[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
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Members
Hon. Carolyn B. Maloney, Chair, a U.S. Representative from New
York........................................................... 1
Hon. Kevin Brady, a U.S. Representative from Texas............... 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''
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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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