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



                                                        S. Hrg. 111-577

                     THE ROAD TO ECONOMIC RECOVERY:
                    POLICIES TO FOSTER JOB CREATION
                          AND CONTINUED GROWTH

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

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 23, 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

                              ----------                              

                                Members

Hon. Carolyn B. Maloney, Chair, a U.S. Representative from New 
  York...........................................................     1
Hon. Sam Brownback, Ranking Minority, a U.S. Senator from Kansas.     3
Hon. Vic Snyder, a U.S. Representative from Arkansas.............     4
Hon. Kevin Brady, U.S. Representative from Texas.................     5
Hon. Maurice D. Hinchey, a U.S. Representative from New York.....     6
Hon. Elijah E. Cummings, a U.S. Representative from Maryland.....     8

                               Witnesses

Hon. Douglas W. Elmendorf, Director, Congressional Budget Office.     9

                       Submissions for the Record

Prepared statement of Representative Carolyn B. Maloney, Chair...    30
Prepared statement of Senator Sam Brownback......................    31
Prepared statement of Representative Kevin Brady.................    32
Prepared statement of Hon. Douglas W. Elmendorf..................    34

 
                     THE ROAD TO ECONOMIC RECOVERY:
                    POLICIES TO FOSTER JOB CREATION
                          AND CONTINUED GROWTH

                              ----------                              


                       TUESDAY, FEBRUARY 23, 2010

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The committee met, pursuant to call, at 11:30 a.m., in Room 
2325, Rayburn House Office Building, The Honorable Carolyn B. 
Maloney (Chair) presiding.
    Representatives present: Maloney, Hinchey, Sanchez, 
Cummings, Snyder, Brady, Paul, Burgess, and Campbell.
    Senators present: Casey and Brownback.
    Staff present: Brenda Arredondo, Andrea Camp, Gail Cohen, 
Colleen Healy, Andrew Wilson, Rachel Greszler, 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 has come to order. I would like 
to thank everybody for coming. And I would like to thank you 
for being here. And we are waiting for the ranking member to 
get here, and given time constraints for Members on both sides 
of the aisle--we are all trying to make up snow days and have 
many, many hearings planned--we are going to give all members a 
chance to ask questions. I would like to limit the ranking 
member or his designee for 5 minutes and others for 3 minutes.
    I would like to give my opening statement before I 
introduce Doug Elmendorf, who will be testifying before us 
today. Today's hearing continues the JEC's focus on our 
country's unemployment problem, an effort that we are 
intensifying this year. The historic one-two punch of snow a 
few weeks ago delayed our series but we are trying to get back 
on track today. We will be examining ways to help our economy 
recover from the great recession of 2007, which was fueled by 
the double blow of crises in both the housing and financial 
services sectors.
    Most economists believe we have two broad job-creating 
policies: increased demand through stimulus and giving 
incentives to employers to hire additional workers.
    Today we welcome the Honorable Doug Elmendorf, Director of 
the Congressional Budget Office. He will give CBO's assessment 
of policies and strategies to spur job creation in the near 
term.
    On Friday we will continue our hearing from business 
leaders and economic forecasters as we explore the prospects 
for employment growth in the coming months.
    Today's hearing is timely, since the Senate plans to 
consider additional actions this week to put Americans back to 
work. Creating jobs is the top priority for Congress on both 
sides of the aisle and for our country.
    With almost 15 million Americans out of work, it is clear 
that immediate targeted actions are needed to spur hiring and 
boost employment. The questions before us are: How do we create 
jobs quickly? And which policies are most efficient? Which 
offer the most bang for the dollar? This hearing will help 
shine a light on the specific actions Congress should take 
right now, not in some distant future.
    Just over 1 year ago, the current administration took 
office taking the helm of a country suffering from the worst 
crisis since the Great Depression. During the last 3 months of 
the Bush administration, we lost an average of 720,000 jobs per 
month. In contrast, the most recent 3 months of the Obama 
administration, we lost an average of 35,000 jobs each month. 
The trend is heading 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 5.7 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 this 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 to support 
struggling families and encourage job creation. These actions 
include creating and extending the first-time home buyers 
credit; boosting funding for small business loans via the Small 
Business Administration; extending safety net programs, such as 
unemployment benefits and food stamps; 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. In 
order to bring creative ideas on job creation to Congress, I 
started the year reaching out to CEOs of Fortune 100 companies 
and leaders of small businesses. And I asked these employers to 
share with us their ideas for job creation.
    In order to jump-start job growth, I have introduced an 
employer tax credit cosponsored in the Senate by my JEC 
colleague, Senator Casey, and my fellow New Yorker, Senator 
Kirsten Gillibrand. The idea was suggested by several of the 
responders to our survey. The credit will give employers an 
incentive to hire new workers and raise wages. This will help 
workers get back on their feet, spark consumer spending, and 
brighten our economic climate.
    I welcome CBO's input about how to best design an employer 
tax credit. A recent CBO study showed that an employer tax 
credit, similar to the one in our bill, is one of the most 
effective and efficient ways of spurring hiring. The object of 
this week's hearing is to get feedback from experts to make 
sure that our actions work and help to create jobs. For 
example, CBO has pointed out that one of the lessons of the 
1970s employer tax credit was that many employers did not even 
know about the tax credit until they filed their returns, too 
late to effect hiring decisions.
    I look forward to CBO's perspective on finding solutions to 
the most pressing issue of the day--creating jobs. Thank you 
very much.
    [The prepared statement of Representative Maloney appears 
in the Submissions for the Record on page 30.]
    And I recognize Mr. Brownback, the ranking member, for 5 
minutes.

   OPENING STATEMENT OF THE HONORABLE SAM BROWNBACK, RANKING 
              MINORITY, A U.S. SENATOR FROM KANSAS

    Senator Brownback. I thank the Chair for the hearing. I 
appreciate this very much.
    Director Elmendorf, you have one of the most challenging 
jobs in government. I welcome you here, and I look forward to 
the question-and-answer session.
    I will submit my full statement into the record so we can 
get to the questions as soon as possible. But the one thing I 
would note to the director is, we are seeing the Fed now start 
developing policies to pull back some on the monetary supply, 
which I think is a wise move on the Fed's part, having put a 
lot of money out there during the recession, the key parts of 
it, to try to keep the banks going, keep the economy as liquid 
as you possibly could. And I think that is a wise move on the 
Fed's part.
    I sure think on our part, then, we ought to be looking at 
how we get our deficits down. I mean, you would think if the 
Fed is looking at the economy and saying, okay, it is probably 
starting to hit bottom, maybe it is going to start coming out, 
and I would love to hear your thoughts and comments on this. We 
have to work on the jobless rate, yet it almost seems like now 
would be the time period we would start looking at how you pull 
back on some of the deficits that the Federal Government is 
running?
    And those numbers are absolutely horrific. We have seen the 
President's proposed budget. The publicly held national debt 
will nearly double from 40 percent of GDP in 2008 to 75 percent 
of GDP in 2018. And that is the publicly held debt. The total 
U.S. debt will surpass 90 percent of GDP this very year. I 
know, Director, you know these numbers very, very well. But 
that 90 percent total debt threshold number is one that I have 
heard a number of economists cite and say, this is a troubling 
level.
    Now, when you get to this point in your debt level, then it 
starts being a drag on your economy and can drag it down. I 
have seen numbers as high as reducing it 4 percent in its 
growth rate. So it seems to me that we are at one of these 
crossroads that the Fed has identified that now, after having 
put a lot of money out there to try to stimulate the economy to 
try to help, now you have got this debt and deficit debt at 90 
percent of GDP, and it is time you start looking at ways to 
pull this back so that you can get that under control so it 
won't drag on your economy or so that the Fed's numbers won't 
create an inflationary situation. And I really think this is 
something we have got to start looking at aggressively for us 
as a country.
    I would note, finally, that I will be hosting, along with 
my colleague, Mr. Brady, a discussion this afternoon, a seminar 
at the Capitol Visitor Center, about return to prosperity, 
creating the strongest economy of the 21st century. We have a 
Nobel prize winning laureate, Dr. Edward Prescott; a noted 
monetary economist, Dr. Allan Meltzer; a former OMB director 
and some others at that. I think we have to start looking at 
this in the big broad picture.
    I think we all want the same thing; we want a strong 
vibrant growing economy. But you have got to start making these 
moves to get the deficit under control. That is what we 
control. And I hope you can help us identify some of the paths 
and ways that we can do this so that the deficit and the debt 
doesn't drag our potential for some real economic growth to 
take place. I want to thank the Chair again for the hearing.
    [The prepared statement of Senator Brownback appears in the 
Submissions for the Record on page 31.]
    Chair Maloney. Thank you.
    Representative Sanchez.
    Representative Sanchez. I have no opening statement.
    Chair Maloney. Okay.
    Mr. Campbell.
    Representative Campbell. No.
    Chair Maloney. Representative Snyder.

