[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

                              ----------                              

                     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.
  

                                  
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