[Joint House and Senate Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 113-4
STATE OF THE U.S. ECONOMY: WHY HAVE ECONOMIC GROWTH AND JOB CREATION
REMAINED WEAK, AND WHAT SHOULD CONGRESS DO TO BOOST THEM?
=======================================================================
HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
FEBRUARY 28, 2013
__________
Printed for the use of the Joint Economic Committee
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JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
HOUSE OF REPRESENTATIVES SENATE
Kevin Brady, Texas, Chairman Amy Klobuchar, Minnesota, Vice
John Campbell, California Chair
Sean P. Duffy, Wisconsin Robert P. Casey, Jr., Pennsylvania
Justin Amash, Michigan Mark R. Warner, Virginia
Erik Paulsen, Minnesota Bernard Sanders, Vermont
Richard L. Hanna, New York Christopher Murphy, Connecticut
Carolyn B. Maloney, New York Martin Heinrich, New Mexico
Loretta Sanchez, California Dan Coats, Indiana
Elijah E. Cummings, Maryland Mike Lee, Utah
John Delaney, Maryland Roger F. Wicker, Mississippi
Pat Toomey, Pennsylvania
Robert P. O'Quinn, Executive Director
Gail Cohen, Acting Democratic Staff Director
C O N T E N T S
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Opening Statements of Members
Hon. Kevin Brady, Chairman, a U.S. Representative from Texas..... 1
Hon. Amy Klobuchar, Vice Chair, a U.S. Senator from Minnesota.... 3
Witnesses
Hon. Michael Boskin, former Chairman of the Council of Economic
Advisers, Senior Fellow at the Hoover Institution and the T.M.
Friedman Professor of Economics at Stanford University,
Stanford, CA................................................... 6
Hon. Austan Goolsbee, former Chairman of the Council of Economic
Advisers, the Robert P. Gwinn Professor of Economics,
University of Chicago, Booth School of Business, Chicago, IL... 9
Submissions for the Record
Prepared statement of Chairman Brady............................. 36
Chart titled ``5.5% Growth Rate Needed Over Next 4 Years''....... 38
Chart titled ``How Does the Obama Jobs Recovery Stack Up?''...... 39
Chart titled ``Obama Recovery Dead Last for Growth''............. 40
Prepared statement of Hon. Michael Boskin........................ 41
Prepared statement of Hon. Austan Goolsbee....................... 59
Questions submitted to Hon. Austan Goolsbee from Senator Martin
Heinrich....................................................... 62
Responses from Hon. Austan Goolsbee to questions Posed by Senator
Martin Heinrich................................................ 64
STATE OF THE U.S. ECONOMY: WHY HAVE ECONOMIC GROWTH AND JOB CREATION
REMAINED WEAK, AND WHAT SHOULD CONGRESS DO TO BOOST THEM?
----------
THURSDAY, FEBRUARY 28, 2013
Congress of the United States,
Joint Economic Committee,
Washington, DC.
The committee met, pursuant to call, at 9:59 a.m. in Room
216 of the Hart Senate Office Building, the Honorable Kevin
Brady, Chairman, presiding.
Representatives present: Brady, Campbell, Duffy, Amash,
Paulsen, Hanna, Maloney, Cummings, and Delaney.
Senators present: Klobuchar, Murphy, Heinrich, Coats, and
Lee.
Staff present: Conor Carroll, Gail Cohen, Christina
Forsberg, Connie Foster, Colleen Healy, Patrick Miller, Robert
O'Quinn, Jeff Schlagenhauf, and Annabelle Tamerjan.
OPENING STATEMENT OF HON. KEVIN BRADY, CHAIRMAN, A U.S.
REPRESENTATIVE FROM TEXAS
Chairman Brady. Good morning, everyone. I would like to
call to order the first meeting of the Joint Economic Committee
for the 113th Congress.
The Employment Act of 1946 established the Joint Economic
Committee to analyze economic issues and make policy
recommendations to Congress. As the 37th Chairman of the
Committee, I want to congratulate Senator Amy Klobuchar on
becoming Vice Chair, and welcome both new and returning Members
to the Committee.
I would like to introduce our new Members: Representative
Erik Paulsen of Minnesota, Representative Richard Hanna of New
York, Senator Roger Wicker of Mississippi, Senator Christopher
Murphy of Connecticut, Senator Martin Heinrich of New Mexico,
and Representative John Delaney of Maryland.
While the United States confronts many problems, our most
vexing economic challenge is the growth gap--and how we close
it. The growth gap between this economic recovery and other
recoveries is significant and intensifies our federal spending
and debt problems.
The growth gap has two interrelated aspects:
First, by objective economic measures the recovery that
began in June 2009 remains the weakest among recoveries since
World War II.
Second, according to many economists, our economy's
potential to grow over time has slowed. If true, the average
rates of growth and private job creation during this recovery
of 2.1 percent annually and 175,000 new jobs per month,
respectively, are about as good as our economy will ever
perform in the future. And that is unacceptable.
Therefore, it is appropriate that the first hearing of this
Committee should address this growth gap. Why have economic
growth and job creation remained weak? And what should Congress
do to boost them?
The anemic nature of the current recovery is indisputable.
During the current recovery, real GDP increased by 7.5
percent in 3\1/2\ years. By contrast, average real GDP growth
during the same period in all the post-war recoveries was 17.5
percent. Today's recovery is less than half as strong as the
average.
Real GDP would have to grow at an annual rate of 5.5
percent in each of the next four years merely to catch up with
an average recovery by the end of President Obama's second
term. That would be slightly higher than the 5.4 percent annual
rate that President Reagan achieved during the first three-and-
a-half years of the Reagan recovery.
Private payroll employment--that is, jobs along Main
Street--have increased by only 5.7 percent since its cycle low.
Had this recovery been merely average, private payroll
employment would have increased by 9.4 percent. The growth gap
means the United States should have 3.9 million more private
jobs today than it does.
Equally troubling is mounting evidence that the annual
growth rate for potential real GDP in the future has fallen
dramatically. In its most recent ``Budget and Economic
Outlook,'' the Congressional Budget Office cut its estimate of
the potential real GDP growth rate to 2.3 percent, one
percentage point below its average since 1950.
One percentage point may not sound like much. However, the
real economy doubles in 22 years at a 3.3 percent growth rate.
But at that lower, smaller rate, it takes 31.9 years to double,
almost a decade longer.
The prospect of a ``new normal'' for America's economy in
which our future economic growth permanently slows by one-third
should be a red flag for all Americans.
During this Congress, the Committee will, through hearings
and research, investigate the growth gap and how to close it.
No doubt some of the growth gap may be due to demographic
factors that are not so easily amenable to economic policy;
however, even a cursory review of recent history strongly
suggests that economic and fiscal policies have played the
dominant role.
To understand how these policies affect performance, let us
compare the generally pro-growth policies and the superior
performance of the U.S. economy during the 1980s and 1990s with
the generally slow growth policies and the lackluster
performance during the last decade.
During the Great Moderation under both Republican and
Democratic Presidents and Congresses and Republican,
Democratic, and split control, the Federal Government generally
pursued pro-growth economic policies and achieved outstanding
results:
The size of the Federal Government, as measured by federal
spending, gradually shrank relative to the size of the economy.
Marginal income tax rates fell. Policymakers focused on
reducing the after-tax cost of capital for new business
investment, and jobs grew.
Monetary policy became increasingly rules-based and
predictable. Ignoring the employment half of its dual mandate,
the Federal Reserve focused on price stability.
The regulatory burden on businesses and households
declined.
And the United States led the world in liberalizing
international trade and investment.
Beginning in 2001 under both Republican and Democratic
Presidents and Congresses with Republican, Democratic, and
split control, the Federal Government reversed course--in large
part due to the terrorist attacks of 9/11--and the results have
been disappointing:
The size of the Federal Government has grown substantially
relative to the size of the economy, soaring to 25.2 percent of
GDP and remaining elevated at an estimated 22.2 percent of GDP
during the current fiscal year.
Marginal income tax rates were first decreased, then
increased. In recent years, policymakers have primarily focused
on the ``fairness'' of the tax system instead of its effects on
growth.
Monetary policy has become discretionary once again. The
Federal Reserve has justified its extraordinary actions based
upon the employment half of its dual mandate.
The regulatory burdens on businesses and households has
increased, generating uncertainty and inhibiting new business
investment.
The United States has fallen behind its major trading
partners in liberalizing international trade and investment.
Today is the perfect time to focus on the growth gap and
what we should do about it. Given the historical and legal
relationship between the Joint Economic Committee and the
Council of Economic Advisers, it is appropriate that two of the
most distinguished former Chairmen, Dr. Michael Boskin and Dr.
Austan Goolsbee, are with us today as witnesses.
With that, I look forward to their testimony.
I recognize Vice Chairman Klobuchar for her comments.
[The prepared statement of Chairman Brady appears in the
Submissions for the Record on page 36.]
[Chart titled ``5.5% Growth Rate Needed Over Next 4 Years''
appears in the Submissions for the Record on page 38.]
[Chart titled ``How Does the Obama Jobs Recovery Stack
Up?'' appears in the Submissions for the Record on page 39.]
[Chart titled ``Obama Recovery Dead Last for Growth''
appears in the Submissions for the Record on page 40.]
OPENING STATEMENT OF HON. AMY KLOBUCHAR, VICE CHAIR, A U.S.
SENATOR FROM MINNESOTA
Vice Chair Klobuchar. Thank you very much, Chairman Brady.
It is an honor to be here in my first meeting as the Vice Chair
of the Joint Economic Committee, and joined by many great
colleagues from both the House and the Senate.
I look forward to working as a committee on some very good
discussions and hopefully solutions to the budget and the
economic problems facing our country.
I also want to thank our two witnesses, Dr. Boskin and Dr.
Goolsbee. It is a great way to start this hearing with both of
you having been former Chairmen of the Council of Economic
Advisers.
We are gathered here at a time, as we know, when Congress'
energy is focused on the Sequestration and the solutions to
that. While that is not the focus of today's hearing, in many
ways it's a good starting point for our discussion, not just
because of its economic consequences but because it underscores
the critical need for thoughtful, balanced, bipartisan policies
that address our debt challenges without undermining growth.
My hope for today is that we can explore some of the bigger
picture ideas for moving our economy forward, while discussing
specific policies for strengthening the fundamentals, the core
economic engines like entrepreneurship and innovation.
As we examine the current economic landscape, I think it is
important to remember where we were just a few years ago. I sat
through many hearings in this very room as we would hear the
unemployment numbers, as we would hear from economists the
difficult situation our country was in.
I think back to the first half of 2009 when our country was
losing jobs at a rate of nearly 700,000 a month. That is
literally equal to the entire population of Vermont.
Four years later, we are adding jobs. Not as many as we
would like, but we have still seen 35 straight months of
private-sector job growth. In that time, more than 6 million
private-sector jobs have been created.
We have also seen promising signs of growth recently in
critical industries like housing. Take the January numbers for
new-home sales, they hit their highest rate in 4\1/2\ years, up
nearly 16 percent compared to December.
Exporting has been another bright spot, with a total value
of American exports reaching a record of $2.2 trillion last
year.
I personally spent last week in 30-below-windchill weather
around Minnesota visiting 30 different businesses, saw
warehouses full of big crates that said ``ship to China,'' and
saw first-hand in our State where we are down to 5.5 percent
unemployment what we are seeing with this kind of private-
sector job growth, which is based so much on exports in our
State, as well as a skilled workforce.
These are positive signs, but it is clear that there is so
much more to be done. There are still more than 12 million
Americans out of work, and there is no question that we have
much more work to do.
Our focus needs to be on policies that spark job creation
in the short-term, while laying the groundwork for prosperity
in the long term. Because if we've learned anything from the
economic turmoil of the last few years, it's that America can
no longer just afford to be a country that churns money. Our
financial industry is important, but it cannot be the basis of
our economy.
We need to be a country that makes stuff, that invents
things, that exports to the world. We need to be working to
bring our country back to the brass tacks of innovation and
entrepreneurship.