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

    Representative Snyder. Thank you, Madam Chair.
    Mr. Director, I appreciate you being here. I want to make a 
few comments about banking. I know you are not a banker. It was 
actually me that had my staff call to get a list of all your 
publications over your entire life, just to see if you have 
ventured into the area of banking, and I decided you had the 
kind of background I could ask the question to, so I am going 
to take advantage of this time.
    I want to tell my own personal experience about overdraft 
fees and some of the things with Bank of America and then lead 
up to my comment. But $35 overdraft fees. I had the experience 
some time ago of discovering the hard way that the checks are 
processed in your account not in the order that you incur them 
but in the order of biggest to smallest. You are probably aware 
of that. I pulled it on a Saturday, checked my account, had 
$140 or something, took out $100. By the time it was processed 
that following Monday, the $100 was, the order was changed. So, 
in fact, the $100 incurred an overdraft fee because they are 
processed not in the order in which I took money out but in an 
order that is most advantageous to Bank of America to drive me 
into overdraft fees.
    And then we are all familiar with the delay. From the time 
I make a purchase, it may show on my account pending Starbucks 
$3.95, but it may be a while before the merchant gets that 
dollar. The banks are holding that money and making some money 
on that.
    But this is what got me started. I was approached at a ball 
game not long ago in Little Rock by an employee of Bank of 
America who said there are some practices going on that are 
shameful. He said that what is happening is that people may 
well get their overdraft--and we are all responsible for 
keeping track of our money; I make mistakes on this stuff like 
a lot of people can--but he said, in fact, that money then does 
not immediately go to the merchant. It is still held for a 
period of time, during which the Bank of America makes money on 
that. And he said, how can this money suddenly have a new 
owner? It is either mine, or it is the merchant's. It is not 
the bank's. So I am paying $35 for the privilege of the 
merchant getting the money, but in fact the bank is holding the 
money for an additional period of time. And he came to me 
because he was embarrassed by what, in his view, I don't know 
if he is right or not, but this is what he told me happened. 
And then the occasion of----
    Chair Maloney. The gentleman's time is almost up.
    Representative Snyder [continuing]. I am sorry.
    And then if you want to have a cash transfer made from your 
Bank of America credit card into your checking account, it is a 
25 percent interest rate. And the last time I did that, a few 
weeks ago, I felt like I was dealing with a loan shark. And the 
comment and question I want to make is, how can we think small 
business in the American community, business community, is 
going to do well if their bankers are not on their side? It is 
like we are no longer dealing with Jimmy Stewart; we are 
dealing with Mr. Potter, to put it in a metaphor that we can 
all understand from ``It is a Wonderful Life.''
    And I know the chairwoman has done a lot of work on this. 
But you are talking a lot about job creation. It seems like we 
still have an issue that the dynamic between business people 
and customers and their bankers has changed over the last 
several decades.
    Thank you, Madam Chair.
    Chair Maloney. Thank you. Mr. Brady.

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

    Representative Brady. Thank you, Madam Chairman.
    Director Elmendorf, thank you for being available to the 
committee this morning. Given the depth and length of this 
recession, economists would normally expect a sharp V-shaped 
recovery with a strong rebound in output and employment. As we 
all know, this hasn't been the case. Real GDP grew at an 
annualized rate of 2.2 percent in the third quarter of last 
year. It accelerated to 5.7 percent, which was encouraging, but 
most of that growth was due to one-off restocking of inventory. 
So the fourth quarter spike revealed how deeply businesses 
emptied their shelves last year, but doesn't give us an 
indication of how confident they are in bringing back workers 
or hiring new ones. Real final sales, which probably are a 
better indicator, rose by just 2.2 percent last quarter.
    This is consistent with the sluggish economic growth 
forecast for the next 2 years. You, the CBO, forecast real GDP 
will grow by 2.2 percent this year, a little less than 2 
percent, 1.9 next. The February Blue Chip Consensus is a little 
more optimistic but still slow when compared to the normal 
growth after a severe recession like this. Weak economic growth 
means less job creation. It will be anemic. The unemployment 
rate will remain elevated for a number of years. CBO again has 
forecast an average unemployment rate 10.1 percent for this 
year; slightly lower, 9.5 percent, in 2011.
    And I think, while January's declining unemployment rate to 
9.7 percent is encouraging, most of the improvement was 
attributable to an increased number of part-time jobs reported 
by households. Payroll employment fell by another 20,000 jobs. 
And this divergence between the household and establishment 
surveys is unusual. I think we will all be watching in the 
future to see exactly what all this portends.
    When I look at the recovery under the Obama administration 
versus that after the August of 1981 to November of 1982 
recession, which was similar in depth and length, there are 
major differences. Comparing the Reagan and Obama recoveries so 
far, the average annualized rate of real growth was 7.2 percent 
in the first two full quarters of the Reagan recovery, compared 
with about half of that, 4 percent, in the first two full 
quarters of this recovery. During the first 7 months of the 
Reagan recovery, payroll jobs increased by 1.2 million jobs. We 
lost about that amount, 1.1, in the first 7 months of the Obama 
recovery.
    So the question is, why are jobs and real GDP growth so 
different? I really believe, as Senator Brownback said, the 
uncertainty; cap and trade, tax increases, health care 
mandates, all that they are seeing up here is having a dramatic 
effect on businesses' decisions to invest capital, make that 
expansion decision, bring back an old worker, hire a new. And 
one of the questions, Director, I am going to ask you is how 
that plays into some of your economic projections going 
forward. Thank you.
    [The prepared statement of Representative Brady appears in 
the Submissions for the Record on page 32.]
    Chair Maloney. Mr. Hinchey.

 OPENING STATEMENT OF THE HONORABLE MAURICE D. HINCHEY, A U.S. 
                  REPRESENTATIVE FROM NEW YORK

    Representative Hinchey. Well, thank you very much, Madam 
Chairman.
    And Mr. Director, it is nice to see you. And thank you very 
much for being here. I am looking very forward to all the 
things you are going to tell us so that we can solve this 
problem. And we know it is a serious problem because last year 
we experienced, at least, the largest deficit that we had seen 
since the Second World War.
    Now, a lot of that has to do with the way in which spending 
was engaged in over the previous administration over the loss 
of the last several years and including tax cuts. There was a 
big tax cut which concentrated wealth in the hands of the 
wealthiest 1 percent of the population of this country. So we 
have right now the greatest concentration of wealth in the 
wealthiest 1 percent of the people of this country since 1929. 
Now, that is indicative also in many ways of the economic 
circumstances that we are dealing with.
    Also, the prescription drug plan. The prescription drug 
plan took a huge amount of funding out and increased this 
budget deficit hugely. That is another thing that has to be 
dealt with and has to be corrected.
    And, of course, the war in Iraq; the war in Iraq, which had 
no justification whatsoever and which has cost us huge amounts 
of money, hundreds of billions of dollars. There are 
estimations that that amount may go to as high at $1 trillion 
at some point in the not-too-distant future.
    And all of these things have to be corrected. And there are 
other things that have to be corrected. We have a lot of the 
manufacturing operations in this country that have been 
exported out to other places around the world. That has got to 
be dealt with, and we have got to deal with that intelligently. 
There is an interesting reluctance on the part of a number of 
members of the Congress here to invest appropriately in this 
economy, not those three things that I just mentioned, the tax 
cuts, the prescription drug plan, the war in Iraq, but to 
invest in the internal needs of this country. And there is a 
reluctance to do that, even though there was no reluctance to 
do the three things that I mentioned in the past.
    That has got to happen. This is a country that needs to 
focus attention on the internal needs and therefore the 
creation of jobs. It was very interesting to me about how the 
Senate yesterday passed that jobs bill. And if I remember 
correctly, I think there were four Republicans, including one 
brand new one, who voted for that bill, enabling it to pass. 
And that jobs bill is going to stimulate a lot of economic 
growth through the creation of jobs, including the 
manufacturing or the upgrading of the transportation industry 
in this country, roads, bridges, et cetera. All of those things 
are in dire circumstances.
    We have had too many administrations that failed to focus 
their attention, and too many Congresses, that failed to focus 
their attention on the internal needs of this country and to 
invest in it appropriately to create the jobs and to stimulate 
economic growth generally. All of that really needs to be done. 
And it needs to be done in the way in which other 
administrations, if you think back to the Great Depression, the 
way in which the Roosevelt administration did and how they 
continued to operate until 1937, until a larger number of 
people said, oh, my goodness, we are spending too much money, 
and then it stopped.
    And the increase in the economic growth stopped, and the 
recession dropped down deeply again, making it even worse. So 
there are an awful lot of things that we know. All you have to 
do is look back on history for the answer to a lot of 
questions. And all you have to do is look accurately and 
honestly in the context of the circumstances that we are 
dealing with to get the answer to those questions as well.
    Hopefully this Congress, maybe even through the example of 
what happened in the Senate yesterday, may now be on the edge 
of doing things in the right way; stimulating economic growth, 
investing in the internal needs of this country and creating 
the kind of jobs that we need. I am very interested in seeing 
what you have to say about all those things.
    Chair Maloney. Thank you very much.
    And I now would like to introduce Dr. Doug Elmendorf--Mr. 
Cummings, oh, I am sorry, I didn't see you.

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

    Representative Cummings. That is okay. That is all right.
    Thank you very much, Madam Chairlady.
    And I want to thank you, Director Elmendorf, for being 
here.
    You know, I was thinking about what Mr. Hinchey said, and I 
associate myself with his words.
    I held my third foreclosure-prevention event the other day. 
More than 1,000 people showed up, and we were able to get 
bankers and lenders to come together, and we saved at least 700 
or 800 people's houses. And they are all consistently like 
that.
    But there are some people we can't save. Those are the 
people who have lost their jobs. And it is really, really very 
sad. And I guess, you know, going back to what Mr. Hinchey 
said, you know, everybody jumped up and down when Scott Brown 
was elected on the other side. But do you know what? I thought 
about it yesterday, and maybe it will work just the opposite. 
Maybe he will be a breath of fresh air coming in. And thinking 
about the people that I saw on Saturday, the ones that left my 
prevention conference in tears, you know, sometimes I wonder 
whether we up here don't think about enough people, like the 
fellow and his wife who were sitting on the front row in my 
conference with tears running down their face the whole time I 
was talking, for 15 minutes, trying to tell them to save their 
houses. And so I think we are going in the right direction.
    To be frank with you, I don't think the Senate bill does 
enough, but it damn sure beats standing still. I mean, at least 
we are now getting our Republican friends to work with us. And 
I encourage the President to continue to reach out, because he 
is right; it is not about us. Sometimes I think we think this 
is about us. It is not about us. It is about the people that we 
represent and the people you try to help every day.
    And so, you know, I am glad you are here. I don't know 
whether you are going to comment on the Senate bill or the 
House bill. But I do want to know what you see as being the 
most effective and efficient and fastest way to get people back 
to work because, and as you said in your testimony, a lot of 
these jobs aren't coming back. So then we have to deal with 
training and things of that nature. So I look forward to your 
testimony.
    Madam Chair, and with that, I yield back.
    Chair Maloney. Thank you very much for all your hard work 
in preventing foreclosures and for policies that create jobs.
    I now would like to introduce Director Elmendorf, Director 
of the Congressional Budget Office. And immediately prior to 
becoming the CBO Director, he was a senior fellow in the 
Economic Studies Programs at the Brookings Institution. He 
served as co-editor of the ``Brookings Papers on Economic 
Activity,'' and the director of the Hamilton Project, an 
initiative to promote broadly-shared economic growth.
    Director Elmendorf also served as a Deputy Assistant 
Secretary for Economic Policy at the Treasury Department and an 
Assistant Director of the Division of Research and Statistics 
at the Federal Reserve Board.
    Thank you for your service. We look forward to your 
comments. Thank you.

