls by the 
President for Stimulus II are further signs that this 
administration's economic policies are failing the American 
public. Consumers are frightened by the debt and their job 
future and are understandably reluctant to spend. Businesses of 
all sizes are worried, reluctant to add new workers while 
Washington promotes higher health care costs, energy costs, 
more regulation, and new taxes.
    The White House and this Congress have taken their eyes off 
the economic ball, opting instead to pursue ideological agendas 
that contribute nothing to our economic recovery and, in fact, 
fuel fear among job creators along our Main Streets. We need to 
stop ``frightening the horses'' if we hope for a stable and 
reliable economic recovery led by our local businesses, rather 
than the government.
    The United States is at an economic crossroads. The road to 
the right is a free market economy in which the decisions of 
Americans acting as entrepreneurs, consumers, workers, 
investors, and savers are determinative, while the road to the 
left is a social market economy in which the Federal Government 
plays a controlling role.
    To the right, Congress would gradually reduce Federal 
budget deficits by restraining the growth of Federal spending 
and pruning unnecessary or ineffective programs. Reforming 
health care on this path would focus on empowering patients and 
lowering costs.
    To the left, Congress would continue its reckless spending. 
Reforming health care on this path would focus on empowering 
the Federal bureaucracy and expanding health care entitlement 
benefits with little consideration about long-term costs.
    To the right, Congress would direct the Treasury to sell 
its shares in Chrysler, Citigroup, GMAC, and General Motors and 
to truly privatize Fannie Mae and Freddie Mac as quickly as 
possible. Once again, the market will determine which companies 
prosper or fail.
    To the left, Congress would establish an industrial policy 
of the United States, determining winners such as green 
technologies and losers such as oil and natural gas production 
based on political criteria. Housing is one of the few sectors 
of the U.S. economy in which the Federal Government has pursued 
an industrial policy. The collapse of the housing bubble and 
the insolvencies of Fannie and Freddie should warn us about the 
dangers of mixing public purpose and private profits.
    To the right, necessary regulations would be as simple as 
possible and fairly enforced. Old regulations would be 
regularly reviewed, and regulations that have proved costly, 
ineffective, or unnecessary would be eliminated.
    To the left, new regulations would multiply. The cost or 
effectiveness of regulation would matter little so long as 
their intent is good.
    To the right, Congress would stabilize the Federal tax 
burden as a percent of GDP at its post-World War II average. 
Congress would reform the Federal income tax system to 
encourage both domestic and foreign investors to make job-
creating investments in the United States, rather than forcing 
them abroad.
    To the left, Congress would allow the Federal tax burden to 
rise as a percent of GDP. Congress would inevitably be forced 
to increase the income and payroll tax rates paid by nearly all 
Americans, not just the wealthy.
    To the right, Congress would aggressively pursue new 
customers around the globe, tearing down barriers and creating 
U.S. jobs by approving the pending free trade agreements with 
Colombia, Panama, and South Korea and engaging in dynamic 
growing markets, such as the Asia Pacific region.
    To the left, Congress would block these agreements, 
withdraw from the global marketplace, and impose protectionist 
measures that block access to the U.S. market at the behest of 
a few labor leaders and other activists.
    History both here and abroad proves that the right road 
leads us to the same economic growth, rising personal income, 
and expanding job opportunities, while the left road leads to 
stagnation.
    The question before our distinguished economists Dr. 
Stiglitz and Dr. Roberts today is which road would you choose?
    I yield back.
    [The prepared statement of Representative Brady appears in 
the Submissions for the Record on page 37.]
    Chair Maloney. Thank you very much.
    Congressman Snyder.

     OPENING STATEMENT OF THE HONORABLE VIC SNYDER, A U.S. 
                  REPRESENTATIVE FROM ARKANSAS

    Representative Snyder. Thank you, Madam Chair.
    I don't normally do opening statements. But I have got to 
tell you, listening to some of my Republican colleagues in 
Washington here talk about deficits is a bit like listening to 
Bonnie and Clyde at a job interview to be a bank security 
guard.
    Have we forgotten the history of the last couple decades? 
1997, the Balanced Budget Act of 1997 under Bill Clinton's 
leadership? It was a bipartisan bill. Newt Gingrich was 
Speaker. I voted for it. It led to surpluses in fiscal years 
'98, '99, and 2000. Remember those days? Surpluses as far as 
the eye can see. Alan Greenspan testifying, gee, we may pay 
down the national debt too fast. That was not a dream, was it, 
Dr. Stiglitz? That really happened. Testified we might pay down 
the national debt too fast.
    Then what happened? A new team in town. President Bush 
comes in. An economic plan in April of 2001 that I did not vote 
for. I think it was one of the best votes I have made here. And 
instead of having budget surpluses as far as the eye can see, 
we are now back into the worst indebtedness that the United 
States has ever seen.
    All of us are concerned about the indebtedness, but to hear 
folks talking about that somehow this has been created in the 
last 9 or 10 months of the Obama administration is just 
foolhardy. It just doesn't make any sense.
    In order to solve problems we have to understand the cause 
of the problems, and the cause of the problems was a bad 
economic policy over the last 8 or 9 years.
    I want to say just a word about the Stimulus Act. I just 
want to read, Madam Chair, if I might, from the CBO report that 
came out just in the last few weeks.
    ``CBO estimates that in the third quarter of calendar year 
2009 an additional 600,000 to 1.6 million people were employed 
in the United States and real gross domestic product, GDP, was 
1.2 percent to 3.2 percent higher than would have been the case 
in the absence of the Stimulus Act.
    Now is that good enough? Hell, no, it is not good enough. 
But let's not pretend that somehow there have not been positive 
benefits. We have certainly seen that in Arkansas with some of 
the infrastructure projects that have gone on, the tax cuts for 
millions of Americans that have helped.
    I just think that, as we look ahead, time does not start 
today. The history of this country started a couple of 
centuries ago, and we need to learn from what has happened in 
the past with regard to our policies. We have an opportunity I 
think to get this country going in the right direction, but it 
will be more difficult if we somehow reform history as we move 
forward.
    Thank you, Madam Chair.
    Chair Maloney. Thank you very much.
    I understand Mr. Campbell is placing his opening comments 
in the record. All members have time to put that in the record.
    Chair Maloney. Dr. Burgess.

OPENING STATEMENT OF THE HONORABLE MICHAEL C. BURGESS, M.D., A 
                 U.S. REPRESENTATIVE FROM TEXAS

    Representative Burgess. Thank you, Madam Chair. I will be 
brief.
    I am grateful for the witnesses we have today. I think this 
gets to one of the fundamental questions that needs to be 
answered and perhaps one of the fundamental differences we have 
between us on different sides of this dais up here: Who is the 
better person for creating jobs in this economy? Is it the 
government or is it the private sector?
    The Federal Government currently employs over 1.8 million 
people. Wal-Mart, a similar number, and no one can doubt that 
Wal-Mart has been a profitable enterprise. The Federal 
Government, not so much, a debt of $12.1 trillion; and we will 
go up sometime before the end of this month another $1.8 
trillion on our debt limit. So if we were a business, we would 
clearly not be in business any longer.
    Now the stimulus bill passed in the spring, the $787 
billion stimulus bill. The academic conversation about who was 
the appropriate creator of jobs was one that was had at that 
time. With that vote, it was determined that the public sector 
was the appropriate creator of jobs. And once we crossed 
irrevocably that bridge--the belief that the government knows 
better than the private sector on how to create jobs--it 
doesn't matter how much money we spend. It is now expected that 
the Federal Government must spend the money.
    However, the government can't continue to spend and spend 
our way into what might be described as a more normal 
unemployment number. Ben Bernanke said on Monday that he 
expects unemployment to stay between 9.3 and 9.7 percent over 
the next year. At that rate, we wouldn't get back to what many 
of us would like to see in an unemployment rate for 6 years. 
And today we hear that in just 1 week, 474,000 more Americans 
have filed for unemployment.
    If we consider this, the Federal Government has spent $787 
billion to create a number of jobs that we can't actually 
really determine. Not even the head of the stimulus board is 
willing to certify. But even assuming that nearly a million 
jobs have been saved or created, that is a cost of roughly 
$800,000 per job, if you believe that the government is the 
right person to do that. Then compare that with the certain 
fact that it costs the private sector somewhere between $55,000 
and $90,000 to create a job, and that is a job with some 
benefits, perhaps health insurance, perhaps some retirement 
package. Now whether you are good at math or not, it doesn't 
matter. But that savings of nearly $700,000 if the private 
sector creates a job versus what the public sector spends is 
significant.
    So as Congress, as a legislative body, we must consider 
what we can do to encourage the private sector to help create 
jobs.
    The reauthorization of the highway infrastructure bill is 
one that we could consider. We put some money into the 
infrastructure in the stimulus bill. Some people would argue we 
didn't do enough in that regard. But we have been sitting on a 
reauthorization pretty much all year, and that is something 
that we could do. President Eisenhower, of course, led the way 
with the creation of the interstate system, and certainly that 
was a job creator when that program was begun.
    Most importantly, we have got to stop damaging the 
environment for the small business and the entrepreneur that 
personally goes to work every day, trying to think of how to 
get ahead and how to grow their business. We spend so much time 
up here renaming post offices, but maybe that is a good thing. 
Because if we are renaming post offices at least we are not 
damaging the economic environment any further.
    Well, let's stop making the environment hostile for 
businesses with things like cap-and-trade, our energy policy, 
the health care monstrosity, and now this latest TARP II bill 
that we will have on the floor today. It seems like that if we 
would do things to create stability within the business 
environment and get out of the way that that might be a better 
trajectory to follow for job creation.
    But I am anxious to hear from our witnesses today.
    With that, I yield back the balance of my time.
    Chair Maloney. Thank you.
    Congressman Cummings is recognized.