I again mention that I come from a State--I will try not,
Chairman Brady, to mention my State too much if you don't
mention Texas too much--but my State brought the world
everything from the Pacemaker to the Post-It Note. We're second
per capita for Fortune 500 companies. So I have a model that I
look at when I look at how we were able to keep our head above
water during this downturn.
And the model is really about innovation and exports. But
this just isn't a Minnesota story, it's an American story. I
believe that innovation is the engine that has kept our country
moving forward since its earlier days.
So the things I think we need to focus on with this
Committee, as we go forward, and working with Chairman Brady,
and I hope we can be as bipartisan as possible--we're going to
have different views, but as long as we get the right
information from our witnesses I think we can come together on
a number of hearings.
First of all, our debt. We need to bring our debt down in a
balanced way. I personally think that there were some very good
things coming out of the Simpson-Bowles Commission and the work
that is being done by many on that balanced approach to
bringing the debt down. I don't think we can put our heads in
the sand, and certainly not when we're facing Sequestration.
Secondly, education. I think we should double our number of
STEM schools. I think there is so much more that we can do to
get our kids to get into science, engineering, technology, and
math, with a better focus on these two-year degrees.
We have so many companies right now in our State that are
looking for welders, and tool-and-die, and these are jobs that
are there right now that are going unfilled because we have
failed to train students in those areas where we have jobs that
are good-paying jobs.
Exports, I mentioned. The President's goal of doubling the
number of exports within this five-year period is attainable.
Regulations. Looking at keeping very important safety
regulations in place, but going industry by industry and saying
what can we do to make things work better so we can compete on
an international basis.
Reforming our Tax Code so it provides greater clarity and
consistency, and doing something about immigration reform which
I think is very doable given the bipartisan work that's going
on in the United States Senate.
I am excited about the coming year on the Joint Economic
Committee and working with Chairman Brady and the rest of my
colleagues. I look forward to this hearing.
Thank you, very much, Mr. Chairman.
Chairman Brady. Thank you, Vice Chairman.
As this time I would like to welcome and introduce our
distinguished witnesses for today's hearing.
Dr. Michael Boskin is a Senior Fellow at the Hoover
Institution and the T.M. Friedman Professor of Economics at
Stanford. Previously Dr. Boskin served as Chairman of the
President's Council of Economic Advisers from 1989 to 1993, at
which point the Independent Council for Excellence in
Government rated the CEA as one of the five most respected
agencies in the Federal Government.
Also, Dr. Boskin chaired the highly influential blue ribbon
Commission on Consumer Price Index, whose report has
transformed the way government statistical agencies around the
world measure inflation, GDP, and productivity.
Dr. Boskin is author of more than 150 books and articles
and is internationally recognized for his research, and has
received the Adam Smith Prize for outstanding contributions to
economics in 1998.
Dr. Boskin received his Bachelor's, Masters, and Ph.D. at
California-Berkeley.
Next I would like to introduce The Honorable Austan
Goolsbee. He is currently the Robert P. Gwinn Professor of
Economics at the University of Chicago, the Booth School of
Business.
Previously he served on the Council of Economic Advisers
from 2009 to 2011, and led it as Chairman from September 2010
to August 2011. He writes monthly for The Wall Street Journal,
and is a contributor and respected economic analyst for ABC
News.
Dr. Goolsbee has also spent time as a Special Consultant
for Internet Policy for the Antitrust Division of the
Department of Justice, and was the lead editor for the Journal
of Law and Economics for several years.
Dr. Goolsbee earned his Bachelor's and Master's Degrees in
Economics from Yale University, and graduated with a Doctorate
in Economics from the Massachusetts Institute of Technology.
Well clearly we have highly respected witnesses who we hope
will bring insight. In reading your testimony previously, there
is an awful lot of wisdom to be tapped today as we look at
these issues.
So, Professor Boskin, Professor Goolsbee, thank you for
your willingness to come before the Committee. We look forward
to hearing your testimony and expert opinion.
Dr. Boskin, you are recognized for five minutes for your
statement.
STATEMENT OF HON. MICHAEL BOSKIN, FORMER CHAIRMAN OF THE
COUNCIL OF ECONOMIC ADVISERS, SENIOR FELLOW AT THE HOOVER
INSTITUTION AND THE T.M. FRIEDMAN PROFESSOR OF ECONOMICS AT
STANFORD UNIVERSITY, STANFORD, CA
Dr. Boskin. Thank you, Chairman Brady, Vice Chair
Klobuchar, Distinguished Members of the Committee:
I have had the privilege of testifying before this
Committee and working with it since the late 1970s when Senator
Bentsen, and a remarkable bipartisan effort of 19 of 20 Members
brought the supply side of the economy to the attention of
Congress, amid the concerns there, in addition to the demand
side. I obviously testified often in my four years as Bush,
Senior's CEA Chairman when we were cleaning up two financial
crises--the Savings and Loans and the Money Center Banks being
insolvent. We had the first Iraq War, an oil shock, and a
recession. So, not totally dissimilar to, although not as large
a scale, as what we went through recently.
Obviously we had a horrific recession following the
collapse of the housing market and the bursting of the housing
bubble and the financial crisis. The recovery, unfortunately,
has been anemic.
Compared to previous recoveries from deep recessions, GDP
is growing at about 40 percent as rapidly, and employment only
at 20 percent as rapidly. This long period of sub-par growth is
as damaging to lost incomes and employment opportunities and
skills as the deep and severe recession.
The modestly good news is, despite the fact the economy has
basically been flat lately and most people expect this quarter
to be only slightly positive, most forecasters expect the
economy to pick up a little later this year and into next.
The Administration is particularly at the high end of that
forecast, as it has been for some time. Hopefully they are
right, but the Blue Chip is looking at 2.0 percent or a little
higher growth this year heading toward 3 percent next. That
would still be way below what the economy should be doing
recovering from such a deep recession.
There are many, many risks the economy faces, from problems
in Europe, to fiscal instability, to geopolitical issues,
Iranian oil for example, continued deleveraging of the private
sector, additional regulation raising costs and uncertainty
that has yet to be written and enforced and so on. All of
those--and the uncertainty about the Fed's exit from its
monetary policy.
But there are a few good signs:
The fiscal drag of state and local governments from their
tax hikes and spending cuts has probably peaked. The technology
revolution in fracking is bringing energy costs down in the
United States, and is promoting jobs along a wide array of our
states.
Housing seems to be rebounding, and there's lots of cash
sitting on the sidelines on household and corporate balance
sheets waiting for an improved economic environment and an
improved policy environment.
I believe that the early policies, the early Fed actions,
the automatic stabilizers in the Tax Code, and making capital
available to the banks, as poorly as it was done, was essential
to preventing the recession being even worse. But much of the
policy since then has not been nearly as effective as it could
have been.
I detail that in my testimony, but in my own view the
temporary spending increases, inframarginal tax cuts, the
attempted social re-engineering of wide swaths of the economy,
from energy to health care to financial services, whatever
their intrinsic benefits and costs, created a lot of
uncertainty, delayed investment, and hiring.
So I think there's lots of reasons to believe that we have
a different course of action as likely required now. In my
opinion, it starts with a strong, credible commitment to
serious fiscal consolidation, phased in gradually as the
economy recovers; difficult to reverse absent a major emergency
such as war or recession. That means it's got to be permanent
and structural and likely requires toughened budget rules,
process rules on spending and debt.
Pro-growth tax reform, lower rates on a broader base, which
almost all economists agree is desirable, would be an important
complement to that effort.
In the long run, we need to get entitlement cost growth
under control in a manner that strengthens and preserves our
key entitlement programs, but prevents them from bankrupting
the rest of the private economy and the rest of the government.
Simply put, we are going to have too many people collecting
too large of benefits--they're not all that generous at the
bottom, but we should be trimming them at the top. And we
should be slowing their real increase per-beneficiary through a
variety of structural reforms.
I have calculated that the harm from allowing the projected
debt to grow--we hear it is unsustainable. That's too
antiseptic a term. It's dangerous. It really would lead, by all
the basic studies that have been done of this, to a generation
of lost income for our children and grandchildren on the order
of 20 to 30 percent lower than it might have been. So we need
to get the debt/GDP curve heading down in the near future as
the economy recovers, and continuously.
I think that there should be, therefore, in addition to
those two things--medium-term fiscal consolidation and tax
reform--long-run entitlement reforms that minimize work and
saving disincentives while reducing subsidies to the well-off.
Budget reform. Making programs more effective. Vice Chair
Klobuchar pointed to some of these issues about jobs going
vacant for lack of training. We have 46 job-training programs
in the Federal Government. President Obama added another one
for green energy jobs. It didn't work very well. The Labor
Department's Inspector General said it should be shut down.
Most of those programs don't even have metrics. We need to
take those 46 programs, eliminate the bad ones, consolidate the
hopeful ones, modernize them, and get people trained for real
jobs. That's something Republicans and Democrats should agree
to. It's conservative and liberal. It will help more people at
lower cost.
There are many examples of that throughout the government.
I would be happy to take questions on that.
In terms of monetary and fiscal policy, they need to be far
more predictable and permanent, what I call Rules-based. Even
if it's not following a specific, clear rule, it's working as
if it is roughly doing so. And any time it deviates from it,
there's clearly an emergency reason, and so on.
You could start by eliminating the endless use of temporary
tax rules and new spending programs that leave everybody
uncertain about whether they will be renewed. Now that
gerryrigs all the incentives in the economy.
Of course in addition to that, the human capital policies,
education as well as job training reform, sensible regulatory
reform, and I might add trade liberalization, which I'm glad to
see the President has begun starting to talk about in some
dimensions, would be an important complement to strengthen
growth. But the focus should be on medium-term fiscal
consolidation primarily on the spending side as the economy
recovers.
The research shows successful fiscal consolidations that do
not cause recessions and succeed in consolidating the budget
have $5 or $6 of spending cuts for every dollar of tax
increase.
So an economically balanced fiscal consolidation is
primarily on the spending side; it's not 50-50.
Thank you. I wish the Committee good luck and tremendous
progress under the new Chair and Vice Chair, and I look forward
to working with you and to hearing your questions.
[The prepared statement of Hon. Michael Boskin appears in
the Submissions for the Record on page 41.]
Chairman Brady. Great. Thank you, Dr. Boskin.
Dr. Goolsbee.
STATEMENT OF HON. AUSTAN GOOLSBEE, FORMER CHAIRMAN OF THE
COUNCIL OF ECONOMIC ADVISERS, THE ROBERT P. GWINN PROFESSOR OF
ECONOMICS, UNIVERSITY OF CHICAGO, BOOTH SCHOOL OF BUSINESS,
CHICAGO, IL
Dr. Goolsbee. Thank you, Chairman Brady and Vice Chair
Klobuchar. It's a great honor, and I appreciate the invitation.
I think the central question that you have raised here
today fits in the tradition of the Joint Economic Committee
where they have had a long history of Democrats and Republicans
working together, the House and the Senate working together,
and I think there are a lot of things that Dr. Boskin and I can
agree on, not the least of which is our dress code today.
[Laughter.]
We did not coordinate, but if the questioning gets
difficult I'm simply going to try to look like I were him and
maybe direct the questions away from myself.
The central question is: Why is the economy not growing
faster after a deep recession?
Now before--and I think there are three primary reasons for
that, but before I state those reasons I would just like to
make one factual observation. Which is: This is not the weakest
recovery in recent memory. This is not even the weakest
recovery of the last two recoveries.
The 2001 recovery was substantially slower than this one.
What is different about this one is that it is not V-Shaped in
the way, as Professor Boskin points out in his testimony, it
was after the deep recessions of 1975 and 1982.
And I think there are three reasons why that is.
The first is, this Recession came from the popping of a
bubble, unlike the 1982 and 1975 recessions, and popping
bubbles are much more difficult to escape from the grips of
than are the others.
So in 1982, my dear friend and mentor, Paul Volcker, rose--
the interest rates rose to over 20 percent on mortgages.
Economic activity slowed dramatically. As interest rates came
down, that pent-up demand could come right back. The
fundamental necessity for a V-Shaped recovery is not having to
do a lot of structural transformation of what the economy is
doing, but being able to go back to what you were doing before.
There was a joke headline in The Onion Newspaper: ``Furious
Nation Demands New Bubble To Invest In To Restore Prosperity.''