  STATEMENT OF THE HONORABLE DOUGLAS W. ELMENDORF, DIRECTOR, 
                  CONGRESSIONAL BUDGET OFFICE

    Dr. Elmendorf. Thank you, Chairman Maloney and Senator 
Brownback.
    To all the committee, I appreciate the opportunity to 
testify today on policies to foster economic growth and 
employment this year and next.
    The United States has just suffered the most severe 
recession since the 1930s. At 9.7 percent, the unemployment 
rate is nearly twice what it was before the recession began in 
December of 2007. Since that time, employers have shed about 
8.5 million jobs. And if one accounts for the jobs that would 
have been created had the economic expansion continued, the 
recession has lowered employment by about 11 million jobs 
relative to what it otherwise would have been.
    The economy is starting to recover with inflation-adjusted 
GDP growing in the second half of 2009. Moreover, as 
Congressman Brady mentioned, severe economic downturns often 
sow the seeds of robust recoveries. During a slump in economic 
activity, consumers defer purchases, especially for housing and 
durable goods, and businesses postpone capital spending and try 
to cut inventories. Once demand in the economy picks up, 
spending by consumers and businesses can accelerate rapidly, 
which in turn generates demand for workers.
    Although CBO expects that the current recovery will be 
spurred by that dynamic, in all likelihood, recovery will also 
be dampened by a number of significant factors. Those factors 
include the continuing fragility of some financial markets and 
institutions; declining support from fiscal and monetary 
policy; and limited increases in household spending because of 
slow income growth, lost wealth, and a large number of vacant 
houses.
    We expect that these factors will cause spending, output 
and employment to rebound only slowly, a view shared by most 
private forecasters. As shown by the first figure, CBO projects 
that the unemployment rate will average slightly above 10 
percent in the first half of this year; fall below 8 percent 
only in 2012; and return to its long-run sustainable level of 5 
percent only in 2014.
    As a result, more of the pain of unemployment from this 
downturn lies ahead of us than behind us. Concerns that the 
recovery will be slow and protracted have prompted the 
consideration of further fiscal policy actions. For a number of 
policies that have received public attention, CBO used evidence 
from empirical studies and models to estimate the impact on 
output and employment. I want to emphasize the uncertainty of 
the 10 such estimates, which we have tied to communicate using 
ranges of numbers.
    The second figure summarizes the results of our analysis. I 
am afraid it is a little small to see on that screen. I will 
try to talk through it. The figure shows for each policy the 
cumulative effect on years of full-time equivalent employment 
per million dollars of budgetary cost. In other words, this is 
the cost effectiveness of different policies at increasing 
employment, and we measure cost effectiveness per million 
dollars of total budgetary cost by its cumulative effect on 
years of full-time employment.
    The lighter set of bars at the top of the picture refer to 
policy options that are estimated to have a substantial 
proportion of their impact beginning in 2010. On the darker 
bars are options that were estimated to have most of their 
impact beginning in 2011.
    Let me briefly run through the policy options we 
considered. The top bar reflects increasing aid to the 
unemployed. Households receiving unemployment benefits tend to 
spend the additional benefits quickly, making this option both 
timely and cost effective in spurring output and employment.
    The second bar is the effect of reducing employers' payroll 
taxes. Firms will probably respond to this sort of tax cut 
through a combination of lower prices, higher wages, and higher 
profits. The changes in prices, wages and profits would spur 
additional spending, which would boost employment. In addition, 
the reduced cost of labor would directly encourage the use of 
more labor and production.
    The third bar shows the effect of reducing employers' 
payroll taxes only for firms that increase their payroll. This 
policy would generate a larger employment gain than the 
previous one per dollar of budgetary cost because the tax cut 
is linked to payroll growth and therefore uses fewer dollars to 
cut taxes for workers who would have been employed anyway. 
Alternative ways of designing such a tax cut could have 
significant impact on its effectiveness, and I would be happy 
to discuss that if you would like.
    The next bar shows the effect of reducing employees' 
payroll taxes. This option would have a smaller stimulative 
effect than reducing employers' taxes. It would not immediately 
affect employers' costs, but instead would have an effect 
similar to those of reducing other taxes for those people. That 
is, it would raise spending and therefore production and 
employment.
    The next bar is the effect of providing an additional one-
time Social Security payment which would increase consumer 
spending.
    And the last of the light bars would allow for full or 
partial expensing of investment costs which would provide a 
greater incentive for business investment.
    Now I will turn to the darker bars, the ones for policies 
that we estimate would have their largest effect beginning in 
2011. The highest of those darker bars is investing 
infrastructure. Many, but not all, infrastructure projects 
involve considerable start-up lags; thus most of the increases 
in output and employment from this option, even if enacted in 
the very near term, would probably occur after 2011.
    The next bar is providing aid to States for purposes other 
than infrastructure. As most States struggle to respond to huge 
budget gaps, additional Federal aid would lead to fewer layoffs 
of State employees, smaller increases in State taxes and so on.
    The next bar is providing additional refundable tax credits 
for lower- and middle-income households in 2011. This approach 
would increase after-tax income for households that are likely 
to spend the significant share of the funds received.
    The next bar, now I am down to the next to last bar, is 
extending higher exemption amounts for the AMT in 2010. This 
option would have a more limited impact on spending because it 
largely affects households whose spending is not constrained by 
their income in a given year.
    And the last bar shows the effect of reducing income taxes 
broadly in 2011. Again, only a fraction of such a tax cut would 
probably be spent.
    In conclusion, in our analysis, fiscal policy actions, if 
properly designed, would promote economic growth and increase 
employment in 2010 and 2011. However, despite the potential 
economic benefits in the short run, such actions would add to 
already large projected budget deficits, as Senator Brownback 
noted. Unless offsetting actions were taken to reverse the 
accumulation of additional government debt, future incomes 
would tend to be lower than they otherwise would have been. 
Thank you. I am happy to take your questions.
    [The prepared statement of Dr. Douglas W. Elmendorf appears 
in the Submissions for the Record on page 34.]
    Chair Maloney. Thank you very much.
    And I think that--oh, Mr. Casey just came.
    Is he here?
    Welcome. And I would like to have you begin the questioning 
since I know you have to get back immediately.
    Senator Casey. Well, thank you very much.
    Mr. Elmendorf, thank you again. I appreciate your testimony 
today and your service.
    I was struck by the graphic that you walked through that 
differentiates between impacts in 2010 versus 2011, especially 
in a couple of different areas. One is obviously the bar for 
impact in 2010, according to your graph, is substantial as it 
relates to aid to the unemployed. Is that correct?
    Dr. Elmendorf. Yes. We think that policy is cost effective 
and can work very quickly.
    Senator Casey. Just so I am reading, I want to make sure I 
am reading the graphic right, you are saying that years of 
full-time employment--I want to have you say it--in terms of 
the impact that an extension of unemployment compensation 
insurance, what that would provide in terms of a job impact?
    Dr. Elmendorf. What this picture shows in the top bar is 
that over 2010 and 2011 together, that increasing aid to the 
unemployed would add in our estimate between 8 and 19 years of 
full-time equivalent employment per million dollars of 
budgetary cost.
    Senator Casey. And I know that in the Senate as well as in 
the House, we are going to be debating extending so-called 
safety-net provisions, whether that is unemployment insurance 
or COBRA health insurance as well as food stamps. So that is 
very helpful for our deliberations about how to do that.
    The other part that I wanted to review is with regard to 
payroll taxes. I have a bill in the Senate, a tax credit 
proposal, which would provide a tax credit for employers that 
are adding to their payroll. For less than a hundred they would 
get a 20 percent credit, and above a hundred would get a 15 
percent credit. Chairwoman Maloney has a companion bill in the 
House, and we think it is a really good idea for a number of 
reasons, in addition to several other tax credit ideas that are 
out there.
    I want to have you walk through the next two if you could, 
or maybe the next three, in terms of what a--and I should say 
for the record, although I won't be able to quote from it 
directly, but I know that CBO, the Congressional Budget Office, 
has given this kind of idea a good review, and we are grateful 
for that.
    But if you can just walk through the payroll tax sections 
here and the impact of a tax credit. I know I have just 
described mine in broad terms, but just your thoughts on that 
to help us with our own deliberations.
    Dr. Elmendorf. Let me just note briefly, as you know, we 
have written you a letter analyzing the effects of--alternative 
ways of designing a tax credit of this sort. Of course, we 
don't review proposals with an eye to supporting or objecting 
to them. We are just doing an analysis, and it is up to you and 
your colleagues to decide what policies to pursue.
    Senator Casey. I was doing my best to put words in your 
mouth.
    Dr. Elmendorf. And I am doing my best not to let you, 
Senator.
    What we have said in our initial report and our letter to 
you, and you can see in those bars, is that in our judgment, 
policies that cut employers' payroll taxes are more cost 
effective in terms of stimulating employment over the next 
couple of years than many of the other policies that we have 
considered.
    In our judgment, what firms will do with a cut of that sort 
is partly to take advantage of their lower cost by cutting the 
prices of their goods and thus trying to stimulate demand, and 
it is really the shortfall in demand that is the crux of the 
recession and the crux of the problem in hiring.
    Additionally, these tax credits provide an incentive to use 
more labor by lowering the cost of labor in particular. In our 
judgment, a broad tax, payroll tax cut applying to all firms 
would raise full-time equivalent employment by 5 to 13 years 
per million dollars of total budgetary cost. A tax cut that was 
focused on firms that increased their payroll would have a 
larger effect of 8 to 18 years of full-time equivalent 
employment per million dollars. It has a larger effect in our 
judgment because less of the money goes toward paying for jobs 
that would have existed anyway. By only granting the tax cut 
for firms that are increasing employment, it is more focused on 
those increases. So per dollar of lost revenue, there is a 
greater incentive effect.
    Now, as people have noted, for firms that have kept their 
payrolls going, that sort of approach does not provide a 
reward, and that is a tradeoff that you need to wrestle with.
