[Joint House and Senate Hearing, 113 Congress]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 113-392

 
               THE RECOVERY AT FIVE YEARS: AN ASSESSMENT

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

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE

                     CONGRESS OF THE UNITED STATES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 15, 2014

                               __________

          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               Bernard Sanders, Vermont
Erik Paulsen, Minnesota              Christopher Murphy, Connecticut
Richard L. Hanna, New York           Martin Heinrich, New Mexico
Carolyn B. Maloney, New York         Mark L. Pryor, Arkansas
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
                 Niles Godes, 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

Mr. Larry Kudlow, Senior Contributor, CNBC, Founder and CEO of 
  Kudlow and Co. LLC, New York, NY...............................     6
Dr. Jared Bernstein, Senior Fellow, Center on Budget and Policy 
  Priorities, Washington, DC.....................................     8

                       Submissions for the Record

Prepared statement of Hon. Kevin Brady...........................    36
Prepared statement of Mr. Larry Kudlow...........................    40
Prepared statement of Dr. Jared Bernstein........................    42
Correction for the Record submitted to Chairman Brady from Dr. 
  Bernstein......................................................    53


               THE RECOVERY AT FIVE YEARS: AN ASSESSMENT

                              ----------                              


                         TUESDAY, JULY 15, 2014

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The committee met, pursuant to call, at 2:03 p.m. in Room 
216 of the Hart Senate Office Building, the Honorable Kevin 
Brady, Chairman, presiding.
    Representatives present: Brady, Paulsen, Carolyn B. 
Maloney, Cummings, and Delaney.
    Senators Present: Klobuchar, Lee, and Wicker.
    Staff present: Corey Astill, Gail Cohen, Barry Dexter, 
Connie Foster, Niles Godes, Colleen Healy, Patrick Miller, Andy 
Nielsen, Robert O'Quinn, Andrew Silvia, Sue Sweet, and John 
Trantin.

    OPENING STATEMENT OF HON. KEVIN BRADY, CHAIRMAN, A U.S. 
                   REPRESENTATIVE FROM TEXAS

    Chairman Brady. Well, good afternoon, everyone. Vice Chair 
Klobuchar, Members, and distinguished witnesses, welcome to the 
Joint Economic Committee hearing entitled ``The Obama Economic 
Recovery at Five Years: An Assessment.''
    This June President Obama's economic recovery turned five 
years old. Despite a near trillion dollar fiscal stimulus 
package, $5.8 trillion in federal deficit spending, and a 
massive ongoing stimulus by the Federal Reserve, this 
recovery--while economic conditions have improved--is 
disappointing by all measures.
    We all hope America gets back to work, but honestly it is 
difficult to find a metric on which the Obama recovery rates 
favorably. Wall Street is roaring, but Main Street and middle-
class families are being left behind.
    For most Americans, income growth has flat-lined. Since the 
recession officially ended, real after-tax income has edged up 
by only 4.4 percent a person. That is less than a third of the 
average recovery of the past half-century.
    For middle-class Americans, this means that a family of 
four is missing $1,120 from their monthly budget. They are in 
effect missing the equivalent of their monthly rent or mortgage 
payment.
    Since the recession ended, those missing dollars exceed a 
whopping $40,000 for that family. Can you imagine how many 
groceries, gasoline, and utility bills that would pay for? No 
wonder so many Americans feel like the recession has never 
ended for them.
    So far, due to President Obama's Growth Gap, our economy is 
missing $1.6 trillion in real GDP compared with the average of 
other recoveries since 1960.
    This means America's economy is missing an economy larger 
than that of Australia, Spain, or Mexico. And if we do not 
begin successfully closing this dangerous Growth Gap, our 
Nation's economic hole will soon be larger than the entire 
economy of neighboring Canada.
    Cumulatively, the overall loss in economic output in 
America is $4 trillion, compared with again the average post-
1960 recovery. That gap alone would qualify as the fourth 
largest economy on the planet. Can you imagine how much that 
missing economic growth would help American families today?
    Can President Obama catch up? Can his economic leadership 
close the Growth Gap? We hope so, but it will be difficult. 
Just to qualify as the leader of an average C- grade economic 
recovery by the end of his presidency, real GDP will need to 
grow at an annual rate of 6.5 percent during each and every 
quarter. Unfortunately, the U.S. economy has only topped a 4 
percent annual growth rate in two quarters of this recovery.
    Disappointing economic growth means jobs are missing, too. 
Despite 52 consecutive months of private sector job growth as 
cited by Dr. Bernstein, the U.S. economy still suffers from a 
private sector jobs gap of 5.8 million jobs measured from the 
end of the recession.
    These are Main Street jobs, not government jobs. And to put 
this staggering jobs gap in perspective, closing that gap would 
mean that every person searching today for a job in 44 states 
and the District of Columbia could go back to work.
    Eliminating the jobs gap won't be easy, either, for the 
President. The U.S. economy would need to generate an 
additional 374,000 private sector jobs each and every month for 
the remainder of President Obama's presidency. Unfortunately, 
the White House hasn't achieved that even once during the 
recovery, and has broken the 300,000 private sector jobs per 
month mark only once--only twice, excuse me.
    And while we all cheer the lower unemployment rate, 
unfortunately the decline is largely a mirage created by 
American workers leaving the workforce. Without the fall in the 
labor force participation rate to 62.8 percent since President 
Obama took office--which is a multi-decade low last seen when 
Jimmy Carter was in the White House--the unemployment rate 
would actually be 10.2 percent today, not 6.1 percent.
    Those dropping out of the work force aren't the elderly 
taking early retirement; their participation rate has actually 
increased since 2007. It is the 16 to 59 year olds, both the 
young and prime working age individuals, whose participation 
has dropped. As a result, our labor force is missing more than 
3.4 million workers between the ages of 20 and 59.
    To the President's credit, from the end of the recession 
through April total employment has increased 5.7 million. 
Unfortunately, many more, over 11.3 million Americans, have 
been added to the food stamp rolls during the same period. This 
is not a hallmark of a strong, broadly based recovery.
    Are recessions caused by a financial crisis difficult to 
recover from? Absolutely. And the President deserved time to 
let his policies work. But at this point, five years after the 
recovery officially began, the responsibility for this 
disappointing economy now lies squarely on this President. The 
excuse box is empty.
    It is time to acknowledge that the President's seemingly 
insatiable appetite for more federal spending, higher taxes, 
and excessive red tape on local businesses has produced an 
economy sputtering along at near stall-speed. That has deprived 
millions of hardworking people, young and old alike, their 
opportunity to pursue the American Dream.
    For the sake of millions of Americans seeking good jobs, we 
can no longer afford to simply stay the course. We need to roll 
back the damaging economic policies that the Obama White House 
has inflicted on the American people.
    In closing, to get our economy back on track we need to 
return to the proven free market principles that built the most 
prosperous country on the planet. We need to implement the 
economic policies--lower marginal tax rates, federal spending 
restraint, balanced regulations, a sound dollar, and opening 
foreign markets to American exports--that got America moving 
again under both President Kennedy and President Reagan.
    We need to remember the words that one of our distinguished 
witnesses today, Larry Kudlow, has uttered so often over the 
years: ``free-market capitalism is the best path to 
prosperity.''
    I look forward to the testimony today.
    At this point, I would recognize the Vice Chair, Senator 
Klobuchar, for her opening statement.

