[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
__________
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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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