[Joint House and Senate Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 111-537
THE ROAD TO ECONOMIC RECOVERY: PROSPECTS FOR JOBS AND GROWTH
=======================================================================
HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 26, 2010
__________
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
Andrea Camp, 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
Witnesses
Dr. Richard Berner, Managing Director, Co-Head of Global
Economics and Chief U.S. Economist, Morgan Stanley & Co., New
York, NY....................................................... 3
Mr. Jeffrey Joerres, Chairman, Chief Executive Officer, Manpower
Inc., Milwaukee, Wisconsin..................................... 7
Dr. Kevin A. Hassett, Senior Fellow and Director of Economic
Policy Studies, American Enterprise Institute for Public Policy
Research, Washington, DC....................................... 10
Submissions for the Record
Prepared statement of Dr. Roger Altman........................... 40
Prepared statement of Representative Carolyn B. Maloney, Chair... 42
Prepared statement of Dr. Richard Berner......................... 43
Prepared statement of Jeffrey Joerres............................ 47
Prepared statement of Dr. Kevin A. Hassett....................... 64
Article titled ``Stimulus Arithmetic'' by J. Bradford DeLong..... 79
Prepared statement of Representative Kevin Brady................. 81
THE ROAD TO ECONOMIC RECOVERY: PROSPECTS FOR JOBS AND GROWTH
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FRIDAY, FEBRUARY 26, 2010
Congress of the United States,
Joint Economic Committee,
Washington, DC.
The committee met, pursuant to call, at 9:27 a.m. in Room
216 of the Hart Senate Office Building, The Honorable Carolyn
B. Maloney (Chair) presiding.
Representatives present: Maloney and Brady.
Senators present: Bingaman.
Staff present: Brenda Arredondo, Andrea Camp, Gail Cohen,
Colleen Healy, Kinsey Kiriakos, Andrew Wilson, Rachel Greszler,
Lydia Mashburn, Jeff Schlagenhauf, Ted Boll, and Robert
O'Quinn.
OPENING STATEMENT OF THE HONORABLE CAROLYN B. MALONEY, CHAIR, A
U.S. REPRESENTATIVE FROM NEW YORK
Chair Maloney. The meeting will come to order.
I am thrilled to be joined by Senator Bingaman. Congressman
Brady will be here momentarily, but I want to start on time
because votes are projected for 10:30 and I will have to leave
for that.
I first would like to thank Mr. Joerres and Dr. Hassett for
their willingness to return to Capitol Hill and testify before
the Joint Economic Committee. Our last meeting on February 9th
was snowed out, and the weather continues to cause problems.
Roger Altman, a former Deputy Treasury Secretary for our
country, was going to testify (he's now a leading businessman),
and he has been snowed out and is not able to come.
So I ask unanimous consent to put his testimony in the
record.
[The prepared statement of Roger Altman appears in the
Submissions for the Record on page 40.]
Chair Maloney. Today's hearing continues our in-depth
series on job creation. Today we will be examining the
prospects of a labor market recovery from the Great Recession,
which was fueled by the double-digit crises in both the housing
and the financial sector.
A recent op-ed by Professor Alan Blinder--which was based
on the testimony that he was supposed to give before this
Committee before he was snowed out--presents a clear picture of
the two possible policy options to increase private sector
employment: either increase demand by consumers and businesses,
or give employers the incentive to hire workers.
On Tuesday, the JEC heard testimony from Dr. Doug
Elmendorf, Director of the Congressional Budget Office. His
testimony showed that an employer tax credit--similar to the
one in my bill--is one of the most effective and efficient ways
of spurring hiring.
His testimony also showed that extending unemployment
benefits has the biggest ``bang for the buck'' on the economy.
Those benefits quickly multiply beyond the original recipients
since families will spend all of their benefits on food and
their expenses. Those purchases have a ripple effect throughout
the economy.
We have come a long way since last January, when the
economy lost 779,000 jobs in that month alone, and recorded an
average monthly job loss of over 750,000 jobs in the first
three months of 2009.
Last month we lost 20,000 jobs. And in the most recent
three months of the Obama Administration the average monthly
job loss was 35,000. So we are headed in the right direction.
Thanks to the Recovery Act, the economy is growing.
The Bureau of Economic Analysis reported that in the final
quarter of 2009, the economy expanded at a rate of 5.9 percent.
The Recovery Act included a tax cut for 95 percent of all
American families and created jobs while investing in clean
energy, infrastructure, and education. While we have brought
back the economy from the brink, we are not yet where we need
to be in terms of job creation.
Over 8.4 million jobs have been lost during the Great
Recession. And in addition to the 14.8 million workers who are
currently unemployed, there are 8.3 million workers who are
currently working part-time but would like to work full-time.
In the last year, Congress has enacted policies that
support struggling families and encourage job creation. These
actions include creating and extending the first-time
homebuyers credit, boosting funding for small business loans
via the Small Business Administration, extending safety net
programs, and extending the net operating loss carry-back
provision that will help small businesses hire new employees.
But we need to redouble our efforts to create jobs. The
Senate jobs bill, which passed this week, is a step forward and
an encouraging sign of bipartisanship.
It includes a scaled-down version of my employer tax
credit. I am happy that the Senate has included this. As Dr.
Blinder said in his op-ed, reducing costs for employers to hire
new workers will create jobs.
During today's hearing we will explore other options and
hear other ideas to help workers get back on their feet, spark
consumer spending, and brighten our economic future.
I am pleased that Dr. Berner was able to testify today and
provide us with his forecasts of which sectors and regions of
the economy are expected to grow in the coming year.
Mr. Joerres will be giving us Manpower's on-the-ground
experience about the increase in demand for temporary workers.
Job creation in the temporary help sector is a leading
indicator of progress in the labor market.
Since September 2009, temporary help services has added
over 247,000 jobs--52,000 in January alone.
Finally, Dr. Hassett will be giving his views about future
growth and the health of the labor market.
I am also pleased to see that today's panel will touch on
another topic discussed on Tuesday with the CBO, and that is
the role of uncertainty about government policies on dampening
economic and employment growth.
I look forward to a lively discussion with the panel today,
one that I hope will help spark bipartisan efforts to create
certainty so that households and businesses will feel confident
and will lead our country out of this Great Recession.
[The prepared statement of Representative Maloney appears
in the Submissions for the Record on page 42.]
Chair Maloney. Thank you all for coming, and I recognize my
colleague, Senator Bingaman.
Senator Bingaman. Thank you all. I don't really have an
opening statement. I look forward to hearing from all of you
about our prospects for accelerating the economic recovery and
creating jobs, and your best suggestions as to what policies we
could adopt that have not been adopted. Thank you for being
here.
Chair Maloney. You are in charge.
Senator Bingaman [presiding]. Okay. Let me just start,
unless you have some preference in the order that you would
like to testify, with Dr. Berner. Have you been adequately
introduced here? I can certainly do that.
Dr. Berner. I am happy to proceed, Senator.
Senator Bingaman. Let me just briefly indicate, he is the
managing director and Co-Head of Global Economics, and Chief
U.S. Economist with Morgan Stanley. We appreciate you being
here. You direct the firm's forecasting and analysis of the
global economy and financial markets, and co-head the firm's
Strategy Forum.
You have served here, of course, on the Research Staff of
the Federal Reserve in Washington where you co-directed the
Fed's Model-Based Forecasting. There are a lot of other things
I have written here that I could say about you, but I think
that gives us an indication of your qualifications.
We are very pleased that you would be with us today. Why
don't you go ahead, and let me hear from you, and then I will
introduce Mr. Joerres.
STATEMENT OF DR. RICHARD BERNER, MANAGING DIRECTOR, CO-HEAD OF
GLOBAL ECONOMICS AND CHIEF U.S. ECONOMIST, MORGAN STANLEY &
CO., NEW YORK, NY
Dr. Berner. Okay, Senator. Thank you, and other Members of
the Committee who may not be here. Thanks for inviting me to
this hearing.
Following the deepest financial and economic crisis since
the Great Depression, the U.S. and global economies are
starting to recover.
In our view, however, the recovery will be moderate and job
gains modest. In 2010 and 2011, respectively, we expect real
GDP to grow by 3\1/4\ percent, and 2\1/2\ percent.
We expect annual job growth to average about 110,000
monthly over that 2-year period, excluding hires for the
decennial census. Even those job gains, however, are not a
foregone conclusion. We have yet to see job growth in our
economy, as you know. And, while indicators have improved, that
is still a forecast.
More important, as you also know it would take stronger job
and economic growth over the next few years to regain the 8.4
million payroll jobs we have lost in this Recession, or to gain
the 10.6 million jobs required to restore the employment rate,
or the employment population ratio to the one prevailing before
we got into the downturn.
Importantly, as well, our unemployment problem has become
chronic. Two statistics I think document that fact. The median
duration of unemployment has reached 20 weeks, and a record 41
percent of the unemployed have been jobless for 6 months or
longer.
So my testimony today I will talk about four specific
obstacles to hiring. Each of these has both a cyclical and a
structural element to them. For each I will talk about policies
that might help foster economic growth and job creation, but
first I want to identify, as you asked me to, where job gains
are likely to be over the next two years and why.
We think advances in export, infrastructure, capital goods,
energy, and health care-related industries likely will account
for most of the job gains in the next 18 to 24 months.
That echoes our views regarding the sources of growth in
our economy. The combination of strong global growth, the
lagged effects of fiscal stimulus, and improving financial
conditions--thanks to the efforts of the Federal Reserve--will
continue to promote growth and will promote improvement in many
of those industries. And of course rising demand for health
care services continues.
When we think about where the regional strengths will be,
that's a little harder. For example, industries that likely
will benefit from exports and other strong sectors happen to be
located in regions that were hard-hit by regional housing
problems.
In our judgment, the Pacific Northwest, parts of the
Rockies, and Upper Midwest, parts of the Southeast, and parts
of the Southwest seem likely to us to be the strongest regions.
Turning to export markets and employment, which is
important, I expect gains in export volumes of around 10
percent to be sustained over 2010. Paced by their domestic
demand, growth in many of our major trading partners--
particularly in Asia and Latin America--probably will average
around 6 to 7 percent this year, and Canada probably will grow
more strongly than in the U.S. A little slower growth in 2011
is likely to occur as the U.S. and overseas policymakers exit
from their very expansive fiscal and monetary stimulus.
In manufacturing, some 20 percent of employment in 2006 was
directly or indirectly related to exports, and I expect that
share to grow over the next two years.
Capital equipment and industrial supplies exports likely
will continue to do well, while consumers will represent a
rising share of overseas demand.
Now let me turn to some of the obstacles to hiring. I think
worries about the sustainability of the recovery are
legitimate, as they often are, early in a recovery, and that is
maybe holding hiring back.
The fallout from the bursting of the housing and credit
bubbles I think has intensified such concerns this time. So I
think it remains essential to pursue policies oriented towards
reducing housing imbalances, reducing debt, and improving the
functioning of financial markets and financial institutions.
In addition, I think there are four specific obstacles to
hiring today:
Rising benefit costs;
Mismatches between skills needed and those available;
Labor immobility resulting from negative equity in housing;
and
Uncertainty around policies here in Washington, as the
Congresswoman mentioned earlier.
I want to turn to what you can do to help the economy and
labor markets to improve as quickly as possible. Let's talk
about the cost of labor.
Thanks to high fixed costs of health and other benefits,
and of taxes on labor to pay for the social safety net, our
labor costs are out of line with other countries when adjusted
for living standards.
I say ``fixed costs'' because benefits do not vary with
hours worked; they are paid on a per-worker basis. But as
employers seek to cut the cost of compensation, these benefit
costs drive a growing wedge between total compensation and
take-home pay.
The Recession made that wedge bigger as cost-cutting
private sector employers cut take-home pay while leaving
benefits intact. So relative labor costs go up in that
circumstance versus other countries, and median pay suffers.
The long-term solutions to this issue include comprehensive
health care reform and innovation to boost productivity and
labor skills.
A short-run remedy might include the refundable payroll tax
credit that we've just mentioned in the hearing, perhaps for
firms that increase their payroll. CBO estimates that would be
one of the most effective short-run remedies, as was just
mentioned.
The second obstacle I think is a mismatch between skills
needed in the workforce, or work place, and what there are in
the workforce. Workers' skills have greatly lagged technical
change, and the big changes in the structure of our economy.
Dislocations in several industries in the Recession magnify
that mismatch as workers who have been trained for one
occupation lose their jobs and have difficulty taking another.
And even in health care there is a growing nursing shortage
that requires new training facilities.
The long-term solution, or solutions, include policies that
keep students in school, improve access to education,
reorientation of our higher educational system towards
specialized and vocational training and community colleges, and
of course the training programs that firms like Mr. Joerres
seek.
The short-term remedies are a little harder. One short-term
remedy might pair training and basic skills that are needed for
work with the income support we need through unemployment
insurance to help people bridge the gap during jobless spells.
Two other groups seeking employment--newly minted college
students and recently unemployed teachers--could be an ideal
nucleus, in my view, for a job training corps that would
empower job-seekers with new skills.
The third obstacle is labor immobility resulting from the
housing bust. Negative equity among a Nation of homeowners, in
my view, leads to substantially lower mobility rates--one-third
lower, according to one study.
That is leading to a wave of strategic defaults in which
borrowers who can otherwise afford to pay decide to walk away
from their homes. Whether through foreclosure or default, this
process is undermining the economic and social fabric of
communities and reducing job opportunities. And so far the
policies that we have employed really have not dented the
problem.
The long-term solution of course is financial and mortgage
regulatory reform which are essential to restore the health of
housing finance. Significantly, improving financial literacy in
my view is equally important.
In the short run, efforts to stabilize communities plagued
by foreclosure are essential, and they are worthwhile, but they
are not enough.
Modifying existing mortgages has not worked. Re-default
rates following modification are between 50 and 60 percent. I
think establishing a protocol for short-sales and principal
reduction should be a useful tool in avoiding costly
foreclosure and strategic default.
The fourth obstacle is policy uncertainty. I think that is
a negative for the economy and for markets. It is clear to all
of us that we need to solve our long-term challenges, and there
are many--health care, budget and tax reform, financial
regulatory reform, retirement savings, infrastructure, the list
goes on--and the debates around major initiatives to address
those problems are obviously an important part of the
democratic process.
But the uncertainty that accompanies major policy change I
think is weighing on business and consumer decisions to hire,
to expand, to buy homes, and to spend.
Now there is some recent work that confirms this intuition.
In effect, the rise in uncertainty increases the option value
of waiting as volatility in markets and the economy rises.
Moreover, this line of reasoning suggests that uncertainty
reduces the potency of policy stimulus. In effect, it raises
the threshold that you have to clear to make a business choice
worthwhile. And, conversely, as uncertainty declines, the
threshold falls with it.
I can tell you as someone who works in financial markets
that market participants are used to thinking that political
gridlock is good, that it prevents politicians from interfering
with the marketplace. And by the way, I think sometimes that
interference is essential and important.
The financial crisis clearly exposed the flaws in that
reasoning, however, with respect to appropriate financial
regulation whose absence allowed abuses. Indeed, gridlock today
is more likely to be bad for markets, as our long-term economic
problems are partly the result of past policies and can only be
solved with political action.
So the long-term solutions here involve bipartisan
leadership to tackle those complex problems one by one in steps
that are fair and call for shared sacrifice and benefits.
The short-term remedies are no easier. They involve,
obviously, getting together, but they will be a tonic for
growth in my view. Reduction of the uncertainty around the
political environment here in Washington I think would give
some clarity to policies and the direction we're headed, and I
think that would support an improvement in our economy and our
financial markets, and would pave the way for renewed job
growth.