  OPENING STATEMENT OF HON. AMY KLOBUCHAR, VICE CHAIR, A U.S. 
                     SENATOR FROM MINNESOTA

    Vice Chair Klobuchar. Thank you very much, Chairman Brady, 
and thank you for holding this important hearing today.
    I would like to welcome our witnesses, Dr. Jared Bernstein 
who is the Senior Fellow at the Center on Budget and Policy 
Priorities; and also Mr. Larry Kudlow. Thank you for being 
here.
    We are here today to talk about the economic recovery, but 
I think it is important to discuss briefly just how far we have 
come.
    The 2007 to 2009 recession was the longest and deepest 
recession in the post-war period. I think back to the first 
part of 2009 when our country was losing jobs at a rate of 
nearly 700,000 a month--literally, the population of Vermont. 
But five years after the recovery began, our economy has 
stabilized, and in some states it is actually expanding.
    In my own State, the unemployment rate is better than 
average. It is at 4.6 percent. And the Twin Cities Metro area 
at 4 percent has the lowest unemployment rate of any 
metropolitan area in the country.
    Yet still in our State, and across the country, we see 
families that are struggling to make ends meet. And we have 
much more work to do. I think we can get even better in 
Minnesota, and for that reason I think we have to look at an 
economic agenda for this country.
    2013 marked the fourth consecutive year of economic growth, 
and recent economic news continues to be encouraging.
    (Cell phone tone is heard.)
    That was more news the Chairman was just getting. Just 
kidding. While the economy contracted in the first quarter, 
Federal Reserve Chair Yellen, who recently testified here, has 
attributed this to some temporary factors such as extreme 
winter weather. The Federal Reserve in fact expects economic 
growth to exceed 2 percent this year, and to be 3 percent or 
more next year.
    Manufacturing, which is an engine of innovation and 
progress and generates 90 percent of all patents, has rebounded 
adding nearly 670,000 jobs since February of 2010--although, as 
we all know, it is not as it once was.
    Exporting has been another bright spot. Exports have grown 
in each of the past four years. Housing starts are up more than 
9 percent in the past 12 months, and the latest report on new 
single-family home sales shows they were at a six-year high.
    The rebound in the housing market has helped households 
rebuild wealth lost during the recession. Net worth has 
increased at an average annual rate of 8.2 percent since the 
recovery began, and is now 12.6 trillion above the pre-
recession peak.
    The job market is also much healthier than five years ago. 
As our chart shows there on the screen, we have now recorded 52 
straight months of private-sector job growth, the longest 
streak in history. With June's gains of 262,000 private-sector 
jobs, we have added 9.7 million private-sector jobs since 
February of 2010, more than were lost during the recession.
    Employment growth has exceeded 200,000 jobs for 5 
consecutive months, the first time that has happened since 
January of 2000.
    For most workers, the prospects of getting and keeping a 
job today are better than they have been in a number of years. 
The number of unemployed workers per job opening has decreased 
from nearly 7 in July 2009 to 2.1 in May of 2014, close to the 
pre-recession level of roughly 2 unemployed workers for every 
job opening.
    The unemployment rate nationally, currently at 6.1 percent, 
is down 1.4 percentage points over the past year, the largest 
one-year drop in almost three decades, as you can see from that 
chart.
    Despite the improvements in the job market, we still have 
work to do. Long-term unemployment is still a very real 
problem. More than 3 million Americans, almost one-third of 
unemployed workers, have been out of work for more than 6 
months.
    We are making progress, but as we look at this, half the 
decline in the unemployment rate in the past year has come from 
a decline in long-term unemployment, and the long-term 
unemployment rate has now fallen to 2 percent.
    As I said at the beginning of my remarks, I believe we need 
a long-term economic agenda for this country. Ramping up our 
work force and our education system I think is job one, 
especially from a state where our manufacturers, 67 percent of 
them, report job openings, trying to find workers with those 
skills, whether it's welding, whether it is fixing robotic 
equipment, whether it is running robotic equipment, to fill 
those jobs. That is up from 40 percent in 2010.
    We have just recently in Congress, bipartisan, each passed 
some kind of work force opportunity Act, and I think that that 
is a good start, and there is more work to be done.
    Passing the Immigration Bill will also be part of this 
solution. Comprehensive immigration reform would strengthen our 
labor force, boost productivity, and accelerate economic 
growth. Some estimates show that it would create 120,000 new 
jobs per year.
    And then of course there is the deficit reduction, which is 
why I called Grover Norquist as a witness before this 
Committee. The CBO scores show that it will reduce the federal 
deficit by $160 billion over 10 years, and around $700 billion 
over the 10 years after that. We passed it in the Senate with 
68 votes. We would really like to get it done in the House.
    We also need to make it easier to afford college. There are 
various proposals out there for that, but that is clearly part 
of this building the work force, along with work force training 
and along with the immigration reform.
    Raising the minimum wage to allow people to work their way 
out of poverty is key. And finally we need to bring down our 
debt, as Mr. Kudlow mentions in his testimony, and pass 
comprehensive tax reform, and bring down the overall corporate 
tax rate. I think we need to pay for it by closing some of the 
loopholes out there, but simplifying it, bringing down the 
rate.
    And then finally, regulatory reform. We have seen that in 
tourism where we have suddenly seen a big boon because we have 
improved the visa approvals, and we would like to see it in 
other areas, as well. I will just add in ``medical device tax'' 
because I always bring it up every time we have a meeting. But 
I just think this kind of regulatory reform is very important, 
as well.
    In conclusion, we have come a long way since the recession. 
I just do not think anyone can deny that. But we have a long 
way to go. And the most important thing I think we need to do 
is provide consistency for businesses so they can add jobs and 
try to get away from some of the short-term fixes as we go into 
the next year, passing more long-term tax reform and other 
things that will give businesses the consistency that they need 
to add jobs.
    Thank you, Mr. Chairman.
    Chairman Brady. Thank you, Vice Chair.
    Votes have been called in the House. We have all been 
looking forward to this hearing for some time. After I 
introduce our distinguished witnesses today, I will turn the 
chairmanship over to Senator Lee. The House Members will vote. 
There may be a short recess. We will return just as quickly as 
these votes are over.
    Larry Kudlow is a Senior Contributor for CNBC, the host of 
``The Larry Kudlow Show,'' and founder and CEO of Kudlow & 
Company, an economic research and consulting firm. He also 
hosted, as you know, CNBC's Prime Time Program, ``The Kudlow 
Report.'' Mr. Kudlow started his professional career at the 
Federal Reserve Bank of New York where he worked in Open Market 
Operations and Bank Supervision. During President Reagan's 
first term, Mr. Kudlow was Associate Director for Economics and 
Planning at the Office of Management and Budget, where he was 
engaged in the development of the administration's economic and 
budget policy. He then served as Chief Economist and Senior 
Managing Director of Bear Stearns & Company. Mr. Kudlow holds a 
BA in history from the University of Rochester. He also 
attended Princeton University.
    Jared Bernstein is a Senior Fellow at the Center on Budget 
and Policy Priorities. From 2009 to 2011, Dr. Bernstein was the 
Chief Economist and Economic Advisor to Vice President Joe 
Biden; Executive Director of the White House Task Force on the 
Middle Class; and a key member of President Obama's economic 
team. Prior to joining the Obama Administration, Dr. Bernstein 
was a senior economist and the Director of the Living Standards 
Program at the Economic Policy Institute here in Washington. 
Between 1995 and 1996, he held the post of Deputy Chief 
Economist at the U.S. Department of Labor. Dr. Bernstein holds 
a Ph.D. in Social Welfare from Columbia University.
    We are thrilled to have two economic experts and articulate 
leaders, thought leaders on the economy here today. I will 
recognize Mr. Kudlow for his testimony, and turn leadership of 
this hearing over to Senator Lee.
    Thank you.

   STATEMENT OF MR. LARRY KUDLOW, SENIOR CONTRIBUTOR, CNBC; 
    FOUNDER AND CEO OF KUDLOW AND COMPANY, LLC, NEW YORK, NY

    Mr. Kudlow. Mr. Chairman, thank you very much. I appreciate 
it. Everybody, thank you for your statements, Ms. Klobuchar, 
and our Republican Senators.
    I will try to be as brief as I can. I agree that there is 
no question we are better than we were back in 2008 and 2009. I 
agree with that. That is undisputable.
    But I will argue we can do a whole lot better. It has been 
a 2 percent recovery. It has been a 2 percent recovery which is 
either one of the slowest, or the slowest since World War II, 
or since 1960. And I think growth is about half of what it 
should be.
    And I think coming off that dreadful crash in '08, we 
probably could be growing the economy as much as 5 percent for 
3, 4, 5 years. I think the potential is there for it.
    Frankly, while I fully agree we have had some much better 
news in nonfarm payroll jobs--undisputable--I just want to 
note, to me at least we are barely in recovery when it comes to 
business investment, Cap X, one of the most vital signs. It is 
also one of the best job creators. And this is the reason that 
I have been crusading and campaigning for significant corporate 
tax reduction and reform.
    I do not know that that would solve all the problems, but I 
think it would solve a lot of the problems. We are losing cash, 
and we are losing plant and equipment to overseas. I hate to 
see it. But the reality is that these firms have to function to 
the best return of their shareholders, after tax.
    And so if you have the highest tax rate, highest business 
tax rate among the leading countries in the world, you are 
going to lose. We are not hospitable. Our firms are leaving. 
You see it in the front page this morning, another 
pharmaceutical company wants a merger in order to relocate. I 
guess it's in Ireland. We're losing tech companies to Ireland.
    So my point is a simple one. I would like to, at some point 
down the road, frankly, I would like to abolish the corporate 
tax in its entirety. I have seen a lot of work done on this. It 
is a very doable proposition. But for now, for now, I would 
recommend a 20 percent corporate tax rate, which would put us 
about on par with Great Britain. The UK has the best economy in 
Europe. They are growing a little better than 3 percent; 20 
percent.
    Canada's, I think, federal rate is 15 percent. That is 
where I would go. And I also would have full cash expensing; 
immediate writeoffs for cash expensing. And I would abolish 
every other deduction and credit in order to get that.
    If you wanted to be revenue-neutral in static terms, or if 
you want to price it out in growth terms with a little supply-
side effect, whatever you have to do, get rid of the 
deductions. And that is one of the reasons, if I can just put 
an advertisement in--it doesn't have a thing to do with the 
corporate tax--I am strongly in favor of abolishing the ExIm 
Bank and all other forms of corporate welfare. I just wanted to 
say that.
    Now other areas, we have problems. You both noted it. Jared 
is a labor expert. The numbers have improved, but there are big 
holes in the labor story. There are big holes in the income 
story. There are big holes in the wages story. Big holes. And 
it has been a very, very weak recovery in the jobs area.
    I will say--this is my view, editorial view, but I have 
been involved in economic policy on and off for a very long 
time--I believe that the government spending stimulus from the 
Federal Government, and the monetary stimulus from the Federal 
Reserve, failed. Both failed.
    I believe these so-called ``fiscal multipliers'' failed. I 
believe the ``money multipliers'' failed. And particularly with 
the collapse of velocity and the risk aversion and the huge 
appetite for safe cash, it all failed. In fact, on money I am 
an ex-Fed guy, many, many years ago. If you look at the M2 
money supply, it has not changed. It has been growing at 6, 
6\1/2\ percent this whole period, even though the Fed's balance 
sheet, the monetary base, has increased by over $3 trillion.
    So I believe we would have been better off not intervening. 
I think the economy would have recovered faster. Now in the 
recent year or so we have had some increases in tax rates, and 
there are more to come, and that is not going to help the story 
either.
    I am a guy who believes in monetary rules. John Taylor was 
just down here, a professor at Stanford, a good friend of mine. 
I think the Taylor Rule would be better for the Fed. I think 
the Fed should watch market prices such as commodities and gold 
and the Treasury Yield Curve, and the exchange rate of the 
dollar. I think they would do a lot better.
    I agree with Professor Casey Mulligan of Chicago that 
redistributionism has contributed to this recession. I am in 
favor of a safety net, always have been. But I think the 
widening of eligibility under Mr. Bush and Mr. Obama has 
created incentives not to work.
    And I think whether it is food stamps, or disability 
insurance, or long-term unemployment, I do not want to sound 
hard-hearted, but I think it is not in their interest to get 
off. The marginal tax rate of getting off those programs can be 
as high as 80, 90 percent, and I think that has been another 
problem.
    So I will just add, some lighter regulations. We can get 
into this later on. One point, finally, I'm an optimist at 
heart. I love to be an optimist. I do not see a recession. I do 
not see a recession. And I kind of hate it when people try to 
politicize the numbers. I have given you my best view on the 
economy, and it is no secret that I am a Reagan Supply Sider. I 
am not breaking any news there.
    But I will say this. In terms of the, what I will just call 
the ultra-pessimist, I do not believe them, either. To me, when 
you see a positive yield curve in the Treasury Market, that 
signals continued expansion, albeit slow or moderate.
    We have never had a recession without a negative yield 
curve. I just put that to the Committee. I think it is a very 
important point.
    Secondly, we have had good news on the Stock Market, good 
news on corporate profits, and I do not see a Stock Market 
bubble. In fact, I do not see any bubbles right now. In fact, I 
think bubbles are the last thing we should worry about.
    The generals always fight the last war. It is a very 
strange thing. That is true in the military, and I think it is 
true in economic policymaking. And I know it is true at the 
Federal Reserve.
    So in that sense, I am somewhat optimistic. But I would 
just say to you: You cut corporate tax rates, and raise the 
value of the dollar about 10 percent; lower tax rates, stronger 
dollar, you can raise this growth rate and it can happen 
overnight. And people will start taking risks, and money will 
come back to the United States, and we can expand jobs, capital 
spending, investment, and all the rest of it.
    Thank you. Sorry I went on a bit too long.
    [The prepared statement of Mr. Larry Kudlow appears in the 
Submissions for the Record on page 40.]
    Senator Lee [presiding]. Thank you very much, Mr. Kudlow.
    Dr. Bernstein.