 OPENING STATEMENT OF THE HONORABLE ELIJAH E. CUMMINGS, A U.S. 
                  REPRESENTATIVE FROM MARYLAND

    Representative Cummings. Good morning. Thank you, Madam 
Chair.
    Today's hearing is yet another reminder why we must build 
upon the success of the American Recovery and Reinvestment Act 
or risk a backslide into conditions like those we saw earlier 
this year when we were losing over 700,000 jobs every month.
    I, unfortunately, may have to leave, because I have got two 
other hearings going on. But I want to hear as much of this 
testimony as I possibly can.
    There have been many such hearings held in the House 
Transportation and Infrastructure Committee, and we have been 
repeatedly briefed on the projects around the Nation that have 
produced immediate gains through long-term investments, and 
that is what we are doing now over there in the Transportation 
Committee. However, my colleagues on the right continue to 
argue that the money can be better spent by paying down the 
debt and reducing the deficit.
    It is a tough position to argue against. Who doesn't want 
fiscal responsibility from their government? But abandoning the 
long-suffering and long-term-unemployed citizens in Baltimore 
and all over this country is a shortsighted world view and one 
I simply cannot endorse. Not only is abandoning these Americans 
a moral failing, but it is bad fiscal policy as well. The 
result would be higher future costs for unemployment insurance, 
food stamps, public health benefits, as well as lower property 
values and higher crime rates.
    But I will stand steadfast by my original statement that it 
is a moral failing to continue to let our constituents lose 
their homes, their savings, and their health care in the name 
of supposed fiscal responsibility after 8 years of gross fiscal 
irresponsibility and blatant catering to the wealthiest among 
us.
    That is why I wholeheartedly support President Obama's 
continued efforts to help the economy recover. In addition to 
the infrastructure investments, the proposal offers tremendous 
assistance to small businesses, the engine that drives our 
greater economy.
    Since taking office in January, the President has not lost 
sight of the ultimate goal of helping all Americans recover. 
Last fall, when we were told that the sky was falling, we took 
action to bail out Wall Street and banks all over America. 
However, record bonuses now flow from those same bailed-out 
firms, and lobbyists tell us the increased consumer protections 
currently being debated on the floor will spell the end of 
business as we know it. I don't buy it. It only further 
entrenches me in the mindset that stronger consumer protections 
are exactly what we need.
    Further, the financial regulatory reform bill being 
considered on the House floor this week will provide $3 billion 
for short-term loans to unemployed homeowners nearing 
foreclosure. This is the kind of relief that can move us from 
trial modifications to permanent stability.
    While we took the necessary action to stabilize the 
financial system last fall, the time has come to embrace 
consumer protection, job creation, and real foreclosure 
prevention in order to meet the larger goal of creating a 
recovery for not just Wall Street but for Main Street and for 
all of Americans.
    I welcome the testimony of our witnesses this morning, and 
I look forward to a frank and productive discussion.
    With that, Madam Chair, I yield back.
    Chair Maloney. Thank you very much.
    I would now like to introduce our distinguished panel.
    Professor Joseph Stiglitz is a university professor at 
Columbia University in New York City and Chair of Columbia 
University's Committee on Global Thought. He is also the 
cofounder and executive director of the Initiative for Policy 
Dialogue at Columbia.
    In 2001, he was awarded the Nobel Prize for Economics. Dr. 
Stiglitz was a member of the President's Council of Economic 
Advisers from 1993 to 1995 and served as its chairman from 1995 
to 1997. He then became chief economist and senior vice 
president of the World Bank from '97 to 2000. He has received 
numerous awards and has been called the People's Professor.
    Professor Russell Roberts is professor of economics at 
George Mason University, a distinguished scholar, and a 
research fellow at Stanford University's Hoover Institution. He 
is the author of a series of novels which discuss economic 
principles. His first novel, ``The Choice: A Fable of Free 
Trade and Protectionism,'' was named one of the top 10 books of 
the year by Business Week and one of the best books of the year 
by the Financial Times when it was first published in 1994. 
Professor Roberts is the host of the weekly podcast series 
EconTalk and is a frequent commentator on NPR's Morning Edition 
and All Things Considered.
    We welcome both of you and look forward to your testimony. 
Both of you will have 10 minutes for your testimony. We usually 
have 5 minutes, but this topic is critical to our country. We 
look forward to your thoughts.
    Dr. Stiglitz and then Dr. Roberts. Thank you.

  STATEMENT OF HONORABLE JOSEPH E. STIGLITZ, NOBEL LAUREATE, 
  PROFESSOR, COLUMBIA UNIVERSITY, FORMER CHAIRMAN, COUNCIL OF 
                ECONOMIC ADVISERS, NEW YORK, NY

    Dr. Stiglitz. Thank you very much. It is a pleasure to 
address you concerning the state of the economy and what needs 
to be done.
    Though the economy today is far better than a year ago, it 
is no exaggeration to say the situation remains bleak. We are 
at a critical stage in our recovery. The banks have been 
rescued and are set to pay out large amounts in bonuses. Yet 
there remain severe problems in our financial markets, with 
mortgage foreclosures continuing apace and massive problems in 
commercial real estate on the horizon.
    The suffering of homeowners who have lost much of their 
home equity, if not their homes, and workers who have lost 
their jobs is palpable. The divide between Wall Street on the 
one hand and the rest of the country, and even parts of the 
financial system that have received special favors from 
Washington and those that have not, has perhaps never been 
greater in recent memory. The fact that the stock market is up 
or credit markets are less frozen should not distract us from 
the problems ahead.
    These are especially grave in the labor market. We should 
not be fooled by the fact that the unemployment rate this month 
dropped by .2 percent to 10 percent. More than one out of six 
workers who would like a full-time job still can't get one. 
Such an unemployment rate should be unacceptable.
    In my written testimony, I describe how bad the situation 
in the labor market is and why I am pessimistic concerning a 
quick recovery, a view that I think is now shared by the Fed. 
We will be lucky if the unemployment rate returns to a normal 
level before 2012 or 2013, unless strong measures are taken 
soon; and, even then, the prognosis is not good.
    I also explain why it would be shortsighted--even more 
shortsighted than those in the financial markets who got us 
into the mess--if we were to give in to deficit fetishism. We 
would be myopic in two senses: to focus on one side of the 
balance sheet rather than both sides (the assets that spending 
can create) is simply bad economics. These investments can 
yield returns far in excess of the cost of capital.
    Investments in jobs can even help reduce the deficit in the 
long run. Unemployed workers lose their job skills. We are at 
risk of replicating a phenomenon observed in Europe in the 
1980s called hysteresis. Those with extended periods of 
unemployment never return to the labor force or, if they do, it 
is in jobs with vastly lower wages and productivity.
    Unless we manage this crisis well, we could be setting 
ourselves up for an extended period of high unemployment. What 
economists call the natural unemployment rate may be 
significantly increased. And if that happens, GDP and tax 
revenues for years to come will be lower than they otherwise 
would be, with the result that the national debt would be 
higher.
    That does not mean that we should ignore the deficit. It 
does mean that we should be very careful in our spending, 
ensuring that we get value for our dollars.
    My earlier book with Linda Bilmes highlighted the high cost 
of the Iraq and Afghanistan wars, including the future cost of 
providing disability payments and caring for the large number 
of injured and permanently disabled returning troops. At the 
time, we estimated, for instance, that those costs would be in 
the order of $500 billion or more. Evidence since the 
publication of our book suggests that those numbers were 
excessively conservative.
    They also suggest that the costs in Afghanistan are 
markedly higher than in Iraq. Using the Administration's 
estimates of about $1 million per troop, which does not include 
future costs of disability and health care, the money spent on 
the 30,000 additional troop surge could have created more than 
1 million jobs in America that pay $30,000; and the jobs 
created in America would have higher multipliers. That is to 
say, second- and third-round effects.
    It is also one of the reasons why I have been so critical 
of the manner in which the bank bailouts were conducted.
    A congressional oversight panel has described how at the 
time that money was provided to the banks we got back 66 cents 
on the dollar in preferred shares and warrants. Not to put too 
fine a point on it, we, as taxpayers, were cheated. Had we 
gotten a fair deal, our national debt in the future would have 
been much lower.
    As we approach the looming jobs problem, we should not 
repeat the mistakes we have repeatedly made responding to the 
crisis of too little, too late. There is in economics something 
akin to the Powell Doctrine in the military. One needs to 
attack the problem with overwhelming force. If things turn out 
better than the pessimistic prognosis given below, we can 
always scale back.
    There are clear criteria for the form of stimulus: high 
multipliers, that is to say, large GDP bang for the buck; large 
job creation bang for the buck; creating assets with high 
returns, especially those directed at national needs like 
improving technology and public transportation systems; 
flexibility; automatic stabilizers which increase spending 
commensurate with the economy's needs; and meeting some of the 
economic and social exigencies created by economic crisis.
    We need to take a portfolio approach. There is no single 
measure that will solve the problems of the magnitude that we 
face.
    But I do want to emphasize the response to some of the 
discussion that has been raised that the stimulus has worked. 
It has not been enough. It could have been better designed, but 
there is absolutely no doubt that, had it not been for the 
stimulus, the job situation would be far worse than it is 
today.
    Assessing alternative measures in terms of the criteria I 
have laid out gives some sense of priorities, which should 
include extending unemployment benefits, aid to States, 
government jobs programs, research and technology programs, and 
longer-term investments.
    Here let me just make a couple of comments. In my written 
testimony, I elaborate on these.
    First, we should take advantage of the fact that this is 
likely to be a long downturn. We should be drawing up plans now 
for higher-return public infrastructure projects that are not 
shovel ready but could be ready in 1 or 2 years' time. If it 
turns out that the economy recovers, which is unlikely, these 
can be undertaken eventually if funds become available. If the 
economy is still weak a year or two from now, we will have a 
portfolio of high-return projects from which we can choose.
    Secondly, as we went about the rescue we had no vision of 
what kind of a financial sector, or what kind of economy we 
wanted to emerge after the crisis. We cannot and we should not 
go back to the world of 2007. Our financial sector was bloated 
and distorted. It will have to be downsized. But the question 
is, what parts should be downsized? We should be strengthening 
the venture capital firms and the banks that lend to small- and 
medium-sized firms.
    A vision of the economy that we want after the crisis 
should also guide our spending. The economy of the future will 
require more educated workers and will be based on high 
technology. That is why it is particularly disturbing for me to 
see universities furloughing teachers and other cutbacks in our 
education system.
    In my written testimony, I discuss the special problems 
facing small- and medium-sized enterprises which are the source 
of job creation. They are facing increasing difficulties in 
getting access to credit, even as the banks seem to be 
recovering. More than a year ago, we were told that we needed 
to bail out the banks to maintain lending. But in giving huge 
sums to the banks, we put no conditions on how they used the 
money.
    I also outline some bold actions that could be undertaken 
that would enhance the flow of funds to SMEs. Whatever benefits 
we give should be linked to job creation. A capital gains tax 
benefit for a small business engaged in real estate speculation 
is not exactly what the economy needs at this juncture. Many 
owners of SMEs rely on the use of their home or other real 
estate as collateral for lending; and with these prices 
plummeting, access to credit is being impaired.
    This is only one of several complex linkages between the 
real estate sector and rest of the economy, explaining why it 
was such a mistake not to do more earlier about that sector; 
and this is only one of several channels through which problems 
in the real estate market are transmitted to the rest of the 
economy.
    For instance, the weak housing market will contribute to 
high unemployment and lower productivity in another way. A 
distinguishing feature of America's labor market is its high 
mobility. But if individuals' mortgages are underwater or if 
home equity is significantly eroded, they will be unable to 
move, to reinvest in a new home, and this will really undermine 
what has been one of our great strengths.
    Let me say a word about global imbalances. This is a global 
economic downturn. Well before the crisis there was a worry 
that there would be a disorderly unwinding of the global 
imbalances. This disorderly unwinding was not the cause of the 
current crisis, but it could be of the next.
    It is important that something be done about these 
imbalances, which include America living beyond its means. But 
one of the things I emphasize is that we cannot rely on some 
international fix, a magic bullet that might result from 
correcting these imbalances for solving our problems.
    While I have emphasized that it is premature to begin 
exiting from the extraordinary monetary and fiscal 
interventions, I thought it important to stress the special 
difficulties resulting from particular measures undertaken by 
the Fed as it puts on its balance sheet around $1 trillion of 
mortgages. We should recognize that, as it exits this program, 
mortgage interest rates will rise, and this will have an 
adverse effect on real estate prices and investment. At the 
same time, the Fed will experience a large capital loss on its 
holdings. Whether it recognizes that loss or not does not hide 
what has really happened. This is just another of the many 
costs that the failure of our financial system and the Fed's 
failure have imposed on our society.
    These costs are one of the reasons that we have to have 
effective regulatory reform. Our financial system failed to 
perform its essential functions of managing risk, and 
allocating capital at low transaction costs. Private rewards 
were misaligned with social returns.
    We are emerging from this crisis with a banking system that 
is more concentrated and less competitive, more able to extract 
rents from the rest of the economy, evidenced by usurious 
interest rates on credit cards. While the money will help 
recapitalize the banks, the higher interest rates will slow the 
recovery and a less competitive banking system will serve 
neither our citizens nor our economy well.
    There is a simple test of the adequacy of reform of our 
financial system. If these reforms had been put in place say in 
2003, would a crisis have occurred? And if it had occurred, 
would it have been less costly? My assessment of the reforms 
currently on the table is that they failed to meet this test.
    Unless we pass an adequate regulatory reform, we can look 
forward to another crisis down the road. This is not good news 
either for our citizens or for our economy.
    I am particularly concerned about our failure to deal 
effectively both with the too-big-to-fail institutions and with 
derivatives and credit default swaps. In my written testimony, 
I explain what we should be doing and why what is currently 
under discussion falls far short. Our regulations failed, but 
so did our regulatory institutions. Again, I explain why I 
think it would be a serious mistake to make the Federal Reserve 
system a system regulator.
    Let me conclude with three general comments.
    The first is that the agenda of our economic reform needs 
to be far broader. Our tax laws encouraged excessive leverage 
and risk taking. What kind of society says that speculation 
should be encouraged at the expense of hard work? But that is 
what we are saying when we tax earned income far higher than 
capital gains. Flawed bankruptcy laws and corporate governance, 
too, contributed to the crisis.
    Secondly, we need to keep in mind that the real costs of an 
economic downturn caused by a bubble occur after the bubble 
breaks. Crises don't destroy the assets of an economy. The 
banks may be bankrupt, many firms and households may be 
bankrupt, but the real assets are as much as they were before, 
the same buildings, factories, and people, the same human, 
fiscal, and natural capital.
    In the run-up to the crisis, resources were wasted by the 
private sector. This is water over the dam. The key question 
is, how will resources be used after the bubble is broken? This 
is typically when most of the losses occur as resources fail to 
be used efficiently and fully and as unemployment soars. This 
is the real market failure and one that is avoidable if the 
right policies are put into place.
    What is striking is how often the right policies are not 
put into place, and the losses in the bubble are compounded by 
the losses after it bursts. Something is wrong when we 
simultaneously have homeless people and empty houses, unmet 
needs and yet firms and workers willing to produce more.
    We are a rich country. We can afford to squander hundreds 
of billions of dollars, but there are limits for even a rich 
country. The combined effects of unbridled spending on 
unproductive wars, corporate welfare, and poorly designed bank 
bailouts inevitably will exert their toll, but when these 
effects are compounded by macroeconomic mismanagement, leading 
to an economy operating for years below its potential, the 
consequences are even more worrisome.
    I know my time is up. Let me just conclude there and ask 
that you put into the record my full testimony.
    [The prepared statement of Joseph E. Stiglitz appears in 
the Submissions for the Record on page 39.]
    Chair Maloney. Without objection.
    Dr. Roberts, you are recognized for 10 minutes. Thank you.