    We have not analyzed your specific proposal. It is 
complicated enough to do hypothetical proposals of the sort 
that we have been working on for a number of months, and we 
haven't tried to apply this methodology to any of the actual 
bills moving or being discussed in the Congress because there 
have just been a lot of pieces on all of these bills, not all 
of which we have analyzed, and specific features of your 
legislation and others that we haven't modeled at this point. 
So I can't give numbers to your proposal, but this is the basic 
thrust of our analysis.
    Senator Casey. Thank you. I know I am out of time. I just 
say by way of comment, it is helpful that you have not only 
differentiated between tax credits versus other strategies, but 
within the realm of tax credits with increase payroll, those 
kinds of tax credits have a bigger impact, and that you are 
talking about 2010, so that is very helpful. Thank you very 
much.
    Dr. Elmendorf. Thank you, Senator.
    Chair Maloney. Thank you very much.
    Senator Brownback.
    Senator Brownback. Thanks, Madam Chair. I appreciate that.
    Director Elmendorf, I asked you as I walked in whether you 
had any number of projections on the administration's new 
health care proposal. And what you told me is that you do not; 
you do not have the detail necessary to make budget projection. 
Is that correct?
    Dr. Elmendorf. That is right, Senator.
    We saw that proposal for the first time yesterday when you 
and others did and have started to look through it. In our 
initial read, we don't think there is enough detail on some 
aspects of the proposal for us to do a cost estimate. And even 
if such detail were provided, it would take us some time to do 
that. As Members of Congress have learned over the past year, 
for very complicated proposals, we try to do a very careful 
analysis, and that takes us a good deal of time.
    Senator Brownback. I noted to you in my opening comments 
that our debt is now 90 percent of GDP, our total debt, and 
that most economists believe when you get at that 90 percent 
level you have a significant drag on your overall economy. Do 
you agree with the assessment of most economists that when you 
get that level of debt that it is a drag on your overall 
economy?
    Dr. Elmendorf. We certainly agree, Senator, that increasing 
levels of government debt provide an increasing drag.
    Whether there are tipping points, and if so, what they are, 
is a much more difficult point to ferret out of the data. And 
there certainly has been some prominent analysis that suggest 
that 90 percent of GDP is a sort of tipping point; that 
countries that have had debt above those levels have 
experienced significantly slower growth than countries with 
debt below those levels.
    But as I say, I think the level to which one can take debt 
and how the risks rise as one increases the level is a 
difficult thing for economists to quantify. I think there isn't 
as much consensus around that. But there is a very clear 
consensus that rising levels of debt will over time reduce 
standards of living, will reduce the flexibility of the 
government to deal with crises, and will raise the risks of 
some sort of financial crisis.
    Senator Brownback. Is there general agreement among 
economists that once you get over 90 percent debt to GDP, that 
this does create a significant drag on the economy? Would you 
agree with that and would you say that there is general 
agreement among economists on that notion?
    Dr. Elmendorf. I am reluctant, Senator, to point specific 
levels.
    I think that is a very subtle proposition. For example, 
many economists and we at CBO tend to focus on publicly held 
debt, which will be, at the end of this fiscal year, we think 
about 60 percent of GDP, rather than gross debt that you point 
to.
    But again, that is one of the issues that people do 
disagree about. So I don't want to point to there being a 
specific number that most economists think is a sort of tipping 
point. But I think, again, it is a very widespread view that if 
we go through the next decade with debt at 60 percent of GDP 
and going up, that will mean lower standards of living over 
time than if we were persisting through this decade with debt 
at say 40 percent of GDP, where it was a few years ago.
    Senator Brownback. On our current trajectory, we are on a 
track to have lower standards of living.
    Dr. Elmendorf. Yes, that is right, Senator.
    Relative to what otherwise would have happened, of course--
there is other progress in the economy as well, and we project 
rising GDP over time. But relative to what would have happened 
with lower debt, the path that we are on, would represent a 
lower standard of living.
    Senator Brownback. So clearly it would be wise to get that 
debt and deficit down?
    Dr. Elmendorf. I think there is widespread agreement among 
analysts that getting that deficit and debt down over time is 
important. At this point in time, it is more complicated. I 
think there is a very substantial group of economists who 
believe that, given the current shortfall of employment 
relative to what it could be, of production relative to what it 
could be, that there should be stimulus provided at this point.
    I think there are very few economists who argue that we 
should be looking for higher deficits 5, 6, 7, 8, 9, 10 years 
from now. I think there is much more disagreement about what 
should happen in the near term. And partly that is because, 
under current law, as CBO projects it, deficit does fall 
considerably in the next few years. As the economy recovers, 
even though we are looking for a slow recovery, we are 
expecting the deficit to fall from nearly 10 percent of GDP 
this year to about 4 percent 2 years from now, in fiscal year 
2012. So under current law, and, again, that assumes that tax 
cuts are not extended and so on, there is a very substantial 
fiscal consolidation (a term people often use) over the next 
few years. And some economists are worried that that is too 
fast; others think that is not fast enough.
    But what I think there is a very widespread consensus about 
is that the persistence of deficits beyond the cyclical 
downturn at the levels we expect under current law, and even 
more so if you extend tax cuts and make other changes, are a 
level that would be very damaging to the U.S. economy.
    Senator Brownback. Or enact other spending that would 
exacerbate the deficit or debt.
    Dr. Elmendorf. Yes, that is right, over that longer time 
frame, yes, would be harmful, yes, that is right.
    Senator Brownback. Thank you, Chair.
    Chair Maloney. Thank you.
    And also, Ms. Sanchez is under a time constraint, so I 
recognize her for 5 minutes.
    Representative Sanchez. Thank you, Madam Chair.
    And thank you, Director, for being before us and for your 
really great report actually.
    I think back to my economic training and the whole issue of 
how one invests for the long term, which is ideally the way I 
always think about things when I look at my own personal 
household income, for example. And we always look at things 
like education, movement of goods or people, communication, 
i.e., e-mail, Internet, et cetera, health of people, your basic 
investment in research, and then I think also to that, your 
access to capital is an important issue there.
    And I think as we have been trying to pass policies and as 
we put forward the Recovery Act and as we are looking at this 
jobs act, we are really trying to take care of people in the 
short run but, at the same time, understanding that we need to 
invest in the long term in order for us to be able to pay back 
what we are pulling forward and spending right now.
    And I think your graph shows that, you know, when you keep 
people--when you extend unemployment, when you give more moneys 
to commodities for food for people who really don't have jobs, 
et cetera. And then where you go into investment of 
infrastructure, we can see how something impacts immediately 
and how something will impact a little bit later as the funds 
come out.
    But my question, and it goes back to what you and I were 
discussing before everybody came in, this whole issue of jobs 
are really created at the local level by our smaller- and 
medium-sized businesses and their real lack of ability to get 
that working capital that they need. And I gave you some 
examples of people that I have been talking to, some very close 
to me, about just what is happening out there.
    What policy could you counsel us to think about really in 
trying to make a little bit more liquid the place for small- 
and medium-sized businesses to go and get that working capital 
they need to start the economic machine to go?
    Dr. Elmendorf. You ask a very important question, 
Congresswoman, and I am afraid I don't have an answer equal to 
it. We have not had an opportunity yet to look hard at ways in 
which the government could improve the flow of capital to 
particular sectors of the economy.
    It is certainly true that small businesses are having the 
most persistent problems in gaining access to capital. For 
large businesses, particularly for large businesses, with 
better credit ratings, capital is available, but less, much 
less so for small businesses. And the lack of capital is 
repeatedly cited as an obstacle to small businesses.
    And I should say that a larger obstacle in the minds of 
small business people, according to surveys and another one was 
released this morning, is a lack of demand for their products. 
And one thing that would help them is for that demand to 
increase through higher consumer spending or business spending 
or government spending, and the policies that we are talking 
about today have some potential for doing that.
    In terms of increasing access to capital, it is difficult, 
I think, for the government to set up a bank of its own in a 
sense. Part of what has worked and is important for small 
businesses is their connection with bankers who know their 
business and know them. And if those banks that they are used 
to dealing with, as you mentioned to me earlier, go out of 
business themselves or are taken over by other banks, that 
connection is broken, and it is very difficult to replace that. 
And there is some evidence that one of the reasons that 
recoveries from financial crises tend to be protracted in other 
countries and the U.S. in past history is because of a 
breakdown in some of that financial intermediation. So you put 
your finger on an important question, but we just haven't done 
enough work ourselves to offer options on policies.
    Representative Sanchez. We do have guarantee type of 
organizations like SBA, which, you know, when you look at 
trying to get through that paper work and the weight that it 
takes on, something like that, and really the higher level of 
loan that one needs to take out from that many times, it 
doesn't hit those businesses that really are looking to hire 
one or two people. So I am hoping that maybe, and I have got to 
go talk to, obviously, Nydia Velazquez, who is our chairwoman 
over here on Small Business, but how we really drive maybe the 
Small Business Administration to be less full of red tape and 
paper work and time and maybe to smaller loans that can really 
be accessed by our local businesses.
    Chair Maloney. Thank you. The gentlewoman's time is 
expired.
    Mr. Campbell is recognized.
    Representative Campbell. Thank you, Madam Chair.
    And thank you, Director Elmendorf.
    Several questions. First one. In this committee last 
October, Christina Romer, the chairman of the President's 
Council of Economic Advisers, said that the stimulus would have 
its most, greatest effect on growth in 2009 and that, by mid-
2010, would have little effect on growth. But yet it is my 
understanding that only a third roughly of the money has gone 
out the door yet. And those two, the statement and that fact, 
don't seem to work together for me. So I guess my question is, 