 STATEMENT OF JARED BERNSTEIN, Ph.D., SENIOR FELLOW, CENTER ON 
         BUDGET AND POLICY PRIORITIES, WASHINGTON, D.C.

    Dr. Bernstein. Chairman Brady, Vice Chair Klobuchar, I 
thank you for the opportunity to testify on this timely topic. 
It is an honor to be here with my old friend, Larry Kudlow, as 
well.
    Thanks in part to countercyclical policies legislated in 
Congress in 2009, along with aggressive monetary policy by the 
Fed, significant progress was made early on in repairing the 
damage done by the uniquely deep recession that began in late 
2007.
    Slide one in my presentation shows how GDP crashed at the 
nightmarish rate of 8 percent in the fourth quarter of 2008. 
The Recovery Act was passed in the middle of the next quarter, 
and by the second half of 2009 real GDP was growing again.
    The other figure in that first slide shows how employment 
losses began to shrink as the Act was implemented and jobs 
began growing in early 2010.
    The next figure shows a broad set of analyses of the impact 
of the Recovery Act on real GDP, including many nonpartisan 
sources, including our own CBO. On average, they find that in 
2010 the Act added 2.5 percent to GDP.
    These actions helped to pull the recovery forward and 
prevent the Great Recession from becoming the next depression.
    The economic progress over the first five years of the 
recovery, while incomplete, are most evident in the job market, 
particularly in the recent acceleration in job growth shown in 
my next slide, and the decline in unemployment.
    After 52 consecutive months of net private-sector job 
growth, non-government employment is up 9.7 million jobs since 
early 2010. Moreover, employment growth has accelerated in 
recent months. Payroll has added 1.4 million jobs in the first 
half of this year, their strongest 6-month growth period since 
late 1999.
    Un-and underemployment are both down significantly over the 
recovery, as are other slack metrics that rose sharply in the 
downturn, including long-term unemployment and involuntary 
part-time work.
    While part of that decline in unemployment was due to labor 
force exit, this negative trend has also stabilized in recent 
months and recent declines in the jobless rate are due to job 
seekers finding work not giving up the search.
    In fact, private payrolls grew about 3 percent faster over 
the first 5 years of this recovery compared to the prior one, 
despite the fact that the recession that preceded this 
expansion was much deeper in terms of lost output and much 
longer lasting than the downturn that preceded the 2000s 
expansion.
    The private-sector added 3.4 million more jobs in the first 
5 years of this recovery than were added in the last one. And 
yet, slack remains in the job market and wage growth has 
generally not yet accelerated.
    Corporate profitability and financial market returns, on 
the other hand, have more than recovered their losses. In other 
words, while there are certainly positive attributes to the 
current recovery--especially in relation to the depth of the 
recession that preceded it--it is clearly not yet reaching 
everyone.
    Still, the evidentiary record shows that there should be no 
question that the quick and forceful policy actions taken by 
some members of this Committee and your colleagues back in the 
depth of the Great Recession were essential.
    Since then, however, factions within this Congress have far 
too often blocked measures that could have built on this 
stabilization, like the American Jobs Act, or more recently 
Emergency Unemployment Compensation.
    Worse, Congress has at times imposed self-inflicted wounds 
on the economy, including the government shutdown, 
sequestration, and the threat to default on our national debt.
    As shown in my Figure No. 5, the imposition of these 
headwinds has blocked progress on growth, jobs, and wages at a 
time when the opposite was needed. In fact, many of the same 
policymakers who today criticize the economic progress I have 
documented have at the same time blocked legislative 
initiatives targeted at improving that progress.
    It is one thing to critically point to the fire; yet quite 
another to do so while blocking the hydrant.
    I would just summarize the message from my testimony as 
follows: When markets fail as massively as they did in the late 
2000s, quick and forceful action clearly helped offset the 
damage. But to stop at stabilization instead of rebuilding jobs 
and incomes that were lost over the downturn is a serious 
policy mistake, one that has proven to be extremely costly to 
working families.
    Still, there is time to build on the recent momentum we 
have seen, particularly in the job market. Now members of this 
Committee have suggested good ideas to help the recovery reach 
more people in the areas of job training, women's financial 
security and equal pay, manufacturing policy, and extending 
emergency unemployment compensation.
    I would add investment in public infrastructure and 
increasing the minimum wage. Such measures would give the 
recovery a much better chance of reaching families that have 
seen too little of it so far, and surely we can all agree on 
the desirability of that outcome.
    Thank you, very much.
    [The prepared statement of Dr. Jared Bernstein appears in 
the Submissions for the Record on page 42.]
    Senator Lee. Thank you, Dr. Bernstein.
    Given the topic of today's hearing, I would like to focus 
at least initially on where we have been, and on some of the 
things that have contributed to where we are and where we have 
been in the last few years.
    Dr. Bernstein, in your testimony you shared your belief 
that we should have had more fiscal stimulus in the early years 
of this Administration than we in fact had.
    You know, as you know during the first three years of this 
Administration we added to the national debt, to the debt held 
by the public, by about $4.5 trillion. So do I take from your 
testimony that means that you think we should have added to the 
national debt to a greater degree than that for the first three 
years of the Administration?
    Dr. Bernstein. Well let me clarify. First of all, my point 
is not that we should have done more early on, as you 
suggested. I actually thought what we did was ample. I think it 
ended too soon.
    So I think what was needed was, once the economy was 
stabilized, we needed to do more to build on that 
stabilization.
    Now on your debt and deficit point, I would like to make a 
very, very important point that always gets overlooked in this 
conversation.
    It is not ``temporary measures'' that add to our fiscal 
problems. And we have real fiscal problems. In fact, if you 
read today's Congressional Budget Office's Long Term 
Projection, there is no reference at all to temporary measures, 
many of which have expired, and in my view as I just said 
expired too soon. What hurts you on the fiscal front is not 
something that comes into the system and gets out of the 
system--``stimulus'' is by definition temporary--it is the 
long-term pressures coming from say health care costs, and an 
aging demographic.
    If you actually look at the contribution of the measures 
that I was advocating to the deficit or the debt, they are 
actually adding zero to the deficit at this point, and 
fractional to the debt.
    Senator Lee. Okay, so you are not saying that we should 
have added more debt during that initial three years, during 
the first three years of this Administration?
    Dr. Bernstein. Not during the first say two years. But 
starting in 2010, and I actually have a slide that shows this, 
starting around 2010-2011 and forward, that is when we should 
have been doing more on the fiscal side. Because at that point, 
fiscal policy was actually creating a significant drag on 
economic growth and holding back the stabilization effects that 
I thought we actually did handily in the first couple of years.
    Senator Lee. So just to be clear, you would say that during 
that third year we should have done more, such that during that 
three-year window we should have added to the debt by an amount 
more than four point----
    Dr. Bernstein. I want to be very----
    Senator Lee. How much? How much More?
    Dr. Bernstein. Well, first of all, I want to be very clear. 
When I talk about these kinds of measures that I am advocating, 
I am talking about temporary measures. And as I have stressed, 
the temporary measures that expire add nothing to the growth of 
the debt over the long term.
    And, yes, I think we needed to do more to the tune of, 
let's just take 2013 as an example. In 2013, fiscal drag took 
1\1/2\ percent off of GDP growth. Fiscal drag that, I would 
argue, Members of Congress were in no small part responsible 
for creating.
    One-and-a-half percent of GDP equates to about half a 
percent of unemployment. That is over a million jobs. It is 
actually three-quarters of a percentage of unemployment. That 
is over a million jobs. So, yes, I would have done more 
temporary measures to help avoid the fiscal drag that has kept 
this economy from reaching more people.
    Senator Lee. Including adding to the debt by an amount 
greater than what was added to during that period.
    Dr. Bernstein. Certainly I am advocating more temporary 
fiscal policy that, once it expires, adds nothing to the budget 
deficit and nothing to the growth of the debt.
    Senator Lee. Mr. Kudlow, what is your response to this? And 
what are the policies that you----
    Mr. Kudlow. Well, look. Jared is a good friend, but we 
diametrically disagree. I just want to say a couple of things 
that come to mind listening to Jared.
    2013 was the sequester. And if you go back and look at the 
press clips, and look at the CBO, we were supposed to have 
lost, I don't know, 700,000 jobs, 800,000 jobs. We didn't. We 
gained jobs. Job growth has been, you know, pretty steady in 
the last couple of years, 2 percent growth a year.
    All the calamities that we heard about never occurred. In 
fact, the whole--what is so interesting to me is, as I said in 
my opening remarks, all this federal spending stimulus, and all 
this monetary stimulus, did not move the meter at all. We have 
been growing pretty steadily at 2 percent a year, which as I 
said is about half what we should have grown coming out of the 
deep recession. Maybe less than half. So I just don't buy it. I 
don't think it can be quantified.
    People are talking about, you know, counterfactual 
scenarios, if we didn't do this it would have been worse. All I 
know is factually here's what we have. And it is not good 
enough.
    I would have gone immediately into progrowth tax reform. 
That is what I would have done. And I would have let the 
countercyclical safety net work its way, as it did. In effect, 
you sort of doubled the safety net. And then it ran out and 
didn't seem to have any appreciable impact on economic growth.
    That is why I argue, with all due respect, these 
multipliers don't work. They come from models that have been 
discredited, and they don't work. They didn't work in the past, 
and they don't work today.
    I am surprised at some of the people on the Obama team that 
they went back and tried that. Less government, lighter 
regulation, greater tax incentives. If it pays more to work and 
invest after tax, you will work and invest more. These are the 
things that I think we should have been doing.
    We should be revaluing the dollar, not devaluing the 
dollar. Here's a good point: The rate of spending has fallen. I 
like that. In fact, if I could think of one stimulus to the 
economy in the last few years, it's the fact that federal 
spending as a share of GDP has come down from a peak of close 
to 25 percent, 24\1/2\ percent, to actually less than 21 
percent. I think it is about 20.6, 20.7 percent.
    The deficit has also come down, but I am a guy who looks at 
spending. To me, that gives the private sector more room to 