Let us not try to re-enact that Onion headline. So it is
quite clear, looking at the data, as we highlighted in the 2011
Economic Report of the President when I was serving as the
Chair, that the expansion of the 2000s was dramatically
outsized in the contribution of housing construction and
personal consumer spending as the key drivers of growth. It was
way underweighted compared to past recoveries and expansions in
the U.S., and compared to other expansions around the world in
business investment and export growth.
We must shift the economy away--we cannot go back to the
building of residential construction and personal consumption
spending faster than income growth as the two drivers of
growth. Those were fueled by a bubble, and they aren't coming
back in the way that they were then. So that has taken some
time.
As to what that means for the job market, I think it's not
a secret that the reason the--the performance of the job market
is tied to how much faster growth is than productivity.
Productivity of our workers grows about 2 percent a year. So
any time growth gets above 2 percent in the economy, you have
to hire workers or add hours to meet that kind of demand. And
if growth remains in the 2 percent range or below, the job
market is going to remain relatively stagnant.
Now as Professor Boskin said, the good news is that the
forecasts are that growth would get back up in the 2.5 percent
or higher range in the immediate term. I fear that the impact
of the Sequester would cut a half to one percentage point off
the growth rate, and that it would again put us back into the
circumstance in which growth is not fast enough to shrink the
unemployment rate; that instead of unemployment shrinking,
unemployment would be rising again.
I think the second factor that has made this not a V-Shaped
recovery is that we're overcoming the worst housing market
really in U.S. history. If you look at the research of Ed
Liemer or others, housing and construction are the most
cyclical component of economy. They have a much outsized
importance in accounting for the short-run business cycle.
So the normal coming out of a recession is at least a third
related to new construction. We got over-built in the bubble
with 6 million vacant homes. Construction fell close to
nothing. It's quite understandable why the overall growth rate
of the economy has not come back in the short run as rapidly as
in past big recession because we couldn't go back to getting
anything from construction.
The good news is that the long nightmare of housing in
many, if not most, markets appears to have turned the corner.
So we may start to get some contribution from that.
Third, the evidence is that financial crises and big
deleveraging take a major toll on growth. The Economic Report
of the President from this year compares the U.S. experience in
its labor market to the experience in other countries that have
had major financial crises, and actually the U.S. appears to be
doing a fair bit better than average for that circumstance.
Now all of those are just to say it's not fast enough, but
I think it is understandable why it wasn't V-Shaped, why it
looks more like the 2001 recovery than it does the 1984
recovery.
Lastly, I would like to say two things that I believe the
data do not suggest are predominantly to explain why growth has
not been faster.
The first is, I do not believe the data supports the view
that regulation or policy changes over the last three years are
the predominant reason why growth has not been a V-Shaped
recovery.
If you look at things like the accumulation of money on the
balance sheet of corporations and a lack of willingness to
invest, that pervades all the advanced economies of the world.
That is happening in countries that did not pass a health plan,
that have not had any changes of their regulatory regime. And
so anybody who is arguing that that regulation is the driver
has to explain why the pattern is consistent across these other
countries.
Second, the way economists normally measure the impact of
regulation on growth when they say, for example, that the 1977
Clean Air Act affected manufacturing, they compare counties
where it applies strictly to counties where it doesn't. They
compare those industries and companies that are affected to
those that are not, by size, by sector, et cetera.
If you do that now, there is little evidence that those
regulatory policies are the primary driver.
The second factor that I believe the evidence does not
suggest is the cause is the short-run deficit. Most of the
short-run deficit has been caused by the downturn, not caused
the downturn.
And while I one hundred percent agree and have for a long
time been an advocate of a rational, long-term fiscal
consolidation, I think you need only look at the GDP evidence
in the United States in the fourth quarter, or in Europe where
they're engaged in dramatic austerity, to realize that there is
a tension between trying to cut too much in the immediate term
and the growth rate.
I think the normal channels by which fiscal contractions
can be expansionary go through the interest rate; that you
satisfy investors, make them more confident in the plan so the
long-run interest rate comes down.
We are facing epochally low interest rates. We have bumped
against the zero lower bound multiple times. It is hard for me
to understand the mechanism by which fiscal contractions would
be expansionary in this environment.
I believe that there are many things that we can agree on,
whether on long-run fiscal consolidation, on investing in
training and innovation as the keys to growth. I hope we do not
do something that would be a mistake in the short run on a
purpose that is something other than re-establishing a growth
strategy.
Thank you.
[The prepared statement of Hon. Austan Goolsbee appears in
the Submissions for the Record on page 59.]
Chairman Brady. Thank you, Dr. Goolsbee. Thank you both for
the testimony.
Dr. Boskin, as we look at the growth gap, ways to close it,
risks to our economy, and more importantly solutions, you
mentioned just recently the generational damage by this high
spending to GDP ratio, and about the need for fiscal
consolidation.
Economists generally believe that federal spending should
be capped and controlled relative to the size of the economy.
The challenge is how best to do that.
I would like your advice. We have developed over the past
year-and-a-half legislation called the MAP [Maximizing
America's Prosperity] Act that addresses the spending caps. The
difference from past efforts is that we used two slightly
different, we think, smarter metrics to do that.
One is the numerator is a non-interest spending; that which
is controlled by Congress, both discretionary and entitlement-
type spending. And the goal clearly there is to be able to
gradually reduce what we can reduce without adding pressure on
us to push the Fed to keep interest rates politically low for--
to mask that debt.
The second, the denominator is potential GDP, rather than
estimated actual or a rolling average. The thought being, it's
not as cyclical. Congresses can't spend as much in the good
times, nor do they have to cut quite as much in the bad times.
As we go forward trying to find bipartisan solutions on
fiscal consolidation, on gradually lowering the size of our
government relative to the economy, are those metrics good ones
to work off of?
Dr. Boskin. I think you are definitely headed in the right
direction, Mr. Brady. I think that it is important that we
allow the automatic stabilizers, for example, to work. I
mentioned them, and Austan dwelled on them, as the major cause.
I agree that quantitatively they are a large part of the
deficit.
So that's important. I do believe there are two other
things that are worth considering. One is that for good
purposes or other we often wind up doing things that are like
spending but don't count as spending. We regulate.
When the government says ``put this on your car,'' and
therefore the auto companies do it and they charge people
higher prices for their car, that may even have a good benefit/
cost ratio but it doesn't show up as part of taxes and
spending. It's almost the same thing as the government spending
the money, taxing and spending the money, and installing it.
So regulation is a substitute. And tax expenditures, of
course, are a substitute for spending. So you would need to
have some complementary way--legislation, or some safety
valve--to prevent, that you could tighten if all of a sudden
the spending cap started to bind and it started edging into
regulation and tax expenditures.
The other is, when you look at spending there's this
fundamental fact of arithmetic we can't get around; that the
present discounted value of future taxes has to equal the
presented discounted value of future spending plus the national
debt. The government has to pay its bills now or later. A
dollar of borrowing now means a dollar plus the rate of
interest tomorrow has to be raised to pay off the interest.
So with that in mind, it is very, very important that the
spending caps be reasonable, and a bind, and that there is some
mechanism by which we do not, even with reasonable spending
caps, start continuing to accumulate more debt as well.
So there is an issue whether you need something on the
deficit and debt side simultaneously with spending. Spending
minus taxes equals the surplus or deficit. So you need really
to do two to control three, but I think the fundamental--you
are at the fundamental core. The first thing we need to get
under control is spending.
We can argue. I think we would both agree that that should
be done gradually as the economy recovers in the short-run, but
in the long run these projections, even if you shave them for
optimistic assumptions, are really, really tremendously harmful
to take the path of spending, as I indicated in my testimony,
as the OMB projects for the President's policies with
reasonable assumptions, which includes the future projected
growth of Medicare and Social Security, means that we are going
to have a wide swath of the population paying marginal tax
rates of 70 percent when we keep paying for it with higher
payroll and income taxes, not just the very well off.
And it is hard to imagine in a generation from now that we
can have a successful, dynamic, growing economy with a large
fraction of Americans being a minority partner in their own
labor.
So I think that you are really right that spending is the
fundamental thing.
The other thing I might say is, you want to give some
thought to the very long run about whether you would have a
recalibration exercise, or think about how demographics
interact with it. But you're basically in the right place.
Chairman Brady. Got it. Thank you, Dr. Boskin.
Vice Chair.
Vice Chair Klobuchar. Thank you very much, Mr. Chairman.
Thank you, both.
I did see a few common threads in your testimony, and I
just want to start with the elephant in the room and go through
a few questions a little more quickly.
On Tuesday, Federal Reserve Chairman Ben Bernanke testified
before the Senate Banking Committee, and he said, and this is a
quote: ``The Congress and the Administration should consider
replacing the sharp, front-loaded spending cuts required by the
Sequestration with policies that reduce the federal deficit
more gradually in the near-term, but more substantially in the
longer run. Such an approach could lessen the near-term fiscal
headwinds facing the recovery while more effectively addressing
the longer term imbalances in the federal budget.''
I will start with you, Dr. Goolsbee. Do you agree with his
statement?
Dr. Goolsbee. Yes.
Vice Chair Klobuchar. Very good. Dr. Boskin, if you could
keep your statement shorter, I notice that you talked about a
phased-in reduction. Do you think that there is a better way to
do this than the Sequestration?
Dr. Boskin. I think there is a better way, but I do want to
make sure we understand that this year the total effect on
outlays is going to be between $40 and $45 billion because the
budget authority gets spent over a couple of years. That is
one-quarter of one percent of GDP. So it is very hard to
believe that this year the Sequester would be a major macro
economic event, whatever specific dislocations it had for some
programs and people.
Vice Chair Klobuchar. And----
Dr. Boskin. Next year it starts adding up. So it would be
better to have it shaped like this (indicating). There's no
doubt. But it is very, very difficult to credibly do that when
we are living in a world where every two months we have got a
new set of negotiations about what it is going to be. So----
Vice Chair Klobuchar. I agree, and I think there are many--
--
Dr. Boskin [continuing]. So there's a big tradeoff.
Vice Chair Klobuchar [continuing]. There are many up here
that would have liked to do a bigger thing at the end of the
year, but we will proceed now and have those opportunities in
the next few months. And there are many I know in the Senate
and I know in the House that want to get this done.
I wanted to just follow up on one thing you talked about,
Dr. Goolsbee, that I thought was interesting, and that is the
number of businesses that have accumulated money right now that
we would like them to invest in our country.
And part of it is the problems that Dr. Boskin has been
getting at with the uncertainty, with changes all the time, and
you, I thought rightly, noted this is not just our country that
has this problem. And what I wanted to get at is how you think
we can unleash this money and get it invested.
Dr. Goolsbee. Well, in my view the reason it is
accumulating in the U.S. and in other countries is fear about
the world economy of has a recovery taken hold. For all of the
discussion of our growth rate being modest, at 2.5 percent that
is about the fastest of all the advanced economies in the
world, which is a sad state of affairs. It has been a tough--
it's been a tough period.
So I think uncertainty about overall world economic growth.
And second, fear over whether there will be another major
financial crisis led by problems coming out of the European
banking sector.
I think those two things hang over the investment decisions
of big firms. And really we can only address that part through
macro economic management and trying to persuade the Europeans
to confront their problems.
I think on the micro policy side, investment tax incentives
I think do have some impact in an environment like this on the
decision of: If you're going to invest, where do you want to
invest?
I think putting a focus on, in some of the sectors, getting
skilled workers, and trained workers that are, in our language,
complementary to the capital, is quite important. Because you
have seen in some high-tech manufacturing and in others they
have not been able to do that.
And the third, I think there is a confidence element that,
as growth gets going you will see more pressure like what you
have seen with Apple, and others, that investors go to the
firms and say: Either use the money for investment, or pay out
the money and we will use it for investment; but do not just
sit on the money.
Vice Chair Klobuchar. Okay. I wanted to follow up on one
thing you raised, the workforce issue. I was picturing myself
telling these small business owners in Minnesota: You need some
workers that are complementary to your capital.
[Laughter.]