Thank you very much. I will be happy to take your
questions.
[The prepared statement of Richard Berner appears in the
Submissions for the Record on page 43.]
Senator Bingaman. Thank you very much. I appreciate you
being here, and I appreciate that testimony.
Jeffrey Joerres is the Chairman and Chief Executive Officer
with Manpower Inc. He joined Manpower in 1993, served as vice
president of marketing, and later as senior vice president of
European operations and global account management, promoted to
president and CEO in 1999. In 2001 he was named Chairman of the
Board.
Again, I have more information that I could put out here
explaining your eminent qualifications, but thank you for being
here and we are anxious to hear your perspective on these
questions.
STATEMENT OF JEFFREY JOERRES, CHAIRMAN, CHIEF EXECUTIVE
OFFICER, MANPOWER INC., MILWAUKEE, WISCONSIN
Mr. Joerres. Thank you, Senator.
Job creation is the topic that we absolutely deeply believe
in, as every day we connect people to jobs. That is what we do
for a living.
Globally we have more than 400,000 associates on assignment
at any given day. In 2009 we interviewed over 12 million people
through our network of over 800 offices in the United States.
We absolutely have a finger on the pulse of what is going on in
the labor market.
So what are we seeing? Companies are clearly starting to
hire. There is no doubt about it. However, this recovery, like
the recovery in the last few recessions, will be a jobless
recovery.
This is because companies are much more sophisticated in
their ability to assess their workforce needs. Companies can
determine exactly when they need workers to support the demand
for their products and services. So from now on, companies will
no longer engage in ``anticipatory hiring.''
They will instead wait for clear signs of an increase in
demand before making permanent hiring decisions. As a result,
we would expect that short-term increases in the level of job
hiring will be driven by new businesses, or by actual demand.
The Manpower Employment Outlook Survey looks to 28,000 U.S.
companies to assess hiring expectations in the quarter ahead.
The latest survey shows that twelve percent of those companies
said they would increase their staff in the first quarter; 73
percent of the employers expected no change in their hiring.
Why is that important? In the 42 years of this survey the
``no change'' number has never been that high. Those companies
are really stuck in the middle of the stabilization waiting for
a sign for them to be able to take on people. The normal number
of employers expecting ``no change'' would be somewhere around
58 percent.
Additionally, the national survey data shows that employers
in mining, durable manufacturing, information, government, are
expecting hiring in the first quarter versus the fourth quarter
of 2009. Slight increases are also expected in nondurable goods
manufacturing, transportation, utility, professional and
business services. Employers in sectors, as you would imagine,
like construction, retail, wholesale, will have a very soft
first quarter, and some of the preliminary indications, we say,
a softer second quarter as well.
Using the seasonally adjusted data, all regions anticipate
moderate quarter-over-quarter growth in their staffing levels,
with the highest growth coming from the South and the Midwest.
And you can see why: growth in the manufacturing jobs is where
our growth is coming from.
A major trend emerging from this down cycle is the number
of unemployed workers who will be forced to find new jobs
outside their industry-of-expertise. In our company we have
labeled these people: ``industry migrants,'' very similar to a
migrant coming into the country.
They face challenges including how to adapt old skills to
the new demand in the marketplace, and how to represent those
skills in a brand new light.
For example, a foreman in an auto company on a shop floor,
might have problems fitting into a manufacturing environment.
Another one of these major challenges that workers face in
this recovery is the lack of mobility exacerbated by the
housing crisis, very similar to what Dr. Berner had referred
to. This inability to help homeowners get out from underneath
their negative equity problems means that many jobless are
unable to take jobs in different locations, when in fact there
are available jobs.
We believe that any initiative that the government
implements to address the level of unemployment and foster job
creation should focus on three specific areas: the individual
job seeker; companies; and potential new businesses.
So what can be done to assist in the individual employment?
Training programs. Again, as Dr. Berner mentioned, these have
very good track records. They also have some challenges
associated with them. But workforce development programs and
other forms of skill retooling--and I might suggest
specifically focusing on these potential industry migrants--to
enable them to leverage their existing skills, but move them
into different industries.
What can we do to assist corporations? Corporations are
more specific than ever about their hiring needs. This is the
conundrum. There are people saying: I have the skills. And
there are companies saying: your skills aren't good enough for
me. That skills mismatch is critical.
They have to have softer skills. They have to have
flexibility, adaptability, intellectual curiosity, an interest
in lifelong learning; things that we didn't have to have
before.
Given the velocity of change in these requirements' skills,
all citizens and particularly industry migrants will need to
develop them.
Tax credits and incentives for companies to increase the
size of their workforce will put needed money in the hands of
businesses. However, companies have gotten smarter, in that
from this recovery going forward hiring decisions will be made
based on demand for their product and services and goods.
Offering incentives will not create new jobs, in my
opinion. Rather, they will subsidize the cost of growth of
companies that they would have hired anyway.
This use of taxpayer monies in this incentive program is
well-intended, yet at the same time will create a tax break for
companies, which is good, but if you look at the long-term core
it is not getting at true job creation.
Businesses create new jobs. One of the biggest challenges
of any Federal Government initiative is getting to the end
citizen, and how that end citizen can participate in those
programs. Programs to provide this group of people with access
to start-up capital, grants, access to cheap real estate,
perhaps even using some FDIC-owned real estate, will create
jobs.
In conclusion, I am suggesting three specific actions that
should be considered to address the three areas of focus I just
spoke about:
One, a targeted investment aimed at new business creation.
Develop a comprehensive program, breaking down the silos within
government to support entrepreneurs to set up and establish new
businesses. A new pipeline of businesses must be there in order
to replace the continued productivity and efficiency.
A program targeted on unemployment and the homeowner.
Again, as Dr. Berner talked about. We need to create a more
flexible and fluid labor market, and therefore we need to be
able to have people continuing to pay their mortgages so
they're not trapped in their city when there's a job offer
elsewhere.
A targeted program to address soft skills which will
particularly benefit industry migrant populations. This
development of these industry migrant populations. This is an
opportunity to develop a training curriculum and program
through workforce investment boards. Industry migrants require
assessment skills, skills' transfer training, and soft skills'
training. All of these can introduce the likelihood of this
migrant moving to other industries.
Manpower has been in the business of jobs and the job-
training business for more than 60 years. We have seen the
economic ups and downs. It is clear that this recession is by
far the most severe that we've seen.
It has been a privilege to share some of the thoughts that
we get and feel from on the ground and those actions I have
presented to this Committee. We consider that strong
partnerships between government and industry will be critical
for rapid progress in the recovery.
It will also be critical that we get it right. Right means
systemically so that we are not solving this same issue 18
months from now. The employees of Manpower and I are ready to
assist in getting America back to work.
Thank you.
[The prepared statement of Jeffrey Joerres appears in the
Submissions for the Record on page 47.]
Senator Bingaman. Thank you very much for that testimony,
and I will have some questions when we get to the question
part.
Our third and final witness is Kevin Hassett, Director of
Economic Policy Studies, a Senior Fellow at the American
Enterprise Institute. His research areas include the U.S.
economy, tax policy, and the stock market. He previously was a
senior economist at the Board of Governors of the Federal
Reserve System, and a professor at the Graduate School of
Business at Columbia. He also served as a Policy Consultant to
the Treasury Department during the Presidency of George H.W.
Bush, and the Clinton Administration.
Dr. Hassett, thank you for being here.
STATEMENT OF DR. KEVIN A. HASSETT, SENIOR FELLOW AND DIRECTOR
OF ECONOMIC POLICY STUDIES, AMERICAN ENTERPRISE INSTITUTE FOR
PUBLIC POLICY RESEARCH, WASHINGTON, DC
Dr. Hassett. Thank you, Senator, for having me. It is a
real honor to be here in the room. Also, I commend--I have
turned on my microphone. Is it working? The microphone is not
working?
Senator Bingaman. No, I think it works. If you will just
pull it a little closer, that seems to be the thing.
Dr. Hassett. How about that?
Senator Bingaman. That's great.
Dr. Hassett. Okay, terrific. Thank you.
It is really an honor to be here, especially before this
Committee, which as you can see looking at my fellow panelists
has a long tradition of inviting people who give the unbiased
truth and are not here to make political points, but rather to
help us think about where we are and what we need to do.
As you know, Senator, my testimony was fairly long. And
after listening to my two predecessors, a lot of the things
they said are things that I agree with explicitly in my
testimony. So what I will do is go through the parts of my
testimony that offer slightly different, or alternative
perspectives and not emphasize the areas of agreement.
So I will begin with a brief overview of our current
economic situation, discuss what I see as the most pressing
challenges for employment and growth, and then describe policy
changes that I think would address our current challenges,
especially those challenges in the U.S. labor market.
The headline of my testimony is that it is absolutely clear
that the Recession is over, although that is not really
commonly discussed, although it is certainly accepted by most
economists. I think in the end the date of the end point, or
the trough of the Recession will be probably sometime in July
of last year.
But even though the Recession is over, as was the case in
the previous two recessions, we've begun with something that
looks a little bit like a jobless recovery. The labor market is
still terrible, and it is improving far too slowly, although it
may have very subtly turned the corner lately.
The fact is that we are coming out of what economists now
call ``The Great Recession,'' but I think that we need to amend
that as we think about our policy challenges because it was
``the Great Recession'' for whites, but it has been a Great
Depression for blacks. If you look at the differences across
races in unemployment, for example, it is startling and
disturbing and an urgent call to action.
I think also the Great Depression for blacks is not over.
So we are starting to see some signs of improvement in labor
markets, but if you decompose the statistics and look at the
different experience of whites and minorities, you find that
minorities are really trailing in a way that challenges
policymakers.
And so I think looking at the economy, we are clearly out
of the Recession. We have had a tremendous growth quarter, but
that growth, a lot of it came from inventories and
traditionally inventory spikes are followed by weak quarters;
they tend to be negatively correlated, the inventory
contributions, which means that there is a downside risk at the
beginning of this year and ample room for caution.
I think that, given that, and given the state of the labor
market, that we would be wrong not to think about additional
measures to take.
Now before I go on to the specific proposals that I would
urgently encourage you to consider, I would like to talk a
little bit about what we did last year. Because I think it is
crucial to not repeat what we did last year, for reasons that I
go into in depth in my testimony.
Now the CBO report released just this week provided
estimates of the impact of the stimulus, and they offer broad
ranges in the report when estimating the economic effects which
are intended to encompass most economists' views, and thereby
reflect the uncertainty involved in such estimates.
As you know, Senator, the estimates were then actually
fairly favorable, giving ranges, you know, well above a
million, or two million jobs. My view is that the CBO report is
incorrect. And I make these observations here not to make
political points about what we did last year, but rather just
to emphasize that it is crucial that we look elsewhere now.
Now why do I disagree with the CBO report? Well, the CBO
analysis relies on large-scale Keynesian macro forecasting
models that were mostly discarded by the economics profession a
long time ago.
The CBO analysis concludes that we got lots of jobs created
and that the broad range of economists' views would support
that, but I disagree. That is not my read of the literature.
A sign of how far off the CBO analysis is comes from the
comparison of their broad range to the analysis in a Wall
Street Journal article, also written this week, by Robert Barro
of Harvard.
Professor Barro has been one of the primary contributors to
the macroeconomic times series literature that has tried to
estimate effects from observed economic data, rather than
assume the facts, as is often done by the Keynesian models.
I should note that Barro is perhaps Harvard's most famous
macroeconomist, is a virtual lock to win a Nobel Prize, and his
work is not out of the mainstream. It has been followed by the
work of many others who have made similar findings.
The key point is that Barro estimated that the government's
spending multiplier for the first year of the Stimulus 2009 was
about .4 percent, pretty small; and the multiplier for year two
would be about .6 percent, a little bit bigger, but both of
these estimates fall well short of the bottom of the range of
CBO multipliers, because the CBO chose to ignore the literature
that relies on experience rather than Keynesian speculation.
I believe that the correct position for policymakers as we
now look ahead at what to do is to adopt skepticism concerning
these effects, and openness to different approaches.
I guess the last point from my testimony that I would like
to emphasize is that it is worth adding that we need to be
particularly wary of big job creation estimates precisely at
this moment.
One reason job creation lags the cycle is that businesses
hoard labor and have excess capacity when times turn sour. As
the economy recovers, they are able to ratchet up production
without making new hires.
Even if the Stimulus did have an outsized effect on output,
one would not expect to see a large impact on hiring at the
beginning of a recovery. The large job-creation claims just do
not add up.
So what should we do, if we're not going to do what we did
last year? Well, I highlight a number of things in my testimony
which I am going to have to give a kind of helicopter view of,
as I am running out of time.
The first thing is that I think that we should recognize
that we have a serious opportunity, if we can get our house in
order. As Mr. Berner emphasized, uncertainty about future
policy and about the course of U.S. prices and the value of the
dollar is certainly having a depressing effect on the U.S.
economy.
The good news is that there have been many countries in the
past that have been in circumstances similar to our own. The
literature suggests that those countries that then get their
house in order, by having something like the bipartisan
commission that was proposed in the Senate recently to reduce
the deficit in the long run, well they have seen even near-term
economic booms in part, I believe, because the uncertainty
about what future policy is going to be is removed.
So I think the first thing we need to think about is not to
sharply cut back government spending, for example, in this
year, which would certainly have some negative effects on the
economy, but rather recognize that we have a near-term
opportunity to remove the uncertainty about future policy by
getting our house in order in the long run.
Such a fiscal consolidation I believe would be a very
beneficial policy going forward. It would give people reason
for confidence as they make their plans about the future.
The second policy that I emphasized in my testimony is
something known as job sharing, which is really a very smart
and clever idea that has been floating around for years and
perfected somewhat by some European nations.
Again, as I'm running short, I will summarize it in this
way. Right now we have unemployment insurance. And if a firm
lays a person off, then they will have a reduction in their
wage bill in what they have to pay, and the person who is laid
off will get some unemployment insurance.
What job sharing is is a kind of fractional unemployment
insurance. So you could reduce a worker's hours by say 20
percent, and then they could get 20 percent of their
unemployment insurance.
The experience of such programs is really remarkable. In
some European nations like Germany they have had GDP declines
very similar to our own, and yet the unemployment rate has
barely gone up at all. And many analysts attribute this to
their job-sharing program.
I think it would be very cost effective to adopt one now,
and it is important to note that it is not too late, even if we
are in the first stages of a recovery. The fact is that each
month four million or so jobs are created and destroyed, so
there is job creation out there, but there is still a lot of
job destruction out there.
If we can use job sharing to slow job destruction, say even
10 percent, then that might add up as much as 400,000 to the
net job numbers that you see in the top line employment report.
I then go on to discuss the idea of creating jobs directly,
which is not something that I would naturally choose to do if
asked, but given the state of the labor market we need to
really be creative about how we do it. And the good news is
that the few programs that we've seen that have tried to create
jobs directly have done so at an astonishingly cost-effective
way compared to things like the Economic Stimulus.
So, for example, one jobs program that H.R. 4564 is seeking
to extend maybe created jobs at a cost of about $10,000 to
$20,000 a job, which is, even by optimistic estimates if we
accept President Obama's numbers, about one-tenth the cost of
creating jobs through the Stimulus.
And the final thing that I mentioned is that, if we want to
give people reason for optimism, we can resolve uncertainty
through a fiscal consolidation, but we have also got to give
America's businesses a break.
The rest of the world has been reducing its corporate taxes
for years, and the idea is that now the average for our OECD
trading partners is about 10 percent below what our current
corporate tax rate is. And so if you are a big multi-national
firm deciding where to locate your activity, are you going to
locate it in the U.S. where you have to pay 10 percent more of
your profits in taxes? Or are you going to choose another
location that has lower taxes?