grow, and the government absorbs fewer funds. That is a good 
thing, not a bad thing. So I, you know, have a different point 
of view with respect to my pal Jared on that.
    And I also think it is never too late to have good policy. 
So the President has talked about corporate tax reform. Senator 
Klobuchar, you talked about corporate tax reform. Why don't you 
do it? Just go on ahead and do it.
    You know, you don't have to do all of it in one fell swoop. 
What I am suggesting here, with great respect to my friend, 
Chairman Dave Camp, just work on the business side for now. 
Stop these firms from leaving. Stop them from taking the cash 
out of the economy. But you can't do that by penalizing them. 
They will just shut down, particularly in this environment 
where the animal spirits of risk taking are so low. People are 
still so risk-averse, you know, because of what we went through 
five years ago, six years ago.
    Slash the corporate tax rate. Advertise it. Talk about it, 
and slash it. We could disagree about the exact point. I want 
20 percent, you want 25, you've got a deal.
    [Laughter.]
    You want 28? Senator, I'd probably take it, but I think 
it's too high. I think the OECD average is about 25 percent. 
That's where I would go, but I would go lower than that just to 
make America more competitive. And get rid of all the K Street 
bells and whistles. Just get rid of them. We don't need them.
    The Federal Reserve is ending its monetary stimulus in 
terms of bond buying. They are getting out of the bond 
business. This is good. It did not do a whit of good, not one 
whit. It did not change the growth of the economy. In fact, 
long-term interest rates went up during most of these 
Quantitative Easings, not down, although they anchored the Fed 
Funds Rate at zero percent.
    Here is a combination: You cut the corporate tax rate. Let 
the market move interest rates up at the short end and the long 
end, as they will, and you will have yourself a roaring 
recovery. I mean a roaring recovery.
    Yes, this was the Reagan prescription. Yes, this was the 
John F. Kennedy prescription. And, yes, I believe it will work 
again. A critic of mine said, oh, it's so 1979. And I said, 
yeah, okay, pal. The way I look at it, it is so 1775. Remember 
the Boston Tea Party was about taxes, and the young Republic 
kept tax rates down.
    Look, I believe the incentive model of growth works. And I 
also believe you have to have a king dollar. I don't want to 
lose money to these other currencies.
    Senator Lee. Thank you very much, Mr. Kudlow.
    Senator Klobuchar.
    Vice Chair Klobuchar. Thank you very much, Senator Lee. 
Senator Lee and I chair the Antitrust Subcommittee of 
Judiciary, and this is a lot more fun. So thank you.
    [Laughter.]
    Mr. Kudlow, I want to start with something you raised, 
which is near and dear to my heart, because we have one of the 
companies that we love, Medtronic, that has actually--you know, 
we're fairly supportive of the fact that they are going to add 
1,000 new jobs in our State as a result of this inversion, as 
well as $10 billion over 10 years in investment. But obviously 
the concern that I have expressed, not about this particular 
deal but about the incentives that are going to continue that 
you have raised, is the fact that these companies have so much 
money overseas and we have to find a way to create new 
incentives.
    And I view it the only way we really do this is with some 
kind of comprehensive tax reform. And so I wanted Dr. 
Bernstein's view on that, but I first just wanted to raise this 
idea of repatriation.
    Mr. Kudlow. Yes.
    Vice Chair Klobuchar. Let's say we cannot get the work done 
on comprehensive tax reform in the next four months, or 
something like that; that is going to take eight months, nine 
months--a big nine months; you can have a baby in nine months, 
so maybe we can get it done----
    [Laughter.]
    But do you think repatriation is worth looking at?
    Mr. Kudlow. I do.
    Vice Chair Klobuchar. Some of the oldtimers around here, 
you know, they say well the last time we did it the money went 
to the shareholders. They did not really invest--I am just 
telling you what they say.
    Mr. Kudlow. I have seen this argument.
    Dr. Bernstein. I think that is true.
    Vice Chair Klobuchar. Yeah, okay----
    Mr. Kudlow. I think it is partially true.
    Vice Chair Klobuchar. Uh-huh.
    Mr. Kudlow. And by the way, the fact that it is partially 
true does not make it bad. All right? If corporations pay 
dividends, or share buy-backs to their investors, their 
investors generally do not put it under the mattress. They put 
it to work.
    They might even start a new Medtronics. I am very familiar 
with that company, all of that company. I know your past and 
present CEO.
    Vice Chair Klobuchar. Very good people.
    Mr. Kudlow. They are, and they did a good job for the State 
and the country. The point I am making is, yes, we need 
repatriation. And, you know, there are two ways to go here. And 
I have heard both. Some people in Congress want a penalty, a 
really strong, stiff penalty, as though these companies were 
criminals.
    They are not criminals. They are just acting on behalf of 
their shareholders under the current tax law, which I don't 
like, but they are doing what--or you can reward them by 
bringing the money home.
    In the mid-2000s, I think the repatriation penalty rate was 
about 5\1/4\ percent, something around that range. Okay? Go 
there. Go back there. You will get more bang now, by the way, 
because there is more money overseas. Ten years has elapsed. 
And if you go higher--I've talked to a lot of CEOs on my show, 
and I've talked to them through e-mail--you start getting up to 
the 10 to 15 percent, they back off. That's a lot for them. You 
look at the margin. You know, remember they're paying tax 
overseas, and then they get a credit against that. So really 
their net tax won't come down that much.
    If you're in the 5, 6, 7 percent, 8 percent zone, most of 
these CEOs would play ball and they would bring the cash home.
    Vice Chair Klobuchar. Okay, Dr. Bernstein, and I would 
also--there's some discussion about linking it to some kind of 
infrastructure funding as well, but why don't we talk about 
where repatriation could be set to make it work, if it's worth 
looking at. And then also this idea of comprehensive tax reform 
and bringing down the rate.
    Dr. Bernstein. Let me start off with two comments that are 
supportive of what my pal Larry has been talking about. First 
of all, nobody is a criminal here. You are right about that. 
People are responding to incentives that are in the system.
    But--and secondly, I am a strong--I am in strong agreement 
that the corporate tax code is quite a mess, and that doesn't 
help anybody. We sort of have the worst of all worlds. And the 
idea of a lower rate and a broader base makes sense to me.
    Now that said, let me just cut to the chase of where I 
fundamentally disagree with where the conversation has been 
going for the last few minutes.
    It is all supply-side trickle-down economics and it just 
doesn't work. I understand the motivation to give tax breaks to 
companies. And in fact, just to be clear, when you have 
revenue-neutral tax reform, which is what I think we are all 
talking about, there are winners and there are losers. So let's 
be clear about that.
    Not everybody has a lower tax bill under revenue-neutral 
tax reform. And the idea that if you take the corporate rate 
down to 28, 25, 20, zero, that you are going to see growth bust 
out all over, has been disproved time and again by the 
historical record on precisely these kinds of ideas.
    For example, right now even though the statutory rate is of 
course 35 percent, because of this morass of loopholes, and 
deferrals, and you name its, double-dutch Irish sandwiches, and 
inversions, the effective tax rate is probably about 10 points 
lower than that that corporations pay. And corporate 
profitability in recent quarters--it came down the last quarter 
because of the problematic GDP report--but in recent quarters, 
corporate profitability as a share of national income was at an 
all-time high in data going back to the late 1920s.
    So if high corporate profitability led to faster job 
growth, we wouldn't be having many of the problems we are 
talking about right now. So absolutely clear out the tax code 
because it's the right thing to do, but don't expect to get 
these supply-side effects.
    What you will get is a lot more corporate profitability. 
You won't see, necessarily, a lot more employment growth here. 
You might see it abroad. And you will get a much larger budget 
deficit, which is something I know Senator Lee is concerned 
about, as well.
    Mr. Kudlow. I just, I just----
    Vice Chair Klobuchar. Well----
    Mr. Kudlow [continuing]. You have to ask yourself--okay, we 
disagree about this, I get that--why are all these other 
countries doing it around the world? You know, Europe is 
unfortunately suffering from a deflation. If their central bank 
would get going and put a little bit more money into the 
system, some liquidity, Europe could grow very rapidly. They 
did a good job, most of those countries, cutting tax.
    Asia tax rates are lower than ours everywhere. Asia has 
recovered very, very nicely. Ditto for Australia. I don't agree 
with Jared that there's no incentive effect. I think there's a 
substantial incentive effect.
    Vice Chair Klobuchar. Do you agree that we should pay for--
you know, if we bring the rate down, which there's general 
consensus on--we may disagree on where--that we have to pay for 
it to keep the debt going down?
    Vice Chair Klobuchar. You know, I'm very--I'm not very good 
on this debt stuff with respect to my friend, Senator Lee. To 
me, debt-to-GDP is the measure.
    So if you grow the denominator faster than the numerator, 
you're fine. You're making an investment in the future. And 
that's where I come out on this.
    Here's the--look at the system we have. Jared is right. 
Corporate tax collections are way below. We have so many 
loopholes. So what you've got here is a high rate and a huge 
loophole. That is called the wrong side of the Laffer Curve.
    What you want is a low rate and ending the loopholes. You 
will collect vastly more revenues. Vastly more. And these firms 
will keep doing it, so they'll invest. It is not enough to 
have--you know, they've had a one-shot recovery in profits 
these recent years from the depths of 2008 and 2009, but they 
won't get a recurring--they won't get a recurring share of 
profits. Profits are already slowed down.
    The 50 percent writeoff for equipment, which lapsed at the 
end of last year, is the reason corporate profits fell by 19 
percent at an annual rate in the first quarter. Now that won't 
be repeated, but many CEOs have said without that expensing 
they're not going to go into the investment game.
    The trick is to make the profits work. And the only other 
point I want to make is this: Studies have shown that lower 
corporate rates, 70 percent go to the work force. 70 percent. 
There's a lot of work done on this by Keynesians, and supply 
siders, and what have you. It is really beneficial.
    Vice Chair Klobuchar. All right, I can see Dr. Bernstein 
shaking his head, but I will leave it to Senator Lee since I 
have gone over my time. And if they aren't back yet from the 
votes, I will go back at it.
    So, Senator Lee.
    Senator Lee. I feel like Dr. Bernstein is going to explode 
unless I let him respond.
    [Laughter.]
    Vice Chair Klobuchar. Thank you, Senator Lee.
    Dr. Bernstein. No, there has--I just wanted to point out 
that I think it is misleading to say that there has been ``a 
lot of research that shows that corporate tax cuts redound to 
the benefits of labor.''
    I can think of one or two papers, and I would just point 
out that as I recall, and I will check this--I think I'm right 
about it--that the CBO assumes half and half, not 70/30.