I am not sure that would quite work. But I think it is
right on in terms of trying to encourage our schools, from the
high school level on to train workers. I think manufacturing is
one of our big bright spots right now, but we simply do not
have enough people going into welding, and tool-and-die, and we
need more women doing it because we simply need more people
doing it. And we are in a big effort in Minnesota to recruit
more women into manufacturing for the floor because of these
job openings.
And if you could just briefly, in just a minute here, Dr.
Goolsbee, talk about your views on this and maybe in a second
round I will ask Dr. Boskin about your ideas with
consolidation.
Dr. Goolsbee. I absolutely agree with that statement, both
of those statements: that manufacturing has been one of the
bright spots. It is pretty clear, as I said in my testimony if
you look at the data, the U.S. has got to shift to a more
export-oriented growth model. And, that the biggest export
market for the U.S. is in the manufacturing sector.
The most of what we export are manufactured goods. In those
cases, there are--and especially in a State like Minnesota
where the unemployment rate has gotten as low as it has--those
issues of finding structural mismatch and addressing it are
quite important.
And it behooves us now at a time when I still think
cyclical unemployment is the dominant factor nationwide, but
very soon as the unemployment rate comes down structural
unemployment will be what remains. And we have already seen the
weakest part of the job market being the drop-outs of the labor
force, and a group of people that have been unemployed for a
very long period; that these issues of training and skill are
going to be forefront issues.
The thought that we are going to cut into investments like
that I think is short-sighted.
Vice Chair Klobuchar. Okay. Thank you very much, both of
you.
Chairman Brady. Thank you. Representative Hanna.
Representative Hanna. You touched on long-term structural
unemployment. As regards Michael Spence's work that I'll
clarify for you quickly where I am going, we have created in
the past 20 years, the vast majority of jobs have been service
jobs. A very small percentage have been science, technology,
engineering, and math.
We know that we have income disparities that are growing.
We also know that every job is not the same. We could have zero
unemployment and still people could be struggling paying their
bills.
What do you think is the severity, in a global sense, that
are increasingly moving away from those things we need to
invest in to increase our global competitiveness in terms of
innovation, tradeable goods, and that type of thing? How big a
factor do you think the unemployment rate that we are seeing
right now that seems to be so intractable is a function of us
not being as competitive and as skilled as we needed to be as a
people? For both of you.
Dr. Boskin. Well I think it's a substantial part of our
problem. It's both a short-term problem and a long-term problem
I think. People are not getting jobs now. American firms list
3.5 million job vacancies, saying they do not have workers
applying with the skills they need. They are not all computer
programmers. As Vice Chair Klobuchar mentioned, welders, tool-
and-die people, et cetera.
That is partly a problem of our K-12 education system, and
partly a problem of the opportunities, private and
governmental, to retrain yourself when you need to retrain.
As I mentioned earlier, we need to modernize these job
training programs. Austan used the phrase ``hate to see us cut
investments in that,'' well I think we can get a lot better out
of it for less money, and actually help people a lot more than
we do now.
So I think that spending should not be the metric. The
metric ought to be how many people get jobs at the end. So I
think it is a serious problem. I think in the long term it is a
larger problem. As Austan said, there is still sizeable
cyclical unemployment. But as that comes down, hopefully in the
next two or three years to closer to full employment, what
remains will be primarily structural.
I also think there is a tendency in many firms, when they
are hit with really rapid, sharp adjustments, that they make
deeper cuts, including stuff that has accumulated they have not
gotten around to, with all due respect, and therefore they tend
to shed a lot--in recent times, they have shed a lot of labor,
more than they might have in previous downturns for the same
cyclical component. And they have pushed their remaining
workers to retool and train and become more productive.
So I think all that is interactive. I think there is
something major to it.
Dr. Goolsbee. I think it is a major issue. I do not think
that--I think it is not appreciated that the U.S.'s
competitiveness problem has not principally been on the
productivity side or the quality of our workforce. We remain,
really of all the major economies, the most productive
workforce in the world. And we only got more productive during
this Recession.
So I think the long-run competitiveness of the U.S. economy
is pretty strong. I think we have gone through a heavy cyclical
unemployment period, and I think what Professor Spence has
highlighted, and it is something we all ought to think about,
is there are a lot of different sectors and different jobs that
in some sense have never faced foreign competition that have
become tradeable goods. And that leads to a lot of tough
adjustments, and we will have to--and we should make quality
investments.
I think Professor Boskin's point is well taken: Let's do
those things that will get people jobs and sustain them in the
jobs. The advance of technology, however, let's not overly
dreadfulize it, if that is a word, if they had said in 1920 how
many phone lines would exist today, they would have said that
is flat out impossible because every man, woman, and child in
America would need to be a telephone operator.
The fact that there do not need to be telephone operators
did not put everyone out of a job. Gradually, as we trained for
other things, we got more skill and we just shifted into other
sectors, greatly to our benefit, and greatly to our income. And
there is no reason we could not do that again.
Representative Hanna. Thank you.
Chairman Brady. Thank you. Representative Cummings.
Representative Cummings. Thank you very much. It is good to
see both of you today.
Dr. Goolsbee, in your testimony today you suggest that
Congress could help the housing market recovery by, and you
said, ``facilitating refinancing for people unable to take
advantage of low rates because they are underwater and by
facilitating people to convert vacant homes into rental
properties.''
I found it interesting what you said about housing. I think
housing sometimes has been put on the back burner, and for my
constituents it is a big, big deal because they have lost a lot
of wealth with the Recession.
Could you explain the actual benefits to the economy of
allowing borrowers to refinance their mortgages down to these
historic low interest rates?
Dr. Goolsbee. Yes. You bet. And in the City of Chicago
where I live, the impact of the housing downturn has been
really devastating, and in a lot of cities in the United
States, as well as a lot of suburban areas. This has weighed on
growth in a quite substantial way.
The benefit of refinancing is pretty simple. As Professor
Boskin discussed in the case of taxes, the most effect of tax
cuts are those that are long-lived and permanent changes to
people's income.
We have got epochally low rates. But if you are underwater
in your mortgage, you cannot go refinance at the bank. So you
are paying an interest rate that is well above what the market
rates are. And this has been noted by Chairman Bernanke as an
impediment to monetary policies' effectiveness in stimulating
the economy.
If people could simply refinance at the market rates as
they are now, it would be literally for the average homeowner
thousands of dollars lower payments per year that would just go
straight into their pocket. It would be the equivalent of a 30-
year permanent tax cut for them of thousands of dollars a year.
And that is pretty substantial.
Now you do need to subtract off. Right now they make a
payment to somebody, and that somebody does something with it.
So it is not just pure stimulus. But the incidence in the short
run of spending the money for people that are massively
liquidity constrained and really hurting, trying to figure out
how to pay their bills each month, that tends to be higher than
for the banks who are currently sitting on reserves and for the
mortgage-holders.
So I think that that could have a positive impact.
Representative Cummings. You know you said something else
that was very interesting--well, you said a lot that was very
interesting--but you talked about this Sequestration possibly
cutting a half to one percent of the growth rate. And Dr.
Boskin projected the growth rate at being a certain amount, I
think 2 percent, about.
Talk about that. Because, you know, the Democratic Steering
and Policy Committee had a policy hearing the other day where
Professor Stephen S. Fuller of George Mason University, who is
I take it a top economist from what I hear, talked about this
very subject. And he believes that even a month of
Sequestration would be like creating, not a hole but a crater
in our economy.
I just want to have your comments.
Dr. Goolsbee. Okay. I think Professor Boskin and I disagree
a little bit on what the multiplier would be of this spending
on the economy. If you take forecasters like Macro Advisers, or
some of the other standard macro forecasters, they anticipate
that the direct impact of the spending, as Professor Boskin
said, is maybe 25 basis points, .2 of a point to .3 of a point.
And the question is what other spill-on effects does it
have. I think that leads it up to be a fair bit higher than the
.2 to .3 of a point. But I don't think that this is as big, for
example, as what the fiscal cliff would have been, which in my
opinion would have driven us into a recession.
In my view, this will cut the growth rate, and will cut it
by enough that we drop below the 2 percent, so actually there's
a decent chance the unemployment rate starts to go back up
again instead of starting to come back down, but that's where I
would characterize it.
Dr. Boskin. I think, Mr. Cummings, that it would be--it
would take quite a stretch to make this into a major macro
economic event this year. I think it is literally about a
quarter of a percentage point direct spending. Economists are
not sure in an expansion, with a high debt ratio, with where
that spending will be offset, whether the multiplier is
slightly negative .6, 1.3. The incoming Obama Administration
used 1.7 in the midst of a deep recession when all economists
agreed they would be much higher.
So that would get, if you took that, which I believe is
fulsome, but, you know, there is a range, let me--there is a
range of disagreement among economists--that would get us up
maybe to .4 percent.
So even at the most sort of Keynesian of what has been used
in Washington recently, it is a minor macro economic event.
It's not trivial with respect to some particular things. It is
disproportionate to the military. Some people are going to get
disrupted. There is no doubt about that. But in terms of the
overall hit to the economy, my best judgment is it would be a
quarter of a percent, or slightly less.
Representative Cummings. Thank you, Mr. Chairman.
Chairman Brady. Thank you. Representative Paulsen.
Representative Paulsen. Thank you, Mr. Chairman.
Well this is obviously a very extremely important hearing,
because I do believe our economy has a long way to go to reach
its full potential.
Mr. Boskin, you had mentioned--Dr. Boskin, you had
mentioned that the current recovery is about 10 million jobs
short. I agree with you overall that we need a strong, credible
commitment to serious fiscal consolidation, as well as pro-
growth tax reform to turn things around.
I am just really discouraged about even CBO recently
announcing that unemployment is expected to remain at about 7.5
percent all the way through 2014, which would be the sixth
consecutive year we have had that type of a situation and the
longest period in about 70 years.
So I guess my overall worry there is that this is being
accepted as the new normal. It is being accepted by Congress.
It is being accepted by elected officials. It is even being
accepted by employers back in my District that understand that
this is what is going to happen now. And I am worried about
that, because we clearly do have a growth gap that needs to be
addressed.
And Dr. Goolsbee mentioned bubbles. I suppose you can look
back at the 1980s and see the S&L bubble, the 1990s, the
dot.com bubble, and some would say the housing bubble and the
mortgage-backed securities bubble of the 2000s. And now I sort
of sense some would argue we are in a federal spending bubble.
Let me just ask you this, Dr. Boskin. At our current
trajectory of spending right now, at what point do you expect
investors would begin to lose confidence in the ability of the
United States Government to back up our debt, to back up our
debt?
Dr. Boskin. Mr. Paulsen, you are on to something extremely
important. Just last week there was a major paper presented by
a former Federal Reserve Governor and three other distinguished
macro economists at the Fed, and they concluded that when the
debt/GDP ratio, in looking at a variety of historical cases,
gets to 80 percent, and in our net debt, leaving out Social
Security, previously accumulated Social Security surplus,
whatever we want to make of that, we are a little below that.
Our gross debt is well over it. That you run increasing risk of
a sudden, abrupt loss of confidence and a dramatic risk in
interest rates that requires such a wrenching change in the
budget position to become sustainable that you run into these
long, depressed growth episodes.
That is by former Fed Member Rick Mishkin and three other
prominent macro economists. So there is a serious risk. The
only honest answer is, we cannot be sure. But if you are
heading toward an iceberg, you ought to change course. You
ought not see well how close can I get before I make a sharp
turn?
So it seems to me we need to start getting the spending
curve bending down, and we need to get the debt/GDP ratio not
only stabilized but heading back down to a safety zone at 50
percent of GDP or something over the longer term.
Representative Paulsen. Let me ask you this, too, because
you just mentioned interest rates and the growing cost of
interest rates to the Federal Government as a part of our
budget.
As interest rates normalize--at some point they are going
to normalize--how much will these payments increase as a part
of our national debt? And what are the tradeoffs as a larger
share of revenues that now have to go to actually pay off
interest?
Dr. Boskin. Well, that is another important point--I don't
mean to disrupt Austan's opportunity to answer; I'll give it to
him in a second--CBO projects that the interest costs over the
next decade will almost quadruple from somewhat over $200
billion to between $800 and $900 billion a year, both from the
higher debt and from higher interest rates.