how much of the money is out? How do you see that? What is the 
effect now and in the future of the stimulus plan?
    Dr. Elmendorf. Of course, I don't want to try to interpret 
what Christina Romer meant particularly, but from our 
perspective, I think the way to think of this is that as the 
money flows out, and that is partly on the spending side and 
partly in the form of lower taxes, so essentially less money 
coming in if you will, but as that deficit effect mounts, that 
provides a stimulus to consumer spending and business spending 
and spending at State and local government levels, and that 
helps to push up GDP relative to what it otherwise would have 
been. Actually a better hand gesture would say GDP is going 
like this, and our judgment, the stimulus act brought it like 
this. And that happens as the money goes out.
    As more money goes out, then the effect gets larger. But 
you reach a point at which, even if the flow of money continues 
so that the level of GDP is still above where it otherwise 
would have been, as it is in our judgment, you are not 
stimulating the growth anymore. And then, in fact, as the 
stimulus effects wane over time, which we think begins to 
happen later this year, then even if the level remains a little 
higher than it used to be, you start to come back on to the 
path you would have been on otherwise so that you are not 
really raising growth; you are actually lowering the growth 
rate of the economy later this year relative to what would have 
been basically because you have gone into less deep of a hole.
    Representative Campbell. Does that mean that, using your 
kind of efficiency sort of chart that you have there, that if 
we reduced some of that spending, in other words, if we took 
some of that stimulus money that hasn't been spent yet and 
didn't spend it, that perhaps that might be an efficient way 
for the government to save a little money and reduce the 
deficit and debt?
    Dr. Elmendorf. Taking back that money fast--taking back 
that money, not using the rest that was intended to be used, so 
it would save the government money would, in our estimation, 
make the economic outcomes a little worse. That part of the 
economy would recover more slowly without the continuing flow 
of those funds. How those particular policies compare to other 
uses of the funds you might make, we haven't done that 
analysis.
    Representative Campbell. Right. Because the question 
becomes an efficiency thing, sort of.
    Okay. Another question. The Federal Government spending as 
a share of GDP is now, I believe, over 25 percent, which is I 
think the highest since the end of the World War II or 
something like that. State and local governments, it is my 
understanding, are about another 10 percent. So you add those 
together, and the public sector, if you will, governments at 
all level, is now over 35 percent of the total economy, over a 
third of the total economy.
    And I would argue that the public sector and governments 
right now are in some trouble. Now, from California, where I 
come from, obviously, my State is in deep trouble, but other 
States are as well. I am in the greater Los Angeles area. The 
City of Los Angeles, a former mayor believes that the city will 
have no alternative but to declare bankruptcy at some point in 
the future; City of Los Angeles is in deep trouble. And we know 
that the Federal Government is in deep trouble, in terms of 
what you and everyone agrees is an unsustainable level of 
deficit and debt. What impact--I mean, my concern is that the 
public sector now is bigger than it has been, and it is in 
trouble, and that the public sector may actually be dragging 
the economy down in the future through this debt or through 
whatever actions, because they got to tax more, spend less, or 
all of this, or they crash. And so what is your view on how the 
public sector may be actually dampening the private sector 
going forward?
    Dr. Elmendorf. I think, in the view of most analysts, 
during the recession and in its early period of recovery, when 
we were still so far short of full employment and full use of 
our capacity, that the extra spending and lower taxes that the 
government is doing, partly through the automatic stabilizers 
and partly through the discretionary actions that have been 
taken, are helping to fill in for some private demand that is 
not there.
    And that is why, in our estimation, the automatic 
stabilizers and the stimulus package have improved outcomes 
relative to what they otherwise would have been. But as you go 
forward and as private demand recovers, which we and others 
expect that it will, albeit somewhat slowly, then the 
government ends up being in competition with private spending 
and private investment. And it is at that point when the budget 
deficits become increasingly costly to the economy.
    And that is the usual discussion that economists will 
provide about how deficits are damaging. And it is that gap 
between spending and revenue which has to be borrowed, 
competing in capital markets with the borrowing that large and 
small businesses are trying to do, and households are trying to 
do to buy homes and mortgages and so on, and that crowding out 
is what lowers standards of living over time.
    But I think the focus then is on the deficit as it will be 
3, 4, 5 years from now, less so than what it is in the next few 
years when in this recession and the slow recovery the 
government is helping to fill in for some private demand that 
is not there. I think that is the consensus view of the 
situation that you describe.
    Representative Campbell. Thank you.
    Chair Maloney. I would like to look at the deficit that we 
have been talking about and ask about the impact of the 
recession on the tax revenues and the deficit. But I would like 
to understand more about it. What percentage of the deficit 
over the next 10 years is due to the stimulus and due to TARP?
    Dr. Elmendorf. I haven't done those calculations exactly. 
Our baseline forecast for the deficit for the next 10 years 
under current law is about $6 trillion. The stimulus 
legislation we think has the cost of about $850 billion. That 
is not all in the next 10 years; some has already happened and 
I can't do all of that math in my head. The 850, of course, is 
less than a sixth of the $6 trillion that we project in deficit 
over the next 10 years.
    The net cost of the TARP is turning out to be about $100 
billion. Of course, that is less than we initially estimated 
because there was a lot of uncertainty at the beginning of this 
process of installing the TARP about which way the financial 
system would go. And as it turned out, the financial system has 
healed in a way that it has lowered the cost.
    Chair Maloney. How much of it is due, do you believe, to 
the Bush tax cuts?
    Dr. Elmendorf. I don't have an estimate of that. In our 
budget outlook, we do report what the effects would be of 
extending the tax cuts versus letting them expire as scheduled. 
Under current law, the 2001 and 2003 tax cuts expire at the end 
of this year. In that sense it has no effect on the next 10 
years if you assume that they expire. If you want to see what 
the cost is if continued, it is in our book. I don't recall 
offhand. It is several trillion dollars.
    Chair Maloney. And how much is due to the wars in Iraq and 
Afghanistan?
    Dr. Elmendorf. Again, as you know the way that we project 
discretionary spending over time is to take the latest levels 
that Congress has approved for budget authority and to project 
that forward.
    What actually happens in Iraq and Afghanistan, of course, 
depends on policy judgments here in Washington and effects 
around the world. So how much it will actually affect deficits, 
I don't know. I don't know what the projected amount of 
spending is based on the most recent appropriations.
    Chair Maloney. What is the impact of Medicare Part D?
    Dr. Elmendorf. Again, I don't have an answer. I don't know 
the forecast of that. We are currently updating our baseline in 
connection with the analysis of the President's budget and we 
will report that for you in a few weeks.
    Chair Maloney. And then talking about the stimulus that 
some of my colleagues have raised, in your November reports you 
estimated that the Recovery Act added between 1.2 and 3.2 
percentage points to growth by the third quarter. Additionally, 
CBO estimated that between 600,000 and 1.2 million additional 
people were employed by the third quarter of 2009 due to the 
Recovery Act.
    How do you respond to critics who say that the Recovery Act 
has not worked when the numbers from CBO, the numbers from 
communities, the numbers that have been given from other 
economic institutions, are very similar to yours?
    Dr. Elmendorf. So let me note first, Chairman Maloney, that 
we will be releasing today our analysis of the fourth quarter. 
We are required by the ARRA law to release a quarterly review 
of the numbers being collected by the administration. That 
report will be coming out today.
    As we say in the report, we don't actually put much weight 
on the counts of jobs, which I think are very limited in their 
scope, in addition to issues of their reliability. We rely on 
economic modeling, and as I said in reference to our analysis 
of potential future policies, there is a very uncertain 
business. In our judgment, and I think it is consistent 
qualitatively with the judgment of a number of outside 
forecasters and analysts, the policies that were enacted in the 
stimulus bill are increasing GDP and employment relative to 
what it otherwise would be. To be sure, not every analyst 
agrees with that proposition. But we think it is well founded 
in economic degree and evidence. And I am happy if you want to 
talk, probably off-line, about some of the details of that 
analysis.
    Chair Maloney. And your numbers are coming out at what time 
today?
    Dr. Elmendorf. I am not sure. I had a nearly final draft in 
my hand before we left. I am told they have come out.
    Chair Maloney. They have come out. Great. Can you share 
them with us?
    Dr. Elmendorf. Our analysis is that the effects of the ARRA 
law were to raise the level of GDP in the fourth quarter by 
between 1\1/2\ and 3\1/2\ percent. That is not the growth rate 
in the fourth quarter. It represents the cumulative effect of 
the higher growth rates over the preceding three quarters. And 
we think it has raised the level of employment in the fourth 
quarter by about 1 to 2 million jobs, with slightly larger 
effects on full-time equivalent employment which is the measure 
we have used in this analysis and tries to incorporate not just 
the number of extra people with jobs, but also people moving 
from part-time to full-time work.
    Chair Maloney. Thank you very much.
    Mr. Brady.
    Representative Brady. Thank you, Director, for being here. 
Now, I think if you are a government worker or belong to a 
teachers union, the stimulus has worked. But if you are in a 
manufacturing business or if you work in a construction 
industry, or in the private sector in general, those employment 
numbers have decreased. And I think that has been one of the 
main criticisms, government jobs only stay stimulated if 
taxpayers keep paying for them. Private sector jobs are 
investments that can drive the economy and almost every 
economist agrees the only way we will have a sustainable 
recovery is if the private sector begins rehiring, new 
expansions, increasing new hires. I appreciated, Director, your 
identification of some of the policy options, what the impact 
is.
    I am not sure economic models work as well in this 
environment. And I say this because I think we are in uncertain 
times. Over the District Work Period, I had a number of 
roundtables with small- and mid-size businesses simply asking 
them, ``What would it take for you to rehire and make that 
expansion decision?'' I ran through many of those options in 
both the House and the Senate bill from tax credits for 
rehiring to lowering payroll taxes and all of that. They 