 STATEMENT OF RUSSELL ROBERTS, PROFESSOR OF ECONOMICS, GEORGE 
    MASON UNIVERSITY, AND THE J. FISH AND LILLIAN F. SMITH 
 DISTINGUISHED SCHOLAR AT THE MERCATUS CENTER, AND A RESEARCH 
FELLOW AT STANFORD UNIVERSITY'S HOOVER INSTITUTION, FAIRFAX, VA

    Dr. Roberts. Chairwoman Maloney and distinguished members 
of the committee, a man once asked his doctor how much weight 
he would lose if he skipped his daily breakfast of a bagel and 
butter, about 350 calories. The doctor said, if you do that 
every day for a month, you will lose 3 pounds. After 10 days of 
skipping breakfast, the man came in to see how he was doing. To 
the doctor's surprise, the man's weight was unchanged. The 
doctor said, Well, good thing you stopped eating breakfast. 
Otherwise, you would have gained a pound. When I made my 
prediction, I didn't realize how bad your weight situation was.
    Unfortunately, the doctor's analysis was flawed. He didn't 
realize that because the man was skipping breakfast he was 
eating a bigger lunch.
    Now I think about that doctor when I think about the CBO 
estimates of the impact of the American Recovery and 
Reinvestment Act of 2009, the stimulus package. The CBO 
estimates, as we have discussed, that there are about 600,000 
to 1.6 million jobs in the economy extra compared to what would 
have happened in the absence of the stimulus. It is an 
embarrassingly imprecise estimate, but it is not really an 
estimate at all. It is just a repeat of the forecast that CBO 
made at the beginning of the process, like the doctor who 
predicts that skipping breakfast will reduce your weight.
    It doesn't use the facts in the economy, as the CEO 
concedes, since the stimulus was passed. It is a fake estimate. 
We have no idea how many jobs have been created or lost because 
of the stimulus since the CBO admits to know the real impact we 
would have to know the path of the economy in the absence of 
the package and that is unknown, just as the lunch habits and 
metabolism of the patient might be unknown to a doctor making a 
forecast in advance.
    What we do know is that we have lost millions of jobs since 
March when the stimulus was passed. We were told that, without 
it, unemployment would reach 8.8 percent. Well, with it, it is 
back at 10 now; and it was, of course, higher.
    There is no way of knowing whether the stimulus averted a 
worse situation or whether it is part of the problem. And I am 
ashamed to say and embarrassed to say there is no consensus in 
the economics profession on this question and no empirical 
evidence available to settle that. But it wouldn't be 
surprising to discover the stimulus has had little or no effect 
or made things worse.
    Of the $235 billion spent to date, more than a third of 
that has been spent on temporary tax rebates, just as the Bush 
Administration temporary rebates of February 2008, had little 
or no impact and were mostly saved. That has been true of these 
tax rebates.
    The direct spending component is about $145 billion of 
that. Eighty percent has been spent by the Departments of 
Health and Human Services, the Department of Labor, Education, 
and the Social Security Administration. Those agencies don't 
have very many shovels. Roughly one-half of the job losses 
since December of 2007 are in construction and manufacturing, 
and HHS spending doesn't do much for those folks.
    Some argue it doesn't matter what the money is spent on. 
People will spend the money they receive. That creates jobs, 
puts more money in people's hands, and so on. Ironically, this 
Keynesian story works best when the economy is healthy. 
Consumer spending is down because people are rightfully worried 
about the future. When people are nervous or scared, they are 
going to save more and spend less compared to when they are 
confident and optimistic. So fiscal policy that counts on the 
multiplier doesn't work any better than monetary policy stuck 
in that liquidity trap.
    This is particularly true of temporary increases in income. 
Both fiscal and monetary policy are constrained by the anxiety 
that people have about the future.
    Unfortunately, policymakers have been doing a lot to create 
anxiety, rather than to dispel it. The deficit last year was 
$1.4 trillion. People know that tax increases are coming, but 
they don't know how big their share will be. The prospect of 
tax increases discourages spending and offsets some or all of 
the stimulus.
    The size of the debt is creating worries about default or 
inflation. The government continues to intervene in ad hoc ways 
in the auto industry, the financial sector, and major changes 
are on the table for how the government regulates health and 
energy.
    We need new businesses to start. We need old businesses to 
expand. Yet their owners can't be sure of what the rules of the 
game are, the tax rates they might face, the interest rates 
they might face, the inflation rate they might face, the health 
care mandates they might face, the emissions regulations they 
might face. And it is not surprising that businesses are likely 
to sit on their hands sitting on the sidelines to see how 
things will turn out.
    In a recent survey of employers by Manpower Inc., 73 
percent said they plan no change in staffing for the first 
quarter of 2010. That is the highest level of no change since 
1962. Employers are waiting to see what the rules of the game 
are going to be.
    So what is to be done? Well, everybody assumes there is 
something that has to be done. There has to be a solution, 
something to get people back to work faster.
    That may not be the case. Government policy induced an 
unnatural expansion of the housing sector over the last decade. 
We built way too many houses. That naturally drew a lot of 
people into construction. Fully 25 percent of the losses in the 
job market have been in construction. The workers who no longer 
hold those jobs have to find other things to do, and they are 
taking their time deciding on what that should be.
    Unfortunately, it is natural that unemployment lingers. If 
you have to do something, please look for effective ways to 
spend money and reduce policy uncertainty. Stop giving away 
money to states with no strings attached.
    Why has a major goal of policy so far been to preserve 
state employment while the private sector takes a beating? 
Let's let the states deal with their past recklessness rather 
than giving them an incentive to be reckless in the future. 
They are obligated to balance their budget. They can cut 
spending. They can even cut spending, if they would like, 
without laying workers off. I think that is a good incentive.
    Don't treat unspent TARP funds as free money. They aren't 
free. Don't waste it the way the stimulus money has mostly been 
wasted.
    Instead of spending randomly, let's cut the payroll tax. 
Cutting the payroll tax makes workers less expensive to 
employers. Cut it by 25 percent for the next 5 years, you will 
see an impact on job creation. It will reduce revenue by about 
$250 billion a year, but it will at least have a chance of 
creating jobs.
    To reduce uncertainty and fears, stop fiddling with every 
aspect of the economy. Maybe it is not the best time to try to 
radically change the health care system and the energy market 
while propping up banks, the auto industry, and borrowing 
trillions of dollars.
    Stop issuing such short-term debt. It is what got Wall 
Street in trouble. The government rescued Wall Street--
mistakenly in my opinion. There is no one to rescue us. Reduce 
some aspect of government spending to show that grownups are in 
charge and that the government can act responsibly. Get rid of 
corporate welfare. Cut tariffs and quota which are a silent tax 
on the consumer.
    Stop propping up losers. Let people who are reckless go out 
of business. Otherwise, we are throwing good money after bad 
and setting the stage for future recklessness.
    F.A. Hayek said that, ``the curious task of economics is to 
demonstrate to men how little they know about what they imagine 
they can design.'' It would be good to recognize our limits 
about what we imagine we can design. We cannot steer the 
economy, we cannot steer the labor market, and recognizing 
those limitations is a step in the right direction.
    Thank you very much.
    [The prepared statement of Russell Roberts appears in the 
Submissions for the Record on page 64.]
    Chair Maloney. I thank both of you for your very thoughtful 
presentation.
    Both of you mentioned the challenge that we have in 
creating private-sector jobs. This is a chart that we did on 
private-sector job loss; and it shows, since 1992--this top 
level is the jobs created and the bottom level is the jobs 
lost, and you see that in the recession of 2000 the jobs 
created never, never went back to the level under the Clinton 
years. In fact, the number of private-sector jobs created has 
fallen dramatically. The jobs lost have risen, which is not 
unexpected in a recession. But what is happening when the 
number of private-sector jobs created has fallen so 
dramatically, particularly during the Bush administration?
    And my question, Dr. Roberts and Dr. Stiglitz, is did the 
labor market fundamentals change or weaken in some way--the 
labor market fundamentals during the Bush administration? Has 
there been some fundamental change in our structure? Why are 
the number of private-sector jobs falling so dramatically?
    [The chart titled ``Current Recession Characterized by 
Precipitous Fall in Private Sector Job Creation'' appears in 
the Submissions for the Record on page 69.]
    Dr. Stiglitz. Actually, I would say things were even worse 
than those pictures depict, because much of the job creation in 
the private sector was artificial. That is to say there was a 
bubble, and a lot of the jobs created in the private sector 
were in real estate or based on consumption that was fueled by 
this artificially created bubble.
    For instance, in one year alone, there were $950 billion of 
mortgage equity withdrawals that fueled consumption in the 
private sector. That was all artificial, so the true picture is 
worse than what you have depicted.
    There is a change in the structure of our economy that has 
been going on for some time, partly having to do with 
globalization. That is to say that there is a shift of 
comparative advantage, in manufacturing in particular, to other 
parts of the world. Some countries, like Germany, have 
responded to that challenge by trying to create education 
systems that enable the sustenance of a competitive 
manufacturing sector based on high technology.
    We decided not to take that course. We did not make the 
investments in people and technology that we should have, and 
that has put us at a competitive disadvantage.
    I think, in some sense, it was a very difficult time. It 
would have been difficult for any administration. But the 
failure to take a proactive response has made things far worse. 
There are other countries like Sweden that did have a proactive 
policy and have succeeded much more impressively.
    Chair Maloney. Thank you.
    Dr. Roberts.
    Dr. Roberts. Well, I think the other fact that is going on 
in that picture, that is, of course, a million factors, that 
people made all kinds of choices about education and training, 
whether it be in the job market or not.
    Of course, the other factor going on in the background of 
that story is monetary policy. It is kind of ironic. Alan 
Greenspan was a genius; and then, all of a sudden, he wasn't a 
genius anymore. Around the 2001 period, he put interest rates 
at their lowest level of the past 40 years; and then he very 
precipitously increased them around 2004. I think that did a 
lot of damage to our economy, as Professor Stiglitz points out.
    There was a lot of artificial investment in housing. That 
was partly due to bad monetary policy. It was also due I think 
in part probably to bad regulation and pressure put on various 
institutions to give low interest loans and low down payment 
loans. Caused an artificial expansion of the housing sector. We 
both agree on that. It was very destructive in foregone capital 
and wasted opportunities for better investment. So I think the 
monetary story is partly what is going on in those data.
    I disagree a little bit with Professor Stiglitz on 
globalization. It is true we haven't made top-down investments 
in technology. We have a lot of bottom-up investments for 
individuals who have done training on their own through their 
own choices.
    We have the most vibrant technology sector in the world, we 
have the most vibrant venture capital sector in the world, and 
those sectors are relatively unregulated, particularly venture 
capital, which is why I have hopes and optimism for the future, 
even though our financial system is a horrible mess as 
government has tried to steer it in I think very destructive 
ways.
    I think the bright side of the story is productivity. Our 
competitiveness is helped tremendously by our incredible 
productivity, not so much in the recent recession, where 
productivity jumps artificially as workers are laid off, but 
rather through the fact that our skills and technology are 
rather spectacular.
    A lot of our job losses since the recession are in 
manufacturing. Some of that is due to a reduction in the 
economy's strength, but some of it is due to productivity in 
manufacturing, a process that has been going on for 50 years as 
we have been able to substitute technology, which is really 