That does not include--that does not envision one of these
abrupt loss of confidence episodes in the meantime, which is
possible. It is far from certain, but possible.
So the interest payments are going to be crowding out other
outlays. They are going to be crowding out other activity.
Higher interest rates will eventually start to crowd out
investment, and we need that investment to generate jobs and
increases in wages.
So it is a serious problem. I think that we have had an
unusual period where the Fed, for some good reasons some not,
and I have been very clear that the only grade I can give them
so far is an ``incomplete'' because we do not know how they are
going to exit from this and what is going to happen. I was a
fan of the early policies. I have not been--I thought there
were diminishing returns--not been a fan lately. But they
basically replaced the credit markets with themselves,
basically deciding to keep interest rates close to zero.
And that has enabled the budget to look better than it was.
That is not why they did it, but as a byproduct it is going to
make the budget look better than it was. So if we kind of
normalize the budget for that, looking at what it would look
like at closer to full employment, tax revenues would be well
above their historic average of GDP at normal employment, for
example, and their spending would come down a little bit on
things like unemployment insurance and so on.
So if we looked at that, interest is going to become a big
issue. And of course it is increasingly leaving the country. It
is a sizeable fraction, roughly half, slightly over half, is
now held abroad by foreign central banks, and pension funds,
and insurance companies, and so on.
So it is a big problem, and that is an extra reason we need
to get the debt down. But the effect on interest rates will
primarily reflect what the budget position is, number one--is
it a surplus; as Mr. Brady mentioned, a primary surplus if we
exclude interest--if we get to a primary balance and a surplus,
that should take a lot of pressure off the risk of interest
rates rising a lot.
Chairman Brady. All right, thank you. Representative
Delaney.
Representative Delaney. Thank you, Mr. Chairman. And I want
to thank you and the Vice Chair for your opening comments,
which as someone who is new to Congress I found overly
constructive and bipartisan, and I appreciate that very much.
Thank you for having me on the Committee.
Dr. Boskin, I thought the last point you made was actually
a very good point, because I think the point that is often
overlooked when we talk about our deficit situation is the fact
that we do not borrow from ourselves. Other countries, like
Japan, that have been able to maintain very high debts
effectively borrow from themselves and they do not have market
forces that affect their interest rates. In other words, it is
not just controlled by ourselves. Which is really why it is so
important for us to deal with this now while interest rates are
low, and while we have the flexibility to reform some of our
entitlement programs in a smarter way than what will ultimately
or inevitably happen if we do not deal with this now.
So I agree with the comments. But I wanted to actually
shift my question to tie into some of the comments that
actually Mr. Hanna made, which I thought was a very good point
about U.S. competitiveness.
Because it seems to me that that is one of the central
issues that this country faces. And it really started probably
20 or 30 years ago when we entered a global, and technology-
enabled world which really did change the face of employment in
this country.
And while we talk a lot about tax policy, and we talk a lot
about the size of government, I worry that we do not talk
enough about what the future competitive situation of this
country is. Because even though we have seen cyclical
employment trends, the trends around the standard of living of
the average American have been very consistent. They have been
down.
And that seems to me to correlate directly to our
competitiveness. Because if you are competitive, you actually
create jobs that have a decent standard of living. And if you
are not competitive, you continue to create jobs, to the extent
you create them, that have a deteriorating standard of living.
When I think about our competitive situation, it seems to
me reforming immigration. You know, there are 7 billion people
in the world, 6 billion still wake up and largely want to come
here. It is a huge advantage we have as a country.
Having a national energy policy, or the lack of a national
energy policy, which we do not seem to have as a country. Not
doing the things in education. There has never been a stronger
correlation than there is now between having a good education
and getting a job. Not investing in our infrastructure. And not
creating enough avenues for the significant amount of private
capital that is accumulating to actually invest in our economy
and shoulder some of the burden that government has effectively
had to shoulder.
I worry about these things as they relate to our long-term
competitiveness. And my question to you two gentlemen, and
field it as you see fit, is:
How do we think about the role of government in light of
what I think is a changing economic landscape for the country?
In other words, a landscape that is defined by globalization
and technology? How do we think about the role of government to
address these things to make us more competitive so that we
actually can reverse the employment trends? And again, the
employment trend I am most concerned about is what has happened
to the standard of living of the average American.
Dr. Boskin. Do you want to start? I've had the last few,
but I'll be happy to go.
Dr. Goolsbee. My grandmother lived in Waco, Texas, and she
used to say to me whenever I would complain about anything, she
would say: You know, 80 percent of the world really does not
care about your problems; and the other 20 percent are glad.
And if you start--if you were thinking, how long will we
need to wait before the government solves our private-sector
competitiveness problem, I think the answer is: Forever. The
government is not going to--if you were waiting for the Fed to
fix it, or the government to fix it, or anyone else, you would
do best to remember that the vast majority of what happens for
the competitiveness of U.S. enterprises has nothing to do with
the government. Policy is only setting the framework that that
is operating in.
In my view, the government has for many decades played an
important function through direct and indirect support of
research development innovation in ways that have been quite
fundamental to the growth of U.S. industries.
The economic infrastructure of the country is quite
important. You can disagree about individual job training
programs, but there is not any question in my mind that overall
federal support through financial aid and through training have
been crucial in keeping the workforce the most productive in
the world. And we do also need to have things like a national
energy policy. The potential drop of energy costs could be a
great boon to U.S. manufacturing. So it behooves us to figure
out a way to take advantage of the new discoveries, while being
mindful that we have got to do that in a way that is safe.
But I think that it is in those types of broad-based things
that the government can play a more important role, rather than
in the directly making companies more competitive.
Dr. Boskin. I think Austan and I generically agree that
this is primarily something that the private sector primarily
does this and the government plays a supporting role and
directly does a few things we wouldn't expect the private
economy to be able to do well.
Pre-competitive research and development, to take the
extreme case, basic physics, individual firms cannot
appropriate the benefits from that so they are not going to do
it, so it has to get done through NSF and things of that sort.
But that needs to stop short of outright industrial policy
where we are subsidizing specific firms, by the way which means
you are giving a competitive disadvantage for their
competitors.
Education is important. The key, however--the key
difference between Austan and I, I would suspect, is we would
draw the--I would draw the line a little shorter than he would.
He would have a little larger government; I would be very
concerned about the effectiveness--he would surely be concerned
about the effectiveness, but I would be concerned as the larger
it got the less effective it got.
And importantly, if the government is playing this role,
the larger it gets it does crowd out the private sector. So if
a combined state, local, and federal government is 50 percent
of GDP versus 40 percent versus 30 percent, the larger it gets,
on balance the more difficult time the rest of the economy will
have because it has got to pay taxes and do other things to
support that size of the government which provides
disincentives to work, and save, and invest.
Chairman Brady. Thank you, Dr. Boskin. I don't mean to
interrupt, but with votes pending I want to make sure we get as
many people as possible.
Senator Coats.
Senator Coats. Thank you, Mr. Chairman.
I ask my staff each day to prioritize my memos, and I am
going to work off this first one. Despite Tuesday's loss to
Minnesota, the Hoosiers still control their own--oh.
[Laughter.]
Vice Chair Klobuchar. Thank you for bringing up that fact,
Senator Coats. We appreciate that.
[Laughter.]
Senator Coats. That is my first priority----
Vice Chair Klobuchar. Since they lost to our team.
Senator Coats. Let me get to my second----
Dr. Boskin. I never thought I would be from a football
powerhouse, either.
[Laughter.]
Senator Coats. The Cubs still stink.
[Laughter.]
I say that as a lifetime, long-suffering Cubs fan. That is
an area where Dr. Goolsbee and I have suffered greatly. Let me
get to my questions. Dr. Boskin, I was interested in your
comment here, which I would like to go into a little more
detail on, and I would like to get Dr. Goolsbee's response to
this.
You said economically balanced is not 50-50 between
spending and taxes. Simpson-Bowles came in with a Commission
report about a 3-to-1 ratio spending over taxes. Yet the
Administration continues to insist that any kind of long-term
deal that will put us on the right track has to be 50-50.
What should that ratio be? You said it should not be 50-50.
What do you think it should be?
And, Dr. Goolsbee, how would you respond to that?
Dr. Boskin. Well, I think the economic evidence, from
looking at all the fiscal consolidations in the entire OECD
since World War II, would suggest that the successful ones have
been $5 or $6 of actual spending cuts, not hypothetical future
ones but actual cuts that occurred, for every $1 of tax
increases.
That does not mean that has to be exactly that. It could be
a little bit smaller, a bit larger. The U.S. may have slightly
different circumstances, but it suggests it is primarily on the
spending side.
The evidence also from economics research suggests that tax
hikes are much more likely to cause recessions than spending
cuts. There are many, many studies that suggest that. There is
a study by one of Austan's colleagues when he first joined the
Council of Economic Advisers suggesting that what they would
call the ``output multiplier'' is very high for tax increases.
So tax increases can be very dangerous in the short-term.
So I think that the mix for economic reasons--there are
many other considerations. People care about the size of
government as a political and philosophical and a liberty
issue. People care about the distribution of income and so on.
But basically as a macro economic issue it should be
overwhelmingly on the spending side, in the vicinity of 5-to-1.
Senator Coats. Dr. Goolsbee.
Dr. Goolsbee. I think two things on this.
First, the evidence that Professor Boskin is citing is
based on a circumstance that is fundamentally different than
the circumstance we are facing now.
Our long-run fiscal challenge is nothing more and nothing
less than the population is aging, and the health care costs
are rising. So that if you just advance forward the Baby Boom
to their retirement with the existing policy that we have known
about for 40 years, it implies the government's size will get
bigger than it ever was before.
And so either you have got to cut those promises, or you
have got to raise revenues higher than they have ever been
before to cover them, or some balance. Those are fundamentally
different than the experiments that are in this evidence.
In my view, Simpson-Bowles laid out what they said was 3-
to-1, but that is counting saved interest payments. It is
really about a 2-to-1 ratio. When the Administration is arguing
about 50-50, I think it is best to also remember we have had
one round that was all cuts and no revenue, and then one round
that was all revenue and no cuts.
If you add all of these things together, so far we are at
about the 2- to 3-to-1 ratio that was in Simpson-Bowles. That
strikes me as a perfectly appropriate starting point that we
ought to balance these things against; so not on any one
particular deal. But at the end of the day, if we do the $4.5
trillion of cuts over 10 years that Simpson-Bowles recommend,
that the total would be 2-to-1, or 3-to-1 spending cuts to tax
revenues seems totally appropriate.
Senator Coats. I have 35 seconds. Dr. Boskin, any follow-up
to that?
Dr. Boskin. Yes. I think it is important to appreciate two
things. Number one, this is not primarily an aging-of-the-
population problem. The projected cost increase in Social
Security and Medicare are primarily because of rising real
benefits per beneficiary.
Demography is a very large minority partner, but we are
making them more and more generous as they go along relative to
the cost of living.
Now some people might say we ought to have those be
proportionate to the size of the economy, but the original
mission of Social Security, in FDR's words, was to provide a
measure of security against poverty-ridden old age.
If I were to collect Social Security at the right time, I
would be getting twice the poverty level just in my Social
Security payments. So we cannot keep projecting--I would use
``projecting,'' not ``promises,'' I do not view 70 years from
now as a promise; ask my students, or young children today,
they think that Social Security will not be there, so it is a
big increase if you actually provide something for them, not a
cut.
So I think that we have to get these programs under
control. With respect to the Simpson-Bowles, I think there are
many good things in there. I supported a large fraction of
them. They did not deal with health care costs, and that is a
big issue, and that is a large--as the President and others
have said--a large driver of future debt.
Senator Coats. Thank you. Thank you, Mr. Chairman.
Chairman Brady. Thank you, Senator. Representative Maloney.
Representative Maloney. Thank you, Mr. Chairman. And I
would like to commend you and compliment you on your new
position, and Vice Chair Senator Klobuchar.
I also would like very much to welcome a new Member on the
Democratic side, Mr. Delaney, from the great State of Maryland,
who has been a very successful businessman and will bring a
tremendously important perspective to this Committee. And of
course welcome to our two panelists, and thank you for your
government service for our country.