The literature on this is clear. When your corporate tax is
as far out of whack as ours is with the rest of the world, then
the revenue costs are really extreme from having the high rate
and you can reduce the rate without losing much revenue, if at
all.
Indeed, I even have references that are listed in my
testimony that suggest that the cost of reducing the corporate
tax rate might actually be nonexistent. It might actually raise
revenue because we're on the wrong side of the corporate tax
Laffer Curve. That is actually an opportunity right now.
We are looking for something to do that will not cost much
revenue because we do not have much revenue to give, and the
corporate tax area is one that both is harming our
competitiveness and, too, can be fixed without having a big
budget cost.
Thank you very much for your attention, Senator, and that
concludes my prepared remarks.
[The prepared statement of Kevin A. Hassett appears in the
Submissions for the Record on page 64.]
Senator Bingaman. Thank you all very much for your
excellent testimony. Let me at this point put an article in the
record that relates to some of the same issues that Dr. Hassett
and the rest of you testified to. This is an article entitled
``Stimulus Arithmetic,'' by J. Bradford DeLong, a Professor of
Economics at UC Berkeley, discussing Dr. Barro's analysis of
the American Fiscal Stimulus Act and its effect on jobs.
[The article titled ``Stimulus Arithmetic'' appears in the
Submissions for the Record on page 79.]
Senator Bingaman. Let me start, Dr. Berner, with a few
questions to you. I think your testimony is very useful,
particularly in that you organized it in terms of the short
term and the long term. That is obviously the reality that we
are faced with here in trying to make policy for the country
here in the weeks ahead, and the months ahead.
One big debate that I think I hear all of you taking a
position on is, we have got some here in the Senate who are
taking the position that we should not be spending any more for
unemployment insurance, any of these job creation initiatives,
payroll tax holidays, these types of things, unless we offset
that spending by cuts elsewhere, or by, I guess presumably by
increased taxes. But some way or another we need to pay for any
continuation of the job creation provisions that we have in law
today, or the job maintenance provisions that we have in law
today.
I guess I would be interested, if I am understanding your
position, Dr. Berner, your position would be that that is not
the right policy in the short term? That is probably the right
policy in the long term? That there is a distinction we need to
keep in mind here about what we do now versus what we do with
regard to the long term deficit and fiscal situation in the
country.
Is that accurate, or not?
Dr. Berner. Yes, Senator, that is accurate.
I think there are two things that are important. In the
short term I think what we are all saying is we need to be
smarter about the way we implement programs, and the way we use
taxpayer money to implement them.
We are all interested in getting the maximum bang for the
buck out of those programs. Income support, for example, is
really important in a period of great stress for American
families and workers. But as I suggested in my testimony, for
example, it might better be paired with training and other
things that would make it more productive in use.
And Kevin and Mr. Joerres also talked about ways that we
could spend our money more effectively in short-term programs.
But I think what we are talking about here--and here is where I
would join Dr. Hassett in this--we need a credible plan to get
our fiscal house in order, and we have not seen that yet.
I think markets would derive great benefit from that. Not
only would we reduce uncertainty, but I think that people would
understand that, while it is going to take some time because we
have got difficult problems to solve and big challenges to
address, a credible plan to resolve our fiscal problems over
time I think would be enormously beneficial to markets and to
the economy.
Senator Bingaman. So the Deficit Reduction Commission that
the President is establishing is the right thing to be doing
for the long term, but continued support for job creation
initiatives now is also the right thing to be doing? Is that
what I understand?
Dr. Berner. It is, Senator. It is the right thing to be
doing as long as we do it in a way that is both creative and
where we get the most bang for the buck.
Senator Bingaman. This suggestion that Dr. Hassett is
making about work sharing, job sharing, is that something you
have looked into, Dr. Berner? Does that make sense as a policy
option we ought to explore or adopt?
Dr. Berner. Senator, I have not looked into that but it
does sound like something we could explore. After all, I do not
think we ought to leave any stone unturned. We should explore
all options.
And the appeal of what Dr. Hassett is talking about is that
if you have people who have their hours significantly cut back,
that there is a level of income support there for those people.
That builds an automatic stabilizer into the system so that we
do not while at the same time reduce hours we also reduce
wherewithal for spending and create a problem for consumers
where we get into them saving in a precautionary way if there
is a lot of uncertainty out there.
So that sort of support could be useful. But I think we
ought to also look at other--the other kinds of creative ways
to both support demand and to get our economy going to support
job creation.
Senator Bingaman. Mr. Joerres, did you have thoughts on any
of these questions that I have just posed to Dr. Berner here
about what short-term policies make sense for us to consider
here in Congress?
Mr. Joerres. Well any time you can get somebody back to
work instead of sitting at home makes a big difference. So
whether it be some form of job sharing, or the industry that
Manpower is in, makes a tremendous amount of difference,
because there is an awful lot of research that says the longer
you are unemployed, the longer it takes for you to get to a
long-term employment situation, even if you just do comparisons
between the U.S. and Europe on the long-term unemployment rate.
A lot of that has to do with not getting people back to work
fast enough.
There are two forms of safety net that must be employed
now, because we are in a period where you have to have safety
nets. In almost all cases, safety nets do not create jobs. But
if we serially look at the connection between safety nets and
creating jobs, we are going to see an S-curve environment where
you're really going to have that dropoff again. There must be
some parallels in order to do that.
To your point earlier, this all costs money, thus we are
going to have to make some choices. Are we interested in true,
long-term systemic job creation, which is really new businesses
filling in the slack of mature businesses continuing to enhance
efficiency?
Say I have 5,000 employees and reduce it to 4,500. A new
business must come up underneath to 500 people just to maintain
those jobs. Right now, the pipeline of new businesses we so
desperately need is not there.
So I would suggest to be very clear about safety net
services, short-term job creation, or really more short-term
job preservation, and then longer term programs in order for us
to start this pipeline of new jobs.
Senator Bingaman. All right. Dr. Hassett, maybe you could
just comment on the general question that I posed to Dr. Berner
as to, as I understood your testimony, you say we have a near-
term opportunity to get our long-term house in order, and that
is the Deficit Reduction Commission, or at least that is one
way to try to begin to address that problem, and you believe
that is a good step to be taken?
Dr. Hassett. Yes. I am not sure about the Deficit Reduction
Commission, although I have a great deal of respect for the
folks who have been charged with setting it up. The fact is
that we have got tough choices to make. And as you know,
Senator, there have been many more failed commissions in the
past than successful ones, and I wish that we were a little
more ambitious in this regard.
I also would highlight the part of my testimony where there
is a chart for this that looks at the U.S. debt situation,
external debt situation, and points out that we really are
pushing the envelope in terms of our debt.
And again I am not here to point fingers on who is to
blame; it certainly is something that started about a decade
ago that we began running up bigger deficits; but the fact is
that right now our external debt relative to GDP is worse than
the external debts we saw for Latin American countries that
have defaulted over the last few decades.
And so if you were to say the U.S. is just like another
Latin American country, then I guess I would respond to that:
You wish. Actually, it would be a big improvement from where we
actually are.
And so I think that, given that that is the circumstance,
we need to be very wary of expanding things without thinking
about how we are going to pay for them. But we do not have to
time them so that they all happen this year.
So, for example, if you could find--and I know that this is
something that politicians often refer to but it never really
exists, or it never really happens--lots and lots of money that
we can save from reducing waste three years from now, or some
program that we are actually going to cancel, and the present
value of that cancelled out all of our jobs programs, then I
think the panelists would all agree that that would be a policy
that would have a significantly better effect than one that
just added to the uncertainty about how we are going to fix
this mess.
But the good news--you know, in some sense it is depressing
to think about our fiscal situation, but I think that there is
a twist on it that one could think of as good news, in the
sense that if you're a person who like me likes to watch the
sort of medical mystery style TV show, then if somebody shows
up and they've got a knife in them, then it is kind of good
news in the sense that you take the knife out, you sew them up,
and then they go home. But if somebody comes in and they've got
a high fever and you don't know why, then it could be really
bad news.
The fact is that we have got some knives in us that we know
how to take out and sew up, and so we can fix this thing. It is
not a mystery how. And I think the question is just how do we
generate the political will; it is not how to design the
policy.
Senator Bingaman. Let me also ask, your endorsement of
direct job creation I think is very interesting. Because again
we get into a real ideological discussion around here whenever
we try to appropriate money for direct job creation. And folks
take the position that that is a terrible thing, that is
government expanding, we should not be doing that, we should be
doing some other indirection action through some tax provision
to incent someone else to create jobs, instead of directly
creating jobs.
But I understand you to be saying that direct job creation
seems to be a more successful way to get jobs created at a
reasonable cost? Am I understanding you right?
Dr. Hassett. Thank you for pointing that out, Senator. I
would add that the thought that started leading me in this
direction was that if we had spent the Stimulus last year by
just hiring people and paying them the median wage of $38,000,
then with the original Stimulus estimate I calculated that we
would have created 21 million jobs.
I think with the new-hire CBO number it is climbing to
something like 23. And I am not saying that that is something
that we really would have wanted to do, but it puts in
perspective the notion of, you know, when is a multiplier a
multiplier?
If you just actually create the job directly, then it turns
out to be a lot more cost effective than to design some big
public works program that is going to create some jobs.
I think that in addition the idea that creating jobs
directly means big government is incorrect, because I think one
could easily envision a program that I would probably want my
colleague to the right of me to design where we arranged for
firms that hire someone who is unemployed to get a fraction of
their salary for the first few months for that person in terms
of a wage-sharing or something contribution. If you did that,
then the firms would have access to the cheaper labor, so their
profits would go up, which would make them want to buy
machines, and so on. We would get someone back into the labor
force before they are lost forever, as my colleague on the
panel mentioned--if people stay out of the workforce for a year
or two, then very often they have a hard time ever returning.
We have got to send a lifeline to these folks.
So I think that, given all of these concerns, especially if
it focused on private job creation, it seems like people of
both parties should agree that it is a much more cost-effective
way to create jobs than anything else, or many of the other
things on the table.
Senator Bingaman. Dr. Berner, I would be interested in your
comment on this proposal that Dr. Hassett has about reducing
corporate tax rates, and indicating that we are at a
competitive disadvantage because of the top marginal corporate
tax rate here being so much higher than it is in many OECD
countries.
My impression is that, while the tax rate is higher, the
effective taxes paid by corporations are not out of line for
corporations operating here versus corporations operating in
Europe. Am I wrong about that? Do you have any thoughts on
this? Or is this something you have looked into?
Dr. Berner. Senator, I have not looked into that
comparison, but I think your intuition is probably correct.
Because many of our largest corporations are global in scope
and they think about their tax liability in the way that they
structure it in a global perspective.
But in my testimony I identified something else that on a
cross-country comparison basis I think is really important.
That is, the role of health care in the workplace.
I think that is one area where we are out of line with
other countries. Even though those benefits are a tax deduction
because they are compensation for employees, nonetheless they
do represent in my view a fixed cost that, when hours are
reduced, still persists. They put our cost structure out of
line, our compensation cost structure out of line with those of
other countries. And a different approach to the way that we
deal with health care and the health care benefit provision I
think would make us more competitive.
Senator Bingaman. Okay----
Dr. Berner. So I think that is a really important issue.
Senator Bingaman [continuing]. Let me throw out a radical
view of things here. Sort of three of our problems are, one is
short-term job creation; a second is eliminating uncertainty
for the long term; and third is getting our fiscal house in
order for the long term--if those are the three big challenges,
it would seem to me that a major reform of our health care
system accomplishes all three, or holds out promise for
progress on all three.
Because it does hold out promise for job creation in the
near term. There are direct jobs being created in the proposals
we have been talking about. One of the uncertainties, I think
you referred to in your testimony, Dr. Berner, that businesses
look at is the uncertainty about what is going to happen with
health care reform.
And then I believe CBO and most economists are in agreement
that over the long term if we cannot reduce the growth in the
cost of health care we can't get this debt problem fixed. We
can't get our fiscal house in order.
So it would seem that doing something significant on health
care ought to be a priority, as it has been for the President.
Do you agree with that, Dr. Berner, or not?
Dr. Berner. I do strongly agree with that, Senator. I think
that the three things that are important in health care are
costs, access, and quality. And many people view them as in
conflict with each other.
I actually think that if we do it right, then we can
actually achieve a lot of those objectives, and the objectives
that you just mentioned. Namely, reduce the cost of health care
for businesses and for consumers; improve the quality; increase
the access; and because that's such a big part of our fiscal
problem going forward, and is only growing over time under
current law, that fixing that is imperative right now to get
our fiscal house in order.
Senator Bingaman. Mr. Joerres, did you have a perspective
on this, whether or not this is an important policy initiative
for us to try to deal with? Or whether we can put this off and
deal with it down the road? What's your thought?
Mr. Joerres. Well, because of the complexity, it is
difficult to put off to down the road. Having said that, in the
U.S. we have over 200,000 clients, many of them small- and
medium-sized businesses telling us, in their exact words, ``I'm
not hiring a person until I find out what that is.''
Senator Bingaman. Till I find out what?
Mr. Joerres. What that cost of that health care----
Senator Bingaman. What the health care costs are going to
be associated with that hiring?
Mr. Joerres [continuing]. Right. So right now, those small-
and medium-sized businesses are not going to make a move unless
they absolutely have to. Then they can do the math. Because
when you take 10 people and move it to 12 and put an additional
30 percent burden on top of a pay rate, or 10 percent, it is
too much money for them.
So they are holding out and stopping. So while we need to
address it, this process of addressing such a complicated issue
during a period of time when you want hiring is creating a
stumbling block. Once that legislation is passed, after
something is passed, it will require some time for digestion.
Because, as an employer, sifting that legislation down to my
additional burden cost over pay is going to take awhile.
So while it needs to be addressed for the long term health,
portability of jobs, movement of jobs, health care solves a lot
of that. And the more we allow for portability of jobs back and
forth, the more vibrant our economy will be. The challenge is
we are in the middle of a time where we are really vapor-
locking small businesses, and they are saying ``I am not moving
unless I have to.''
I think that becomes the biggest issue right now.
Dr. Berner. Senator, if I could just add?
Senator Bingaman. Surely.
Dr. Berner. Mr. Joerres has pointed out something really
important. That is, that there are lots of Americans who are
staying in their jobs essentially to keep their health care
benefits.
That frustrates the mobility that we have in our workforce,
the dynamism of our economy. I think that when you make policy
you have to consider that that is going to be an important
benefit to health care reform, that it is going to actually
make our workforce and our labor markets much more efficient
and dynamic and free labor mobility.
Mr. Joerres. And there are some very good examples of that.
It's a smaller example, but if you were to study what happens
in Singapore between the portability of health care and the
portability of your pension scheme, it allows a high velocity,
which is required in a smaller environment.
Even now in a larger environment, what is happening is that
talent needs to move quickly and companies need to move talent.
But without the portability of pension scheme, and without the
portability of health care, you are really shortening the
ability to really create a robust economic and job creation
environment.
Senator Bingaman. Dr. Hassett, did you have a perspective
on this?
Dr. Hassett. Thank you, Senator.
I think that I understand that the political clock and the
economic clock, you know, sometimes they are in harmony and
sometimes they are not, and I understand why health care was
addressed this year, but I agree that it was probably the wrong
time and that health care is best folded into the fiscal
consolidation.
We need to build a process for fiscal consolidation, and it
will not work without addressing health care. And so I think
that many of the facts about our long-run objectives that, even
though I agree with specific policies, that those facts are
unassailable.
I would just like to make one last aside, Senator, about
the corporate tax issue.
You absolutely are correct that if we look at corporate
taxes in the U.S. that the actual raw number, the sort of
average tax that a firm will pay, is not the highest on earth.