rejected all of those.
    And here is what they said just listening to them. Looking 
at my notes from the roundtables, Keith Walls who has a dry 
cleaning business encapsulated everything. He said: Get rid of 
the fear. The fear of health care mandates, the cap and trade 
costs on energy prices, the fear of tax increases and 
reregulation, he said is holding back their decisions.
    Margie Claybar has a cafe in Orange said: We need 
certainty. Sue Cleveland in Lumberton, Texas, just north of 
Beaumont, they do renovation work in homes and businesses and 
she said: Basically it is the fear about what is going to 
happen. Again, health care, cap and trade, tax increases across 
the board. And Lori from State Farm Insurance said people are 
scared to invest.
    And I think what we are seeing is the issue of economic 
rational expectations. What businesses and people will do 
looking forward. Does all of this spending require tax 
increases in the future? Clearly, yes, it does. And it is 
having as one business said last week, ``it is hard enough for 
you to predict the market, trying to predict the market and 
Congress both is impossible, so we are holding our cash. We are 
not willing to make that decision until we see where things are 
going.''
    And this morning in The Wall Street Journal, Robert Barro, 
a Harvard University economist did an op-ed and basically 
talked about what the impact of the multiplier for deficit 
finance government spending is. And his point is, since the 
fiscal multiplier was less than one in the first year of the 
stimulus, that the stimulus itself was partially offset by 
lower private consumption and investment expenditures. His 
summary was the stimulus plan likely reduced our economy about 
$300 billion over the next 4 years because private expenditures 
are reduced more than the stimulus spending. Rational 
expectations.
    Again, you have a good area of study. You guys do a lot of 
modeling. It is difficult, obviously, by the ranges you gave 
us. Do your models incorporate the concept of rational 
expectations in a very uncertain market economy at this point?
    Dr. Elmendorf. So I should say I am familiar with the work 
of Robert Barro. He is one of my teachers in economics and we 
cite the study of his in the appendix of our report on ARRA 
where we talk about different methodologies for doing these 
kinds of estimates. So we take that approach seriously.
    I think economic models are not very good. Even the best of 
them are not very good. And that is why we use ranges and so 
on. And I think you are hitting on an important point which is 
that even if a model provides accurate estimates in the normal 
course of affairs, it may not do a very good job under 
particular circumstances. And we wrestled with that in doing 
these estimates.
    I think this current situation is unusual but it is unusual 
in different sorts of ways. I think the uncertainty about 
policy plays a role. And future tax policy, future regulatory 
policy, there is a good deal of uncertainty. Our own judgment 
is that the biggest uncertainty--and I think your 
businesspeople would agree with this--is about the demand for 
their products. And the extent to which the government can 
provide additional demand, we think that does help to stimulate 
activity.
    On this jobs tax credit, for example, we think one way that 
works is that firms, business even though they might not decide 
themselves at first blush to hire workers, lower costs so that 
they can lower prices and get more business in the door. And 
then that business then can indirectly spur hiring.
    Now, so it is hard to know from specific answers how things 
will play out in a complicated economy. We are relying on 
cumulative evidence, but we do not have evidence of what 
happens in recessions like this one, this deep, caused in this 
way, under this set of policy circumstances.
    Under rational expectations, we do give some weight, and 
models generally give weight to people looking ahead. How well 
they look ahead, how rational those expectations are, is one of 
the disputed issues in economics. And the models that we rely 
on don't assume that people are completely rational. But they 
do have some forward looking behavior and we have written about 
this that a temporary tax cut has less effect on spending than 
a permanent tax cut because you are trying to figure out if 
this is $100 that you have every year or $100 that you only 
have this year.
    So we have some forward looking behavior. It is not as 
rational I think as Robert Barro would support. Or as Ed 
Prescott, who you are hearing this afternoon, would support. We 
are solidly in the mainstream of the economics profession, and 
particularly the people who focus on forecasting employment 
output over the near term and we are pleased that our estimates 
of GDP and employment bracket the private forecasters that we 
have seen. But there is no guarantee that that is right. I 
would readily admit that.
    Chair Maloney. The gentleman's time has expired.
    Representative Brady. I understand. Thank you, Director.
    Chair Maloney. Mr. Snyder.
    Representative Snyder. Thank you, Ms. Maloney. Mr. 
Elmendorf, I am going to continue my discussion about banking 
because it relates to a lot of these discussions here and I 
know it does not fall under the CBO kind of thing. I agree with 
you that businesses will take the incentives over the moneys 
available; it may not be determinative of their decision.
    I met with a businessman some time, a landscaper who wanted 
to buy a small excavator. A guy who never had problems getting 
money from the bank. Couldn't get the loan. Had to lease an 
excavator. What that means is whoever makes small excavators 
did not get that product to sell. So it was one less product to 
sell, which relates back to banking and credit policies that I 
think we are talking about.
    If you have any comment--and I am prepared for you to not 
have any comment--but it seems to me that, and I will overstate 
it, that banks have become more of an adversary as 
institutions. Wonderful people at Bank of America in Little 
Rock. Every person I talk to on the phone politely enforces 
their policies. But it seems there are too many banking 
policies that work as adversary. More interested in encouraging 
policies that encourage overdrafts rather than finding Mr. 
Brady's businesspeople to loan money to because they would like 
to advance a product.
    Do you have any comments about the nature of what banking 
has become in America over the last two or three decades?
    Dr. Elmendorf. Congressman, I appreciate your confidence in 
the breadth of my knowledge, but I am afraid that I have to 
disappoint you. I actually don't know anything about overdraft 
fees or these payments--I am aware of them from my own 
statements from my bank, but I don't know of any analysis of 
them. It is not a topic that CBO has done a lot of work on, 
although there may be some that does not come to my mind 
offhand.
    I think economists believe that most businesspeople are 
mostly interested in supporting their business. And Adam Smith, 
founder in a sense of modern economics, said that it is not 
through the benevolence of the butcher that we get our meat or 
the baker that we get our bread. They are looking out for 
themselves, the way they provide for themselves is they provide 
a service or product that somebody else wants to buy. And that 
in a competitive market, leaving aside a whole variety of 
complicated and important issues, that competition induces 
people to run businesses in a way that provides value to others 
and that is how they sell their products.
    Representative Snyder. I think that makes sense, but the 
examples I gave, if I have an employee that comes to me and 
says here is how it is working. We debit your account, we hold 
the money for several days so we can make money, the 
businessman does not have it that I bought the product from, I 
don't have it.
    They stole my money for several days and then charged me 
$35 for that honor. That doesn't seem to be the kind of thing 
that Adam Smith would think was good policy for building 
America. Would you agree with that.
    Dr. Elmendorf. I think I am already too far out on a limb 
speaking for Adam Smith.
    Representative Snyder. I did not know him.
    Dr. Elmendorf. Nor I. I have been to where he is buried in 
Edinburgh, Scotland. An interesting place. The issue for banks, 
seriously, is that they need to make a profit like other 
businesses, and there are different ways, different 
combinations of interest rates they can charge, interest they 
can pay on accounts, and fees for other services. And I just do 
not know how those decisions are made or how they really evolve 
over time. It is not something I have looked into.
    But I think in some ways one might think about the overall 
profit that banks make. Might also of think about how they do. 
Whether they are doing it by pricing certain kinds of services 
in certain ways. So I think the issue you raised is of how they 
are doing it, but the broader issue is do you think they are 
making too much money and how would one judge that?
    And the last few years, of course, a lot of banks have 
taken very substantial losses. Given the losses on the loans, 
the interest that they are paying to customers on their bank 
accounts, interest that they are charging on new loans, a lot 
of banks have been in trouble. So one needs to weigh that 
against the other examples you raise, cases where it seems like 
they are maybe making money in ways that seem to you 
undesirable. But we just haven't looked at that carefully.
    Representative Snyder. Can we ultimately solve our 
indebtedness if we don't grapple with the costs of health care, 
whether it is military health care, veterans health care, 
Medicare, Medicaid or Indian Health Service?
    Dr. Elmendorf. No, I don't think so, practically speaking. 
I mean, the health spending is now a large share of total 
Federal spending. It is growing more rapidly than the rest of 
spending, more rapidly than GDP, and thus more rapidly than the 
tax base. For some period of time, one could cut other spending 
or taxes enough to cover the cost of rising health care. But if 
the current rate of growth of health spending at the Federal 
level continues for decades in the future, that becomes 
increasingly untenable.
    Representative Snyder. Thank you for being here.
    Chair Maloney. Thank you. And Mr. Hinchey.
    Representative Hinchey. Well, this is always a fascinating 
discussion, and I very much appreciate you and your work. The 
circumstances we are dealing with are very complex, and I think 
that if we are going to deal with them effectively, we need to 
understand what we are dealing with.
    So fundamentally, the sort of deregulation of the financial 
industry, which began back in the mid-1990s and which generated 
that Wall Street bailout was one of the major problems that we 
had to deal with and we consistently have to deal with. The 
other things I mentioned in the first context of these 
question, the Bush tax cuts, which I understand expires now at 
end of this year. Is that true?
    Dr. Elmendorf. The 2001 and 2003 tax cuts expire at the end 
of this year.
    Representative Hinchey. The end of this year?
    Dr. Elmendorf. Right.
    Representative Hinchey. So that will be a positive thing. 
Those tax cuts are going to make some more money available, 
won't it?
    Dr. Elmendorf. The expiration of the tax cuts increases 
Federal revenue relative to extending them. Just remember our 
baseline assumes those tax cuts expire. So if Congress takes no 
action and they expire and everything else turns out just the 
way we expect, then we will have the same forecast for the 
budget deficit than we now have.
    Representative Hinchey. We will have the same?
    Dr. Elmendorf. Our baseline forecast assumes current law so 
it assumes the expiration.
    Representative Hinchey. So your baseline forecast assumes 