Tomorrow, the real question before your government now is
Sequestration that kicks in with an $85 billion cut. It is
estimated that this will result in a loss of over 700,000 jobs.
Chairman Bernanke testified yesterday before the Financial
Services Committee in the House of Representatives. And
although we have been gaining jobs over 35 months of roughly
6.1 million in the private sector, 5.5 million of non-farm
payrolls, but the government lost .6 million jobs. But he
testified that the Sequestration was a problem not only--and I
will quote him: Besides having an adverse effect on jobs and
incomes but, he said, a slower recovery, which he says
Sequestration will cause with our fragile economy, would lead
to less actual deficit reduction.
Now the whole purpose of Sequestration is deficit
reduction. He is testifying that it will slow that because of
the impact on jobs and incomes.
There has been testimony today that the impact on GDP would
be roughly a quarter of a percentage point, but the independent
CBO estimates that it will contribute about .6 percentage point
to a fiscal drag on the economic growth this year.
I would like to hear your comments in relation to what
Chairman Bernanke was saying, that the idea of phasing it in
over time, having targeted reductions, the Democratic minority
keeps putting forward closing loopholes, let's not fire all
these people that are paying their taxes and are a part of the
economy, dredging more money back into the economy instead of
having them on welfare and not able to produce and be part of
the economy.
And this is turned down by the Republicans. But there was
an article this week in one of the papers where Speaker Boehner
was quoted as saying, in terms of the tax debate, because we
all support tax restructuring, that he would take closing
loopholes if given a lower rate for taxes.
But it seems to me that closing some of these tax
loopholes--why we are giving tax breaks to companies that move
overseas and take our jobs over there is beside me. If you are
going to give a tax break, give it to someone who is providing
a job here in America.
Also, the tax subsidies of 40 percent in some examples to
really very successful oil companies that are making a lot of
money. Why are we subsidizing a company that is making a lot of
money?
It seems to me that closing these loopholes and lowering
the deficit would be a better approach than closing loopholes
and giving a lower tax break. So I would like Dr. Goolsbee's
response to those two questions, and yours, Dr. Boskin, too.
Dr. Goolsbee. Okay, on the first I think I am more in the
camp, as I outlined, of the Congressional Budget Office and the
Macro Advisers that the impact of Sequestration would be half a
point to as much as a full point off the growth rate. And I
think that would be enough to set the labor market back, and
might even start it deteriorating.
On the tax loophole point, I think what Professor Boskin
said in his testimony, that there is a whole lot of spending
that is done through the Tax Code, is correct. And so if you
cut the loopholes, it is not accurate to think of that as tax
increases. By that very logic, we should be viewing cutting of
tax loopholes as spending cuts.
So I do not see that there is any problem with changing the
form of the spending cuts to be in a more rational direction,
and I hope that we would get it off of the next 6 to 12 months
and into a period where the economy would be recovering more
quickly.
Chairman Brady. Gentlemen, I am going to be tight on the
five-minute limit for questions, just because a vote has been
called. And so I would like, with your permission, to go to
Representative Campbell, Representative Duffy, and Senator Lee,
in that order.
Representative Campbell.
Representative Campbell. Thank you. And because votes are
called I will not take the full five minutes. So I will just
ask one question.
The title of this hearing is: Why has economic growth and
job creation remained weak? And what should Congress do to
boost them?
I would ask each of you, and I will start with Dr. Boskin,
this House and Senate, we cannot do too many things at once; it
is just kind of the way we are. So give me your number one
thing that you would think we should do to boost job creation
and economic growth, and one thing you would say we should
avoid. Dr. Boskin?
Dr. Boskin. The thing I would avoid would be any major tax
increase. The second thing--the first thing I would do would be
to try to have a credible commitment to serious fiscal
consolidation as the economy phased in. That would mean
changing indexing formulas, altering structural features of
programs not just cutting a few billion off of one program next
year that could be reversed the next.
Representative Campbell. Fiscal consolidation? That's a new
word.
Dr. Boskin. Primarily getting spending headed down as the
economy recovers.
Representative Campbell. Okay.
Dr. Boskin. It's growth of spending heading down, spending
to GDP ratio heading down.
Representative Campbell. Dr. Goolsbee.
Dr. Goolsbee. I guess I would say putting investment in the
workforce is the most important thing in the short run. And I
would say the thing to avoid would be anything that is going to
have a significant negative impact on incomes and wellbeing of
the broad middle class of the country over the next 6 to 12
months.
Representative Campbell. Okay, both of those are pretty
broad. Investment in training? What----
Dr. Goolsbee. Sure.
Representative Campbell [continuing]. What is that?
Dr. Goolsbee. Quite specifically, federal R&D spending I
think that we should not just not cut it, that we should
increase it. I think investments in economically important
infrastructure, which are not all roads and bridges but a lot
of the shipping, container ports, and that type of
infrastructure is important.
Representative Campbell. Okay. And then the thing you said
we should avoid was what? Give me an example of that.
Dr. Goolsbee. Well tax increases on the middle class would
be one.
Representative Campbell. Okay.
Dr. Goolsbee. Things that are depressing the wages of the
middle class, or--I'll leave it at that. The biggest example
would be things that would increase the taxes on the middle
class. The stuff we are doing on the housing front can be
thought of somewhat in that vein.
Representative Campbell. Thank you very much, Mr. Chairman.
I will yield back so others have a chance.
Chairman Brady. Thank you, Mr. Campbell. Representative
Duffy.
Representative Duffy. Thank you. I am concerned about the
unemployment rate of our youth. I believe the number from those
who are 16 to 19 years old have an unemployment rate of 23.5
percent. Those who are 20 to 24 years old have an unemployment
rate of 14 percent, much higher than the national average.
I would ask you both, with some quick answers, are you
concerned about it? And what impact does that high unemployment
rate have on the life skills that our kids learn at this very
important age?
Dr. Boskin. You are exactly right. It is a major--even
though it is limited to some subset of that group--it is a
major problem. Not being in the workforce means they are not
acquiring those skills, so they are relatively being left
behind. What skills they have learned from high school or part-
time jobs or jobs earlier is deteriorating.
So I think it is very important that we have a more robust
economy. We have talked. We agree on some things and disagree
on others about how to create that in the short run, but I also
think we need to dramatically improve our K-12 education
system.
I think injecting competition into it is one. It's not the
only, but it is one thing that could be done to improve it so
that they wind up at the beginning of their careers with skills
that are better matched, number one.
And number two, we reform these programs that we have spent
a lot of money on so that they actually provide jobs, not just
spend a lot of money.
Representative Duffy. Thank you. Dr. Goolsbee.
Dr. Goolsbee. Sadly, and I have published on this subject
that I am about to describe some work, the evidence suggests
that the negative dynamic you are describing is persistent and
damaging. That if you come out of school in a period in which
it is hard to get a job, or you are forced to take a lower
level job than you should based on your background, that that
sticks with you partly because of less skill development,
partly because you get tracked in a negative way.
So I think it is critically important. I think we have--the
most important way to do that is to get the overall growth rate
of the economy up. But I think that the youth unemployment is
one of the weakest and scariest parts of the labor market.
Representative Duffy. And that age range, from 16 to 19, 20
to 24, are they the higher earners or the lower earners in our
economy? They would be the lower earners, right?
Dr. Goolsbee. Well, yes and no. It depends where you are in
the skill distribution. I was going to say for the 16 to 19,
you have seen actually a big uptick as people could not get
jobs and stay in school longer.
Representative Duffy. But you would agree that on average
our younger individuals make less money?
Dr. Goolsbee. Oh, yes. Sure.
Representative Duffy. So if we want to improve the
opportunity for the youth in our country to make sure they
learn the skills that are necessary to be successful on a
career track, can we grow more opportunity for them, create
more jobs for them, if we would just raise the Minimum Wage?
Dr. Boskin. No. I think that the Minimum Wage has
offsetting effects. It may raise the incomes of some, but it
obviously will disemploy others and will tend to disemploy
people with the lowest skills. It is not very carefully
targeted in this regard. So teenage children of rich people who
are working in Minimum Wage jobs will get more, et cetera.
So it is a big concern, but I think that raising the
Minimum Wage is not the most effective way to try to deal with
this problem.
Representative Duffy. And, Dr. Goolsbee, you had talked
about the growth of jobs. Will that help grow jobs if we raise
the Minimum Wage for that sector of our economy?
Dr. Goolsbee. Well I think the most important word in what
Professor Boskin just said is the tradeoff; that the Minimum
Wage has tradeoffs.
There are some people that it would raise their wage and
make it harder to get a job. There are others it would raise
their income. And the question and the tradeoff is really how
much do you think that affects the overall income and consuming
power----
Representative Duffy. But my question is very specific,
though. Will it grow jobs for the----
Dr. Goolsbee. It could. It depends, as I just said, it--if
you believe that the total income is going to rise for low and
middle income people, then that could grow jobs, yes, by
increasing purchasing power.
Representative Duffy. So your position is that if we
increase Minimum Wage, that means that more of our small
businesses or manufacturers, the places that a lot of these
youth work in, will have more opportunity and more jobs for the
youth in our community? Is that your position, Dr. Goolsbee?
Dr. Goolsbee. Well, no, Congressman. My position is that
the Minimum Wage does several things, not just one thing. But
just looking at the one thing is the incorrect way to look at
it.
Representative Duffy. But I am looking at the one thing
with regard to job growth, and your position----
Dr. Goolsbee. As regards job growth, there are two factors.
One is what is the direct impact on the wage of the people who
can't get a job, on the people who are still employed, their
income goes up, and what is the overall macro impact? And the
macro impact may outweigh the direct impact.
Representative Duffy. So to invest in our workforce and to
grow jobs, a good policy would be to increase the Minimum Wage
to provide more opportunity for the youth in our community?
Dr. Goolsbee. It could, or it might not. It depends on what
those values are.
Representative Duffy. Whatever you----
Chairman Brady. We will be tight, if you don't mind, and we
can continue this discussion. Thank you, Mr. Duffy.
As I recognize Senator Lee, let me--votes have started in
the House, and I want to thank Dr. Goolsbee and Dr. Boskin for
being here today. It's been very helpful. And as Senator Lee
closes out discussion, I want to turn the rest of the hearing
over to the Vice Chair, and thank you very much.
Vice Chair Klobuchar [presiding]. Thank you very much, Mr.
Chair. We had great attendance at this first hearing of the
year, and I thank you for your leadership.
Senator Lee. Thank you, Mr. Chairman, and thanks to both of
you for joining us today.
Dr. Boskin, I wanted to talk to you a little bit about tax
reform. There does seem to be a pretty broad bipartisan
consensus that we need some kind of tax reform, especially some
kind of Tax Code simplification.
It was in this committee just a few months ago that we had
a gentleman who has a Ph.D. in the U.S. Tax Code system, and we
asked him if he did his own taxes and he said, no, I don't.
And we asked why. And he said: Because there is no way I
could possibly know whether I was correct. And I think that is
indicative of how many Americans feel.
So for that and other reasons, I think there is a pretty
broad consensus among Republicans and Democrats in both Houses
of Congress that a simplified approach to the Tax Code would be
better. We need some kind of tax reform.
There is not broad bipartisan consensus on what that ought
to look like, at least in the sense that some are less inclined
than others to say that we need a tax reform package that would
yield more revenue when statically scored.
But I think most would agree that, as long as we are within
the world of saying we are statically scoring something, if we
can assume that we are going to be neutral, if we keep what we
have got, maybe we would be better off reforming the Tax Code,
simplifying it, and leaving it revenue neutral at least under a
statically scored model.
And then at that point, some would suggest that that would
stimulate economic growth, leaving us free then to see whether
or to what extent it did lead to more revenue as a result of
economic growth occurring in the wake of passage of that reform
package. Would you tend to agree that that would be a good
idea?
Dr. Boskin. Yes, I think it is an excellent idea as long as
it is primarily of broadening the base and lowering the rates.
I think that a tax reform that raised tax rates would be a bad
tax reform.
So broadening the base and lowering the rates. We have not
talked much about corporate tax reform, or about small business
here, but so many successful small businesses, 3 percent of the
businesses but half of small business income, some of it is
passed through but some of it is what we normally think of as
small business, pay out on the personal form. So broader base,
lower rates would be very good for their incentives.