It is the corporate tax rate that is. But that is precisely
because there is this Laffer Curve in the data.
The fact is that these firms are rocket scientists at
locating their profits and low tax jurisdictions. They move the
profits around to reduce their global tax rate. And that
involves moving stuff out of the U.S.
So that is why, if we lowered our rate, we should not
expect to lose a lot of revenue because we sort of lost that
revenue already, it is just going to somebody else. There is a
real opportunity to make us a more attractive place to do
business, without losing a lot of revenue I think in the
corporate tax, and I think we would be wrong at this time to
ignore it.
Mr. Joerres. I----
Senator Bingaman. Mr. Joerres.
Mr. Joerres [continuing]. Must jump in on that, because 85
percent of our business is outside the U.S., going to 95
percent. $20 billion in our companies, $2 billion right now are
in the United States.
None of that is outsource jobs. Our two largest competitors
are a Swiss-based company, and a Dutch-based company. In our
current environment we have $120 million deficit disadvantage
because of taxation with our Swiss-based competitor. So that
means we have to do $120 million more of productivity in order
to just maintain a competitive position with this company.
None of those jobs have been offshored. None of those jobs
are coming back. I am growing markets in Vietnam, in China, and
in others. So when I look at taxation, taxation within the
minimizing the effective tax rate can be done very, and much
more effectively, in a manufacturing environment through the
use of transfer pricing.
That is not done within the services industry. I recognize
that is not what this is about, but it is a very serious issue.
Senator Bingaman. All right. Well, I am informed that Chair
Maloney is on her way back and will be here in about 15 minutes
and would like us to recess for a short period, and then she
would like to ask some questions. If you folks have the time on
your schedule, we would put the Committee in recess at this
point and she will reconvene the Committee.
Thank you all very much for being here. I think this is
very useful testimony.
[Brief recess.]
Chair Maloney [presiding]. This Committee is called back
into order, and I regret and apologize that we had hearings
right in the middle of it, and I will be looking at the tapes
of this hearing to hear your testimony.
Mr. Brady is on his way back and will be here in a moment,
but I would like to ask the witnesses something that I always
ask at the monthly hearings of the Bureau of Labor Statistics.
Do you see any bright spots for job growth in our economy?
Anyone who would like to give any positive news about job
growth in our economy?
Mr. Joerres. I think I can do that. As you had mentioned
earlier in some of your remarks, there is a very traditional
flow of what happens in the economy. When there is some
uncertainty but demand, we are the ones who come back first.
On a weekly basis, the number of people that we are adding,
and the additional people that are out on assignment that we
are adding, says that this is clearly recovery. The majority of
those jobs are going in manufacturing, and they are spread
across the entire U.S.
We have not seen a growth rate like this since 1993. So,
yes, it is happening. We, like you, have questions: is it
sustainable? How long will it be? Is it inventory
replenishment? Sure, in some cases. But I would say right now
our field of some 800 offices in the U.S. are feeling like,
``Wow, it might be over; we're on our way.''
Chair Maloney. Well, could you tell us some of the things
we could do for the people that have been unemployed, or under-
employed, for a long period of time? Do you have any ideas in
that area?
Mr. Joerres. It is something we have worked on for a long
time. We have organized programs in the under-employed and
unemployed. We spend a lot of time on training and development
in order to put them in jobs.
What we have found is that work readiness is becoming more
and more of a difficult issue. And of course work readiness for
the longer and long term unemployed----
Chair Maloney. That is important, Mr. Joerres, because 40
percent of the unemployed have been unemployed for over 6
months, and their skills are deteriorating, and this is a
problem.
Do you have any ideas for programs to put in place to
reduce long-term unemployment?
Mr. Joerres [continuing]. Well the programs, unfortunately,
that we have seen--and I say unfortunately; they work, they
have good efficacy, but they take time--that is, to get them
back into some type of training, training that is tied to a
job. Not training that is just for training's sake.
So the things that we have done in that area, we work very
closely at a community level with a workforce investment board
to say: Where are the jobs? Where are the people? And try to do
surgical training updates to get people into a job quickly.
Chair Maloney. Would anyone else like to testify about the
green shoots or bright spots that they see in the economy now?
Dr. Berner. Sure. You know, I think that we are starting to
see some advance-indicators. We do actually a survey of all of
our industry analysts where I work, and hiring plans--and I
think this echoes what Mr. Joerres was saying--hiring plans
reported by those companies are up back where they were before
the Recession began.
Chair Maloney. Wow. Good news.
Dr. Berner. Those are hiring plans, however, and they
haven't materialized yet into action. And I think the
discrepancy between the plans and the action has something to
do with the uncertainty point that you made, and that we all
referred to in our testimony.
But just coming to the issue that you raise about the long-
term unemployed, in both of our prepared remarks Mr. Joerres
and I referred to training.
The history of training programs is, to some extent, a
checkered one but I think the importance of training cannot be
denied. The importance of education. So there is a short-term
component and a long-term component to that.
In the short term, for example, I propose that we pair the
unemployed who are getting income support, which is very much
needed, with a pool of unemployed, for example, newly minted
colleges students, perhaps some teachers who have been laid
off, and get them together in a training program that can give
people some basic job skills.
That way, you are giving people important things to do
while they are looking for a job. And I think we all agree that
when you have long spells of joblessness, that erodes the
chance that you are going to get a new job; it erodes your
skills; and it erodes your ability to find a new job. All those
things are really important.
Chair Maloney. Dr. Hassett, do you see any bright spots?
Dr. Hassett. Yes, thank you, Mrs. Maloney.
I think that first of all an interesting chart, which in
questions and answers we always follow up hearings with those,
I'll be happy to include, is one that shows the geographic
distribution of the economic recovery. Because you can see that
there are some states that are actually starting to really look
pretty solid again, and other states that are still in deep
trouble.
In particular, one correlation that I have seen in some of
the work I have done is that if you want to organize them, the
states that had the real estate markets that you read the most
about are the places that still are even going in the wrong
direction, and maybe are not even seeing recovery yet.
So there are some----
Chair Maloney. Well, where are we seeing recovery? Which
states? And which regions?
Dr. Hassett [continuing]. One state that comes to mind--I
wish I had the chart with me, because it has been about a month
since I have looked at it--but one state that I remember was
Texas seems to be doing pretty well. Maybe Mr. Joerres has some
other detail on that.
The other thing I would say that is a bright spot--and the
opportunity that motivates me to be so psyched about job
sharing--is that there is always a lot of job creation and
destruction going on. That number you see in the Labor Report
is very often one-tenth, or one-twentieth of the actual growth
flow in that month.
So in November there were more than 4 million jobs created,
but there were more than 4 million jobs destroyed. And so the
destruction was still winning. But I think that it is important
to remember that our economy is a place where there is always
creation and destruction going on, and what we need to do is
create the circumstances where the creation can overwhelm the
destruction.
Chair Maloney. Thank you. My time has expired.
Mr. Brady.
Representative Brady. Thank you, Madam Chair, for calling
this hearing.
Mr. Joerres, I was just on a teleconference back to the
Woodlands, Texas, participating in an economic outlook
conference. On the panel with me was your regional
representative, Mr. Arkless, I believe?
Mr. Joerres. Arkless, David Arkless.
Representative Brady. Yes. So apparently a lot of people
are interested in what Manpower has to say these days. And I
agree with you, I think that the corporate tax rate the U.S.
has to shoulder does put us at a competitive disadvantage
internationally. And the proposals to raise $120 billion more
on top of that from our U.S. companies that are trying to sell
American products around this world, to compete, I think will
be even more damaging to us.
Dr. Hassett, I am not an economist. I am a Chamber of
Commerce executive by trade and work with small businesses. It
seems to me the economic models on the Stimulus are outdated.
They seem to be one dollar in of government spending generates
this much of output, period.
But back home, you listen to our small business consumers,
their behavior is modified because they know increased spending
leads to new debt, and new taxes. The business community,
small, medium, and large, looks at cap and trade, health care
mandates, spending, taxes, international tax provisions, and
they are frightened by it. The uncertainty.
One of them said, look, it's tough enough to predict the
market; trying to predict the market and you guys? I'm not
going to do it. I'm holding my money. And I think that is
affecting those older economic models.
My question to you is: Thinking about the study that John
Cogan and Tobias Cwik and others did examining the forecasts of
Christine Roemer and others on the Stimulus, they were using
sort of the old Keynesian forecasting models instead of the
ones that really sort of deal with those expectations, rational
expectations of people, businesses, consumers, and others.
Looking at CBO, who does a terrific job on things, but
based on your extensive research and knowledge of
macroeconomics, were the CBO's fiscal multipliers used too
high? Were there estimates of the Stimulus impact perhaps a
little larger than you see?
Dr. Hassett. Thank you, Mr. Brady.
I am a big fan of the CBO, and an especially big fan of its
current director, who I think has been in the tradition going
back to Alice Rivlin, exactly what we expect of directors. But
the thing is, the infrastructure that has been built up to
analyze these things has kind of been there since day one.
Too often in Washington proof proceeds by induction. If you
remember your math, that if something is true today, it was
true yesterday. And so if we adopt a model in the 1970s that
tells us how policies affect the economy, then it is very
unlikely the government agency will ever stop using the same
darn model.
But the fact is that the literature has moved on. One
metric--and I was trying to think of the most vivid way I could
describe this--but the place where these big, large macromodels
were really developed, pushed perhaps the farthest, was the
University of Pennsylvania.
Larry Kline got a Nobel Prize for it. Albert Ando, who is a
close friend and a mentor of mine, designed the model for the
Federal Reserve that was a large Keynesian macromodel. Those
were developed in the 1970s. I started graduate school in the
mid 1980s. And when I was in graduate school at the University
of Pennsylvania, they did not teach these models. Because
already they had been rejected by the literature.
And yet, these are the models that are creating the sound
bites. I think though that does not mean that we know--we think
that it hurt growth last year, or that we know precisely that
the Stimulus was a failure and made things worse. What it does
mean is that we should have a great deal of skepticism that we
know what the right thing to do is.
And so, especially going forward, I think that we have seen
some success of some programs that I highlight in my testimony,
and that we should try to trust evidence more than models, I
think, and be skeptical about what the models say, especially
when the model predictions are so at odds with what we see in
the literature.
Representative Brady. You know, my gut feel is that the
economy has changed; that those models are not as reflective.
And I think stimulus almost always arrives after the recession
has peaked, and is slow. And I think that today we downplay the
economic boost from a lower after-tax cost of capital, lowering
corporate income taxes, and on a permanent basis where
businesses can count on it, not a gimmick, but where they can
count on that rate of return and the ability to invest.
Your thoughts?
Dr. Hassett. I think that you are right, Mr. Brady. And
again the way I like to think about it is, not that the
Stimulus again made the economy worse last year; I think that
there is no question that growth was higher last year because
of the Stimulus. It had to have been. The question is how much.
But the problem is that, as we see when we consider that
the job measures that I mentioned in my testimony could have
created jobs for maybe one-tenth the cost of the Stimulus, when
you consider that, and when you consider that we spent an
enormous amount of money on it and did not repair the broken
policies like the corporate tax that could have made people
optimistic about the long run, I view it as something of a
squandered opportunity.
Representative Brady. Right. I appreciate all the panelists
today. Thank you.
[The prepared statement of Representative Brady appears in
the Submissions for the Record on page 81.]
Chair Maloney. Thank you.
Dr. Berner, do you agree with Dr. Hassett on the CBO model
used to estimate the effects of the stimulus?
Dr. Berner. Well thank you for your question,
Congresswoman. As a former model builder and one who ran the
forecasting models at the Federal Reserve, I just point out
that we were constantly changing our methodology, and
constantly adapting it to reflect new considerations, whether
it is structural change in the economy, globalization, and a
variety of other things.
The models that we use, and we do not rely exclusively on
models because I am old enough to use judgment and experience
as my key model, but the models that we use explicitly
incorporate the role of expectations, whether it is
expectations in financial markets, or for inflation, or the
kind of uncertainty that we are talking about that affects
business decisions so importantly.
So, you know, I think that that is really important in
thinking about how to use those models. And, quite frankly, I
think that is something that people often overlook.
Chair Maloney. Can you tell me, in your opinion, and I am
asking all of you this question, the number one thing that can
be done to stimulate job creation in the short run? Could you
give the number one thing you think we could do? Of course it's
a combination of things, but if you had one thing that you feel
could stimulate job creation in the short run, what would it
be? Dr. Berner?
Dr. Berner. You know, Mr. Joerres talked about the role of
small business and new business is what we really mean by small
business. When we think about what their main problems are,
small businesses are telling us in the surveys that we have
that their problems are poor sales, access to credit, and the
cost of employee health care.
So we need to continue to use policies that improve the
functioning of our financial system, that get people access to
credit on reasonable terms. We need to address in the short run
and over time the cost of health care and reduce the
uncertainty around that. And we need to have policies that will
continue our ability to access global markets, because that is
the key source of growth that I indicated in my testimony.
Exports and the access to global markets are going to be a
key driver for our economy.
Chair Maloney. Mr. Joerres.
Mr. Joerres. Well I would really like to do two. One,
because I think where we are right now is we are in a critical
spot. So I do not want to underestimate what we need to do in
some form of what we call safety net, or stop some things
happening now.
That is not job creation. That is stopping the slide. And I
think we need to do that. I have spoken before, and----
Chair Maloney. So how do we stop the slide?
Mr. Joerres [continuing]. Well we stop the slide in some
ways of giving some additional visibility of what will be
coming and not coming. We have some limited opportunities to do
that.
It is difficult to say that we have long-term and short-
term objectives. But in order to do that, it comes down to
confidence. Hiring is confidence and demand combined.
Those two combined. We are starting to see the demand. Now
is the demand inventory-replenishment? Does the demand start to
level off? We don't know that. But I can feel very confident in
saying the demand may not level off as much if we give them
confidence that we are not going to create policies that get in
the way of expanding their business.
Small business must create jobs to back up the efficiency
that will be driven out by job deterioration in large
businesses.
Chair Maloney. Thank you.
Dr. Hassett.
Dr. Hassett. Thank you, Mrs. Maloney.
You know, I hate to waffle and say two things, but I think
that reducing the corporate rate is urgent if we want to create
the context that is necessary for long-term growth to really
ignite.
But I think that if we were to adopt a job sharing proposal
that we could see a response right away, right away. I would
expect that the reduction in the corporate rate would have
benefits that would be spread out over many years. I think that
a job sharing program could slow job destruction almost
immediately, if it were a generous one, and we could see a
turnaround in labor markets a few months after the proposal
became law.
Chair Maloney. Thank you. My time has expired.
Mr. Brady.
Representative Brady. Mr. Joerres, is that uncertainty
among your clients real? Do businesses look at--and again, the
efforts like on targeted tax credits, or payroll--are sincere
efforts to try to help--are small businesses responding to
that? But is that uncertainty an issue with your clients in
their hiring practices? In their ability to either rehire, hire
new, or buy that new warehouse and make an expansion plan?
Mr. Joerres. The number one discussion that we have with
our small clients is the amount of uncertainty. Their business
is growing. So when the business is growing at a pace where
uncertainty is overcome by demand, then of course they'll do
that.
But as the demand is somewhat tepid, the uncertainty is
their diver. So they are really looking at the tax rate. What
is the additional burden on top of an additional person?
I can't emphasize enough that if I'm going to add an
additional person, and I don't know what that person's cost is,
plus the other 10 percent that I have on existing staff, or if
it is going to have an additional 30 percent increase in burden
over the cost of pay? That slows down employment decisions. No
doubt about it.