human knowledge embodied in machines, and made our workers more 
productive. So I am optimistic about our future and competing 
in the global marketplace.
    Dr. Stiglitz. Can I just make one more comment? I agree 
very strongly that we have very vibrant technology, but it is a 
high-technology sector that has not created as many jobs and 
hasn't been as integrated into manufacturing as in some other 
countries.
    But I wanted to really focus on one other point, which is 
that, normally, we think of a low price of factor inputs as a 
good thing, as stimulating the economy. The cost of capital 
that was made artificially low by the Fed should have been the 
basis of a large job creation, if our financial sector had been 
doing its job. The fact is, it could have directed that capital 
to productive uses. We could have had a real boom if things had 
gone the right way.
    But, unfortunately, our private financial sector didn't do 
what it should have been doing. Combined with these other 
problems that I have described, the result was that what would 
have been an opportunity from low cost of capital to have a 
massive expansion of the productive powers of our economy 
wasn't taken advantage of.
    Dr. Roberts. May I comment on that?
    Chair Maloney. Certainly. Then we have to move to the next 
speaker, but, in fairness, you should have an opportunity to 
comment, too.
    Dr. Roberts. Briefly, it is an excellent point that those 
low rates of interest normally would have stimulated all kinds 
of potentially productive activities. Unfortunately, in 1997, 
we made capital gains on housing tax free. That encouraged a 
lot of people to accumulate second homes and third homes as a 
way of investing, which is not particularly productive. So that 
was a terrible mistake.
    But I think we also have to recognize that the government 
mandates pushed money explicitly into low interest, low down 
payment mortgages. Fannie and Freddie were pushed tremendously 
in this period, especially starting in 2001, to invest in a lot 
more low-income housing. It is a lovely goal. But, as a result, 
a lot of those mortgages went underwater.
    The private sector, the financial Wall Street side that 
Professor Stiglitz is referring to, also got into that, but 
that wasn't until about 2004 to 2006 when they did make a lot 
of bad bets. The question is, why did they do that? And I worry 
a lot that they were expecting to be bailed out by the 
government, which, of course, they were. They were gambling 
with my money and yours, not their own money. Until we fix 
that, we are not going to have a healthy financial sector. The 
too-big-to-fail problem which you mentioned earlier I think is 
the central problem that has to be solved.
    Chair Maloney. Thank you very much.
    Mr. Campbell.
    Representative Campbell. Thank you, Madam Chair.
    John Maynard Keynes said that the government could 
stimulate the economy by digging a hole, by paying someone to 
dig a hole and fill it back up again. Dr. Stiglitz, do you 
agree with that?
    Dr. Stiglitz. Yes, but we have better ways of spending 
money than either going to war or filling holes.
    Dr. Roberts. I don't agree with it. In fact, I want to 
emphasize one thing we do agree on is that money spent on war 
is wasted. It is not a stimulus package.
    I think one of the most destructive and immoral economic 
doctrines of the last 75 years was the belief that World War II 
was good for our economy because it created a Keynesian 
multiplier. Even more effective than just digging ditches, it 
got people to buy tanks and airplanes. But tank and airplane 
purchases are good for tank and airplane manufacturers. They 
are not good for the rest of us. Private consumption in those 
times fell. It was very bad.
    Representative Campbell. I got a letter--we all got a 
letter from Vice President Biden earlier this year saying, here 
is a list of the stimulus, that stimulus money that was put in 
your district. Interestingly, the very first thing on the list 
in my district was $2.3 million to put a green roof on a 
Federal building. What they didn't point out was that that 
Federal building is scheduled to be torn down. So we are 
spending $2.3 million to green roof a building in my district 
which will subsequently be torn down. Now that is clearly 
digging a hole and filling it back up again.
    Now to your point, Dr. Stiglitz, yes, somebody got hired to 
put on that roof. But there is no multiplier. There is no 
downstream, no additional jobs.
    I would think it sounds like you would both agree that if 
we were going to spend--through tax credits or any other way--
Federal money that it would be much better spent, rather than 
digging a hole and filling it back up again, in something that 
creates a number of downstream jobs.
    Let me just throw two ideas at you both and get your 
comments on them.
    One, on infrastructure things, suppose the government put 
free broadband Internet, wireless Internet in the 250 largest 
markets in the country and then let the high-technology 
community do what they could with that capability. It actually 
wouldn't be that expensive to do that.
    Or let me give you a second idea. What if we had a capital 
gains tax holiday but different than what has been talked 
about. You said that for 12 months or 9 months or 6 months--
pick a period of time--that any investment made by someone 
would be free from capital gains tax whenever they sold it. If 
they sold it 5 years from now, 10 years from now, it didn't 
matter. It seems to me that one of the problems right now is 
the perception of risk out there and that people are not making 
investment, not hiring, not doing anything.
    Dr. Stiglitz talked about the financial sector. I am on the 
Financial Services Committee. I agree with you on the war in 
Afghanistan, with both of you on all of that stuff. But I only 
have got 5 minutes. So we will stick with this particular topic 
right now.
    But if we did something like that, we reduce the risk or 
increase the potential return in exchange for that increased 
risk that is out there and perhaps get some money off the fence 
and say, well, maybe I will invest in that business, maybe I 
will grow this particular business, maybe I will buy that piece 
of commercial real estate which is troubled.
    So your views on those two thoughts, Dr. Stiglitz and then 
Dr. Roberts.
    Dr. Stiglitz. I think both of them are good ideas as a 
broad concept. Let me speak to the first one.
    The fact is that the margin of cost of using broadband is 
very close to zero, and that is the kind of facility where 
there is a particular role for government in the provision. The 
private sector could provide it, but it would charge. This 
would create a distortion, because the price exceeds the 
marginal cost of usage, so this is a particularly good example 
of something that the government could provide. It increases 
efficiency and then creates an environment. It is part of the 
infrastructure, which is particularly relevant for modern 
technology. So I think that is the kind of thing that one ought 
to very seriously consider.
    The second point you raised has to do with how do we reduce 
the risk of investment? There is another problem that I want to 
also emphasize, and that is access to capital, which small- and 
medium-sized enterprises are particularly facing. So the 
problem is both the demand for investment but also the 
capability of making that investment.
    One way of trying to attack both problems simultaneously, 
for instance, is to allow firms, and especially small firms, to 
write down immediately the cost of their investment. That is 
like the government paying a part of the cost up front, but it 
is effectively a loan. Now is a particularly good time for 
doing that because, while it reduces government revenue today, 
it will increase government revenue in the future, because the 
depreciation isn't there and the cost of capital to the 
government right now is close to zero. It is effectively a loan 
from the government to the firm at a time when the firm really 
values it, both reducing the uncertainty and giving them access 
to capital.
    One should try to think about two general principles: 
First, when can you do that? And, second, what tax benefits 
ought to be linked to investment? It is not just lowering tax 
rates, giving tax benefits, but they have to be linked to job 
creation or to investment.
    Representative Campbell. Dr. Roberts.
    Dr. Roberts. I would love to have free broadband. There are 
a lot of free things I would like. One of the lessons we learn 
from economics is nothing is free; and one of the challenges 
you face in your jobs is trying to recognize what the costs 
are, especially in today's world where it appears that 
everything is a free lunch, that there is no cost to spending--
in fact, ``there is a benefit, because it is going to reduce 
unemployment!'' I think that is sometimes an illusion that can 
actually make the situation worse.
    I particularly worry about the precedent of using the 
government to decide where technology goes. It is going to lead 
to lots of lobbying and decisions made not necessarily on the 
basis of what is most productive but what is politically 
expedient.
    Right now, for example, we are guaranteeing a loan to the 
Tesla Corporation which makes a very nice sports car. It is an 
electric sports car out of California. It is beautiful. It is 
very fast, and it is an electric car that is lovely.
    They want to develop a sedan for families. Are they going 
to be able to do that? I would like to see them do that on 
their own two feet, convincing investors of the very risky 
proposition they are involved in, rather than being guaranteed 
that I am going to step in and make them whole if it doesn't 
work out. I think that is a terrible precedent not simply 
because the government has no incentive to make those 
investments wisely but, even worse, people start lobbying you 
for favors and goodies as, of course, they already do.
    Again, the same thing is true with the tax holiday. It is 
always tempting. I just think it is important to remember it is 
not free. There is foregone income and opportunities that could 
be done with that money, and I would worry about tweaking the 
system here and there.
    The reason I advocate--I have mentioned a 25 percent cut in 
the payroll tax. I would actually like to eliminate the payroll 
tax. Payroll tax is a regressive tax. It deceives people into 
what its real effects are. The people actually think that it 
goes to be set aside for their Social Security money instead of 
out the door to go fight the war in Afghanistan, pay for food 
stamps, and everything else the government does. So, right now, 
people have a very weird idea about what a dollar of government 
spending costs them.
    So I would like to get rid of that and add a little bit to 
income taxes so that everybody can see with transparency what 
the effects of government spending are on their pocketbook. So 
that is politically difficult to do, and it is probably not the 
best thing to do right now because it is complicated. People 
are going to say, what is going to pass? What is going to 
happen? So every time a nice idea gets put on the table, people 
say, you know, maybe I will wait until that tax break comes 
through. So it is a dangerous game.
    Again, I would argue for simplicity, transparency, and, 
ideally, efficiency, if you can find it.
    Chair Maloney. Thank you very much.
    And recognized in order of appearance Congressman Snyder.
    Representative Snyder. Thank you, Madam Chair.
    I thank y'all for being here and your different 
perspectives.
    Dr. Roberts, I wanted to direct my question, if I might, to 
you. In your written statement you have this one--at the end 
you say, reduce some aspect of government spending to show that 
the grownups are in charge and that someone can practice tough 
love with the American people. Say ``no'' to some special 
interests. Get rid of corporate welfare.
    We have a situation regardless of what you think about the 
health care reform bill and the different variations. But we 
have this issue of Medicare Advantage. I don't know if you are 
familiar with it or not. But it was--well, I will go ahead and 
describe the situation.
    We have a situation now where one out of five Medicare 
recipients gets 12 percent more money on average than the other 
four out of five and 80 percent. And it originally came about 
because some private insurance company said they can deliver 
Medicare more efficiently. The program was set up. But then at 
some point they said, actually, we want a little more money. So 
now they are getting 12 percent more on recipient.
    Part of the--at least in the House bill--is to gradually 
eliminate that additional money, which I have heard somebody 
today say that is corporate welfare. They are getting more 
money to do what they said they could do more efficiently.
    So what happened? I voted for the bill, as a lot of Members 
did. And we now have the U.S. Chamber running ads all over the 
country talking about these massive cuts to Medicare. Yet you 
go on the U.S. Chamber of Commerce's Web site and they're 
saying something like, where are the legislators with courage 
to stand up for entitlement reform?
    So regardless of what you think about all aspects of this 
thing--but isn't that a good example? You have one program that 
most of us--regardless of the financing--would say it is very 