And we have the highest corporate rate in the world,
nominally, between federal and state taxes, about 39 percent,
the highest in the OECD. The effective rate, when you account
for deductions and exemptions and so on, is lower. It's in the
high 20s. But it is out of line, but not as far out of line, as
the statutory rate.
So I think that moving in this direction could be very good
for the economy, both the short and long run, but it is--and I
do believe that if it was accurately statically scored that at
least over time it would raise more revenue than is likely
being forecast in the models.
Senator Lee. Particularly if, as you suggest, we lower the
rates and we broaden the base. Would that also tend to have the
impact of stabilizing, or producing a less volatile revenue
stream?
It is my understanding our income tax system brings in
about 18.5 percent of GDP on average. We have peaks and valleys
within that. I think in 2011 we were in a valley of about 14.5
percent. At times we have gone just a little over 20 percent,
but generally do not go higher than that.
Could lowering the rates and broadening the base produce a
more stabile code?
Dr. Boskin. It very much would, because the--the steep
progression, some say the rates are too high; I am not going to
argue about the levels, but we have relative to the other OECD
countries according to OECD the most progressive tax system.
They have larger tax. They collect more with value-added taxes,
but we have a more progressive tax system. It becomes more
volatile.
The place to see it most is my home State of California
where we have by far the most volatile. We have a very
progressive income tax. And we get into this awkward situation,
especially with our balanced budget requirements, which are
sort of adhered to, we wind up having the revenue flow in. They
spend that. They project more. Then the crisis hits. We rely
heavily on capital gains and stock options across Silicon
Valley. The revenues collapse. It is very hard to cut spending.
So we wind up trying to make the Tax Code more and more
progressive, and we wind up not being able even to fund the
basic benefits for people that are really hurting in
California.
Senator Lee. It is a tough cycle.
Dr. Boskin. You're right.
Senator Lee. That is a tough cycle. That is why I
ultimately tend to come to the conclusion that where there is
not consensus on everything, we ought to look to where there is
consensus. There does seem to be a certain amount of political
consensus that we need tax reform in the form of
simplification.
Maybe we could start out with something revenue neutral,
one that is statically scored, and then see where it takes us.
That would leave subsequent Congresses free to either plus-up
or minus-down where they go from there.
If I can ask one more question, as my time is expiring?
Vice Chair Klobuchar. Of course. It looks like it is just
the two of us here, Senator Lee, so please go ahead.
Senator Lee. Thank you, thank you, I appreciate that. Thank
you, Madam Chair.
In your testimony, Dr. Boskin, you mentioned the need for
permanent structural changes, not just a specific dollar cut,
while discussing a credible commitment to deficit reduction.
Can you speak to us briefly on the importance of maintaining
our Nation's credibility in deficit reduction packages? And why
it is that markets are not going to be satisfied in this regard
with cuts? In other words, tell us why cuts just will not cut
it anymore?
Dr. Boskin. Well it turns out that, if you look at the
history of these budget negotiations, I have been involved in
several when I was CEA Chair, for example, and advised on
others, sometimes the cuts, ``cuts,'' evaporate later. Now
sometimes tax policies change also later, and that tends to
happen less frequently.
There are a lot of frequent changes, but if you cut tax
rates it becomes a much bigger battle than small changes in
spending at the next appropriations hearing.
So I think what people want to see in financial markets,
what people what to see about what the environment is going to
be for investments that are paying off 5 and 7 and 10 years
now. Austan mentioned infrastructure. A lot of that should be
going on in the private sector.
Big investments in--he mentioned energy. We can be
exporting natural gas. That is going to require firms investing
ten billion dollars for an export terminal. To do that, they
have to have some notion of what the taxes they are going to
pay on that when they finally get that investment done and they
are starting to export the stuff.
And so that is, to me, credible means that the rules have
changed and they are harder to reverse than just a typical
single appropriations bill next year if the makeup of Congress
changes, and so on.
Senator Lee. Okay.
Dr. Boskin. So tax rules, indexing formula, retirement ages
phased in over time, things of that sort. We have had a history
in the past of those actually occurring, like from the 1983
Greenspan Commission and Social Security changes.
Senator Lee. These are the kinds of permanent structural
reforms you are referring to----
Dr. Boskin. Yes.
Senator Lee [continuing]. As contrasted against something
that just occurs in a CR or something.
Dr. Boskin. Yes. You just say we will cut $10 billion, and
it may happen once, or it may not. And the following year it is
up for debate again.
Senator Lee. Thank you, Dr. Boskin.
Thank you, Madam Chair.
Vice Chair Klobuchar. Thank you very much, Senator Lee.
I just had one last question. As we grapple with
immigration reform in the Congress, and if you could just talk,
each of you, a little bit about how you view this from an
economic viewpoint for the country. There are many aspects of
immigration reform, but one of the parts that I have been
working on with Senator Hatch and I have a bill called I-
Squared, along with Senator Rubio and Senator Coons, and what
it does is basically makes it easier for students from other
countries when they study at our universities, that they more
easily access a green card. In fact, get a green card when they
get an advanced degree in science, math, technology.
And then we also are doing more with the cap on the H1B
visas. Senator Warner and Senator Moran have another bill
called Start-Up 3.0, I think, that is about entrepreneurial
visas. And if you could talk a little bit about how this fits
in with the overall economy.
We have been focusing on job training, which is a major
part of this. In fact, our bill adds $1,000 in fees supported
by the Chamber for each of these H1B visas, and that money is
going to go directly to STEM education to help train our
students in these areas where we have openings right now.
I guess we will start with you, Dr. Boskin.
Dr. Boskin. I am a strong advocate of immigration reform,
sensible immigration reform. Three key components of that would
be the green card provision you are talking about. It is silly
that we have these great students that come from abroad to
Stanford and Chicago, and the University of Minnesota, and then
we send them home.
We make it hard for them to stay. They should be working
here and helping us grow our economy. The H1B visas, again, we
tend to focus a lot on the problems of people who are at the
lower end of the income scale, as we should. That is a big
concern. But we should not neglect the technology jobs and so
on. Those are important. That is a place where the economy is
growing and can continue to grow.
And then thirdly of course we need a sensible guest worker
program. There are other aspects about making sure that we do
have a border that is enforced and things of that sort, and
these get very emotional. But I think it is the case that we
have been refreshed numerous times by waves of immigration in
our society.
One of the beautiful things about America is how diverse we
are in many dimensions. And it seems to me if we are smart and
we have an immigration policy that strengthens the opportunity
for higher skilled people to stay here and improves the
opportunities for people with lower skills, that it could do so
again.
Also, finally I would say these problems of Social Security
and Medicare, and the slowing growth of the labor force which
Chairman Brady mentioned about potential GDP out there over the
next 50 years, unless our birth rates change we are going to
probably need to have some more immigration.
Vice Chair Klobuchar. And I appreciate those comments. One
of my favorite statistics is that 30 percent of U.S. Nobel
Laureates were born in other countries. So, you know, you go
back in time and this has been a major part of our innovation
in our country that has built America.
Dr. Goolsbee.
Dr. Goolsbee. Look, Senator, thank you for your support and
leadership on this issue. We talked about this a lot when I was
in the Administration, and we should keep talking about it
now----
Vice Chair Klobuchar. And the President is talking about it
now and working on it.
Dr. Goolsbee [continuing]. And the President has endorsed
that. I championed the--several of the ideas that you
mentioned: start-up visas and the green card type policies when
I was in the Administration. And I think you do not have to
look very far, either in the research literature or just
talking to business people, to recognize that immigrants have
made not just an important contribution to the legacy of who we
are as a Nation, but to the economy.
My friend John Doerr said that 50 percent of the companies
that Kleiner-Perkins has funded have at least one founder born
outside the United States. And I think on net they are big job
creators, and that by doing some of these things that we could
have a positive impact.
I think on H1B visas, they do have the complication that
you are tied to one employer. So I think there are----
Vice Chair Klobuchar. We actually have made some changes--
--
Dr. Goolsbee [continuing]. So making changes on that I
think is a good idea, as well as expanding the number.
Vice Chair Klobuchar. Okay. Very good.
Well I wanted to thank both of you, first for your
knowledge and wisdom and everything you shared with us; but
secondly the civility that you set here I think bodes well for
the future of this Committee.
I had several Members say this is so unique, how everyone
is acting. So I hope that we see more of that going forward. I
think we all know we have to come together to solve these
challenges. The American People are demanding it, and I thank
you for setting a good beginning for this Committee, one that
you have testified before it sounds like for 30 years, Dr.
Boskin. So you have seen it all in probably many different
outfits and hairstyles over the years. But we are very excited.
Chairman Brady and I are going to do a number of hearings
obviously on these topics and move forward, but thank you very
much for being here. The hearing is adjourned.
[Whereupon, at 11:38 a.m., Thursday, February 28, 2013, the
hearing was adjourned.]
SUBMISSIONS FOR THE RECORD
Prepared Statement of Hon. Kevin Brady, Chairman,
Joint Economic Committee
The Employment Act of 1946 established the Joint Economic Committee
to analyze economic issues and make policy recommendations to Congress.
As the 37th Chairman of this Committee, I congratulate Senator Amy
Klobuchar on becoming Vice Chair and welcome both new and returning
Members to the JEC.
While the United States confronts many problems, our most vexing
economic challenge is the growth gap--and how we close it? The growth
gap between this economic recovery and other recoveries is significant
and intensifies our federal spending and debt problems.
The growth gap has two interrelated aspects.
First, by objective economic measure, the recovery that
began in June 2009 remains the weakest among all recoveries after World
War II.
Second, according to many economists, our economy's
potential to grow over time has slowed. If true, the average rates of
growth and private job creation during this recovery of 2.1 percent and
175,000 per month, respectively, are about as good as our economy will
ever perform in the future. And that is unacceptable.
Therefore, it is appropriate that the first hearing of this
Committee during the 113th Congress should address this growth gap. Why
have economic growth and job creation remained weak? And what should
Congress do to boost them?
The anemic nature of the current recovery is indisputable.
During the current recovery, real GDP increased by 7.5
percent in three and one-half years. In contrast, average real GDP
growth during the same period in all post-war recoveries was 17.5
percent. Today's recovery is less than half as strong as the average.
Real GDP would have to grow at an annual rate of 5.5
percent in each of the next four years merely to catch up with an
average recovery by the end of the President's second term. That would
be slightly higher than 5.4 percent annual rate that President Reagan
achieved during the first four years of his recovery.
Private payroll employment--that is, jobs along Main
Street--has increased by only 5.7 percent since its cycle low. Had this
recovery been merely average, private payroll employment would have
increased by 9.4 percent. The growth gap means that the United States
should have 3.9 million more private jobs today that it does.
Equally troubling is mounting evidence that the annual growth rate
for potential real GDP in the future has fallen dramatically. In its
most recent Budget and Economic Outlook, the Congressional Budget
Office cut its estimate of the potential real GDP growth rate to 2.3
percent, one percentage point below its average since 1950.
One percentage point may not sound like much. However, the real
economy doubles in 22 years at a 3.3 percent growth rate. At 2.3
percent, it takes 31.9 years to double, almost a decade longer.
This prospect of a ``new normal'' for America's economy in which
our future economic growth permanently slows by one-third should be a
red flag for all Americans.
During this Congress, this Committee will, through hearings and
research, investigate the growth gap and how to close it. No doubt some
of the growth gap may be due to demographic factors that are not easily
amenable to economic policy. However, even a cursory review of recent
history strongly suggests that economic and fiscal policies have played
the dominant role.
To understand how these policies affect performance, let us compare
the generally pro-growth policies and the superior performance of the
U.S. economy during the 1980s and 1990s with the generally slow growth
policies and the lackluster performance during the last decade.
During the Great Moderation under both Republican and Democratic
Presidents and Congresses with Republican, Democratic, and split
control, the federal government generally pursued the pro-growth
economic policies and achieved outstanding results:
The size of the federal government, as measured by
federal spending, gradually shrank relative to the size of the economy.
Marginal income tax rates fell. Policymakers focused on
reducing the after-tax cost of capital for new business investment, and
jobs grew.