Representative Brady. Looking at job opportunities, it
seems to me because so many of the world's customers live
outside the United States, because other regions are recovering
in some ways faster than us, it is important not to just buy
American but sell American, sell our products throughout the
world, every corner.
Sometimes we can do it with a company from here. Other
times they have to have--they are headquartered here, and they
have to have a presence overseas to sell our goods and
services. Today there is almost an attitude of Benedict Arnold
if you are out--if you are large and you are out there
competing. You know, if a company expands into another state we
say ``go get 'em; way to go.'' A company that expands into
another country to get those customers somehow is viewed by
some as, you know, some bad actor.
Yet, in almost every study it shows those jobs create
stronger headquarters here. A lot of the research and
development technology--we have an energy company in Houston
that has a project in Algeria. It has 40 workers on site. It
has 400 in Houston, monitoring, operating, doing all the
services tied to it. So it is a huge help.
Shouldn't we be, as lawmakers, encouraging rather than
discouraging companies that are finding new customers in every
quarter? Is it outsourcing of jobs? Or is it looking for
opportunities to sell more of our products and services?
Mr. Joerres. Because all of these have some complications,
I think it would be easiest for me to talk about my specific
situation. We are headquartered in Milwaukee. We are 62 years
old. We have had three CEOs in those 62 years. Each one of them
was born in Milwaukee. So we think Milwaukee is a good place.
Ninety percent of our $20 billion business is outside the
U.S. In six to seven years, it will be 96 to 97 percent of our
business. While the U.S. is growing, the Chinese market is
growing fast. None of this is outsourcing. We are putting
thousands of people into jobs in China, in Vietnam, in the
Middle East, in Qatar, in Abu Dhabi.
Because of the success in the last 10 years of growing our
business from an $8 billion business to a $22 billion business,
we have built a brand new building in downtown Milwaukee that
has 400,000 square feet that employs 1200 people.
The mayor of the city was all in favor of it, and we have
re-energized a park downtown. We could not have done that
without our expansion overseas.
Our two largest competitors on a global basis are foreign
companies. Their tax rates are anywhere between 8 and 15
percent less than ours, which puts us right now at a
disadvantage annually of between $60 and $120 million compared
to our two European competitors.
Representative Brady. And my guess is that there isn't that
big of a margin. You've got to compete in a pretty tight
market, I would imagine, with our competitors?
Mr. Joerres. 3.5 percent net margins. We do a lot of work
for a little money, but we love what we do.
Representative Brady. Great. Thank you for your story,
appreciate it. We need more of you, by the way.
Chair Maloney. That is an amazing story. Congratulations on
your success.
Dr. Berner, Greece and its financial problems are very
much--I just came from the Floor, everyone's discussing it,
everyone is looking at it, we are all concerned. And I am
concerned about the potential impacts to the United States if
Greece ends up defaulting on its debt.
Dr. Berner, I know that you have previously reported that
the impact to the U.S. of slow growth in the European Union is
relatively small. I believe that you said that a one percentage
point reduction in growth in Europe would shave only 0.2
percentage points off of U.S. growth, but that you were worried
about financial contagion. Can you speak about the crisis in
the European Union and Greece and financial contagion?
Dr. Berner. Yes, I can, Congresswoman.
Very briefly, I think the big problem is that you have the
potential for what's happening in Greece to spill over into
other countries in the periphery of Europe--Portugal and Spain,
for example--and that it is important for Greece to be able to
refinance its debt over a long period of time, because they
have a huge fiscal problem.
They are having difficulty rolling over that debt on terms
that they can afford, and they just postponed an auction of 10-
year debt this week, as you may have heard, so that they can
cool off and get better terms on that debt.
One way or another they are likely to get assistance from
their partners in the European Union, That assistance will come
with strings attached, of course, because the other members of
the European Union do not want to pay for the mistakes that
Greece made. But one way or another, that assistance is going
to have to come or else they will all--as Ben Franklin was fond
of saying--hang together.
And so that is the real problem that the Europeans have.
And because of the fiscal consolidation, and because of the
increased cost of financing the debt which will spill over into
the core of Europe and the increased cost of funding for
European banks, all that is going to slow down the European
economy.
So we have been pretty pessimistic about Europe to begin
with. These developments make us more pessimistic about
prospects for Europe. But one of the things we talked about
earlier--namely, coming up with credible plans to fix fiscal
problems--is also important here.
If Greece and the European Union can fix these problems
that are prevalent now in the periphery of Europe and do them
in a way that reinstills confidence in investors bringing down
the cost of debt for Greece, for its people, for the banks in
Europe, that is going to reinvigorate the Greek economy and the
European economy.
The key is to come up with a credible plan to do that. As
we think about--you know, to your question--as we think about
the potential for this contagion, if you will, to spill over
into other economies, the point is that people are drawing
parallels now between what is happening in Greece, and they are
saying where is the next Greece.
It is kind of like during the financial crisis people were
saying, after Bear Stearns, where is the next Bear Stearns? And
there are some parallels there. So we need to think about the
way that, while there are many, many differences between what
is happening in Greece and in Europe and what is happening in
the United States and around the rest of the world, there are
some parallels. And I think the thread that draws them together
is that lawmakers around the world need to think about how they
are going to deal with fiscal problems, and to articulate how
they are going to come up with a game plan to do that in a way
that reinstills confidence among investors.
Chair Maloney. Can you tell whether the impact of the
reduction in the export sector will be spread across the U.S.,
or whether certain sections of the country will be particularly
susceptible to any reduction in exports to Europe or Greece? In
particular, I am concerned about the Greek-American community
that I represent, and I am concerned that they may have a
burden on them and bear a disproportionate share of this
burden.
Dr. Berner. You know, Congresswoman, I have not really done
the work on that so I will be pleased to get back to you, if I
can, to try to uncover the answer to that question.
Chair Maloney. And additionally, can you estimate the
impact to employment in New York City if the financial
contagion in the EU spreads to the U.S.?
Dr. Berner. That is a difficult task, but I will do my best
and try to get back to you on it.
Chair Maloney. And lastly, Mr. Joerres, you mentioned that
your growth--and I am amazed--is 92-96 percent in foreign
markets. Do you have offices in Greece?
Mr. Joerres. Yes, we do. We have an operation there.
Chair Maloney. And can you tell us something about what is
going on on the ground, information on employment with your
organization's employees there?
Mr. Joerres. Right. So our operation in Greece is no doubt
feeling the effects of this. Things have kind of grinded to a
halt as companies are, needless to say, very concerned about
what might be happening.
I can also say that in markets like France, Italy, Germany,
Netherlands, the Belgian market, they are not on the ground
feeling it at all. We are still seeing improved trends. So, as
there is plenty of speculation about what Merck will do, or
what others might do to generate recovery, we think that the
employment numbers within Europe will have more of a knock-on
effect further down than what they have now. Our Greece
operation is facing a very challenging environment right now.
There is no doubt about it.
Chair Maloney. Thank you. My time has expired.
Representative Brady. Thank you, Madam Chair.
Dr. Berner, exports are one result of successfully selling
American products and services throughout the world. And as you
point out, one out of five manufacturing jobs is tied to that.
And then with service companies like Mr. Joerres', we have a
huge surplus. So when we compete and sell overseas, it has huge
economic impacts.
We are looking at three pending trade agreements in markets
in Colombia, Panama, and a major one in South Korea. We are
seeing other countries stepping in ahead of us from Canada, the
EU, and others to get in line ahead of us and put us at another
competitive disadvantage.
Do you support passage of those trade agreements and
opening those markets for U.S. service and production
companies?
Dr. Berner. Mr. Brady, thanks for your question.
I support in general the idea that we should have free and
open trade, and also the idea that it has to work both ways.
Representative Brady. Yes.
Dr. Berner. So that, you know, when we open our markets to
companies in other countries and to other countries, we also
want to make sure that we have access to their markets and that
we have intellectual property agreements and other things that
make sure that we have a level playing field, to the extent
that that is possible, in which our companies can compete. And
so it does work both ways.
Representative Brady. I think it is important--you know, we
are such an open economy in the United States. Panama and
Colombia, for example, have one-way trade, almost duty-free and
quota-free trade, but we have obstacles when we try to do two-
way trade. Clearly agreements like that give us a chance to
compete on a level playing field and in every other case have
worked beautifully for us. We have doubled, or tripled our
exports.
NAFTA, which I've worked on for many years, we've turned a
trade deficit into a trade surplus. We even have a
manufacturing surplus with our NAFTA countries, as well.
Let me ask you this. Unrelated to exports but related to
sort of your view going forward, I notice in your testimony
your GDP growth percentages are higher than the Blue Chip this
year, but lower next year, and much lower next year than what
the White House forecasts.
Is there a reason for that? I know there's always a range,
but is there a reason why you see significantly lower economic
growth next year than Blue Chip or OMB?
Dr. Berner. Thanks for your question, Congressman.
Yes, there is a reason. And to make it explicit, up until
very recently we have been assuming that the tax cuts, the Bush
tax cuts, would probably sunset as scheduled on January 1st,
2011. If that is not the case and some of those tax cuts are
extended, we would see somewhat faster growth in our forecast.
In addition, we are thinking that our massive Treasury
borrowing needs will combine with a return of private credit
demand, as the economy comes back, and that will result in a
significant increase in interest rates.
So it is a combination of those two things: sunset of the
tax cuts, as well as the rise in interest rates would give us
somewhat slower growth.
Representative Brady. So continuing the tax cuts helps
boost our economy, in other words?
Dr. Berner. It would have a modest positive effect.
I would say, however, as I did in my testimony, that the
most important policy decisions that are out there right now
are not so much around taxes, but they are around foreclosure
mitigation and coming up with a credible plan to do something
about our fiscal situation.
If we were to do that, then our forecast for long-term
interest rates, U.S. Treasury Rates, would be somewhat lower
and you would see that in the marketplace right away. And that
would have a short-term beneficial impact on growth. So coming
up with a plan, if it is credible, would make a material
difference to the outlook.
Representative Brady. Can I go back to why the Bush tax
cuts are so good for America--I'm kidding. I'll stop with that
one.
Dr. Hassett, consumer demand. It's always hard to know what
families are thinking about. Obviously they're looking at their
own pocketbook, worried about their jobs, lots of things going
through.
The thing I hear back home, and it may be an intangible
from an economic issue, but the debt, and the spending is a
number one concern of consumers.
Does that weigh on the decisions that a family makes in
purchasing a new TV set, or making an economic decision?
Dr. Hassett. Sure. Thank you for the question, Mr. Brady.
There is a great deal of scholarship in this area that goes
back to Milton Friedman's basic observation that the reason why
temporary tax cuts like the ones that we observed last year do
not have a really big effect is that people know that they are
going to have to pay for them with future higher taxes. And so
they are sort of skeptical about the fact that if you take a
dollar from them next year and give it to them this year that
you are really making them better off.
And indeed I could add that if they are not skeptical about
it and they think they are better off, then they are going to
regret it next year when they get the tax. So it is not kind of
clear that this is a point that argues for the policy, even if
you disagree with it.
The fact is, though, if you look at the numbers of future
taxes associated with things like the Stimulus, they are really
mind-boggling. So for example if we divide the Stimulus last
year up amongst all taxpayers, the 110 million or so taxpayers,
then the cost of just the Stimulus last year--we are not
talking about the deficit--is about $8,000 per taxpayer, a
little bit less.
But remember that about half of taxpayers do not pay taxes.
And so what that means is that if you are someone who does pay
taxes, if you actually had a positive number on that tax return
when you mailed it to the IRS, then your number is about
expected to be double that.
So if you are someone who paid taxes, then your bill just
for the Stimulus will be maybe about $16,000. If we raise the
monies for the Stimulus, according to the distribution of the
income tax that we now observe, then for people with incomes in
the hundred, or two hundred, or five hundred thousand dollar
range, the small businesses maybe that have a little bit more
money, their bills for just the Stimulus are enormous.
For someone with an income between $200,000 and $500,000,
the Stimulus bill will average about $41,000. If we then factor
in the debt that we have to pay off, then we are talking about
future tax liabilities that are mind-boggling. And I think that
American consumers should expect those taxes, if we do not see
a big reduction in government spending, they should expect
those higher taxes, and they should wisely plan accordingly.
And one reason why we see a spike in the savings rate and
lower consumption, I believe, is the expectation of future
taxes. Some of them are, as Mr. Berner just referred to, kind
of, people thought, baked in the cake. The expiration of the
Bush tax cuts is an example of that.
Representative Brady. So people may not know the amount
they are going to owe, but they know someone is going to pay.
Dr. Hassett. They know that their taxes are going up and
are consuming accordingly, I would add.
Representative Brady. Thank you.
Chair Maloney. I would like Dr. Hassett and Dr. Berner to
react to a proposal that one of my constituents, Wilbur Ross, a
businessman, put forward through the New York City Partnership.
His idea was to take the unemployment, which many
economists say is important not only in terms of helping the
unemployed and their families, but this money is plowed back
into the economy, therefore driving more goods, more spending,
more services, but to take the unemployment and tie it to job
training, and tie it to job hiring. Give it to a business that
will hire an unemployed person and have their employment run
through that business.
Could you, or Mr. Joerres, any of you, could you comment on
this idea, or any new ideas that you might have on how we could
help job development in our country?
Dr. Berner. Congresswoman, thanks for the question.
As I indicated in my testimony, that is one of the four
things that I thought would be very helpful. And specifically,
if we look at training programs, and I think we all agree that
education and training, training job skills, are extremely
important, if you pair training with income support, which we
all agree is so necessary to help American workers and families
in this time, that that is going to give them the skills they
need to acquire--to go out and look for jobs, to be able to
perform in jobs when those jobs are available.
And we have a skills' mismatch in America that is profound.
I just read the other night, for example, that Microsoft built
a development facility in British Columbia because they could
not find the skilled workers that they needed in the United
States--at the right price.
And also, you know, they ran out of room under their H1B
visa program. So that is I think just one little anecdote that
supports the idea that we need to improve the skills of
American workers and maybe doing that through the income
support unemployment insurance programs would help.
It would also help I think to look at newly minted college
students, unemployed teachers, retirees, people who have
experience and skills who can train others in basic job skills
to link them up in a partnership that would help them acquire
those skills.
Chair Maloney. Any other comments?
Mr. Joerres. Yes. We have a fair amount of experience in
this, as we have worked with several WIBs across the United
States, as well as in other countries.
What we have found is that when there is a disconnect
between the job training program and finding the job, it is
much less effective. When the trainer and the end employer are
two different organizations, the training organization is
essentially training for government dollars, if I could be so
bold.
When corporations almost sponsor or take on the individual
as they are going through their training program, the chances
of that person getting hired have dramatically improved.
I am sure you have heard many times, Congresswoman, that
the companies are saying: you're not giving me the skills I
need. You're not doing this. Well what we have said is we have
said: ``Then get in the game. Get in the game and bring these
people all the way through.''
So I would ask for a connection between job training and
job placement, as opposed to a hand-off. Because that hand-off
is a very dangerous hand-off.
Chair Maloney. It sounds like a very good bipartisan
effort.
Dr. Hassett.
Dr. Hassett. Madam Chair, in fact in the break a number of
the staff and I were actually discussing a very related point;
that the Unemployment Insurance Program that we have was kind
of designed for the old-fashioned economy where people took a
break in August, or something, and got laid off.
And now we have got an economy that requires moving between
jobs a lot of time, and search costs are really high, and a
really important factor for firms and so on, and it is urgent
that we redesign the Unemployment Insurance Program allowing
for things like job sharing maybe through the Unemployment
Insurance Program, and I would encourage you to consider having
a hearing where you ask the best minds, the people who have
spent their careers studying it, for proposals.