    [Correction for the Record submitted to Chairman Brady from 
Dr. Bernstein appears in the Submissions for the Record on page 
53.]
    Mr. Kudlow. But half-and-half ain't bad.
    [Laughter.]
    Senator Lee. What if it is half-and-half?
    Dr. Bernstein. That's my point. If you think that you're 
going to cut corporate taxes and get more revenue and generate 
more jobs and more income for middle-class households, just 
look back at the record of the past really 20 years.
    Corporate tax payments as a share of GDP are close to the 
lowest they've ever been on record, while profitability is 
high. If corporate profitability led to jobs and income growth, 
believe me we would see it and I would have written a much 
different testimony.
    I am sorry, but this magic elixir of cut taxes at the top 
and all of a sudden everything wonderful breaks out, has been 
disproved since Reagan. And yet people are still talking about 
the Laffer Curve.
    Mr. Kudlow. But the revenue yield--of course the revenue 
yield goes down. That's the whole point of the need for reform. 
As I said earlier, you have a system of high tax rates and huge 
loopholes.
    What you want is a system of low tax rates and no 
loopholes.
    Dr. Bernstein. I agree with that.
    Mr. Kudlow. Your revenue yield will be substantially 
higher. That is why I don't worry about, you know, revenue 
neutrality or the debt on this score.
    Look it, Kennedy did it. It worked in the '60s. Reagan did 
it. It worked in the 1980s. Clinton kept it. In fact, I think 
Clinton had some expensing provisions in his second term that 
were very helpful.
    It has worked. I disagree with Jared. When we went and let 
inflation dominate expensing and depreciation, it did work in 
the 1970s.
    Senator Lee. Mr. Kudlow, I want you to tell us a little bit 
more about the importance of full expensing and cost of 
capital, and how those would lead to a stronger and fuller 
recovery.
    Mr. Kudlow. Well, you know, corporate tax experts will tell 
you that you lower the cost of capital and you raise the return 
to investment. That's what you're doing. You want the cost of 
capital to be as low as possible, and the incentive effect then 
kicks in because you have a higher investment return.
    Corporations don't pay taxes. They collect them, and then 
they redistribute them. Fred Smith, the CEO of FedEx, taught me 
this on the air one night on ``The Kudlow Report'' many years 
ago, and I have never forgotten the lesson.
    I went back and I started reading the literature, because I 
am not a business tax expert. He's right.
    Senator Lee. Okay, so----
    Mr. Kudlow. They pass it on to the workers in the form of 
lower wages or benefits. They pass it on to consumers in the 
form of higher prices. And he said--and he's not alone; if you 
go into the Business Roundtable, all right, and talk to these 
CEOs--expensing is what they want. Alongside a lower rate, they 
want full cash expensing. That lowers the cost of capital.
    Senator Lee. So regardless of what you think in the 
abstract about how graduated the income tax system should be on 
the individual side, in light of what you just said, I assume 
you take issue with Dr. Bernstein's suggestion that, to lower 
corporate tax rates would necessarily be equivalent to lowering 
tax rates on people at the top of the economy.
    You would say those are two different things, and that tax 
rates on corporations should not be conflated, should not be 
regarded as the same thing as tax rates on individuals?
    Mr. Kudlow. You know, ideally, ideally I would have a 
system where everybody pays about 15 percent. No deductions.
    Senator Lee. Everybody? All individuals?
    Mr. Kudlow. Everybody.
    Senator Lee. And all corporations?
    Mr. Kudlow. Yes, sir. Ideally. I would have a 15 percent 
flat tax for both businesses and individuals. And by the way, I 
would have individuals pay the dividends and capital gains that 
are passed through.
    But let me make a point about the corporate tax, just to 
focus on this. I should have added this earlier. In my vision 
for this, the S corps, or the LLCs, can switch to the lower C 
corps rate. Now this is what happened in the 1986 tax reform. 
You've got a real, live example.
    This is why all these inequality redistribution guys like 
Pochetti, this is what they always get wrong. They look at the 
numbers and say, oh, my God, look what's happened. The rich 
have gotten so much richer in the last 25 years.
    The 1986 tax bill put the individual rate below the 
corporate rate. The individual rate dropped to 28 percent. The 
corporate rate stayed at 35. So what happened?
    All these S corps and LLC passthroughs switched from the 
corporate rate to the individual rate and became S corps. So 
what that shows is a huge bulge in personal income which looked 
like a lot of inequality.
    The fact is, gross income didn't change. It's just the way 
it was scored. I would do the same thing right now, because I 
think Main Street businesses have to be cared for. I think 
that's a big problem with our economy right now.
    And when you combine federal, state, and local taxes, you 
know, in a lot of these large states, you're talking about a 45 
percent, up to 50 percent, tax burden. So, yeah, I would let 
them switch into the lower rate.
    Senator Lee. Just to be clear, I heard you say a few 
minutes ago that ideally you wouldn't have a corporate tax rate 
at all, but you're also saying ideally you would like to see a 
15 percent rate applicable to all individuals and all 
corporations.
    Tell me why you say that, first.
    Mr. Kudlow. I, by the way, would abolish the corporate 
rate. I'd have some kind of net sales tax, net of all 
investment, and I would probably stick it at 15 so it would be 
the same as the individual rate. It's a flat tax. Essentially 
it's a flat tax. And I've advocated this for, I don't know, the 
better part of four decades. And I believe that would be--some 
countries have gone to a flat tax and they've had great 
success.
    I think that would be the cleanest, simplest, and best pro-
growth incentive structure we could possibly have. I mean, 
look, individuals--if 15 percent's the rate, millionaires are 
going to pay vastly more than people earning $50,000 a year. 
It's actually very progressive. It's actually very progressive.
    And I probably would do something to change the payroll tax 
rate, too, because I think middle-class people get really 
damaged by the payroll tax rate.
    Senator Lee. And in some cases by the corporate rate, also. 
I mean, if what you're saying is true, if it translates to 
diminished wages, unemployment, and higher prices.
    Mr. Kudlow. This is probably the part that is least well 
understood. Jared thinks it's half. I'll take half. I've seen 
studies that say 70 percent. But again, the principle, Senator 
Lee, that I'm proposing here is that corporations don't pay. 
They're collectors. They're just tax collectors.
    The worker pays. The consumer pays. And that's why the 
yield to the Federal Government is so low. And whether it comes 
out of wages or benefits or both. Look, right now, right now--
I'm stirring the pot some more--when you look at the current 
structure of our corporate tax, and you look at Obama Care, 
okay, which is, you know, setting tax penalties if you don't go 
into the system, you see these firms. What are they doing? 
They're pulling back on employment.
    The part-time numbers are very substantial. Even last 
month, which was a great private--you know, 260,000 jobs. Well 
guess what? Full-time jobs last month fell by 523,000. Part-
time jobs last month increased by 799,000.
    I recommend to you the op ed piece in The Wall Street 
Journal a couple of days ago on this whole subject of part-time 
versus full-time by Mort Zuckerman--I'm sorry, by my friend 
Mort Zuckerman. It's worth looking at.
    This is a weird recovery. And part-time work is not good 
enough, because it doesn't pay as much. But that is where we're 
going because of Obama Care and because of high corporate 
taxes. It's a double hit.
    Senator Klobuchar, you may not agree with me, I appreciate 
that, but that's my point of view. And you've got to give them 
some relief.
    Senator Lee. Senator Klobuchar.
    Vice Chair Klobuchar. Thanks. I want to change the subject 
a little bit here to the thing that I first raised, this part 
of this economic agenda, and that's work force training and 
immigration reform and those kinds of issues.
    Dr. Bernstein, do you want to talk a little bit about that 
again? My State is not unique, as we see the unemployment rate 
going down, but it is in one of the top groups for having jobs 
that are unfilled because we simply don't have the skills right 
now with some of the workers. And ideas are--you know, 
Secretary Duncan has tons of ideas of bringing this more into 
the high schools, going into community colleges. We're doing a 
lot of that in Minnesota. Businesses are working to identify 
job openings in the next few years so we can get students 
trained.
    But could you address that issue?
    Dr. Bernstein. I will. If you'll forgive me, I need to make 
a few comments about this last exchange.
    Vice Chair Klobuchar. Okay.
    Dr. Bernstein. Look, this is a hearing about the recovery 
at five. And the target, in my view, and I think in Senator 
Klobuchar's view as well, is to reconnect this recovery to the 
livelihoods of middle income families, of poor families, the 
folks who have yet to be reached deeply enough by the recovery, 
is I think something that we all agree upon.
    The idea that we would spend a considerable amount of time 
talking about how lowering the corporate tax rate is a solution 
to that problem strikes me as (a) fantastical, and (b) very 
unfortunate. We have a serious problem in this recovery that 
the growth that we've seen thus far has accumulated largely at 
the top of the scale, and it doesn't trickle down. It just 
doesn't happen, as much as we might like it.
    So if we cut taxes at the top of the scale--and by the way, 
most corporate income does accrue to the top of the scale, and 
I have evidence of that from CBO that I would be happy to 
submit to the Committee.
    If we think we're going to get here by supply-side tax 
cuts, I'm afraid we're going to (a) exacerbate the inequality 
problem; and (b) exacerbate the fiscal problems.
    Okay. It is absolutely the case that the work force 
training of the very type you're talking to, and I know you've 
supported some of these ideas in Congress, are important in 
precisely the sense you mention.
    Historically--and I've been around this track for awhile--
our training was very indiscriminate, very nonsectoral in the 
sense that we sort of sprinkled some training on some people, 
show up for work on time, and, you know, here are some basic 
skills, which I'm not degrading them but what's much more 
effective is when policymakers work with employers to figure 
out where the labor demand needs are going to be, where they're 
going to occur in cities like some that you've mentioned, 
Senator Klobuchar.
    We know who these employers are, and we know the nature of 
their demands. They don't necessarily need someone who has a 
set of basic skills. I mean, that's fundamental. They need 
someone who on top of a set of basic skills knows how to clean 
an MRI machine; knows how to maintain a lab. So this kind of 
sectoral targeted granular training I think is very important.
    Immigration reform is something I know that this Chamber, 
that the Senate anyway has passed a bill that I thought was a 
very useful one, mostly in the very terms you mentioned earlier 
in terms of its macro economic impacts.
    That said, there are supply effects, and I think we have to 
be mindful about the pressure on low-wage workers from an 
increased supply of labor at a time when the economy isn't as 
strong as it should be.
    So I think one of the things that actually helps 