the elimination of these tax cuts and then the moving into 
availability more money that is going to come into the Federal 
Government from those tax cuts?
    Dr. Elmendorf. That is assumed. That is part of why the 
deficit narrows after this fiscal year.
    Representative Hinchey. That is one of the problems that we 
are dealing with. The loss of that money over this long period 
of time. The prescription drug plan and I mentioned the war in 
Iraq and all of those things are the issues that we are dealing 
with.
    Have you done--now, I assume that you make recommendations 
specifically to this Congress and to the President in some way, 
one way or another. Or at least the analysis that you create 
becomes available to them. That is the way it is.
    Dr. Elmendorf. We make no recommendations. All our analysis 
is made available to you.
    Representative Hinchey. You just provide the information 
and anybody can take advantage of the information if they want 
to?
    Dr. Elmendorf. Right.
    Representative Hinchey. Have you provided any information 
with regard to the context of the budget situation that the 
Obama administration inherited when they came into office?
    Dr. Elmendorf. I am not sure we have written it up in quite 
that way. As you know we report several times a year on the 
budget projections and one could go back to the projection we 
made before the Obama administration took office and look at 
our current projection. And we try to decompose revisions into 
those caused by legislation and those caused by evolution in 
the economy or technical factors. We haven't put those features 
together in the way that you are asking about.
    Representative Hinchey. You haven't put them together? You 
don't think it is necessary to do so or you don't think it is 
part of your responsibility?
    Dr. Elmendorf. We have been busy. We haven't had a specific 
request to do the analysis this that way. I think the 
information is out there in the document to be used.
    Representative Hinchey. I am just focusing on the title of 
your representation here today which you presented up there in 
the TV screen: The policies for increasing economic growth and 
employment in the short term. So in effect, you are making 
recommendations. You are talking about the policies that could 
come into play and should come into play.
    Dr. Elmendorf. We are analyzing policies that we know have 
been discussed in the Congress. And we are providing the 
information so you can make your choice but we don't have 
favorites among them. The omission of things from the list 
shouldn't be viewed as a negative sign or the inclusion as a 
positive sign. It is a set of policies that we thought we knew 
how to analyze.
    Representative Hinchey. You are just making the information 
available, if anybody wants to tap into it, it might be useful 
and it might be helpful.
    We know that in the productive, intelligent expenditures of 
funding can be profitable, can generate huge amounts of money. 
Now that can be done personally by individuals or can only be 
done by larger organizations including this entire country. So 
the use of the expenditures that are going to generate funding 
could be very, very profitable in terms of generating a 
stronger economy.
    We know, for example, based on one experience that for 
every dollar that you invest appropriately, internally, in the 
internal needs of the country, generates back more than a 
dollar.
    Dr. Elmendorf. Well, I think it depends on the sort of 
investment. Right? So there are good investments and bad 
investments. That is not always known until after the fact.
    Representative Hinchey. If you identify the needs and you 
invest in those needs and those needs then stimulate the kind 
of growth that you are anticipating, that generates more 
economic growth. And that is somewhat consistent, in the 
investing in infrastructure that you have here. But it is a 
very small piece. The investing in the infrastructure is 
something--like if that bill passes and was signed by the 
President, the one that passed yesterday in the Senate, that is 
going to generate a significant amount of money for this 
economy. That is going to generate jobs immediately. For 
example, in people who are doing construction. Construction 
work.
    And then flowing out of that through the investment in the 
internal needs of the country, you generate jobs immediately, 
but you also generate general economic growth through the 
expansion in a positive way of the internal needs of the 
circumstances that you have to deal with. The obligations that 
you have in order to maintain this country for a growing 
population. All of those things really need to be done, don't 
you think?
    Dr. Elmendorf. Well, again, I don't make recommendations. 
It is up to you and your colleagues Congressman to decide those 
things. Our analysis here focuses on the short term effects, 
the next few years which come principally from the hiring of 
workers to do projects, the spending that they do, and the 
additional workers get hired and so on. And we think there is 
what economists call a multiplier process of that sort.
    Over time, if the infrastructure that is built turns out to 
be useful, that will support economic activity in the future. 
It can be an investment of the sort that you are describing in 
our economic well-being down the road. The thing to keep in 
mind there is that the government borrowing, if that persists 
over a longer period of time, well, when the economy gets back 
to full employment will crowd out some private borrowing that 
would have gone to private investment. When investments by the 
Federal Government are deficit financed, one needs to weigh the 
extra public investment that has occurred and the private 
investment that does not occur indirectly in ways that are not 
so visible but will not occur as a result.
    A different approach, of course, is to do more investment 
of the sort you are describing. Paying for that through other 
spending reductions or tax increases today. In that case, then 
the trade-off is between the extra public investment and 
whatever other Federal spending is cut back or whatever private 
spending does not occur because of the tax increase. There is 
always a trade-off there in how the money is used.
    Representative Hinchey. Thank you.
    Chair Maloney. Thank you. I don't know if you read The 
Washington Post op-ed article that was written by Dr.--
professor Alan Blinder, who was supposed to be part of your 
panel on February 9th and it was canceled and he turned his 
testimony into an op-ed. And in it he addresses three major 
ways that employers may game a jobs tax credit. And I would 
like to ask a few questions about a job tax credit and the way 
it should be formulated. My colleague, Mr. Casey, and I have 
one bill, but there are numerous approaches out there.
    If you had to design a tax credit or a jobs credit, what 
would be the key parts? For example, would we target firms of a 
particular size or age? Would you include everyone? Would you 
target it?
    Dr. Elmendorf. Well, so our analysis is focused on a single 
criterion which is the cost-effectiveness in terms of number of 
full-time equivalent jobs per dollar budget cost. Other 
criteria can well matter and we have said this a number of 
times in our analysis of stimulus policies. But from that sole 
criterion of the cost-effectiveness, our judgment is that 
restricting the tax credit to smaller firms as is sometimes 
discussed, actually reduces its cost-effectiveness. Jobs 
created at big firms are good jobs too. Many small businesses 
tend to be more volatile, they tend to have rapid job growth 
and sometimes when things don't work out unfortunately large 
job declines. What that means is that any jobs that you are 
creating through the policy may be shorter lived than jobs 
created at more stable large firms.
    Chair Maloney. Our proposal covered all firms. And one way 
firms can game the credit is to both hire and fire workers. And 
our bill only allows a credit for existing firms that increase 
head counts or payroll. But Professor Blinder, in his article, 
points out that firms that slashed employment during the 
recession will not be eligible for the tax credit. Is there 
some way to reward these firms without allowing others to gain 
the credit?
    Dr. Elmendorf. I think that is very difficult. Again, in 
our analysis, only rewarding firms that increased payroll is 
more cost-effective than rewarding others but there is, as I 
mentioned earlier, a consequence that firms that have kept 
their payrolls up, sometimes struggling to do that, don't get 
rewarded then.
    I think the choice that you have is to broaden, if you 
would like, to broaden the scope of the credit to include not 
just those who increase but others. That does whittle away the 
cost-effectiveness to some extent, but may provide other 
benefits that are important. It is not an either/or thing. I 
think you can give larger credits to firms that increase 
payroll and a smaller credit to all other firms if you wanted 
to find some balance between those alternatives.
    Chair Maloney. I recently had a conversation with Professor 
Shiller, who is a critic of rational expectations and the 
author of Irrational Exuberance. And it seems to me that a lot 
of the uncertainty, especially about consumer spending, is due 
to the housing bubble, and most of the blame for the housing 
bubble can be blamed on lax regulations. There was absolutely 
no regulation of certain sectors of the housing market. In that 
case, I am certain it could have been avoided by better 
regulation.
    In the future, there is much uncertainty about the price of 
carbon and how to limit health care spending and some of the 
areas that were discussed here today and it seems that the 
House has tried to limit uncertainty. When we have come forward 
with regulation, we are basically trying to limit uncertainty. 
What is your opinion on that?
    Dr. Elmendorf. I think if, I understand you right, I agree 
that one can eliminate uncertainty by not regulating and 
sticking with it or by establishing regulations of a certain 
form and sticking with them. And I think that is absolutely 
right. Of course, the sort of regulation may have other 
effects. But in terms of the uncertainty alone, I agree that 
the key issue is establishing a policy that is then maintained.
    And so there are several ways to do that. Obviously 
adopting the House-passed legislation in various fronts would 
be one way of reducing the uncertainty. I think that is right.
    Chair Maloney. Because there was some criticism of action. 
It seems it was an effort to solve problems and to create 
certainty. My colleague, do you have further questions?
    Representative Hinchey. No.
    Chair Maloney. Well, I just would like to close by thanking 
you very much for coming today and reorganizing your schedule 
after the snowstorm. And I just would like to comment that I 
was confused by assertions made today by some of my Republican 
colleagues that unspent funds would be returned to the 
Treasury. Many of my colleagues on both the Democratic and 
Republican side have really spoken out very positively about 
how the recovery funds have provided jobs or created jobs and 
improved infrastructure in their districts.
    Your testimony today--we appreciate very much your insights 
on policies to promote growth and lower unemployment. We 
appreciate that and I hope that your comments will help 
enlighten the debate in the Senate that is taking place this 
week as they try to move forward with jobs-creation 
legislation. And we will be continuing this discussion on 
Friday when we will have members of the private sector, a panel 
of business leaders and other forecasters, come forward. We 
appreciate your public service and we appreciate you being 
here. Thank you. This meeting is adjourned.
    [Whereupon, at 1:00 p.m., the committee was adjourned.]
                       SUBMISSIONS FOR THE RECORD