Because as we analyze the sort of low-hanging fruit right
now, given the terrible job market, it seems like all of them
are kind of mutations of revising Unemployment Insurance.
Mr. Joerres. I'm sorry. I know the time is limited, but I
have such anecdotal evidence here that is compelling. We have
about 2500 accountants in one of our organizations that we own.
There are people who have been unemployed in the finance
industry. We have been able to find them jobs, put them in
jobs, that would be contract jobs. In other words, they might
work for three months. They have refused those jobs because if
they take that job their Unemployment compensation goes away
and they are not sure really what is going to happen.
When in fact, about 50 percent of all the people we put out
on an assignment get hired by the company that they are placed
in.
So there is something wrong here in not having these hand-
offs right that the individual is put in this poor position of
either sitting home working on job boards and getting paid, or
possibly improving their skills. So it is almost like a job
sharing environment that you could consider it not just job
sharing but ways of splitting the Unemployment dollars that
they might be getting less, paid for by them, getting work
experience, and then getting hired.
Dr. Hassett. And just to follow, there are two spikes in
re-employment from workers who are on Unemployment Insurance.
There is one at the beginning, and there is one near the end.
And it is exactly because of that.
Sort of once you are in, then if you go take a job then you
are sort of giving up a big spell of Unemployment Insurance
that is costly. And so people tend to be very cautious about
which jobs they accept once they get into the spell.
Chair Maloney. Thank you. My time has expired.
Mr. Brady.
Representative Brady. I know there have been past proposals
on job training where they create not a voucher but a lump sum
for workers where they could continue their training, or
retraining, take job opportunities if they got that full-time
job, they weren't penalized for the money they were given. In
fact, even part-time jobs, as long as they were continuing the
education and skill building, too. We need to be innovative
like that.
At a time when business investment is scarce, why aren't we
repatriating more of our foreign investments back to the U.S.?
Because of our Tax Code, in 2005 a number of us pushed for a
provision successfully in the American Jobs Creation Act to
address the issue of stranded U.S. profits, our Tax Code, 35
percent HCI, to bring it back. So we proposed for one year to
lower it to a fairly minimal 5 percent, let that investment
flow back to the United States.
Even with some restrictions I didn't think belonged there,
$300 billion came through that year. Today it's regenerated. We
have $600 to $800 billion stranded U.S. profits outside the
United States too expensive to bring back.
Why are we not lowering the gate again for a year to bring
back that type of investment? It is the size of the Stimulus
outside the United States waiting to find a home. Right now,
finding a home in another country.
Why aren't we--and I know the government can't direct that
investment. You know, it's got to go straight into the
marketplace in decisions that benefit the companies, and
hopefully the workers, but do any of you have any thoughts on
why we would not be encouraging bringing back those
investments?
Mr. Joerres. Well I won't speak from a political view
because on this I don't have it. I can speak purely from a
mathematical view.
Our largest operation in the world is France where we
produce $7 to $8 billion a year in that organization,
generating somewhere between $250 and $300 million of free
cash. We have never repatriated that cash because it is a pure
CFO, chief financial officer, calculation.
The only time we will use that cash is when we were able to
use that cash to buy assets in the same denomination. In other
words, Euro denominated.
Two weeks ago we bought a company in Houston for $431
million, a very good IT contracting staffing company. We
decided to use half cash, half stock because we can't get the
pull from France to convert it into dollars.
So this is just pure math. This is not about whose tax
code, or what tax code. When we look at a transaction like
this, we look at it purely from an efficacy of the dollars and
return to shareholders.
Representative Brady. Thank you.
Dr. Hassett. Mr. Brady, the one thing I would add, though,
is that the reason this mess is happening is that our tax
policies are out of whack. It's a symptom, and it is something
that happens when our corporate tax rate is so high that people
have to locate their profits overseas in order to compete.
And so the problem I have with this proposal--and it is not
one that I have ever come out and combatted--but I have two
problems with it.
One is that it is salve on the wound. What we really need
to do is fix the wound that's driving the problem in the first
place.
The second problem is a temporary holiday creates all sorts
of uncertainty about, you know, when is the next time they are
going to have one of these, that is going to make people not
repatriate in the income. And so I think that----
Representative Brady. To bring the gate down permanently?
Dr. Hassett [continuing]. You've got to bring the gate down
permanently. I mean, again, as an economist it is obvious that
that is the right answer, and I understand budget constraints
and so forth, but I think that rather than focus on that gate
what I would do is I would focus on reducing the corporate tax
rate.
Representative Brady. Got it. Great. Thank you.
Chair Maloney. Thank you. One effort where we do have
bipartisan efforts is our effort to cut the debt. Currently it
is about $12 trillion, or about 85 percent of annual GDP.
I want to know, how are we comparing to other countries? Do
you know what percentage of annual GDP in debt Greece, and say
France, or England, or Spain have? Anyone who can answer that?
Dr. Berner. Congresswoman, I don't have the statistics
right in front of me, but I think what is important is that our
debt is growing rapidly. As you know, at the end of Fiscal 2008
our debt held by the public, you referred to the gross debt
statistics, the debt held by the public, which is now about
$7.2 trillion, was then 48 percent of--sorry, 41 percent of GDP
at that time, and here we are in 2010 and by the end of this
fiscal year it will be about 61 percent of GDP.
So it has risen rapidly, obviously because of the
Recession. Other countries have gone through a recession. The
point here is that we're just on the cusp, as you know, of
seeing a major increase in our deficits. And whether you look
at CBO's forecast adjusted for realistic assumptions, or the
Administration's forecasts, we're going to be looking at
deficits of 5 or 6 percent of GDP for quite some time to come.
So our guess is that by, in the next 10 years we will be
looking at debt held by the public at 87 percent of GDP. And
there's no magic threshold in my view, although some economists
think that there is--Ken Rogoff thinks it is 90 percent, for
example, in his recent book--where investors start to question
the fiscal sustainability of your policies.
Personally, I think that they are already starting to
question that. We haven't seen it in our interest rates. They
are low. And they are low because other countries are in many
cases in worse shape. And so they look to us still as the
broadest, deepest, and most liquid financial markets in the
world, and the benchmark against which others are judged.
If we want to maintain that status, then we have to think
seriously about making the tough choices to get our fiscal
house in order.
Chair Maloney. Okay. And in making those tough choices, how
much can we reduce the deficit by cutting discretionary
spending, say by 10 percent?
Dr. Berner. You know, as you know, Congresswoman, the
discretionary spending is not the real story here. The real
story----
Chair Maloney. Okay, how much by cutting government
spending that is actually discretionary and how much that is
mandatory, such as Medicare?
Dr. Berner [continuing]. Well right now, if we look over
the next ten years and we take Medicare, Medicaid, and Social
Security, they will account for half of all federal outlays.
And they are growing very rapidly. And that Medicaid portion
assumes that state and local governments will get back on their
feet and be able to pay their share of the Medicaid burden.
If they aren't, then what we will see is the Federal
Government being asked to pick up an increasing share of that
tab, which will make Medicaid grow even faster. And that is the
fastest growing health care plan that we have. And so that
percentage will likely rise even further.
Chair Maloney. Well on that note, the state and local
governments are facing enormous budget shortfalls. We have had
states come to the Federal Government and ask for bailouts and
total support.
At the same time, the swelling ranks of the unemployed are
putting further pressures on the budget. I would like to hear
your ideas--any of the panelists--about two problems: the
short-run problem in the states and local governments and the
potential impact on employment, and how do we deal with the
long-run problem of these budget problems in the states?
As you said, if Medicaid can't be assumed by the states,
then it is a tremendous pain, or a tremendous problem going
forward. Your comments further on these two points?
Dr. Berner. Well from a federal perspective, we obviously
have a system of federalism which is not working. Medicaid is
one of the key issues in that system. So we all know that when
we go into a recession, particularly the deepest Recession we
have had in 70 years, the ranks in the Medicaid grow
dramatically, and that puts an enormous burden on states that
they really can not pay.
In my state, your state, the State of New York for example,
it is 50 percent shared. In Mississippi it is only 22 percent
at the state level. Either way, it is an enormously growing and
unsupportable burden.
So the grants to state and local governments for FMAP
assistance, or to offset the cost of Medicaid, have been in the
very short run necessary without making cuts to those programs.
But in the longer run, part of health care reform, it seems
to me, has to involve fixing the way that we share Medicaid,
and the way that the Medicaid program is in fact designed.
At the state and local level, we have enormous fiscal
problems that need to be addressed. Obviously the governance
there is at the state and local level. They vary tremendously
by state.
There are 50 different kinds of problems in 50 different
states, and thousands of different problems in local
governments as well. Ultimately, tough choices are going to
have to be made there because, like it or not, we have been
making promises for health care, for pension benefits, and
other promises that haven't been funded and that can't be kept.
And we are going to have to make a lot of tough choices around
those areas, as well.
Chair Maloney. I could listen to this panel all day long.
All of you have been inspiring and insightful. You have given
us a great deal to think about, but I am told that it is
impossible to get back to New York; that the planes are not
running, and if we don't watch out the trains won't be running.
So we are going to have to call an end to this. I hope you
will come back to testify again. You have given us a tremendous
session today. And the truth is, we will have a slow, long
climb to get where we need to go in terms of creating jobs in
this economy, but we are beginning to see glimmers of
opportunity, and certain strategies in certain sectors, and
this will help us on an upward trend toward future growth.
My goal is to work with my colleagues in a bipartisan way
to develop and enact effective policies that will create jobs
immediately and in the long term that ensure that we are
getting the most value for our dollars, and helping our economy
move permanently in the right direction.
I want to thank all of you for the tremendous work that you
do in your lives to help employ and move our economies forward,
and we really appreciate your time here today. Thank you very,
very much.
Dr. Berner. Thank you.
Mr. Joerres. Thanks for having us.
Dr. Berner. Thank you.
Chair Maloney. Thank you for being here.
[Whereupon, at 12:55 p.m., the hearing was adjourned.]
SUBMISSIONS FOR THE RECORD
Prepared Statement of Roger C. Altman, Chairman, Evercore Partners
Madam Chair and Members of the Committee, thank you for inviting me
here today to testify on the labor market and policies for
strengthening it.
It seems to me that there are two overarching economic policy
issues facing this Congress and the Administration. One is our topic
today: jobs and how to improve the difficult outlook which faces
American workers. The other is the threatening fiscal deficit, as
outlined in the President's proposed fiscal 2011 budget. I might note
that the two issues are linked. The deficit, if not tamed, will raise
interest rates and put downward pressure on overall growth and on job
growth. Indeed, the Clinton years demonstrated that deficit reduction
can coincide with strong employment growth.
Let me begin with a quick review of the outlook. By historical
standards, it is a slow and difficult one. The latest Bloomberg survey
of private sector forecasts average 3.0% real growth rates for both
2010 and 2011. The related forecast for unemployment rates is 10.0% and
9.1%, respectively.
Such growth rates are far below those which the U.S. would
typically realize in the years immediately following a severe
recession. A historically normal rate for 2010, for example, might
approximate 6-7%. We saw that in 1983, the first year of recovery
following that deep recession.
But, the downturn of 2008/2009 was caused by rare balance sheet
factors. Not the traditional dynamic of overheating and monetary
response. History and academic research tell us that the negative
growth and employment impacts of recessions following financial crises
are especially deep and prolonged.
In this case, that reflects: (1) the over-stretched balance sheets
of American households and the diminished consumer spending, especially
discretionary spending, which results from it; and (2) the still
shrinking balance sheets of our banks and the reduced lending which
that causes, which we saw in the FDIC data earlier this week. It is
difficult to achieve a healthy recovery when both consumers, whose
spending represents 70% of GDP, and banks are retrenching.
Through BLS data revisions, we recently learned the real number of
jobs which actually have been lost since the so-called Great Recession
began. That number is a staggering 8 million jobs, which means that an
entire decade of job creation has been lost. In other words, the number
of American jobs today is approximately the same as it was ten years
ago, despite our population growing by thirty million over that period.
The unemployment rate, of course, is 9.7% today, and job losses
have continued through last month. The underemployment rate, perhaps a
better measure of true unemployment, is 16.5%, and this translates into
25.3 million Americans. This includes those who are looking for work
and those who have given up and are no longer looking. Further, the
employment-to-population ratio has fallen to 58.2%, down from 64.6% ten
years ago. This is the lowest level in 26 years.
With our population continuing to grow, America needs around 2%
real growth to hold our unemployment rate stable. This is why the 3.0%
growth rates forecast for 2010 and 2011 will only lower it modestly.
Let me turn then to strategies for creating jobs, starting with
lessons we can learn from the Clinton years. Those were remarkable ones
in terms of employment growth. Over the eight years spanning 1993-2000,
America saw 22.7 million new jobs. This equates to an average monthly
gain of 237,000 jobs, the fastest job growth on record.
Those years also saw strong income growth across the board. Real
family income increased almost 3% annually over this period, and all
income groups participated rather fully in this growth. In contrast,
during the following eight Bush years, real income growth for the
bottom 99% of families reached only 1.3%.
The question, then, is what explains the powerful labor markets of
the Clinton years? I do not have all the answers, but here are a few
factors which played important roles:
The U.S. experienced relatively high levels of savings
and investment during these years. The net investment share of GDP rose
from 2.1% to 4.4% under President Clinton. By 2008, it had fallen back
to 2.5%. There is nothing which promotes job growth more effectively
than strong investment. It expands the capacity of our economy, and
that requires more employment.
One reason for these high savings rates, of course, was
the balanced budgets and subsequent surpluses of that period. These
meant that both the federal sector and the private sector were saving
at once. And, it is savings which finances investment.
My very large generation--the baby boomers--were in prime
working ages and this contributed to high employment rates.
The boom in technology and technology investment also was
a key contributor. The Clinton years saw record amounts of venture
capital raised and invested, record amounts of capital raised through
technology IPOs and large scale hiring in the tech sector and those
businesses serving it.
Manufacturing employment was stable, and the dollar value
of industrial production grew 40%. In contrast, since 2000, the
manufacturing sector has shed almost 400,000 jobs a year, and
industrial output has been flat.
The American export sector added 500,000 jobs a year over
the Clinton period, but only one fifth of that rate over the following
eight years.
The U.S. stock market rose almost uninterruptedly over
those years. The Dow Jones Industrial Average stood at 3,300 when
President Clinton took office and 10,400 when he left it. There is no
stronger impetus to consumer and business confidence than steadily
rising equity prices, especially when matched with fiscal balance.
Interest rates also remained low. Today, absolute rates
also are low, but economic conditions would typically mandate even
lower rates.
The natural questions, then, are: (1) which of these factors can be
replicated to improve the employment outlook now?; and (2) what other
policy initiatives could be taken?
Overall, the Clinton years provided a climate of stability and
consistency to our private sector. Employers will tell you, when they
run small businesses or large ones, that consistency of policy is
important to them and uncertainty is anathema. But, right now,
Washington is inadvertently promoting uncertainty. And, that must
change, in order to spur investment, growth and jobs.
A central uncertainty relates to the deficit outlook. By any
measure, it is threatening and undermines confidence at all levels. The
idea that, over ten years, deficits will not fall below 4% of GDP and
that debt will exceed 80% of GDP is not acceptable. Indeed, it won't
materialize. Either Congress and the Administration will act
proactively to rectify it or, at some medium term point, global
financial markets will revolt, perhaps through the foreign exchange
markets, and impose a solution on the U.S. If the latter scenario
results, the solution will be a punitive one.
We all know that 2010 is not the year for deficit reduction. Our
economy is still too weak to absorb those contractionary impacts. But,
it is not too soon to formulate a plan, beyond the Obama budget, for
deficit reduction after this year. In particular, it is important that,
later this year, the recommendations of the new Deficit Reduction
Commission be taken seriously and given a true vote in the Congress.