well-received by the American people. But you have taken one 
out of five Medicare recipients and are paying corporations 12 
percent more money on the average than the other 80 percent. Is 
that a good example, as I have described to you, of what we 
should be doing away with?
    Dr. Roberts. Well, I don't know the details of Medicare 
Advantage, and I have no interest in defending the U.S. Chamber 
of Commerce's strategies for provoking you to do what they 
think is in their interest.
    I would say, quoting Friedman, that pro business is not the 
same as pro capitalist. I am pro capitalist. I am not pro 
business. Businesses don't like capitalism. It makes them 
compete. They would prefer to get special treatment. I want to 
get rid of all that.
    That is why I want to get rid of those quotas on sugar 
which enrich about 10 families in the United States and make 
every American pay a higher price. It is outrageous. Especially 
now. It is a great time to do something for the American people 
at the expense of rich fat cats. Get rid of those quotas. They 
are unfair, and they are destructive.
    Representative Snyder. In fact, I brought it up several 
times that there has been bipartisan interest, as you know, in 
doing something about our trade policy with Cuba. It seems 
like, if we are going to do something, this would be a 
wonderful time to help sell more stuff to Cuba.
    I wanted to ask you another question, if I might. I forget 
how you phrased it, but, basically, you are saying, is this the 
right time to create more uncertainty by--I think your word 
is--``fiddling'' with different aspects of the American 
economy. Probably two biggest aspects of fiddling--I think 
maybe Dr. Burgess mentioned it--are health care and energy 
policy or climate change.
    The question I have for you, though, is, even if we come up 
with some bill that Dr. Burgess and I would both support or you 
and I would support, given the nature of energy policy and 
energy and given the nature of health care, we will acknowledge 
I think that whatever we would do it would take several years 
to implement. I mean, how can we sit back and say, we will do 
nothing until we can look ahead and see several years of 
blissful peace and paradise economically and socially in the 
worldwide community and then we will act in these areas?
    That is not going to happen when in fact--I mean, I have 
people coming to my office all the time from the business 
community, and they have been doing this for a couple of 
decades, saying we have to do something about health care 
costs. It hurts my ability to compete internationally, whether 
it is small- and medium-sized companies or from international 
corporations based in Arkansas coming and saying we have got to 
do something about this. It will add to our ability to compete.
    So my question is, I can understand what you are saying 
about this uncertainty, but there is uncertainty, is there not, 
in doing nothing?
    Dr. Roberts. Oh, absolutely.
    Representative Snyder. Please respond to that.
    Dr. Roberts. It is an interesting challenge. If you want to 
do something in health care--let's take a very narrow problem 
that everybody is worried about, which is that some Americans 
don't have health care coverage, right? Or, worse--it is often 
confused--have limited access to health care, which is what we 
really fundamentally care about.
    We could create a program that would help those folks. It 
would cost a lot of tax dollars, right, but we could subsidize 
their insurance. We could create a larger entitlement program 
for Medicaid than we have now. We could fix ways to make sure 
that people are covered.
    Well, why would we pass a 2,000-page piece of legislation 
that no one understands? I don't get it. Well, I do get it, 
actually. And people say, I don't mind that it takes a while, 
but people say, well, we will figure out how it works later. 
That is the mistake. Not that it takes a while but that we are 
passing legislation when we don't understand the consequences.
    Representative Snyder. So you don't have a problem with 
tackling a problem today at the time of this economic downturn, 
like health care or like energy and climate change legislation. 
Your concern is your ability to understand the legislation or 
the ability of the American people. I need to be sure. Because 
I think that is an important point.
    Dr. Roberts. I am saying two things. Transparency is 
extremely important in today's climate, right? So a 2,000-plus 
page bill that--I don't know--creates 80 new, 100 new--whatever 
it is--pieces of the health care puzzle, no one understands how 
they interact. Most of us haven't read the whole bill. I think 
that is the wrong way to fix the problem.
    The second thing I would say is that whatever you do to fix 
the problem you want to be pretty confident that it will make 
the problem better and not worse. I would say a lot of the 
stuff we are doing right now, we are really not quite sure, and 
that is the biggest problem we have. But if our goal as a 
Nation is to help coverage, let's pay for it. Just like, if our 
goal is to get more people in houses, let's subsidize housing. 
Let's not create a labyrinthine regulatory environment with 
Fannie and Freddie that no one understood, no one was on top of 
and is going to cost the American people hundreds of billions 
of dollars that at the time was said was going to be a free 
lunch. That is what we want to avoid.
    Representative Snyder. I know my time is up. But what you 
are saying, though, is you do not have a problem with us acting 
today. It is the programs with regard to health care that you 
have a problem with, which is different I think than what I 
took from your testimony.
    Dr. Roberts. Absolutely.
    Chair Maloney. Thank you.
    Dr. Burgess.
    Representative Burgess. Dr. Snyder, it will be a cold day 
when you and I begin to agree on a lot of things. But I think 
you know, just like Dr. Snyder, through the summer, Dr. 
Roberts, I heard from angry people at home about what we were 
doing with this--at that time, it was a 1,000 page bill. They 
got madder when it went to 2,000 pages. Yet we weren't fixing 
the fundamental problem that most people were concerned about, 
and that is someone who, because of a tough medical diagnosis, 
because they find themselves between jobs and their COBRA 
benefits are something they can't keep up with because of the 
way COBRA is structured, they now end up with a tough medical 
diagnosis without health insurance.
    It is very, very difficult then to claw your way back into 
the system. That is what has been so pernicious.
    Interestingly enough, we had a Congressional Budget Office 
study that told us how much it would cost to fix that problem 
based loosely on what Senator McCain advocated in the fall of 
2008 based on the stated high-risk pools and reinsurance 
programs, giving states some flexibility. It was about $25 
billion over the 10-year budget window, which is, as you point 
out, a significant amount of money but nowhere near the $1 
trillion price tag that we ended up with with this large bill.
    Because of the things we are doing--and it is not just 
health care, because we have got a 1,400-page bill today on 
financial services, and we had 1,000-page bill on energy 
earlier in the year--the lack of job creation is something that 
has not been seen since--did you say since 1962? Did I 
understand that correctly?
    Dr. Roberts. That was the expectation of employers that 
they are going to do nothing. That number is at its highest 
level since 1962 for the first quarter of 2010. Seventy-three 
percent say they don't expect to hire or reduce in the first 
quarter, which evidently is the largest since 1962. People are 
just waiting.
    Representative Burgess. And what broke that? What caused 
that to change in 1962? I mean, I was alive, but I don't know 
that I was economically aware of my surroundings. What changed 
in 1962?
    Dr. Roberts. I turned 8. I think that was the crucial 
event.
    I don't know. There were a lot of things going on. I don't 
know. There were some tax cuts I am aware of, but I don't know 
if they were decisive or unimportant.
    Representative Burgess. But the tax rate did come down 
significantly somewhere around that time, is that not correct?
    Dr. Stiglitz. The big thing was the investment tax credit 
that stimulated the economy.
    Representative Burgess. And it got people off the sidelines 
and created jobs?
    Dr. Stiglitz. At least one of them.
    Representative Burgess. Well, Dr. Roberts, you mentioned I 
think in your testimony the problem of the true unemployment 
rate. The people who have just given up and may not be looking 
for a job. I think we heard in this committee last Friday that 
that number is 17.2 percent of people who are--the actual 
number of unemployed are those people that have just stayed 
away from even seeking employment.
    What is the right thing to do here? Do we continue to 
extend unemployment benefits to that group of people? Or are we 
creating more problems than we are helping at some point by 
indefinitely extending those benefits?
    Dr. Roberts. Extending unemployment benefits are good for 
the people who get them. And we understandably feel bad for 
those who don't have a job. It will discourage them from 
looking more. The measured unemployment rate will be higher 
than it otherwise would be. Politically, that is tough for you 
guys, isn't it? That is a real tension that you have got to 
deal with.
    Representative Burgess. Has anyone measured the job-
searching activity that goes on toward the conclusion of those 
benefits? Do we have any data? Has any economist looked at that 
and said, okay, we have got 26 weeks of unemployment. People 
know what that 26 weeks is, and the last 6 weeks is there a 
change in behavior that might lead to finding a job or is the 
market just so bad that it doesn't matter what you do?
    Dr. Roberts. Well, there have been a lot of studies of it. 
I think the crucial question here is how different, 
potentially, this particular leaving of unemployment is going 
to be for the Americans who are struggling right now.
    We have a couple of sectors that are going to have to get 
smaller. We can artificially prop them up. I think that would 
be a terrible mistake. But, as I mentioned, a quarter of the 
people who have lost their jobs since 2007 were in the 
construction industry. You have specialized skills.
    What would you do in that situation? You could say, well, 
maybe my sector will come back. And, of course, maybe it will. 
But maybe it won't, in which case maybe it is time for you, 
unfortunately, to leave those skills behind and retool. Those 
are very difficult decisions. People want to postpone them, and 
I don't blame them.
    Representative Burgess. What about the demographic of the 
young individuals, 17 to 21, say that----
    Dr. Roberts. Teenage unemployment rate is about 26 percent 
right now. It wasn't helped by the increase in the minimum 
wage. I think that was a mistake. Again, especially in a time 
of high unemployment, to make it more costly to hire low-
income, low-skilled workers I think is a mistake.
    Representative Burgess [continuing]. Should we look at 
revisiting what--we don't call it reduction of minimum wage but 
call it an entry-level wage for certain sections of that 
demographic?
    Dr. Roberts. I would get rid of the minimum wage. I think 
it puts low-skilled workers at a terrible disadvantage. It 
creates an artificial pool of people who want to work and 
reduces the number of employers who want to hire them. We only 
look at the wage. We should look at the other aspects of the 
job, on-the-job training, how hard you have to work while you 
are on the job.
    You raise that minimum wage, you make the life of a 
person--it is true--a bunch of people get a higher wage, which 
is great for them. But the other folks who have fewer 
opportunities than the people who do have a job are going to 
find the workplace a less friendly place because there is more 
competition with other folks.
    Chair Maloney. Would you like to respond?
    Dr. Stiglitz. Just a couple of points, very briefly.
    First, although there have been studies about the effect of 
unemployment insurance on job search, most of those studies are 
not in the context of high unemployment in the particular 
situation we are today. The problem is there are no jobs, so 
having many more people looking for the same jobs isn't going 
to lead to more employment. It is not lack of search but lack 
of jobs. We ought to remember that this particular situation is 
not always the case. When the economy recovers, the search 
becomes a more relevant concern.
    Secondly, the situation is much worse than what you have 
just described, because, in fact, large numbers of people are 
moving over to disability, and those do not appear in the 
unemployment numbers, even in the broader measure of 
discouraged workers. Discouraged workers do not include people 
who have applied for disability.
    The estimates are that the increased number of people 
applying for disability--not all of them will get it--is about 
a million. About half of them will get it, and they will likely 
remain out of the labor market perhaps for the rest of their 
lives or at least for an extended period of time.
    There is not any epidemic of a disease that is causing 
this. It is a lack of jobs. It is another part of what you 