Monetary policy became increasingly rules-based and
predictable. Ignoring the employment half of its dual mandate, the
Federal Reserve focused on price stability.
The regulatory burden on businesses and households
declined.
The United States led the world in liberalizing
international trade and investment.
Beginning in 2001 under both Republican and Democratic Presidents
and Congresses with Republican, Democratic, and split control, the
federal government reversed course--in large part due to the terrorist
attacks of 9-11--and the results have been disappointing:
The size of the federal government, as measured by
federal spending, has grown substantially relative to the size of the
economy, soaring to 25.2 percent of GDP in fiscal year 2009 and
remaining elevated at an estimated 22.2 percent of GDP during the
current fiscal year.
Marginal income tax rates were first decreased then later
increased. In recent years, policymakers have primarily focused on the
``fairness'' of the tax system instead of its effects on growth.
Monetary policy has become discretionary once again. The
Federal Reserve has justified its extraordinary actions based upon the
employment half of its dual mandate.
The regulatory burden on businesses and households has
increased, generating uncertainty and inhibiting new business
investment.
The United States has fallen behind its major trading
partners in liberalizing international trade and investment.
Today is the perfect time to focus on the growth gap and what we
should do to close it. Given the historical and legal relationship
between this Committee and the Council of Economic Advisers, it is
appropriate that two of its most distinguished former Chairmen, Dr.
Michael Boskin and Dr. Austan Goolsbee, are today's witnesses.
With that, I look forward to their testimony.
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Prepared Statement of Hon. Austan Goolsbee
Thank you, Chairman Brady and Vice-Chair Klobuchar for inviting me
today to discuss the nature of the recovery in the United States.
The central question we have confronted in the economy in recent
years is this: why has the economy not grown faster after such a deep
recession?
I believe there are three basic reasons for that but before laying
those out, I would like to first fix the facts on the nature of our
current economic recovery. I have heard the statement that this is the
weakest recovery ever. That is factually incorrect. This recovery is
not the weakest recovery in recent memory. It is not even the weakest
recovery of the last two recoveries. Measured from the trough, the 2001
recovery was substantially weaker. On the employment side, the jobs
picture continued deteriorating for, literally, two and a half years
after the 2001 recession's declared end date. This time it was 8
months.
Measured by the speed of decline in the unemployment rate, the rise
of GDP or the percentage increase in the number of jobs, this recovery
has been below average compared to past recoveries but substantially
better than in 2001. It has not been fast enough, certainly. But there
is not any question at all that conditions have improved.
The important question, though, is: why there was not a ``V-
shaped'' recovery following such a deep recession? Certainly compared
to 1982-1984 and older episodes of big recessions when deep recessions
led to rapid rebounds, this time, the recovery has looked more like the
last two recoveries which followed much shallower recessions than it
has looked like 1984.
In my opinion there are three basic reasons the recovery is not
faster right now:
1) Recessions from Popping Bubbles Are Much Harder To Recover From
When my dear friend and mentor, former Fed chair Paul Volcker,
raised interest rates above 20% in the early 1980s, economic activity
slowed dramatically. When rates came down, people went right back to
doing what they were doing before the recession began. The key
component to a V-shaped recovery is not requiring a lot of structural
transformation.
This recession resulted from the popping of a bubble so we were not
able to return to business as it was before the recession. As we
documented in the Economic Report of the President in 2011 when I was
serving on the Council of Economic Advisers, the expansion of the 2000s
in the United States was heavily driven by residential investment and
consumer spending--much more so than past expansions in the U.S. and
much more so than other advanced economies during the 2000s.
There was a joke headline in The Onion you may have seen: ``Furious
Nation Demands New Bubble to Invest in to Restore Prosperity.''
Shifting the main drivers of growth away from housing construction and
spending growing faster than income and toward exports, business
investment and more sustainable forms of expansion entails retraining,
labor mobility and time. There really isn't a get-rich-quick-scheme to
do it, and that's a big reason the recovery hasn't been faster.
Add to the problem that the necessary shift to exports has been
complicated by the stagnation and shrinkage in some of our
traditionally largest export markets and you can understand why
recovery hasn't been faster. Our modest growth of 2-2.5% per year has
been among the best in the advanced world. It's been a very rough patch
for the world economy.
With regard to jobs and unemployment, I don't think there is any
secret to how things go. Over time, productivity grows about 2% per
year. If output grows faster than that, then companies must hire or get
more hours from their existing workers. The periods of relatively rapid
decline in the unemployment rate in the last two and a half years have
corresponded to periods when the growth rate got up above 2%. When
output grows less than 2%, companies really don't need to hire
additional workers to grow that fast and the unemployment rate
stagnates or gets worse.
The good news is that exports and investment have rebounded, firm
profitability has, literally, never been higher as a share of GDP and
interest rates and the cost of capital are epically low. Once companies
feel that the overcapacity problem has ended and they can expect a
sustainable increase in demand, the stage is definitely set for an
investment increase. You have seen this already in some sectors.
Congress should be doing everything it can to encourage export growth
and investment at home. I can go into more detail on these steps if you
like but suffice to say that there are many policies that have garnered
bipartisan support in past years which could help.
2) Overcoming the Worst Housing Market in History Has Undermined Growth
There has never been a housing collapse like the one we just
experienced. Housing is normally the most important cyclical sector in
the economy, accounting for about one-third of the growth in the
typical expansion. Economist Ed Leamer has documented quite clearly the
outsized importance of housing and construction for the short-run
business cycle.
So I think it's pretty understandable why the V-shaped recovery
model doesn't work when your recession comes from a popping bubble in
real estate. Prices grew so far above construction costs in this
country that new housing construction exploded to absolutely record
levels. Since prices fell, we have had to work through an astonishingly
large inventory of vacant homes. At one point there were more than 6
million vacant properties in the country. Normally construction and
housing might account for as much as a third of an expansion, but in
this kind of environment, they contribute nothing. Who needs to build
new houses when there are millions of vacant ones? That major hit on
the growth rate also helps explain why there has been no V-shaped
recovery.
In the immediate term, the positive side is that in many if not
most housing markets around the country, prices seem to have begun
rising and we have seen the first vestiges of a return to a normal
contribution of the housing sector to growth. This alone would go a
fair way to returning growth to a more normal level. Congress could
help this process, in my opinion, by facilitating refinancings for
people unable to take advantage of low rates because they are
underwater and by facilitating the conversion of vacant homes into
rental properties. Longer term, most economists would like to see a
rational resolution of the country's housing finance system to get the
government out of the business of backing 95+% of the mortgage activity
in the nation. But it doesn't seem to be on Congress' primary agenda at
the moment.
3) Financial Crises and Deleveraging Take a Big Toll on Growth
As our financial system continues its attempts to recover from the
crisis, it has complicated the recovery, as it always does whenever
there are major financial crises and forced deleveraging. The Economic
Report of the President in 2012 documented that the U.S.'s labor market
experience has actually been a fair bit better than the average for
countries that have lived through financial crises like the one we just
endured.
The good news is that consumer deleveraging may have almost run its
course now. Several important measures of consumer and small business
credit have begun to expand again, albeit modestly. But the
international experience with events like the one we just lived through
suggest that years of slower than normal growth result from financial
crises. Congress could address this issue by trying to get more
principal reduction in underwater mortgages, which is the primary form
of consumer debt overhang, but that subject has been a vexing one for
some time so I think policy may not make much of a dent in the near
term.
Let me take a brief moment to mention two things that I believe the
data do NOT suggest are primary shackles on our current recovery.
1) Regulation/Policy Changes Are Not the Main Source of Modest Recovery
Some commentators have argued that the policy decisions and
regulatory changes of the past three years have been the primary cause
of slow investment and modest growth. Anyone that argues this must
explain why the patterns of behavior we see in the U.S., like the
accumulation of money on corporate balance sheets without a big
increase in investment, are prevalent in virtually every advanced
country of the world. Places that did not enact any of the policies of
the last four years still had the same experience.
I have noted in the Wall Street Journal and in other venues that
economists' normal methods of detecting the negative economic impact of
a policy or a regulation such as comparing places or industries
affected and not affected by a particular policy do not, in this case,
seem to indicate that policies have been especially important as a
primary influence on the recovery. This is true for industries most and
least affected by the health plan, energy policy, and so on.
2) The Short-Run Deficit Is Not the Main Source of Modest Recovery
It should be clear to anyone who looks at the CBO projections of
the last two decades that the business cycle is an overwhelmingly
important driver of the short-run deficit and that the large majority
of the increase in the deficit in 2009 to today came directly from the
slowdown, not from any explicit change in policy. That is the same
reason (in reverse) that government spending and the deficit are now
shrinking at the fastest rate in decades. The notion that short-run
austerity would increase the U.S. growth rate has not been borne out in
the data at all. European countries engaging in austerity have seen
their growth rates plunge and their economies shrink.
The idea that fiscal contractions could be expansionary normally
relies on austerity improving investor confidence and, in turn,
generating lower interest rates which expands output. Interest rates on
U.S. debt remain at epically low levels. Central bankers are debating
what to do when facing the zero lower bound. Arguing that major
immediate cuts to government spending would increase growth requires at
least giving a mechanism of how it would work in this kind of
environment.
I am a long time advocate of the nation confronting the long-run
fiscal imbalance it faces from the aging of our population and the rise
of health care costs. I hope Congress will work with the President to
sign a so-called grand bargain that will address those issues and think
about the level of tax revenue needed to pay for it. But in my opinion,
major immediate-term cuts in government spending beyond the
unprecedented drops in spending as a share of the economy that are
already underway will have the same kind of heavily negative impact on
the growth rate that we have seen in other countries of the world and
that we saw in the fourth quarter GDP number in the United States.
conclusion
I think that the difficult experience for the U.S. and for the
world over these past several years will soon be coming to an end. It
has been a brutal episode in our history and one that we should come
together to rise above. The key is promoting growth. I believe Congress
and the Administration could have a positive impact on the long-run
growth rate of the economy and job market by putting a focus on
expanding exports, encouraging private-sector investment at home,
upgrading the skills of the workforce and ensuring that the economic
infrastructure and intellectual property of the country are secure.
Innovation has driven our growth for at least 200 plus years and we
should invest in keeping it that way.
Thank you for your time.
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Responses from Hon. Austan Goolsbee to Questions Posed
by Senator Martin Heinrich
1. I think it is important for us to avoid confusing the effects of
recession from underlying trends. When the administration's critics say
government has grown under President Obama and cite government spending
as a share of GDP, they are confusing the business cycle with policy
change. The overwhelming reason government spending grew in the initial
years of the Administration is that we had a terrible recession. Every
recession leads to an increase in that ratio, and this one was worse
than any other. Employing their own logic, those same critics should be
praising the Administration for lowering taxes more than any president
before for taxes as a share of GDP plunged unprecedentdly in the
recession.
As you observe, both the deficit and government spending are now
dropping at the fastest rates in a half century, and most private
sector analysts believe that additional austerity in the short run will
undermine growth in the U.S. just as it has done in Europe. I believe
that the Nation still faces the same long-run fiscal problem it has
known about for 50 years and that we will need to address it. But that
problem has virtually nothing to do with the reason deficits rose in
the recession.
To the second part of your question, as a factual matter, the
decline of public sector employment and especially state level teachers
and other workers have been one of the primary reasons the job market
has not recovered to pre-recession health.
2. I agree with both parts of your statement: we should be
sensitive to national security technology getting into the wrong hands
AND we should constantly be evaluating whether our export controls are
doing that in the least intrusive way possible with as little
disruption of private sector growth as we can. I am not familiar with
the specifics on satellite technology or other engineering
technologies, but I do think that being too restrictive or even merely
being too slow to update what is cutting-edge technology can have a
negative impact on the economy, and we should fix it.
3. This relates closely to your previous question. Without getting
into specific industries, I generally concur with the NRC report that
if export controls are not applied judiciously, it can harm competitive
leadership of U.S. companies. We should be especially mindful of
applying excessive controls when there is international competition in
the industry. It does little for our national security if we forbid a
U.S. company from selling some satellite part, say, but the technology
is already available on the open market from competing firms not in the
United States.