 Prepared Statement of Carolyn Maloney, Chair, Joint Economic Committee
    Today's hearing continues the JEC's focus on our country's 
unemployment problem--an effort that we are intensifying this year. The 
historic one-two punch of snow a few weeks ago delayed our series a 
bit, but with today's hearing, we are getting back on track. We will be 
examining ways to help our economy recover from the Great Recession of 
2007, which was fueled by the double blow of crises in both the housing 
and financial sectors.
    Today, we welcome the Honorable Doug Elmendorf, Director of the 
Congressional Budget Office. He will give CBO's assessment of policies 
and strategies to spur job creation in the near term. On Friday, we 
will continue by hearing from business leaders and economic forecasters 
as we explore the prospects for employment growth in the coming months.
    Today's hearing is timely since the Senate plans to consider 
additional actions this week to put Americans back to work.
    Creating jobs is the top priority for Congress and for our country. 
With almost 15 million Americans out of work, it's clear that 
immediate, targeted actions are needed to spur hiring and boost 
employment.
    The questions before us are:

      How do we create jobs quickly? and
      Which policies are most efficient--which offer the most 
bang for the buck?

    This hearing will help shine a light on the specific actions 
Congress should take right now--not in some distant future.
    Just over one year ago, the current Administration took office, 
taking helm of a country suffering the worst crisis since the Great 
Depression. During the last three months of the Bush administration, we 
lost an average of 727,000 jobs per month. In contrast, during the most 
recent 3 months of the Obama administration, we lost an average of 
35,000 jobs each month.
    The trend is heading 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 
5.7 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.
    In order to bring creative ideas on job creation to Congress, I 
started the year reaching out to CEOs of Fortune 100 companies and 
leaders of small businesses. I asked these employers to share new ideas 
on ways to create jobs.
    In order to jump-start job growth, I have introduced an employer 
tax credit (co-sponsored in the Senate by my JEC colleague Bob Casey 
and my fellow New Yorker, Kristen Gillibrand). This idea was suggested 
by several of the respondents to our survey. The credit will give 
employers an incentive to hire new workers and raise wages. This will 
help workers get back on their feet, spark consumer spending, and 
brighten our economic climate.
    I welcome CBO's input about how to best design an employer tax 
credit. A recent CBO study 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. The object of this week's hearings is to get 
feedback from experts to make sure that our actions work quickly to 
create jobs.
    For example, CBO has pointed out that one of the lessons of the 
1970s employer tax credit was that many employers didn't know about the 
tax credit until they filed their tax returns--too late to affect 
hiring decisions.
    I look forward to CBO's perspective on finding solutions to the 
most pressing issue of the day: creating jobs.
                               __________
  Prepared Statement of Senator Sam Brownback, Ranking Minority Member
    Thank you Chairwoman Maloney for scheduling today's hearing on 
``The Road to Economic Recovery: Policies to Foster Job Creation and 
Continued Growth,'' and thank you Dr. Elmendorf for taking the time to 
join us this morning.
    This hearing on job creation and economic growth comes as the House 
and Senate are both considering implementing a third round of deficit 
financed stimulus aimed at combating what has, no doubt, been a very 
severe economic downturn. While I agree that the weak projected 
economic recovery is of serious concern to the U.S. and particularly to 
unemployed workers and their families, to me, the greatest threat our 
nation currently faces is a national debt that has spiraled out of 
control.
    To-date, the federal government has enacted more than $1 trillion 
in deficit-financed stimulus spending, and on top of that, the Federal 
Reserve and Treasury Department have extended multiple trillions of 
dollars in liquidity and financial backing. The impact of stimulus 
spending to date is highly uncertain. As we will hear from Dr. 
Elmendorf, the expected effects on output and employment of further 
proposed stimulus measures are also very uncertain. However, the CBO 
does note that many of the proposed stimulus measures, such as spending 
on infrastructure and aid to the states will not have any substantial 
impact on the economy until 2011.
    With two quarters of economic growth already in place through the 
end of 2009, additional stimulus support in 2011 could potentially 
prove detrimental to a recovery already significantly underway in 2011. 
Of the proposed stimulus measures which CBO deems to have substantial 
impacts beginning in 2010, only one policy--increasing aid to the 
unemployed--has an average expected multiplier effect of one or higher. 
All the other policies were estimated to have an average multiplier 
effect of between 0.60 and 0.85, meaning that each dollar of spending 
would only generate between sixty cents and eighty-five cents in 
additional output.
    Furthermore, the estimated cost per new full-time equivalent job 
created by these policies would be extremely high--ranging from $74,000 
for increased aid to the unemployed to $182,000 for investment 
expensing. In my view, these estimates indicate that additional 
stimulus spending is not worth the added debt and lower future incomes 
that CBO warns will result if offsetting actions are not taken to 
reverse the accumulation of additional government debt.
    Under the President's proposed budget, our publicly held national 
debt will nearly double from 40% of GDP in 2008 to 75% of GDP in 2018. 
And the total U.S. debt will surpass 90% of GDP this very year. 
Surpassing the 90% total debt threshold is a troubling reality: a 
recent study by economists Reinhart and Rogoff found that a total debt 
level of 90% of GDP has historically served as a tipping point for 
reduced economic growth.
    If the U.S. does not stop spending beyond its means and fails to 
address long-run imbalances contained in its unfunded entitlement 
promises, the often hailed U.S. economic powerhouse could quickly lose 
its status as an engine of growth and leave younger and future 
generations with a lower standard of living. Our projected level of 
debt has the potential to cause serious consequences to growth: failure 
to confront our current and long-run budget deficits and rising 
national debt could cause a significant rise in interest rates that 
will crowd out private investment, raise future borrowing costs and 
interest payments on the debt, and potentially force policymakers to 
enact prohibitively high tax rates that could spur a downward spiral in 
output and the U.S. standard of living.
    These threats are not just theoretical--they are very real. The 
recent crisis of confidence in Greece is a clear example of the 
potential debt threat facing the U.S. The only difference is that no 
one will be there to bail out the U.S. if financiers of our debt lose 
confidence in the U.S.'s ability to repay it.
    Rather than contemplate ways in which the U.S. can further increase 
our debt in attempts to alleviate the current economic downturn, I 
believe we need to change gears and get serious about addressing our 
out-of-control budget-deficits and exploding national debt that 
threaten to cause our generation to become the first in history to 
leave our children and grandchildren with a worse future.
    Finally, I'd like to note for my colleagues that Mr. Brady and I 
will be hosting an event at 1 p.m. this afternoon in the Capitol 
Visitor Center titled ``RETURN TO PROSPERITY: CREATING TIIE STRONGEST 
ECONOMY OF THE 21ST CENTURY.'' We have four outstanding speakers 
including 2004 Nobel Prize winner Dr. Edward Prescott, noted monetary 
economist Dr. Allan Meltzer, former OMB Director and Federal Trade 
Commission Chairman Jim Miller, and President of the Institute for 
Research on the Economics of Taxation Steve Entin. If members want to 
hear how to get the economy back on track by returning government to 
its proper role and through sound monetary policy, all are invited to 
join us--as is the public.
                               __________
            Prepared Statement of Representative Kevin Brady
    I am pleased to join in welcoming Director Elmendorf before the 
Committee this afternoon.
    Given the depth and length of this recession, economists would 
normally expect a sharp V-shaped recovery with a strong rebound in 
output and employment. However, this has not been the case so far.
    Real GDP grew at an annualized rate of 2.2 percent in the third 
quarter of 2009. While the real GDP growth rate accelerated to 5.7 
percent in the fourth quarter, more than 57 percent of the growth in 
the fourth quarter was due to a one-off restocking of inventory. The 
fourth quarter spike reveals how deeply businesses emptied their 
shelves last year but gives no indication they are confident in 
bringing workers back or hiring new ones. Real final sales, which are a 
better measure of the underlying trend in real GDP than the headline 
number, rose by only 2.2 percent in the fourth quarter of 2009.
    This is consistent with the sluggish economic growth forecasted for 
the next two years. The Congressional Budget Office (CBO) forecasts 
that real GDP will grow by 2.2 percent in 2010 and 1.9 percent in 2011. 
Likewise, the February Blue Chip consensus of private economists 
forecasts that real GDP will grow by 3.0 percent in 2010 and 3.1 
percent in 2011, somewhat faster than CBO, but still slow when compared 
with normal growth after a severe recession.
    Weak economic growth means that job creation will be anemic and the 
unemployment rate will remain elevated for a number of years. Indeed, 
the CBO forecasts that the average unemployment rate will be 10.1 
percent in 2010 and 9.5 percent in 2011. Again, the February Blue Chip 
consensus is somewhat more optimistic than the CBO, but not much, 
forecasting average unemployment rates of 10.0 percent in 2010 and 9.2 
percent in 2011.
    While January's decline in the unemployment rate to 9.7 percent is 
encouraging, most of the improvement is attributable to an increase in 
the number part-time jobs reported by households. At the same time, 
payroll employment fell by another 20,000 jobs. This divergence between 
the household and establishment surveys is unusual. We must await 
future employment reports to see how this inconsistency between the two 
surveys is resolved.
    Let's compare the recovery after the recession that began in 
December 2007 with the recovery after the August 1981 to November 1982 
recession, which is similar in depth and length to the recent 
recession. The National Bureau of Economic Research has not yet 
determined the official bottom for the recent recession. However, 
industrial production hit its bottom in June 2009, and real GDP began 
to grow in July 2009. So, until the National Bureau of Economic 
Research makes its official determination, let's assume that the bottom 
of the recent recession occurred in June 2009.
    Comparing the Reagan and Obama recoveries so far, we find:

      The average annualized rate of real GDP growth was 7.2 
percent in the first two full quarters of the Reagan recovery compared 
with 4.0 percent in the first two full quarters of the Obama recovery.
      During the first seven months of the Reagan recovery, 
payroll employment had increased by 1.2 million jobs, while during the 
first seven months of the Obama recovery payroll employment fell by 1.1 
million jobs.

    Why are both real GDP growth and job creation so slow after this 
recession? Unfortunately for American workers and their families, the 
current economic recovery is fighting the head winds of excessive 
government spending and debt, the prospect of higher income taxes in 
the near future, and uncertainty over the future of health care and 
``cap and trade'' legislation.
    The expectations among entrepreneurs and business leaders for new 
costly and intrusive regulations and higher taxes on income, capital 
gains, and dividends starting in 2011 that will continue rising to 
service the explosion of federal debt under the Obama budget are the 
reason why firms, especially small businesses, are neither investing 
nor hiring new workers.
    Congress should not waste taxpayer dollars on another stimulus 
bill, deceptively packaged as a ``jobs bill.'' Instead of pushing 
controversial, costly, and job-killing healthcare and ``cap and trade'' 
bills, Washington should reduce federal spending from President Obama's 
23 percent of GDP to no more than the post-war average of 19.5 percent 
of GDP over the next five years. Recently, Moody's warned the United 
States that its reckless fiscal course threatens its triple-A credit 
rating. Congressional action to reduce and then eliminate the federal 
budget deficit through spending reductions and entitlement reforms will 
do more to increase business confidence and create new jobs than any 
``jobs bill.''
    I look forward to hearing today's testimony.


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