might call our safety net. But what I am emphasizing is that 
the labor market situation right now is worse than even the one 
out of six number that I mentioned.
    The third point, to reiterate what Dr. Roberts said, is 
that there is going to have to be a lot of structural change, 
with people moving from one industry to another. That is why 
what I think active labor market policies are required, and 
that requires education and training.
    Chair Maloney. Thank you very much.
    Mr. Cummings.
    Representative Cummings. I want to just pick up exactly 
where we left off here.
    So what are we training them for? In other words, if the 
jobs are not there--and we had testimony in this committee just 
a week or so ago, less than a week ago, where we were told that 
one of the areas that seemed to be increasing is health care or 
at least is staying pretty steady. It is not losing.
    But, you know, when you think about people who are in a 
position right now where, if they lost their job, their job is 
pretty much going away--I think you talked about this, Dr. 
Stiglitz.
    I guess the better question is, if the President called you 
today as soon as you walked out this door and said, you know, I 
just saw you on C-SPAN. I want you to tell me what you would do 
if you were me to deal with this jobs situation. What would you 
tell him? Both of you.
    You know why I am asking this question is because, you 
know, we can go back and forth. This reminds me of a ping-pong 
game. We could go back and forth, back and forth. We could have 
our theories about all kinds of stuff.
    But the fact is, is that when I go back to Baltimore, I 
have still got people who don't have a job. I have still got 
people who--it is about Christmastime. They are not able to buy 
presents. They are not trying to get to Disney World. They are 
just trying to get to the park. They are not trying to have 
filet mignon. They are trying to have hamburger. And they can't 
get there.
    You all have said it, I think--I know you said it, Dr. 
Stiglitz. Not only are they losing their homes, they are losing 
the equity in their homes. They are looking at their stock 
portfolio and realizing that, almost overnight, they have been 
wiped out.
    So I am trying to figure out, when we go to jobs, what is 
it that we can do? We have all this nay saying, oh, we can't do 
this. What can we do and how soon can we do it? Because the 
people that I am talking about are holding on by a thread; and 
the thread is getting very, very, very, very thin. So they 
don't want to hear a lot of, you know, theory. They want to 
know how they can get to work.
    Dr. Stiglitz.
    Dr. Stiglitz. Let me first say that there is no magic 
bullet. In my written testimony I gave a list of several 
things.
    Representative Cummings. You are talking to the President. 
Tell him what you would do. Go ahead.
    Mr. President----
    Chair Maloney. We will send it to him.
    Dr. Stiglitz. I would begin with aid to the states. They 
have balanced budget frameworks. Their revenues are plummeting, 
and their shortfall is over $200 billion a year. They have to 
either raise taxes or cut back expenditures, which means 
cutting back on jobs.
    For instance, over the past year alone, state and local 
governments have reduced their employment by 96,000. Government 
is compounding the problem because of lack of revenue. It is 
not because they have mismanaged anything; it is a macroproblem 
that was imposed on them.
    I would recommend what I call revenue sharing. If the 
economy turns up, you don't have to help them. If it turns 
down, you need to give them more money so they don't have to 
cut back. This is really important, because the needs that you 
describe are getting worse and the ability of the States to 
respond is weakening.
    Representative Cummings [continuing]. Anything else you 
would tell him?
    Dr. Stiglitz. I would actually use investment tax credits, 
particularly marginal investment tax credits, to encourage the 
private sector and other kinds of things I mentioned before 
like accelerate depreciation for small businesses. That 
directly links to encouraging investment.
    I also think that you need to have a government jobs 
program. You can create jobs. We have big public needs: 
creating parks, weatherizing public schools, lots of things 
like that that we might be doing in the future but accelerating 
them today.
    I also think research and technology programs are 
important. The big advancements in our technology that have 
transformed our economy for the most part come from the 
government. They have been implemented by the private sector, 
but they come from the government. The Internet was financed by 
the U.S. Government.
    You can go down a whole list of things where governments 
have played a transformative role, and yet now support for 
these activities is being undermined. This is particularly 
critical at this time because some of our big, major 
universities are suffering greatly, the private ones because of 
the reduction of their endowments, and the public ones because 
of cutbacks at the state level.
    Finally, as I have described in my testimony, we focused in 
the first round of the stimulus on shovel ready projects. That 
created the problem of things that perhaps should not have been 
done. But this is a long-term downturn, and we should begin 
thinking about what we can do over the longer term. If it turns 
out that we are wrong and the downturn is shorter term, we can 
always cut back. But if we don't do the planning now, we won't 
have plans that we can put in place a year from now or 18 
months from now.
    On the credit side, credit is not flowing to small- and 
medium-sized enterprises. As Congresswoman Maloney pointed out, 
that is where the job creation is. There are a whole set of 
things we should do to fix this.
    We ought to require all banks to allocate a certain 
fraction of their portfolio to small- and medium-sized 
enterprises, effectively extending CRA temporarily for small- 
and medium-sized enterprise.
    I mentioned that with much of the TARP money, there was no 
thought to what kind of financial system we ought to have. It 
didn't go to the banks that were involved in lending to small- 
and medium-sized enterprises, which is where it should have 
gone.
    The Fed is providing money at low interest rates, close to 
zero interest rates, to the banks without asking what they are 
using the money for. If the Fed is lending money to the banks 
at zero interest rates, there ought to be a link to job and 
investment creation in the United States.
    The real problem right now is we are actually having a 
foreign policy problem, because our Fed is lending money to 
banks at close to zero interest rate, and they are worried 
abroad that we are creating bubbles in their country, which is 
actually undermining globalization. Brazil has put up barriers 
to the inflow of capital, and other countries are discussing 
putting up inflow barriers of capital as well.
    The conduct of our monetary policy is leading to a 
weakening of capital market globalization. It is 
counterproductive.
    One other idea is using some of the TARP money, for 
instance, to help reduce some of the cyclical risks associated 
with SME lending. Much of the risk that they face today is they 
don't know the business cycle. We have talked about the risks 
associated with health care reform. We know about that. But the 
big risk facing most businesses is, where is the economy going? 
Small businesses can't control that. The downturn is a result 
of macroeconomic mismanagement, and we ought to help small- and 
medium-sized enterprises manage that risk. Big businesses can 
do it on their own.
    Another provision is extending loss carry-back provisions 
for SMEs that engage in incremental investment or job creation. 
This is an example similar to immediate tax write-offs for 
investment. It has a cost to the Treasury in the short term but 
will make up for that in the long term. The year is not a 
natural unit.
    There are a number of other suggestions in my written 
testimony. But I think there is actually a portfolio here. None 
of them by themselves is going to transform the economy, but, 
taken together as a package, I think it will make a dent in the 
unemployment rate.
    Representative Cummings. Thank you very much. I see my time 
is long over.
    Chair Maloney. Mr. Roberts, would you like to respond to 
what would you tell the President today?
    Dr. Roberts. My phone call is briefer. I will make it 
short.
    I would say, Mr. President, I really appreciate--I am 
deeply flattered that you think economists have something 
useful to tell you, particularly this economist. But I, as an 
economist, have become more humble in recent years. I will give 
you an example.
    The economy is a complex system that we do not understand 
well as economists, and I mentioned earlier that we have Nobel 
laureates who want to see the stimulus be double what it was 
initially. We have equally illustrious economists who think it 
ought to be zero. That is embarrassing. That tells you that our 
field is in a little bit of turmoil. We don't understand the 
complex system called the economy. So maybe you are looking up 
the wrong tree when you are asking for me to make jobs for 
people on the streets of Baltimore.
    Because that is not what presidents are good at. What 
presidents are good at is trying to make a policy environment 
that might make a difference. But, ultimately, those decisions 
are not going to be made by the President.
    You know, airline crashes have fallen steadily over the 
last decades. We are much, much better at reducing the risk of 
crashing an airplane. Why aren't we better at reducing the risk 
of financial crashes? We have lots of data. We have lots of 
smart people thinking they can steer the financial system the 
way we steer the aircraft safety system.
    But they are fundamentally different. We are not good at 
steering the financial system. I don't care how many pages are 
in the bill.
    So I would--again, I would push for transparency. I would 
ask the President, let's try to learn from our mistakes and not 
repeat them.
    And I would be skeptical about the ability of government to 
create technology, despite Dr. Stiglitz' encouragement. The 
government created DARPANet. The private sector created the 
Worldwide Web and the Internet as we know it today. They can 
work together, and it can be useful. Sometimes they are 
synergistic. But the ability of the government to pick winners 
I think is an extremely dangerous road to go down.
    Chair Maloney. Thank you very much.
    Mr. Brady.
    Representative Brady. Thank you, Madam Chairman.
    I did get a chance to read both of your testimonies last 
night while I kept an eye on that highbrow, intellectual 
economic news program I like to call SportsCenter. So I did get 
to read the testimonies and appreciate them. Both of them are 
very enlightening.
    Right now, when it comes to jobs, the U.S. is recovering at 
a slower pace than any other major developed nation. When you 
look back, the Great Depression, while countries entered it 
about the same time, the speed of their recoveries also varied 
greatly. On one extreme, Sweden, 1934. On the other extreme, 
the U.S., 8 years later.
    Dr. Al Felzenberg in his book, ``The Leaders We Deserved 
(and a Few We Didn't): Rethinking the Presidential Rating 
Game,'' he identified in the sense that President Franklin 
Roosevelt had unintentionally retarded the U.S. recovery by 
vacillating between mutually contradictory economic policies, 
starting from reflation, breaking the gold standard and 
devaluing the dollar, and moving to price controls. Then there 
was a focus on balancing the budget, especially with higher 
taxes and tax experiments, increases in taxes on retained 
earnings. That led to a recession on top of the Depression. 
Then there was the trust busting where they broke up the price 
fixing that had been put in place before. And then, of course, 
the big spending, the WPA, the make work project.
    While there has been a lot of effort to not repeat monetary 
mistakes from the Great Depression, it seems like we may well 
be repeating some of the fiscal and regulatory mistakes from 
the Great Depression. FDR's policy fluidity increased 
uncertainty and slowed private business investment and job 
creation in the 1930s, just as I hear from our local businesses 
back home who tell me their customers and clients are not 
making those key investment decisions because it is hard enough 
for them to predict the market. It is impossible for them to 
predict the market and Congress at the same time.
    Dr. Roberts, in your testimony, you state that policy 
fluidity is once again exacerbating uncertainty and therefore 
retarding business investment and job creation. So the question 
is, in contrast to one of our former colleagues, now Chief of 
Staff Rahm Emanuel, who said, never let a crisis go to waste, 
should Congress put large, contentious issues such as health 
care, climate change, imposed tax increases aside to reduce 
uncertainty and encourage quicker business investment and job 
creation?
    Dr. Roberts. You want a yes, don't you?
    Well, I do think that is a good idea. I do think that is a 
good idea. I think it is the wrong time to be experimenting.
    Again, if we had to fix something that we thought was 
desperately wrong that would be simple, transparent, and quick, 