immigration reform is a stronger economy, a stronger labor 
market.
    Vice Chair Klobuchar. Mr. Kudlow.
    Mr. Kudlow. Can I just say that, regarding work force 
training, at great risk I agree with everything Jared said.
    [Laughter.]
    Vice Chair Klobuchar. Excellent. I knew I'd find something.
    Mr. Kudlow. Honestly. I think he's dead right. We have 
dozens of these--when I worked in OMB, I discovered we had 
dozens of these training programs. This was 30 years ago. And I 
don't know if any of them do anybody any good.
    At the state level you have a much better shot at doing the 
match-up that Jared is describing, and I take it you support--
--
    Vice Chair Klobuchar. Well that was in the recent Senate 
bill, the bipartisan bill that passed, that actually reduced a 
number of these programs to get more money out there in the 
field to the states, and I think is along those lines.
    Mr. Kudlow. Yeah, I like that stuff. By the way, but you 
might save a buck by getting rid of a lot of the stuff. The 
Federal Government has probably got, what, 45, 50 of these 
programs, and somebody smarter than I am can comb through them 
and say ``this doesn't work; it doesn't meet the criteria,'' 
for example, that Jared mentioned.
    Vice Chair Klobuchar. And where do you see immigration 
reform fitting in here?
    Mr. Kudlow. I am pro-immigration reform. All right? Sorry, 
but I am.
    Vice Chair Klobuchar. I'm very proud of the bill we passed 
in the Senate, so I'm glad you are.
    Mr. Kudlow. I may not agree with, you know, everything in 
the Senate bill, but generically. And let me say, I regard 
immigration reform as pro-growth. And I've written about this 
and, I don't know, Senator Lee, we may or may not agree on 
this, but look, I'm for border enforcement. I just want to put 
that aside for a minute. I'm not an expert on border--I'm all 
for border security, and I think what's happening now is just 
an utter catastrophe, okay, and we've got to sort through that 
and probably deport all these kids.
    But the growth aspect, which intrigues me, is to increase 
visas for the so-called STEM people. You know, science, 
technology, engineering, and math. I would almost have an 
unlimited visa supply. You go out to Silicon Valley here--not, 
here--in New York City, we have Silicon Alley, they'll all tell 
you there's a shortage. And a lot of them maybe trace to the 
education system or not, but there's a shortage. So that to me 
is pro-growth.
    What's the study? I just saw it. 40 percent of the Fortune 
500 companies are started by immigrants. And we also have 
tremendous deficit of startups, new, brand-new business 
startups.
    Vice Chair Klobuchar. I think it's 90 of the Fortune 500 
companies were formed by immigrants, and 200 were formed by 
immigrants or kids of immigrants.
    Mr. Kudlow. Okay----
    Vice Chair Klobuchar. I just wanted to take that 
opportunity.
    Mr. Kudlow. Terrific. So we're at 290----
    Vice Chair Klobuchar. I almost have as good a command of 
stats.
    Mr. Kudlow. The bid is 290, the offer is 400.
    [Laughter.]
    We'll settle later. So I also think the kids who go to 
school should be allowed to stay. And again, I'm speaking about 
legal, but give them visas. Let them stay if they want to stay. 
If they love America and they want to help us, they're smart, 
we send them to the best private and public universities, let 
them stay. I'm all for that.
    And at probably some risk I believe that the children who 
came here with illegals----
    Vice Chair Klobuchar. The Dreamers.
    Mr. Kudlow [continuing]. The Dreamers, should be allowed to 
dream. They should be able to take advantage. They should be 
legal, and they should be able to take advantage of our 
education system. I actually believe that. I think you have a 
lot of potential there that will help the country.
    And I also would add, I would legally increase the visas 
and work permits for the low ends, for the growers and so 
forth. If you can get a job, you register in Mexico, let's say, 
register in Mexico, if an employer--you've got an E-Verify 
system--the employer will then say, yes, or no.
    If it's yes, then you get a visa. And you have a guest 
worker program such as we have many, many years ago, the 
BRUSARA program. That stuff worked before everyone started 
interfering with it.
    I don't think it's perfect. I know some people will violate 
it, but we've got technologies now that would help us. But, you 
know, I think the low end is also going to be pro-growth. And 
most of all I don't see this as a zero sum game.
    In other words, if high-end immigrants, low-end immigrants 
come here legally, I do not believe that means our people lose 
wages or jobs. I want to grow the pie larger. And I think too 
many people think in terms of a zero sum game on immigration 
and I don't believe it.
    Vice Chair Klobuchar. All right. One last thing I have, and 
I'll turn it back to Senator Lee.
    Dr. Bernstein, at the beginning of this session you were 
talking about how we need to focus very strongly on the income 
inequality issue, and I agree with that. I want you to know, I 
may not have started out with the cookie-cutter Democratic 
questions when I asked Mr. Kudlow about the inversion issue and 
the incentives in place. We're just living it right now in 
Minnesota.
    And luckily for us, we have a good company that I believe 
is going to keep jobs and expand jobs in our State. But that's 
not been true of all of these proposals that are out there. And 
I think it is an immediate issue because we are just seeing 
more and more companies do this, and we have been frustrated so 
long in getting comprehensive tax reform, and even I've been 
generally supportive of the Gang of Six, Gang of Eight. This is 
the only place in the country where gangs are good things. But, 
you know, the work that is being done on bringing the debt 
down.
    But I think you know, Dr. Bernstein, that those proposals 
also included some revenue in there and some expenditures in 
areas like NIH and other things. And I just ask you to go back 
to that general issue you raised of income inequality.
    We had Secretary Reich in here who went through the numbers 
with us. I think it's the top one percent families have grown 
seven times more in their incomes than the average family, and 
we are just starting to see more and more of a problem.
    And one of my favorite CEOs in Minnesota--I have to get 
permission to say who they are--was saying recently that they 
believe that we are actually eating into our economy and our 
profits because a lot of what is happening is middle class 
people that used to go to middle class restaurants, or stay in 
middle class hotels, aren't able to do that because they can't 
afford it.
    And I don't believe it is just one solution on the minimum 
wage. I believe it's everything we've been talking about, with 
making sure we have the incentives in place for companies to 
stay here. Immigration reform. Inventing more things. Making 
stuff. Exporting to the world. Making sure those barriers 
aren't up. And then also looking at the work force training, 
and student loans, and it's got to be a lot of things. But I 
wonder if you would just address the minimum wage issue?
    Dr. Bernstein. I will. Let me reference a couple of other 
things that you ticked by there in your list of everything 
good.
    I would like to say that I think this--I would just like to 
get on the record, and I suspect Larry will agree with me--I 
don't think that a solution to inversions, which we may argue 
about what that means, can wait for tax reform, can wait for 
individual tax reform, can wait for corporate tax reform. I 
would urge Members of this body to start working on that 
yesterday.
    Let me tie the inequality discussion into what we've been 
talking about in terms of the recovery at five in a way that I 
think will resonate perhaps with Members from the other side, 
as well. And I will mention the minimum wage towards the end of 
my comments.
    One of the most effective tools against rising income, 
wage/wealth inequality is actually a full-employment economy, a 
full-employment job market. I have done extensive research on 
this, often in collaboration with the economist Dean Baker. We 
have a recent book on this topic. Wherein we point out that if 
you look over the period say mid-'40s to late '70s, when 
inequality was relatively quiescent, the job market was at full 
employment, about 70 percent of the time.
    Since then, it has been at full employment only about 30 
percent of the time. And we show that when the economy is 
operating with this much slack in the labor market, the cost to 
that problem redounds to low income people the most, middle 
income people next, and it doesn't really hurt those at the 
high end because their unemployment rates are fractional at 
good times and at bad times.
    In fact, a 10 percent decline in the unemployment rate--so 
not percentage points; 10 percent--say down from 7 percent to 
6.3 percent, leads to, in our analysis, a real 10 percent gain 
at the 20th--for low wages, a real 10 percent gain for low 
wages; 4 percent gain for middle wages; and zero at the top.
    So it's actually very much an antidote to the problems of 
an employee of course working the other way. Depressing gains 
at the bottom, and accentuating gains at the top.
    Now added to that, a moderate increase in the minimum wage 
has been found to have its intended effects, which is to list 
the earnings of those at the bottom of the wage scale without 
anything like the very large displacement effects that 
opponents claim.
    Now these are the workers with the least bargaining power, 
particularly in a climate of high unemployment. And even when 
the job market is pretty tight, it's often weak for those at 
the low end, particularly for minority workers. So a minimum 
wage is Congress's way of returning some bargaining power and a 
bit of the growth to the lower end of the pay scale.
    Recent analysis by the Congressional Budget Office of a 
policy that's been introduced in both the Senate and the House, 
I believe, by Senator Harkin and Congressman Miller, find that 
a three-year incremental increase that would take the minimum 
wage to $10.10 an hour, and then index it, would lead to 24.5 
million people, 24.5 million workers, benefitting from the 
increase, 500,000 jobs lost.
    That's a ratio of 49 beneficiaries to 1. And I think it's a 
very strong deal. Now I don't think those 500,000 who CBO says 
jobs lost are to be ignored, but I will mention again 49 to 1 
beneficiaries, and there's a great deal of churning in the low-
wage labor market. When they get a new job, it will be a better 
job.
    Vice Chair Klobuchar. Thank you, very much, Senator Lee.
    Senator Lee. Mr. Kudlow, do you want to respond to that?
    Mr. Kudlow. Yeah. I'm sorry, I completely oppose a hike in 
the minimum wage. I think it really damages people at the low 
end. It damages the poorest, the least educated. I think that, 
you know, Jared's point about income, sure, what you get is a 
rebasing, a higher rebasing. Let's say you're in a Union state 
or just the middle of the job ladder. All their wages go up as 
a result of the rise in minimum wage. So it helps those who 
already have jobs, and hurts those who don't have jobs, and 
will hurt those who have marginal jobs.
    I commend to you a book by my friend, Jason Riley, The Wall 
Street Journal editorial page. It's a gook about African 
American economic discussions. And he points out that for many, 
many, many decades African Americans had the same unemployment 
rate as White Americans did. And since the inception of the 
minimum wage, which was four or five decades ago, African 
American unemployment is now double White unemployment and 
stayed there. It stayed there for about 50 years.
    And I think that the evils of the minimum wage are even 
under-stated by the CBO's analysis, which is a job loss 
analysis.