A second major uncertainty concerns health care legislation. This
is a giant and transformative undertaking with large economic
implications. It will affect a high proportion of employers and they
need to know whether it will move forward or not. The longer that this
uncertainty persists, the slower will be the recovery in confidence
levels. Passing health care legislation will not only help dissolve the
uncertainty currently surrounding it; it may assist in reigning in our
long-term deficits, since the growth in health care costs is the most
significant factor affecting the future of the federal balance sheet.
Then, there is the question of new initiatives, both short term and
long term. In the first category, President Obama is proposing $280
billion of additional stimulus. That would come on top of the $787
billion package which was adopted last year. The same four components
in the 2009 program--extended benefits, state fiscal assistance,
infrastructure and tax cuts for middle income Americans and small
business--are included in the new proposal.
I support the concept of additional stimulus. The growth and job
markets outlooks are too weak. Moreover, last year's amounts, in the
context of this economic weakness and the sheer size of our economy,
was too small. But, the spend-out rate on the 2009 stimulus was not as
rapid as it should have been. Only 34% of last year's total was
dispensed in calendar 2009. This is surprising because the greatest
stimulus should have been applied in the weakest year. The explanation
partially lies in the infrastructure component. Despite countless
promises to the contrary from localities, this spends out very slowly.
It would seem wiser to design the new package to take effect more
quickly. In turn, that would require maximum emphasis on steps which
put money directly into the pockets of middle and lower income
Americans. Perhaps, a greater focus on extended benefits and targeted
tax cuts, and a lesser one on infrastructure. In addition, the earlier
cash for clunkers initiative was an effective one. The homestead
provision in the Senate jobs bill, which would use the same principle
and extend it to appliances, makes eminent sense.
Next, there is the question of longer term strategies for
strengthening the labor markets. Beyond deficit reduction, which I
regard as paramount, here are five areas which deserve this Committee's
attention:
Investing in science and technology. Historically, these
have generated new industries, from information processing to the
internet, and substantial job creation. While most technology
businesses aren't large scale employers, their products generate
growth, e.g., the iPhone. The new Obama budget recognizes this by
increasing federal commitments to basic research. It also emphasizes
energy technology, which would seem a clear opportunity.
More effective education policies at all levels of
government. Jobs and wages are becoming more polarized by education
level. The urgency of raising high school and college education rates,
therefore, is greater than ever.
In New York City public schools, for example, the high school
graduation rate hovers just below 60%. Given the polarization
trend, how can America achieve its labor market goals without
raising such graduation rates?
The most important steps which America could take would center
around raising teacher quality and increasing the amount of
time during which kids are in school. Recent data makes clear
that teacher effectiveness is the most important ingredient for
student success, together with the sheer amount of quality
teaching which kids receive.
Build stronger connections between education and specific
job markets. This is important because the days when certain levels of
education assured good employment have receded. It is increasingly
important that schools provide the more specific skills which today's
workplaces demand. Including skills required by markets adjacent to
those schools.
One way to do this may be to strengthen the community college
system in this country. In turn, this could involve subsidies
to businesses which provide part-time employment to students in
those schools. The more a student acquires skills during
school, the more employable he or she is.
Reduce the constraints on H1B visas. Today, only 85,000
visa are reserved each year for highly skilled workers. But, consistent
with reasonable national security tests, we should want every single
such worker who wants to come here. They tend to be highly
entrepreneurial and foster innovation, start-ups and job formation.
Duke University has estimated, for example, that 52% of Silicon Valley
start-ups over the past ten years were initiated by foreign born
workers.
Reform the U.S. disability system. Right now, too many
older workers who find themselves jobless are moving onto permanent
disability status because they cannot find work. The percentage of
American males aged 40-54 who are on the disability program has reached
nearly 5%. That is testimony to our difficulty in redeploying older
workers. We should learn more about the approaches to re-training and
re-employment which other nations use, including Germany.
It is difficult to overstate the labor market challenges which
America faces in corning years. We are going to need all of these
initiatives, and more.
__________
Prepared Statement of Carolyn Maloney, Chair, Joint Economic Committee
I would like to start by thanking Mr. Joerres and Dr. Hassett for
their willingness to return to Capitol Hill and testify before the JEC
after our Feb. 9th hearing was cancelled due to the snow.
The weather continues to wreak havoc with this hearing.
The Honorable Roger Altman, former Deputy Treasury Secretary, had
to cancel his appearance before this Committee because of the snowstorm
in New York.
I ask for unanimous consent to include his written testimony in the
record.
Today's hearing continues our in-depth series on job creation.
Today, we will be examining the prospects of a labor market recovery
from the Great Recession, which was fueled by the double blow of crises
in both the housing and financial sectors.
A recent op-ed by Professor Alan Blinder, which was based on the
testimony he had planned to bring before this committee before the snow
shut down DC, presents a clear picture of the two possible policy
options to increase private sector employment: either increase demand
by consumers and businesses; or give employers the incentive to
substitute workers for equipment.
On Tuesday, the JEC heard testimony from the Honorable Doug
Elmendorf, Director of the Congressional Budget Office.
His testimony showed that an employer tax credit--similar to the
one in my bill--is one of the most effective and efficient ways of
spurring hiring.
His testimony also showed that extending unemployment benefits has
the biggest ``bang for the buck'' on the economy.
Those benefits quickly multiply beyond the original recipients
since families will spend all of their benefits on food and other
expenses. Those purchases have a ripple effect throughout the economy.
We've come a long way since last January, when the economy lost
779,000 jobs in that month alone and recorded an average monthly job
loss of 753,000 in the first three months of 2009.
Last month, we lost 20,000 jobs. And in the most recent three
months of the Obama administration, the average monthly job loss was
35,000. So we're headed in the right direction. Thanks to the Recovery
Act, the economy is growing.
The Bureau of Economic Analysis reported that in the final quarter
of 2009, the economy expanded at a rate of 5.9 percent.
The Recovery Act included a tax cut for 95 percent of American
families and created jobs while investing in clean energy technologies,
infrastructure, and education.
While we have brought the economy back from the brink, we are not
yet where we need to be in terms of job creation.
Over 8.4 million jobs have been lost during the ``Great
Recession.''
And in addition to the 14.8 million workers who are currently
unemployed, there are 8.3 million workers who currently work part-time,
but would like to work full-time.
In the last year, Congress has enacted policies that support
struggling families and encourage job creation. These actions include:
Creating and extending the first-time homebuyers credit, boosting
funding for small business loans via the Small Business Administration,
extending safety net programs, and extending the net operating loss
carry-back provision that will help small businesses hire new
employees.
But we need to redouble our efforts to create jobs.
The Senate jobs bill, which passed this week, is a step forward and
an encouraging sign of bipartisanship.
It includes a scaled-down version of my employer tax credit. I'm
happy that the Senate has included this--as Alan Blinder said in his
op-ed, reducing costs for employers to hire new workers will create
jobs.
During today's hearing, we will explore other options and hear
other ideas for helping workers get back on their feet, spark consumer
spending, and brighten our economic climate.
I am pleased that Dr. Berner was able to testify today and provide
us with his forecasts of which sectors and regions of the economy are
expected to grow in the coming year or two.
Mr. Joerres will be giving us Manpower's on-the-ground experience
about the increase in demand for temporary workers.
Job creation in the temporary help sector is a leading indicator of
progress in the labor market.
Since September 2009, temporary help services has added 247,000
jobs--52,000 in January alone.
Finally, Dr. Hassett will be giving his views about future growth
and the health of the labor market.
I am also pleased to see that today's panel will touch on another
topic discussed on Tuesday with CBO--the role of uncertainty about
government policies on dampening economic and employment growth.
I look forward to a lively discussion with the panel today--one
that I hope will help spark bi-partisan efforts to create certainty so
that households and businesses will feel confident and will lead our
country out of the Great Recession.
__________
Prepared Statement of Richard Berner, Co-Head of Global Economics and
Chief U.S. Economist, Morgan Stanley & Co.
Chair Maloney, Ranking Member Brownback, and members of the
Committee, my name is Richard Berner. I am Co-Head of Global Economics
and Chief U.S. Economist at Morgan Stanley in New York. Thank you for
inviting me to this hearing on Prospects for Jobs and Growth.
Following the deepest financial and economic crisis since the Great
Depression, the U.S. and global economies are beginning to recover.
Thanks to aggressive monetary stimulus, support from strong global
growth and from fiscal stimulus, the U.S. economy is now growing again.
In my view, however, the recovery will be moderate and job gains
modest. The financial system, while improving, is still burdened by the
legacy of bad lending decisions. Imbalances in housing persist. In 2010
and 2011, we expect real GDP to grow by 3\1/4\% and 2\1/2\% (Q4/Q4
change), respectively. We expect annual job growth to average 1%
(110,000 monthly) over that two-year period, excluding hires for the
decennial census. Even those modest gains are not a foregone
conclusion. Job losses have abated, and some labor-market indicators
have improved, but employment has yet to turn up.
More important, we would need persistently strong economic and job
growth over the next few years to regain the 8.4 million payroll jobs
lost since December 2007, not to mention the 10.6 million jobs required
to restore the employment rate (employment-population ratio) prevailing
before the start of the Great Recession.
Moreover, as you are aware, our unemployment problem has become
increasingly chronic. Two statistics document that fact: The median
duration of unemployment has reached 20 weeks, more than twice the peak
in the deep 1981-82 recession, and a record 41% of the unemployed have
been jobless for six months or longer.
In my testimony today, I will identify four specific obstacles to
hiring. Each of these hurdles has a cyclical and a structural
dimension. For each, therefore, I will discuss policies that might help
foster economic growth and job creation both in the immediate future--
the cyclical dimension--and for the longer run--the structural part.
But first, I want to identify where job gains are likely to be over the
next two years and why.
Where will the jobs be? What sectors of the economy are likely to
grow in 2010 and 2011, and by how much? How will employment growth vary
in different regions of the country? What will be the likely state of
the export market over the next two years, and the resulting impact on
employment?
Strong sectors. Advances in export, infrastructure, capital goods,
energy, and health care related industries likely will account for most
of the job gains in the next 18-24 months. That forecast echoes my
views regarding the sources of growth in our economy. The combination
of strong global growth, the lagged effects of fiscal stimulus, and
improving financial conditions will promote improvement in many of
those industries. And rising demand for health care services continues.
In contrast, employment in residential and commercial construction,
retailing, and financial services likely will remain soft as those
industries continue to restructure.
Strong regions. Identifying regional strengths and weaknesses is
difficult. For example, industries that likely will benefit from
exports and other strong sectors are located in regions hard-hit by
regional housing woes. Conversely, some regions that fared relatively
well in the downturn, like the Midwest, are now doing less well. In our
judgment, the Pacific Northwest, parts of the Rockies and Upper
Midwest, parts of the Southeast, and parts of the Southwest seem likely
to be the strongest regions.
Export markets and employment. I expect gains in export volumes of
around 10% to be sustained over 2010. Paced by their domestic demand,
growth in many of our major trading partners in Asia and Latin America
likely will average 6-7% this year, and Canada probably will expand at
a faster pace than the U.S. Somewhat slower growth seems likely in 2011
as the U.S. and overseas policymakers exit from stimulus.
In manufacturing, some 20% of employment in 2006 was directly or
indirectly associated with exports, and I expect that share to grow
over the next two years. \1\ Capital equipment and industrial supplies
exports likely will continue to do well, while consumer goods will
represent a rising share of overseas demand.
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\1\ Source: International Trade Administration, Department of
Commerce.
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Obstacles to hiring. Worries about the sustainability of recovery
are legitimate and probably are holding hiring back. Such concerns are
characteristic early in recovery, but this time they are worse because
of the lingering fallout from the bursting of the housing and credit
bubbles. As a result, it remains essential to pursue policies oriented
towards reducing housing imbalances, reducing debt, and improving the
functioning of financial markets and financial institutions.
In addition, I think there are four obstacles to hiring that
magnify the normal, early-recovery hesitation: Rising benefit costs,
mismatches between skills needed and those available, labor immobility
resulting from negative equity in housing, and uncertainty around
policies here in Washington. Each has both a long-term structural and a
shorter-term cyclical element. For each, I'll first discuss the problem
and the long-term solutions. Then I will turn to what policymakers can
do to help the economy and the labor market improve as quickly as
possible.
Obstacle 1. Cost of labor resulting from escalation in benefits.
The problem: Thanks to the high ``fixed'' costs of health and other
benefits, and of taxes on labor to pay for the social safety net, our
labor costs are out of line with other countries when adjusted for
living standards. I say ``fixed'' costs because benefit costs don't
vary with hours worked; they are paid on a per-worker basis. But as
employers seek to cut the cost of compensation, these benefit costs
drive a growing wedge between total compensation and take-home pay.
Unlike in other countries where health care benefits are not directly
part of compensation, these rising costs likely have intensified
employers' efforts to boost productivity by cutting payrolls. \2\ The
recession made the wedge between compensation and wages bigger, as
cost-cutting private-sector employers cut take-home pay while leaving
benefits intact. So relative labor costs go up versus other countries
and median pay suffers.
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\2\ See Sarah Reber and Laura Tyson, ``Rising Health Insurance
Costs Slow Job Growth and Reduce Wages and Job Quality,'' Working
paper, University of California at Los Angeles, August 2004.
---------------------------------------------------------------------------
Long-term solutions include comprehensive health care reform and
innovation to boost productivity and labor skills. Health care reform
to expand access and control costs will reduce the soaring costs of
health care for employers and employees alike. Policies that boost
worker productivity will reduce labor costs in what will be a win-win
for employers, employees and overall living standards, because real
wages will rise.
Short-run remedies: A refundable payroll tax credit, perhaps for
firms that increase their payroll, would be among the most effective
short-run remedies. CBO estimates that a well-designed credit could
boost employment by about 9 years of full-time equivalent employment
per million dollars of budgetary cost. \3\
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\3\ See Congressional Budget Office, ``Policies for Increasing
Economic Growth and Employment in the Short Term,'' February 2010.
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Obstacle 2. Skills mismatch. The problem: For years, employers have
complained that they don't find the skills they need in today's
workforce. Worker skills have greatly lagged technical change and
tectonic shifts in the structure of our economy. Immigration
restrictions and massive dislocations in several industries in
recession have magnified that mismatch as workers who have been trained
for one occupation lose their jobs. And even in health care, an oasis
of job growth, there is a growing nursing and nursing skills shortage
that requires new training facilities. \4\
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\4\ See Bridget M. Kuehn, ``No End in Sight to Nursing Shortage:
Bottleneck at Nursing Schools a Key Factor,'' JAMA 2007; 298:1623-1625.
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Long-term solutions include policies that keep students in school
and improve access to education, reorientation of our higher
educational system towards specialized and vocational training and
community colleges, and immigration reform.
Short-term remedies: Our current unemployment situation demands
income support through unemployment insurance for those seeking but
unable to find a job. Jobless spells degrade worker skills, just when
workers need re-training. One remedy would pair training in basic
skills that are needed for work with such income support. Two other
groups seeking employment--newly minted college students and unemployed
teachers--could be an ideal nucleus for a Job Training Corps that would
empower job seekers with new skills. As is the case with Teach for
America, the Job Training Corps would build a pool of training
advocates who then go on to work in other occupations with the
perspective and conviction that come from helping others to acquire
needed skills. \5\
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\5\ http://www.teachforamerica.org/mission/
mission_and_approach.htm.
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Obstacle 3. Labor immobility resulting from the housing bust.