I think it would be a good idea. But I think overhauling 
complex systems at this time is very difficult.
    Just one comment on the Great Depression. It is 75 years 
later, and economists still can't agree on what caused it or 
how we got out of it. I think that is a warning sign, Mr. 
Cummings, to asking economists to solve, steer the economy. It 
is embarrassing, but it must be admitted. It is true.
    Representative Brady. Thanks.
    In all fairness, Dr. Stiglitz, please.
    Dr. Stiglitz. Uncertainty is inherent, and there is 
uncertainty if we do something and uncertainty if we don't do 
something. I have talked to a lot of businessmen in the energy 
sector who say the real problem right now is they know that, at 
some time in the future, they are going to pay for the price of 
carbon. The equilibrium price of carbon is much higher than 
zero. If we don't do something, Europe is going to implement 
border taxes. We are going to have to do something.
    And they want a response. They know something is going to 
have to be done, and they want something to be done sooner 
rather than later. So there is no way of getting out of this 
inherent uncertainty of the world that we live in.
    The same thing is true about health care. That was one of 
the discussions that we had earlier. In my mind, I agree it 
would be a lot better if we could do something that was 
transparent and clear. But again there is no getting out of 
this inherent uncertainty.
    Representative Brady. Doctor, I was just going to ask, 
there are real-life consequences to all this uncertainty. 
Yesterday, we had a company, Eastman, that had--that canceled a 
major chemical construction project in Beaumont. It cost us 
about 2,500 jobs. It was on the board because not just of 
global uncertainties, but there are uncertainties about climate 
change, global warming legislation and how it might affect 
their projects. So that uncertainty came home to roost for a 
community in our district with real negative consequences.
    I agree, uncertainty exists in all climates, but I really 
think back home in all of our states it has changed the 
behavior and it is altering behavior and the ability for us to 
recover from this economy.
    Dr. Stiglitz. As I said before, I know that a lot of, say, 
large electric power plants do not want to invest, knowing that 
sometime in the next 5 years or 10 years we will have to deal 
with this problem of climate change. They would rather have it 
dealt with sooner than later.
    This is not going to go away. If we resolved it, hopefully 
in a good way, that would allow them to go ahead. In the 
meanwhile, they know there is a high likelihood that there will 
be some form of carbon charge. There will be taxes put on our 
exports if we don't, and we should recognize that we can't be 
the free rider on the global system. Our firms know that they 
will face these border taxes if we don't do something.
    Chair Maloney. The gentleman's time has expired.
    Representative Brady. Thank you both.
    Chair Maloney. Mr. Hinchey.
    Representative Hinchey. Thank you very much, Madam 
Chairman.
    Thank you both, gentlemen. I am sorry I wasn't here to hear 
what you had to say, but, unfortunately, I had to be someplace 
else. But I am happy to be here at least for a few minutes to 
have an opportunity to see you and maybe ask you a question 
that I'm sure you have addressed before.
    But the situation that is confronting us is this deep 
recession, and the deep recession has its primary results in 
the loss of employment. We have more people who have been 
unemployed than we have in a long, long time. The economic 
circumstances we are dealing with hearken back to the 1929 
Depression.
    The economic stimulus package that we have introduced, $787 
billion, was, in the opinion of many of us, about half of what 
we should have put out. Unfortunately, only about 30 percent of 
that $787 billion has been put out so far. It has been awfully 
slow. A lot more needs to be done.
    Could you give us some insight into what you think about 
the initiation of the stimulus bill and what needs to be done 
to get it out there more effectively? What is the focus of 
attention that it needs to have and what else we need to do to 
create and stimulate the much-needed jobs that are going to be 
essential to addressing this economic condition?
    Dr. Stiglitz. I agree that the stimulus package that was 
passed was both too small and not as well designed as it could 
have been. We knew that the large part that went into household 
tax cuts was not going to lead to that much spending. Because 
with the overhang of debt, the uncertainties, households would 
tend to save a lot of that. The nature of a stimulus is that 
you have to stimulate. You have to have people spend. So that 
part was not very effective.
    The tax cut should have been aimed at investment. An 
incremental investment tax credit, as I mentioned earlier, or 
other provisions encouraging investment would have been better. 
Some of the money went to help states and localities but not 
enough. The result of that is, while the Federal Government is 
expanding, states and localities are contracting, and that is 
undoing the stimulus. It is like a negative stimulus coming 
from the state and local level.
    It is one of the lessons we should have learned from the 
Great Depression but didn't. Exactly the same thing happened 
during the Great Depression. The magnitude of the net stimulus 
is much smaller because it is being offset, and that is another 
thing I would have changed.
    One of the discussions that we have been having this 
morning is that different economists disagree. That is always 
going to be the case. But I think that the overwhelming number 
of economists--and we will have a disagreement about this--know 
that we have had lots of experience of situations where there 
is an economic downturn, and the problem is a lack of aggregate 
demand. In those contexts, increasing aggregate demand, by and 
large, does lead to more output and more jobs. The situation 
is, as you said, serious. The fact is, it is not just a lag. 
People say the problem is that employment always lags, but that 
is not the problem. We haven't had enough growth to create 
jobs, with or without lags.
    Representative Hinchey. So, with regard to growth, one of 
the things we ought to be doing is stimulating the existing 
industry and maybe also coming up with new technology that is 
going to create new industries.
    In connection with what you were saying just a few minutes 
ago, the energy situation, don't you think we should be putting 
more attention and more investments into the generation of 
alternative energy, solar energy to stimulate new technologies 
and new industry?
    Dr. Stiglitz. Yes. Let me be clear regarding the discussion 
we have had earlier this morning about the issue of the role of 
government in stimulating technology. It is not just a question 
of picking winners. The real question is that there are huge 
spillovers, what we economists call externalities, benefits to 
all of society when you create new technologies.
    We have all benefited enormously from inventions like the 
Internet or the laser. We could all list a whole set of things 
where the inventor got only a small percentage of the social 
benefit arising from his innovation. That kind of basic R&D 
that always necessarily needs to be supported by the 
government. That is even more true when we are talking about 
benefits that are societal in nature, like global warming. The 
answer is very much that those are exactly the kinds of things 
that we ought to be doing now, which would create the 
preconditions for more private-sector activity.
    Chair Maloney. The gentleman's time has expired.
    We have been called to a vote, but I want to briefly ask--
maybe we have time for two brief questions.
    In your testimony, Dr. Stiglitz, you pointed out that there 
were going to be severe shocks and problems with our financial 
markets due to the mortgage industry's foreclosures continuing 
and the looming problem of commercial real estate. Do you have 
any solutions or ideas of what we should do with these 
challenges that are before us?
    Dr. Stiglitz. In the area of home foreclosure, the real 
problem is that the policies of the Administration so far have 
not been sufficient. The main deficiency is that we have not 
written down principal. A quarter of all homes are underwater. 
We know that once homes are underwater, the probability of a 
default and a foreclosure goes way up. Eventually, that leads 
to problems in our financial sector, in the ability of banks to 
lend. It leads to all kinds of consequences. So we need to 
restructure the value of those mortgages.
    Unfortunately, we have made some mistakes in what we have 
done so far, two mistakes in particular. We allowed the banks 
to keep on their balance sheet these mortgages at face value, 
rather than writing them down to the reality. I call that 
marking to hope, not marking to market. That discourages them 
from dealing with these problems.
    Secondly, it was a mistake in some of the bailouts when we 
decided to underwrite the banks' losses because that encourages 
them to, again, hope for a gain so that they get the upside and 
the government takes the downside. That in turn encourages them 
not to do anything.
    I think we need a homeowners Chapter 11 that would provide 
a legal backdrop to encourage restructuring. We have Chapter 11 
that allows for a rapid restructuring of corporate debts 
because we think it is important to keep jobs; keeping people 
in their homes is equally or more important. We need a 
homeowners Chapter 11 that treats homeowners at least as well 
as we treat corporations and homes at least as well as we treat 
debts associated with yachts and other things of indebtedness.
    Chair Maloney. And commercial real estate which is a 
looming time bomb, what should we do about that?
    Dr. Stiglitz. That is a problem with no easy solution, 
other than to recognize that it is a problem and that we ought 
to be demanding capital adequacy on the part of banks. If we 
don't, we are going to have a problem with our financial system 
in 1, 2, 3 years time all over again.
    Dr. Roberts. But if we continue to give people a do-over 
for their mistakes, as compassionate as that sounds and its 
impact on the economy as a whole might be beneficial today, we 
are continuing to destroy the incentives that make our country 
productive and prosperous. So I think it is a terrible mistake 
to say to people, if you are in trouble, turn to us and we will 
extend your hand, where the ``us'' is the government. I think 
it is a bad precedent. It is a problem.
    I think we will have a serious foreclosure problem next 
year. It is going to be very destructive. Unfortunately, we 
aren't going to have the budgetary leeway, I suspect, to do 
much about it.
    But to say to people, whether it is on Wall Street or on 
Main Street, you don't have to take responsibilities for your 
actions; if you made a mistake, we will bail you out; that is 
going to be the end of our country as we know it. Down the 
road, we will pay a fierce price. It will destroy the mortgage 
market, and that is how we got into this mess, by assuming that 
we could tweak and control and steer the mortgage market the 
way we thought was socially desirable. It is an illusion to 
think that comes at no price.
    So it does have a good short-run effect. I agree with 
Professor Stiglitz. But the long-run consequences are easy to 
ignore, and I think they have to be faced.
    Chair Maloney. Thank you very much.
    Mr. Brady.
    Representative Brady. Dr. Stiglitz, in your testimony--and 
I am curious--you made a recommendation that to spur employment 
that we encourage people to retire early, lowering penalties to 
get on Social Security and lowering the eligibility for 
Medicare. Many European countries tried these in the 1980s and 
1990s, and it ultimately reversed course because it actually 
took away Federal outlays and increased their entitlement 
costs.
    Right now, as you know, everyone knows Social Security and 
Medicare are sinking ships. So the dual thought of adding more 
people onto those ships at the same time removing them as 
productive citizens at a time life expectancy is increasing, 
wouldn't that proposal actually reduce real GDP over time?
    Dr. Stiglitz. I thought of that as mostly a short-term 
measure. I will agree with you that, over time, we ought to be 
increasing Social Security and Medicare. This is one of the 
older ideas in the Greenspan Commission, and I support that 
idea.
    Representative Brady. Dr. Roberts, any thought?
    Dr. Roberts. No, no comment.
    Representative Brady. Thank you both. I appreciate it.
    Chair Maloney. First of all, I would like to thank our 
distinguished panelists today. While putting Americans back to 
work today may require deficit spending, the dangers of 
inaction are even more costly. If we don't invest in job 
creation, we will pay later in the form of higher payments to 
unemployment insurance, food stamps, welfare, and other 
entitlements.
    Thank you for your ideas to help us work in government to 
help the private sector create more jobs and to move our 
economy forward.
    We have been called for a vote. I could listen to both of 
you all day. Thank you very much for being here. Thank you.
    Dr. Roberts. Thank you.
    [Whereupon, at 11:54 a.m., the committee was adjourned.]