    You know, I would say this. I'll concede one point on this. 
If states want to do this, because they are closer to the 
businesses, and if your CEOs in Minnesota want a higher minimum 
wage, okay. At least the Tenth Amendment would have federalism, 
they know more about it than the Federal Government. I say at 
the federal level, the government has no business telling 
companies what they ought to pay their employees--no business 
whatsoever.
    Senator Lee. Thank you, Mr. Kudlow.
    Chairman Brady [presiding]. Thank you, Senator, for 
chairing the hearing today, and I apologize again for the 
timing of the vote on this.
    I know a number of questions have been asked about the 
priorities of fixing this broken tax code, the lowering of our 
rates, becoming more competitive. And I believe, too, you know, 
our ability to rapidly recover our capital, reinvest it back 
into these investments, will continue to be a strong part of 
our tax reform.
    Since that has already been explored quite a ways, Mr. 
Kudlow, let me ask you. I have a question about the Fed policy, 
and a question for Dr. Bernstein about regulation.
    Mr. Kudlow, the Federal Reserve plays an important role in 
laying the economic foundation for any country. The Fed often 
tries to do, in my view, too much. And in fact, their tools can 
only boost employment in the short term.
    In the long term, their tools are best used addressing 
inflation and deflation, which create I think a strong 
foundation for economic growth.
    Looking at the last five years since the recovery began, 
looking forward, your advice on the best monetary policy that 
would allow us to close that Growth Gap, frankly, and create a 
better foundation for economic growth?
    Mr. Kudlow. All I ask from the Fed is that the prices are 
stable. Inflation is as low as possible. And the currency is 
strong and reliable. That's all I ask.
    I go back 50 years ago in 1968 in his Presidential address 
to the Economics Association, American Economics Association, 
Milton Friedman gave this talk. And I encourage everyone to 
read it. It's one of the reasons he got a Nobel Prize.
    And you talk about limits? You are right. Monetary policy 
has no lasting impact on employment, on investment, on all the 
real variables. Monetary policy has direct long-term impacts on 
inflation, and hence interest rates and the exchange rate.
    So I come out in favor of rules. I'm a rules-based guy. I 
like to have fiscal rules. I like to have monetary rules. And I 
would just offer two suggestions: Number one, the Taylor Rule, 
which I think would be quite useful, and was used 
predominantly--predominantly, central banks all around the 
world used the Taylor Rule in the 1980s and 1990s. It wasn't 
just us.
    By the 1990s, that was basically the view. And as you know, 
that is the formula that combines potential GDP and inflation.
    I would also, Mr. Chairman, I'd like forward indicators, 
forward indicators. That's why I'm a stickler for using so-
called market price rules. I think central bankers ought to 
keep an eye on gold. They ought to keep an eye on commodities. 
They ought to keep an eye on the Treasury Yield Curve. And they 
ought to keep an eye on the exchange rate.
    Those are pretty good forward indicators. Probably none of 
them alone is perfect. If you use the four of them, you pretty 
much cover the ground. So that is where I would go.
    The other thing is, as I said on fiscal policy, I don't 
think the federal stimulus works. I don't believe there were 
multipliers. The same with the Federal Reserve. They bought 
over $3 trillion worth of paper. The money multiplier brought--
the difference between the monetary base and the money supply 
collapsed. The multiplier collapsed. And, by the way, so did 
the turnover of velocity of money.
    The money supply itself hasn't changed in five years. The 
good news is, there's no inflation. The good news is, there's 
no inflation. The bad news is, the Fed has embarked on this, 
you know, vast journey that they're now going to spend the next 
five years trying to get out of.
    I also believe it's a huge mistake--I'll end on this 
point--with all due respect to Ms. Yellen, it was very, very 
smart. This business of using a group of labor indicators to 
conduct monetary policy is dead wrong. It's a reversion back to 
the old Phillips Curve tradeoff, which I think has no validity. 
Her dashboard of indicators I think is just absolutely the 
wrong way to go.
    Chairman Brady. We are told often in this hearing room, 
don't worry about inflation. It isn't here. It won't occur. We 
need to focus on getting people back to work.
    But inflation isn't always so clear and can take root long 
before the Fed, frankly, can identify it. And the Fed, frankly, 
is honest about its limits there.
    For the sake of caution, should the Fed begin now, or soon, 
normalizing interest rates? Again, working off not over a 
decade but begin normalizing its policy sooner rather than 
later? Do you think that can be achieved without a negative 
impact on the economic growth going forward?
    Mr. Kudlow. Well, hope springs eternal. Hope springs 
eternal. I think the answer is theoretically yes, you can do 
it. And I think what they want to do--it's just my take--
they're going to let the bond portfolio basically run off. 
There's not going to be massive selling of bonds. And given the 
situation they're in, I basically agree with that. I grew up as 
a Fed guy, and I was a Fed watcher, and I was a bond economist.
    If I owned $4 trillion worth of paper, I'd let it run off, 
too. If they keep selling it to the market, that's going to be 
really, really tough.
    Other ideas they have, I don't know, sir. Paying interest 
on reserves, we don't have a lot of experience on that. 
Manipulating the so-called reverse RP market, the MATs, we used 
to call MATs, sale purchases, basically means the private 
sector loans money to the Fed at a certain rate. We'll have to 
see.
    Yes, let's start normalizing. The Taylor Rule right now, 
just as a reference point, the Taylor rule right now would have 
the Fed Funds Rate at not less than 1.5 percent, possibly 
higher. All right? I wouldn't do it tomorrow, but I would pave 
the way.
    And what troubles me a little bit--and from what I caught a 
glimpse of Ms. Yellen's testimony this morning--I don't think 
the Fed is paving the way. I think their forward guidance is 
murky.
    Chairman Brady. Murky.
    Mr. Kudlow. Murky. And one of the really good things here 
is the stock market has done very well. A lot of people would 
say the only people that benefitted was the top one percent. I 
want to disagree with that.
    I want to remind everybody, if I may, that roughly 50 
percent of American households one way or another are invested 
in the stock market. And that means pension funds. And that 
means school teachers, and cops, and firemen and women, okay, 
as well as millionaires.
    And let's not blow--let's try hard not to blow off the 
stock market. Let's really try hard. It's as, as I think Jared 
said, or somebody said, it's contributed to a lot of gains in 
household wealth, and the distribution is not bad. And I want 
those pension funds to heal. Otherwise, the states are all 
going to go bankrupt.
    So my point is, I would like to see the Fed start paving 
the way, and they're not.
    Chairman Brady. Thank you, Mr. Kudlow.
    Dr. Bernstein, I need to recognize Ms. Maloney, who has not 
asked a question, but perhaps with your permission I could come 
back for a final quick point. I don't want to take too much 
time.
    Vice Chair Klobuchar. Mr. Chairman, we now have votes in 
the Senate, so I want to thank the witnesses for their patience 
with this revolving chair game.
    Chairman Brady. Thank you, Vice Chair.
    Vice Chair Klobuchar. They did a great job, and it was a 
lot of fun. So thank you. We learned a lot, and hope to have 
you back soon.
    And thank you, Mr. Chairman, for holding the hearing.
    Dr. Bernstein. Thank you.
    Chairman Brady. I recognize the former Chair of the Joint 
Economic Committee, Ms. Maloney, from New York.
    Representative Maloney. Thank you, Mr. Chairman, and 
Senator, for calling this meeting. It is very good to see both 
of you again. Mr. Kudlow happens to be a neighbor of mine, so 
we see each other back in the District I am privileged to 
represent.
    I would like to first start with Dr. Bernstein and get your 
input, too, Mr. Kudlow.
    In your testimony, you testified, and I think it was your 
sixth frame you used in your opening statement, you testified 
that austerity, and many of the self-inflicted wounds that we 
put on ourselves such as the government shutdown, 
sequestration, not paying our bills, that this--indiscriminate 
cuts to key government programs--that they're hurting the 
economy and harming our long-term competitiveness.
    For example, funding cuts to the National Institutes of 
Health are damaging critical research efforts. And I would say, 
not funding the Highway Trust Fund in the long range hurts 
planning and business. I would say this debate mystifies me 
over the ExIm Bank. It is making money now, and helping small 
and large businesses export, which is one of the areas that we 
need to work on.
    And I would say the failure to reach an agreement on TRIA 
for long-range planning are all damaging to our economy. So in 
your opinion, how can we achieve a balanced budget while still 
investing in things that will help our economy in the long 
term? And how damaging do you think were self-inflicted wounds 
like sequestration, and closing the government down, and 
cutting NIH and others indiscriminately?
    Dr. Bernstein. Well thank you for your question. One of the 
things I wrote about at a bit of length in my written 
testimony, which I submit to the Committee, is precisely this 
question. And I went to some lengths not to cite my own work, 
not to cite the work of the White House or anyone who could be 
accused of having a thumb on the scale.
    I cited the work of mostly investment banks, or the 
Congressional Budget Office. And every one of those analysts 
found that the events that you mentioned created a negative 
impact on GDP growth and on jobs.
    As you mentioned, one of my figures--which happened to be 
by Goldman Sachs researchers, so we're not talking about wild-
eyed radicals here--one of my figures quantifies the impact of 
the federal fiscal policy on real GDP, showing quite clearly, 
by the way if you want to go back a few years, some of the 
positive fiscal impacts of measures I touted in my testimony 
back in the heart of the Great Recession. But that those--there 
it is----
    (Slide is shown.)
    --that those reverse course. 2013 was a particularly tough 
year wherein fiscal drag, including self-inflicted wounds of 
the type you mentioned, subtracted 1\1/2\ points off of GDP 
growth this year.
    I have never heard, and I don't think anyone could come up 
with a particularly good explanation, as to why public policy 
ought to slow down a recovery that is still trying to gain 
traction there in 2013.
    So I think that the implicit points of your question are 
exactly correct. I didn't get a chance yet to weigh in on the 
ExIm Bank, so let me do that quickly.
    My view is that the role of the bank is important, and it 
should be mended not ended.
    Private banks will demand a very high premium to offset the 
risk involved when it comes to loans to those who would 
purchase our exports, to overseas' buyers of our exports. And 
this extra cost could kill the deals for some of our smaller 
and less well-capitalized firms who are trying to boost their 
exports.
    As you mentioned, the fact that the ExIm Bank is a small 
net plus for the budget tells you that the risk assessment is 
actually pretty effective in this regard.
    Now it is the case that, while most of their loans go to 
smaller businesses, most of the dollar value--volume of their 
work helps large firms who arguably don't need the help. So I 