America's workers have always been footloose. Even in the Great
Depression, they looked for work wherever it was. Today, however, about
one in four homeowners is trapped in their house because they owe more
than the house is worth, so they can't move to take another job. Unlike
in the Depression, when homeownership was less prevalent, negative
equity among a nation of homeowners leads to substantially lower
mobility rates. Owners suffering from negative equity are one-third
less mobile according to one study. \6\ That is leading to a wave of
``strategic defaults,'' in which borrowers who can otherwise afford to
pay decide to walk away. Whether through foreclosure or default, this
process is undermining the economic and social fabric of communities
and reducing job opportunities.
---------------------------------------------------------------------------
\6\ See Fernando Ferreira, Joseph Gyourko, and Joseph Tracy
``Housing Busts and Household Mobility,'' forthcoming in the Journal of
Urban Economics.
---------------------------------------------------------------------------
Long-term solutions: Financial and mortgage regulatory reform are
essential to restore the health of housing finance. Significantly
improving financial literacy is equally important. \7\
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\7\ Efforts by the Federal Reserve and others are especially
encouraging. See http://www.federalreserve.gov/consumerinfo/
foreclosure.htm and http://www.mymoney.gov/.
---------------------------------------------------------------------------
Short-term remedies: Local efforts to stabilize communities plagued
by foreclosure are essential, but they are not enough. \8\ It is
essential to reduce debt, writing off bad loans while not destabilizing
the financial system. Modifying existing mortgages seems appealing, but
policies aimed at mitigating foreclosures under the Home Affordable
Modification Program (HAMP) have not worked because they attempt to
modify mortgage payments and not the amount of debt owed; re-default
rates following modification are 50-60%. Efforts to establish a
protocol for short sales and/or principal reduction should be a useful
tool in avoiding costly foreclosure and strategic default. \9\
---------------------------------------------------------------------------
\8\ See http://www.stablecommunities.org/ for examples.
\9\ See, for example, Larry Cordell, Karen Dynan, Andreas Lehnert,
Nellie Liang, and Eileen Mauskopf, ``Designing Loan Modifications to
Address the Mortgage Crisis and the Making Homes Affordable Program,''
Brookings Institution, October 2009.
---------------------------------------------------------------------------
Obstacle 4. Policy uncertainty is a negative for the economy and
markets. America's long-term challenges--health care, budget and tax
reform, financial regulatory reform, retirement saving, infrastructure,
education, energy, and climate change--are not new. Solving them is
imperative. But while the debates around major initiatives to address
them are an important part of the democratic process, the uncertainty
that accompanies major policy change is weighing on business and
consumer decisions to hire, expand, buy homes and spend.
Recent work confirms this intuition, underlining how uncertainty
produces negative growth shocks. Nicholas Bloom shows how a rise in
uncertainty makes it optimal for firms and consumers to hesitate, which
results in a decline in spending, hiring and activity. In effect, the
rise in uncertainty increases the option value of waiting as volatility
rises. Moreover, this line of reasoning suggests that uncertainty
reduces the potency of policy stimulus. \10\ That's because the
uncertainty can swamp the effects of lower interest rates, transfers or
tax cuts. In effect, uncertainty raises the threshold that must be
cleared to make a business choice worthwhile, and as uncertainty
declines, the threshold falls with it. This notion squares with our
long-held view that policy traction from easier monetary policy,
improving financial conditions and fiscal stimulus was lacking through
much of last year, but improved as uncertainty fell.
---------------------------------------------------------------------------
\10\ See Nicholas Bloom,``The Impact of Uncertainty Shocks,''
Econometrica, vol. 77(3), pages 623-685, 05, May 2009.
---------------------------------------------------------------------------
I can tell you as someone who works in financial markets that
market participants are used to thinking that political gridlock is
good, that it prevents politicians from interfering with the
marketplace. The financial crisis clearly exposed the flaws in that
reasoning with respect to appropriate financial regulation, whose
absence allowed abuses. Indeed, gridlock today is more likely to be bad
for markets, as our long-term economic problems are partly the result
of past policies and can only be solved with political action.
Long-term solutions involve bipartisan leadership to tackle these
complex problems one-by-one, in steps that are fair and call for shared
sacrifice and benefits. That means setting priorities, making hard
choices, communicating the game plan, and getting buy-in for it in
advance. I would encourage you to look to the National Commission on
Fiscal Responsibility and Reform--the deficit reduction commission--for
leadership.
Short-term remedies: Reducing policy uncertainty now could be a
tonic for growth. That won't be easy or come quickly, given the
political backdrop in this election year. But even some incremental
clarity on policies in any of these areas would offer investors a
chance to assess the fundamentals again--fundamentals that we still see
as improving.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Stimulus Arithmetic
(By J. Bradford DeLong, Professor of Economics, U.C. Berkeley Research
Associate, NBER; February 25, 2010)
In The Wall Street Journal on February 23, Robert Barro made an
intelligent argument against the American fiscal stimulus--the ARRA. It
is a great relief after wading through the works of those who claim,
one way or another, that the basic principles of economics set out by
Say and Bastiat make it impossible for government decisions to spend.
(They would, if they thought about it for even a minute, realize that
their arguments also entail the conclusion that nobody else's decisions
to spend can alter the flow of economic activity either, and hence that
recessions simply do not happen. Which raises the question of why the
unemployment rate has risen from 5% to 10%, but I digress.) Barro is,
thankfully, not one of that crew. So my first desire is to wind up
Barro and turn him loose to deal with those who stopped reading the
economics literature before 1890, and not only never understood Milton
Friedman \1\ but never understood Friedman's predecessors like Irving
Fisher and Knut Wicksell.
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\1\ Who argued that the stimulative effects of expansionary fiscal
policy were, as long as interest rates were at more-or-less normal
levels, ``certain to be temporary and likely to be minor''--but who
agreed that the stimulative effects on production and employment were
there.
---------------------------------------------------------------------------
However, I think Barro has gotten some key things wrong. First, I
believe that Barro makes an error of logic in assessing how his own
view of the situation applies to the question of what macroeconomic
policy should be.
Barro writes, in ``The Stimulus Evidence One Year On,'' \2\ that
he:
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\2\ http://online.wsj.com/article/
SB10001424052748704751304575079260144504040.html?
estimate[s] a spending multiplier of around 0.4 within
the same year and about 0.6 over two years. . . . [T]he
[tax] multiplier is around minus 1.1. . . . [Thus] GDP
would be higher [because of the ARRA stimulus] than
otherwise by $120 billion in 2009 and $180 billion in
---------------------------------------------------------------------------
2010 . . .
and by $60 billion in 2011.
That is roughly 1.3 million more people employed in America in
2009, 1.9 million more people employed in 2010, and 0.7 million people
employed in 2011. Suppose that what the government spent money on is
worth to us on average \2/3\ of what private-sector spending is worth.
Then according to Barro we spent $600 billion on the ARRA and got $400
+ $120 + $180 + $60 billion = $760 billion worth of goods and services
in return, for a net social profit of $160 billion. And it is not as
though that $160 billion would have been offset by a loss of leisure
time on the part of those who are not but would have been employed. The
cyclically-unemployed do not place a high value on their lost leisure.
Only if you think there are additional large costs lurking down the
road--that the ARRA has destabilized price expectations and set in
motion a damaging and destructive spiral of deflation, or that the ARRA
has used up America's debt capacity and so interest rates have spiked
and amortizing the debt will be very costly--does the social profit
turn negative. And neither of those things have happened. As the London
Economist's ``Demcracy in America'' correspondent wrote on Wednesday:
You can argue that private actors will spend the money
in ways that generate more employment than government.
. . . It's pretty hard to make this argument at a time
when banks are not lending . . . because they see few
promising opportunities. . . . You can argue that
government programmes generally take years to get
underway, and by the time the spending gets going, the
economy will already be in recovery . . . this argument
looks much weaker now than it did a year ago: the
recession has been far deeper than expected, we seem to
be having a jobless recovery, and unemployment looks
set to stay above the 5% ``full employment'' level for
many years . . .
The long-term nominal and real Treasury rates continue to be
absurdly low, so much so that I rub my eyes whenever I see them. Just
today the Treasury auctioned $32 billion more of seven-year notes at a
yield of 3.08% per year. And the market forecast of inflation--the
spread between TIPS and normal Treasuries--remains extremely well
behaved. As Martin Feldstein wrote yesterday, the market continues to
expect consumer price inflation to average only 2.5% per year over the
next several decades.\3\
---------------------------------------------------------------------------
\3\ http://www.project-syndicate.org/commentary/feldstein20/
English.
---------------------------------------------------------------------------
Thus I really do not understand the logic behind Barro's last
paragraph in his op-ed, in which he claims:
The fiscal stimulus package of 2009 was a mistake. It
follows that an additional stimulus package in 2010
would be another mistake . . .
Second, I think Barro makes an error of analysis in reading the
current situation. I think Stanford's Bob Hall \4\ has a better read on
what is going on with respect to the current sizes of multipliers:
---------------------------------------------------------------------------
\4\ http://muse.jhu.edu/journals/
brookings_papers_on_economic_activity/summary/v2009/2009.2.hall.html.
With allowance for other factors holding back GDP
growth during those [years of total] wars, the
multiplier linking government purchases to GDP may be
in the range of 0.7 to 1.0 . . . but higher values are
not ruled out. . . . Multipliers are higher--perhaps
around 1.7--when the nominal interest rate is at its
---------------------------------------------------------------------------
lower bound of zero, as it was during 2009 . . .
The problem, I think, is that Barro tries to use the total war
years of the twentieth century to
realistically evaluate the stimulus . . . the main
results come from fluctuations in defense outlays
associated with major wars such as World War I, World
War II and the Korean War . . .
Because
the defense-spending multiplier can be precisely
estimated . . .
This suffers from the standard economist's problem of looking for
one's lost keys under the lamppost because the light is better there.
Yes, the total war defense-spending multiplier can be relatively
precisely estimated. But we are not interested in what the multiplier
is when the unemployment rate is 3%, we are interested in what the
multiplier is when the unemployment rate is 10%. And we are not
interested in what the multiplier is when the government is taking all
kinds of other steps to diminish consumption and boost private savings
via rationing and patriotism-based bond drives, we are interested in
what the multiplier is under more normal conditions.
Third, Barro characterizes the stimulus bill as a two-year $600
billion increase in government purchases. But about half of the
stimulus money spent to date is on the tax and transfer side, and about
a quarter is direct aid to states which enables them not to raise taxes
during this recession. It seems to me that Barro should be weighted-
averaging his spending multiplier of 0.6 and his tax multiplier of 1.1
to get an ARRA multiplier of 0.9--in which case our social profit is
not $160 billion but rather $340 billion, and we should certainly do
this again, and again, and again. (Until, that is, there are signs that
additional stimulus may start to threaten price-level or debt-
management stability, or until unemployment falls far enough to make
Barro's multipliers overestimates.)
Fourth, Barro complains that because Christina Romer has ``not
[carried out] serious scientific research . . . on spending multipliers
. . .'' he ``cannot understand her rationale for assuming values well
above one . . .'' To say that policymakers should rely only on their
own personal research to formulate policy seems to me simply bizarre.
Fifth, Barro assumes that spending in 2009-2010 is then offset by
levying equal taxes in 2011-2012, claiming that ``the timing of future
taxes does not matter.'' But it does. It matters very much. At the
moment the U.S. Treasury can borrow at a real interest rate of zero for
five years--and shove all of five-year inflation risk onto the lender
at that. Time preference means that the $600 billion addition to the
debt today that Barro sees as the cost of stimulus is--because of the
easy terms on which the Treasury can finance things right now--not
nearly as burdensome as a demand to pay $600 billion now would be. We
get the goods now. But the costs are delayed until later, when we will
in all likelihood be richer and feel the costs less severely.
Sixth, when future taxes will be levied to amortize the added debt
induced by the stimulus, they will be levied at a time at which nominal
interest rates will not be stuck at their current floor of zero. The
Federal Reserve will then be able to ease monetary policy--reduce
interest rates--to offset the fiscal drag. There will be no lost
production and employment through Keynesian channels. So I do not see
why Barro believes that, although the stimulus boosts employment now,
amortizing the stimulus must inevitably reduce employment at some point
in the future.
__________
Prepared Statement of Representative Kevin Brady, Senior House
Republican
I am pleased to join in welcoming Dr. Berner, Mr. Joerres, and Dr.
Hassett before the Committee this morning.
This is not a good time for American workers and their families.
While there are some positive signs in the labor market--the rate of
job losses has slowed and temporary services firms have begun to hire
more workers in recent months--the unemployment rate is elevated and
job openings remain scarce.
President Obama signed the American Recovery and Reinvestment Act
on February 17, 2009, promising that it would jump start economic
growth, create jobs, and reduce the unemployment rate. At the time, two
of the Administration's top economists predicted that Obama's stimulus
plan would keep the unemployment rate below 8.0 percent.
A year later, the Administration's rosy predictions remain
unfulfilled. Since the Obama stimulus plan passed, the United States
has lost more than 3 million payroll jobs. The unemployment rate is 9.7
percent.
At first, Administration officials tried to claim Obama's stimulus
plan was creating or saving hundreds of thousands of jobs based on
reports filed by stimulus fund recipients. However, the news media
uncovered so many errors in the tabulation of these ``jobs created or
saved'' that Administration claims became the butt of jokes by late
night television comedians.
On Tuesday, the Congressional Budget Office entered the fray with
its estimates of how much the Obama stimulus plan contributed to real
GDP growth and employment during the fourth quarter of 2009. The CBO
used fiscal multipliers to make these estimates. Unfortunately, the
CBO's methodology prejudges the outcome and causes it to overstate the
likely economic benefits from Obama's stimulus plan.
First, the CBO derived its fiscal multipliers from three
macroeconomic forecasting models that use historical relationships
among demand-side factors to predict the near-term performance of the
U.S economy. These models ignore many supply-side factors. For example,
business investment is treated largely as a function of aggregate
demand and the real interest rate. Thus, a business tax cut does not
affect directly investment by reducing the cost of investing and
increasing the after-tax return on capital. Instead, a business tax cut
affects investment indirectly through higher aggregate demand as
business owners consume a portion of the payouts received from their
businesses.
The CBO even acknowledges that the models' demand-side orientation
biases its calculation of fiscal multipliers. Quoting from the CBO
report, ``Because they emphasize the influence of aggregate demand on
output in the short run, the macroeconomic forecasting models tend to
predict greater economic effects from demand-enhancing policies such as
ARRA than other types of models.''
Second, two of three macroeconomic forecasting models used by the
CBO are ``old Keynesian'' models that do not allow for rational
expectations. This creates a strong upward bias in the CBO's
calculation of fiscal multipliers. Consequently, the CBO ignores what I
see occurring in my district in Texas: people are saving more and
businesses are investing less in anticipation of paying higher taxes in
the near future to service the enormous debts from stimulus spending,
``cap and trade,'' and new health care entitlements. Last year, John
Cogan, Tobias Cwik, John Taylor, and Volker Wieland found that about
\5/6\ths of the real GDP growth benefits and almost all of the net job
creation benefits of stimulus spending disappear when a ``new
Keynesian'' model that allows for rational expectations is used.
For these reasons, the CBO's fiscal multipliers are biased. The CBO
simultaneously overstates the likely economic benefits from stimulus
spending and temporary tax rebates and understates the likely economic
benefits of business tax cuts designed to reduce the after-tax cost of
making job-creating business investments. Therefore, we should take the
CBO's claims that Obama's stimulus plan increased real GDP by between
1.5 percent and 3.5 percent and increased the number of people employed
by 1.0 million to 2.1 million with a pound of salt.
I am interested in hearing what the private sector experts here
today have to say about job creation. I look forward to hearing their
testimony.