                       SUBMISSIONS FOR THE RECORD

 Prepared Statement of Carolyn Maloney, Chair, Joint Economic Committee

    For the first time since the recession began two years ago, the 
labor market appears to have stabilized. After month after month of 
punishing losses, November's employment picture was relatively stable. 
Less than a year ago, job losses were growing more and more severe. 
Last November, the economy shed 600,000 jobs. Losses increased until 
January, when they hit a post-Great Depression record of 741,000 jobs 
lost, the last month that President Bush was in office.
    But we turned a corner. Job losses have steadily fallen for the 
last six months. Yet there is no escaping the cruel math of recoveries. 
The recovery of the job market lags behind the recovery of the broader 
economy. Businesses must have more customers before they add employees.
    Although the labor market appears to be stabilizing, too many 
Americans remain out of work. More than 15 million workers are 
unemployed. While we have brought the economy back from the brink, we 
are not yet where we need to be in terms of job creation.
    The mission is to create high-quality private-sector jobs. Congress 
has already done a great deal of work on this front. The $700 billion 
Recovery Act included a tax cut for 95 percent of American families and 
created jobs while investing in clean energy technologies, 
infrastructure, and education--and we see those investments paying off 
in the steadily improving labor market figures. The effect of the 
stimulus on job creation has been verified by the non-partisan 
Congressional Budget Office.
    Just last month, we extended the $8,000 first-time homebuyers 
credit that will spur construction jobs.
    We extended tax relief to small businesses. We are boosting funding 
for small business loans via the Small Business Administration. These 
two initiatives should spur hiring.
    Earlier this week, President Obama announced a new job creation 
agenda with three key initiatives to accelerate job growth. First, we 
need to focus on small businesses. Small businesses are the engine of 
the American economy. By helping small businesses expand investment and 
access credit, they can fuel job growth. Second, we need to invest in 
our future by rebuilding America's crumbling infrastructure. Finally, 
we need to focus on ``green'' jobs. Smart, targeted investments in 
energy efficiency can help create jobs while improving energy security 
and saving consumers money.
    Congress and the President will work together to aggressively 
pursue a job creation agenda that speeds the labor market recovery. Of 
course, some of those initiatives will require new spending. We are 
committed to transparency regarding the cost of our initiatives.
    But let me be clear: While putting Americans back to work today may 
require deficit spending, the dangers of inaction are even more costly. 
If we don't invest in job creation, we will pay later in the form of 
higher payments to unemployment insurance, food stamps, welfare, and 
other entitlements for a ballooning number of out-of-work Americans and 
their hard-hit families.
    Nearly 6 million Americans have been unemployed for 6 or more 
months. Over 3 million Americans have been unemployed for over a year. 
Research shows that the longer a worker is out of work, the harder it 
is for him to find a new job. We must invest in these workers with 
aggressive job creation policies coupled with targeted job training 
initiatives. Otherwise, we face a long-term cost burden far more 
expensive than smart spending on job creation investments today.
    Our challenge today is immense. While the economy may be on the 
road to recovery, the labor market remains on shaky footing. We 
Americans are a hard-working, resilient people. But the millions who 
have been battered by the economic storm need our help today in getting 
back to work. I am confident that we are up to the task.
    And I am thrilled that we have with us today Dr. Joseph Stiglitz, 
one of America's brightest economic minds, to help us learn about the 
best ways to accomplish our goal of a rapid and complete labor market 
recovery.

                               __________

     Prepared Statement of Senator Sam Brownback, Ranking Minority

    I want to thank the chair for scheduling today's hearing. The 
question of how to restore growth to the labor market is the single 
most important challenge facing the Administration and the Congress. In 
answering the question of ``what should government do?,'' we need to be 
mindful of the equally important consideration of ``what government 
should not do.''
    The only way that we are going to restore meaningful, long-term 
growth in employment and output is through the private sector. We need 
to once again unleash the engine that powers our economy to create jobs 
and opportunity for our citizens. We need to make sure that our 
citizens are able to enjoy the fruits of THEIR labor instead of being 
asked to give more and more of those fruits to the government to 
distribute according to its wishes and desires.
    Point is that instead of paving the way to economic recovery, the 
government is standing in the way.
    The massive stimulus bill--$787 billion--that passed in February. 
The American people were told that this was necessary to prevent 
unemployment from rising above 8 percent. The last time I checked, 10 
is greater than 8. The February stimulus has turned out to be no 
stimulus, so now the President and Democratic leadership are calling 
for more stimulus--even though the majority of the first stimulus 
hasn't been spent. This time they are talking about using unspent money 
from TARP. I opposed passage of TARP and I am even more opposed to the 
Administration and Congressional majority transforming this money into 
a perpetual slush fund. The legislation was specific. As money was paid 
back to the government, it was to be used to pay down the national 
debt, not to fund new programs or new spending.
    What are the biggest threats to the future long-term prosperity of 
our nation? Plain and simple: it is our skyrocketing national debt, our 
unfunded entitlement promises and a government intent on getting bigger 
and bigger and controlling more and more of our nation's economy. Does 
the marketplace have imperfections? Yes it does. But those 
imperfections pale in comparison to the threat posed by a runaway 
government that believes it has better and more complete knowledge of 
how to allocate resources and determine the value of labor and capital.
    The failure of ``really smart people'' on Wall Street to recognize 
and account for risk couple with excess leverage brought our entire 
economic system to the brink of collapse. The government is in the 
process of doing the same thing. For instance, instead of creating 
stability and reducing uncertainty, our government is introducing 
greater uncertainty and great risk into the private sector.
    Let's take the current debate over the proposed takeover of the 
health care system by the federal government. If you are a small 
business the current debate and the ideologically driven path of 
current legislation offer little comfort and introduce even greater 
uncertainty into an already uncertain economic environment. What will 
it cost? What new mandates and penalties will I face? These are 
questions business owners and managers are concerned with. These 
uncertainties loom as a major obstacle to a decision to hire new 
workers or to postpone decisions to reduce compensation costs by 
reducing the number of employees.
    Entrepreneurs see it for what it is--a giant government scheme to 
embark upon the greatest redistribution of economic resources in this 
history of this nation. The difference is that when an entrepreneur 
embarks on a new venture, the money at risk is usually his own. When 
the government embarks on a new scheme, it's other people's money.
    We will hear that legislation passed in the House and in pending in 
the Senate will reduce the deficit. It's a mirage that relies on timing 
and inflation. The real point is that the legislation will permanently 
and significantly increase the size of government both in terms of what 
the government spends and what it takes from hard working citizens. At 
the end of the day, it will leave us less free, more deeply in debt, 
and less prosperous in the future.
    I look forward to the testimony from our witnesses. Both are 
distinguished scholars. I will be interested to hear their thoughts on 
how to move the economy forward. For my part, I am convinced that 
government needs to cease being the obstacle to recovery. We need to 
stop increasing uncertainty and as I said earlier stop blocking the 
road to recovery.

                               __________

            Prepared Statement of Representative Kevin Brady

    I join in welcoming Dr. Stiglitz and Dr. Roberts, and look forward 
to hearing the views of these two distinguished economists.
    The economy remains the number one issue for Americans and my 
constituents in Texas. They are apprehensive--in some cases 
frightened--about the direction that economic policy has taken in 
Washington.
    A new Bloomberg survey of the American public reveals that the vast 
majority of the Nation, 60 percent, believe the stimulus had no effect 
or is hurting the economy. More troubling, nearly half (48%) say they 
feel less financially secure today than they did when President Obama 
first took office. And their pessimism grows about the willingness and 
the ability of the government to reduce the staggering deficit.
    The recent hastily-arranged jobs summit and calls by the President 
for Stimulus II are further signs this Administration's economic 
policies are failing the American public.
    Consumers are frightened by the debt and their job future and 
understandably reluctant to spend. Businesses of all sizes are 
worried--reluctant to add new workers while Washington promotes higher 
health care costs, energy costs, more regulation and new taxes.
    The White House and this Congress have taken their eyes off the 
economic ball, opting instead to pursue ideological agendas that 
contribute nothing to our economic recovery and, in fact, fuel fear 
among job creators along our Main Streets. We need to stop 
``frightening the horses'' if we hope for a stable and reliable 
economic recovery led by our local businesses, rather than the 
government.
    The United States is at an economic crossroads. The road to the 
right is a free market economy in which the decisions of Americans 
acting as entrepreneurs, consumers, workers, investors, and savers are 
determinative, while the road to left is a social market economy, in 
which the federal government plays a controlling role.
    To the right, Congress would gradually reduce federal budget 
deficits by restraining the growth of federal spending and pruning 
unnecessary or ineffective programs. Reforming health care on this path 
would focus on empowering patients and lowering costs.
    To the left, Congress would continue its reckless spending. 
Reforming health care on this path would focus on empowering the 
federal bureaucracy and expanding health-care entitlement benefits with 
little consideration about long-term costs.
    To the right, Congress would direct the Treasury to sell its shares 
in Chrysler, Citigroup, GMAC, and General Motors and to truly privatize 
Fannie Mae and Freddie Mac as quickly as possible. Once again, the 
market would determine which companies prosper or fail.
    To the left, Congress would establish an industrial policy for the 
United States, determining winners such as green technologies, and 
losers such as oil and natural gas production, based on political 
criteria. Housing is one of the few sectors of the U.S. economy in 
which the federal government has pursued an industrial policy. The 
collapse of the housing bubble and the insolvencies of Fannie Mae and 
Freddie Mac should warn us about the dangers of mixing public purpose 
and private profits.
    To the right, necessary regulations would be as simple as possible 
and fairly enforced. Old regulations would be regularly reviewed, and 
regulations that proved costly, ineffective, or unnecessary would be 
eliminated.
    To the left, new regulations would multiply. The cost or 
effectiveness of regulations would matter little so long as their 
intent is good.
    To the right, Congress would stabilize the federal tax burden as a 
percent of GDP at its post-World War II average. Congress would reform 
the federal income tax system to encourage both domestic and foreign 
investors to make job-creating investments in the United States rather 
than forcing them abroad.
    To the left, Congress would allow the federal tax burden to rise as 
a percent of GDP. Congress would inevitably be forced to increase the 
income and payroll tax rates paid by nearly all Americans, not just the 
wealthy.
    To the right, Congress would aggressively pursue new customers 
around the globe, tearing down barriers and creating U.S. jobs by 
approving the pending free trade agreements with Colombia, Panama, and 
South Korea and engaging in dynamic growing markets--such as the Asia 
Pacific region.
    To the left, Congress would block these agreements, withdraw from 
the global marketplace, and impose protectionist measures that block 
access to the U.S. market at the behest of a few labor leaders and 
other activists.
    History both here and abroad proves that the right road leads to 
sustained economic growth, rising personal income, and expanding job 
opportunities while the left road leads to stagnation.
    The question before Dr. Stiglitz and Dr. Roberts today, is which 
road would you choose?

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