think there is room for certainly reform and improvement there. 
But as long as our competitors, our international competitors 
are providing credit assistance to those who purchase their 
exports, I simply don't see why we would consider unilaterally 
disarming, especially at this point in time.
    Representative Maloney. Thank you.
    Mr. Kudlow.
    Mr. Kudlow. Yeah. I'm afraid I disagree on that one. I 
would not reauthorize the ExIm Bank. I think it's just a 
beautiful, perfect case, a real-world case of corporate welfare 
and chronism. And, let's see, something like 60 or 65 percent 
of the money goes to 10 companies.
    And we are giving a lot of loans and loan guarantees to 
countries that are not our friends. I would add, we give about 
$2 billion to Russia. I wouldn't give them a nickel. We give 
close to $10 billion to Saudi Arabia, an outfit that finances 
terrorism more often than not.
    Here's one for you. They give $2 billion--they have given 
$2 billion worth to Venezuela, a communist country. They hate 
us. Why are we doing this?
    Also, as Jared put his finger on another point, by 
financing foreign competitors we're doing some damage to 
ourselves. This is what the CEO of Delta keeps saying. He's a 
very brave man. He has actually come to the point where he's 
said: You know, if you stop making these loans to Boeing's 
customers, I'd be able to hire more workers and my cost of 
capital would be more competitive, and I would be able to buy 
more jets from Boeing.
    So I think that we've just gone way too far. We do not need 
the ExIm Bank; 98 percent of these transactions----
    Representative Maloney. But, Mr. Kudlow, if they did not 
buy Boeing, they'd be buying Air Train. And now China is coming 
out with their competitor to Boeing, and these are heavily 
subsidized by the countries that produce them.
    Mr. Kudlow. You know, we might generate a stronger airline-
making business--I mean, you've got Lockheed, you've got a 
bunch of 'em--so we don't necessarily--look, on the government 
dole. I don't think these companies need to be on the 
government dole.
    I think the information in the last month shows corruption 
inside the ExIm Bank. You've got a bunch of people now that are 
being criminally investigated for taking bribes and other forms 
of fraud.
    You've got an even larger number of people whose cases have 
been referred to the Justice Department. I mean, what goes on 
there----
    Representative Maloney. Well that's good that we're finding 
the fraud, but my time is running out. Could you comment, too, 
on some of the self-inflicted wounds to our economy such as 
sequestration, such as closing the government down, such as the 
instability? You talk all the time about businesses need long-
term planning, they need certainty.
    So when you're renewing programs for seven months, or six 
months, and not renewing them long term, it has a disruptive 
effect on the economy.
    Can you comment on some of the self-inflicted wounds, I 
would say, that we are--most economists feel that the 
government shutdown was not helpful to the economy, nor was 
sequestration, nor was cutting some of the vital areas that we 
invest in for our competitiveness such as the National 
Institutes of Health and other research facilities, cuts in 
those areas.
    And then renewing the Highway Trust Fund just for a couple 
of months, as opposed to a long-term range? The impact of these 
policies on our economy.
    Mr. Kudlow. Well renewing the Highway Trust Fund for a 
couple of months is not a great idea. I would have a radical 
overhaul of the Highway Trust Fund, by the way. I think it 
should all be based on true user fees based on mileage. I would 
not raise the gas tax. I'd abolish the gasoline tax. I would 
turn it into a user fee operation, with the bulk of it being 
run by states. That's the way I would do that.
    Secondly, shutting the government down is not my favorite 
thing in the world. Okay? So I'm with you on that one. 
Sequestration was not my favorite thing in the world, either. 
However, however, as I've testified earlier, even though there 
are some priorities that got lost in sequestration, the CBO and 
others predicted hundreds of thousands of lost jobs, 700,000 
lost jobs. It never happened. Jobs went up by a couple million 
in 2013.
    The horror shows never happened. And I believe limiting 
government spending is itself a pro-growth measure, though I 
would not--I would have preferred not to use sequestration.
    One of the achievements here--I know you'll disagree with 
me--but my view is, getting government spending down from close 
to 25 percent of GDP four or five years ago to less than 21 
percent of GDP is a good thing, a very good thing. And it gives 
the private sector a lot more room to breathe, and takes the 
pressure off tax hikes that many businesses think they're going 
to have.
    So I might not have done it that way. I happen to be in 
favor of some NIH spending. I'm also concerned about our 
defense posture which I think suffered enormously under 
sequestration. But sometimes you have to bite the bullet. We've 
had Gramm-Rudman in the past when I worked down here. We had 
budget freezes during the Reagan years. There was a lot of 
howling. I think on the whole limited government is a good 
thing. It's pro-growth.
    Representative Maloney. Dr. Bernstein.
    Dr. Bernstein. Can I quickly respond to some of that? A 
couple of times Larry has mentioned something that I disagree 
with, which is this idea that somehow because we had job growth 
last year all the self-inflicted wounds really didn't do any 
harm.
    That is just substantively an incorrect analysis. It is not 
an accident that in 2013 when we were creating significant 
fiscal drag, which many of the analysts I cite in my testimony 
quantify to 1\1/2\ percent of GDP, which is a big deal, that 
job growth was considerably slower last year than it is this 
year.
    And in fact I commend Congress for moving to a kind of a 
do-harm in terms of fiscal headwinds, to at least a do-no-harm 
neutral view. If you look at my slide No. 6, you will see that 
this kind of fiscal impulse is neutral in 2014 relative to 
negative in 2013.
    So the fact that there was job creation in 2013 is not at 
all an argument that this stuff didn't hurt. And in fact, the 
fact that there's been acceleration in job creation this year, 
something Larry agrees with, is further proof of my case I 
think.
    Mr. Kudlow. You know, as I said before, again with all 
respect to my friend Jared, Congresswoman, you know this, I 
don't believe in federal spending stimulus. I don't believe in 
federal spending multipliers. I don't. I don't think that's the 
path to economic growth. I'm not a spender. Never have been; 
never will be.
    I believe in the incentive model of growth. And I think if 
it pays after tax to work, invest, and take risks, and I 
include regulatory costs in that calculation, it's not just a 
tax issue, then people will do so.
    Dr. Bernstein. So let me just say----
    Mr. Kudlow. I think we've had----
    Dr. Bernstein. Sorry, finish.
    Mr. Kudlow. I believe in the last 10 years, dozen years, 
we've had too much government activism. And I don't know the 
answer to this, but if you go back and you look at just data, I 
think since 2001 or 2002, if you take the so-called Bush 
recovery and you take the Obama recovery, the rate of growth of 
real GDP in the USA has averaged only 1.8 percent per year--
under Bush and Obama. That's terrible.
    Now it just seems like 9/11 was--something happened. I can 
never--if I was smart enough, I'd write a book on it. All I 
know is, we were growing in the 1980s and 1990s with tremendous 
prosperity under Democrats and Republicans. We were growing 
about 3.5 percent a year, creating new wealth, new 
technologies, new businesses, like no tomorrow. It was 
fabulous.
    And all of a sudden it stopped, under Dems and under 
Republicans, under different Congresses. I'm completely 
nonpartisan in this.
    Representative Maloney. 9/11 changed our country 
profoundly.
    Mr. Kudlow. Carolyn, you may be right. I mean, I just don't 
know all that there is to know. I just put that fact on the 
table. And I personally--look, I'm an old guy. I want 
everything to be better in the country.
    Something's gone wrong. That's what I know.
    Dr. Bernstein. So all I wanted--can I add something, sir?
    Chairman Brady. Quickly.
    Dr. Bernstein. Very quickly.
    Chairman Brady. We're about 20 minutes overtime----
    Representative Maloney. This is great, though.
    Chairman Brady [continuing]. Yes, briefly.
    Dr. Bernstein. I think you'll----
    Representative Maloney. I've got one last question.
    Dr. Bernstein. I think you'll like this. I think you'll 
like this--you, as well.
    [Laughter.]
    The idea that I am trying to espouse here in terms of 
Congressional actions to help improve the recovery and to 
offset the damage done by the recession are not ideas that I 
think should be in place when we have an economy that's firing 
on all cylinders.
    If we're at full employment, I believe that fiscal policy 
should be towards lower deficits, and lower debt-to-GDP ratios.
    Where I differ from Larry is he always thinks that fiscal 
multipliers are zero. There are absolutely times when fiscal 
multipliers are zero, and when none of these good Kenysian 
ideas work.
    That happens to be not the case when the economy is demand-
constrained. When the economy is demand-constrained, these 
ideas are actually very important.
    Chairman Brady. I'm going to blow the whistle here. That 5-
minute period is now close to 15. So, Representative Maloney, 
thank you for your questioning.
    Let me finish up with a question for Dr. Bernstein. I too 
disagree that government spending is a solution. For the past 
six years, we've overspent our budget by nearly $6 trillion. 
The result is the weakest economic recovery in half a century.
    Doing more of that I don't believe will change the course 
of our economy. Looking over the last five years, consumer 
spending recovered quite some time ago. It's up beyond what it 
was before the recession.
    Government spending recovered fairly quickly as well, due 
again to that stimulus, well above the recession. What 
continues to be missing is business investment, building, 
equipment, software, one of the one-to-one correspondent with 
private sector jobs.
    Your view? And when I talk to local businesses, national 
businesses, multi-national businesses, they don't talk about 
sequester. They don't talk about the government shutdown. They 
talk about fear of higher taxes. In fact, the San Francisco Fed 
said the biggest fiscal drag in 2013 was not sequester; it was 
higher taxes.
    The question is--and they don't talk about those issues, 
inside-the-beltway issues--they talk about the potential of 
higher taxes and tremendous regulation. My question to you is: 
Is there a smarter way to impose regulations that have public 
good, frankly, to them, but are done in a way without economic 
analysis, without understanding the technology available to 
reach those goals, done in a way that is smarter and helps grow 
the economy, is there a way in your view that when regulations 
are imposed in an Act they can be done in a way that is smarter 
for the economy?
    Dr. Bernstein. That's a great question, and a challenging 
one. One quick factual point. It is true that part of that 
fiscal drag that I've been complaining about in 2013, was due 
to a tax increase. And that was the expiration of the payroll 
tax holiday, something I think was a mistake. I think that's 
precisely in the spirit of what I'm talking about in terms of 
helping to boost the recovery.
    To get to your question, I think there are two things that 
come to mind. And it's such an important and challenging 
question, I'd like to submit an answer following.
    Chairman Brady. Thank you.
    Dr. Bernstein. So two things come to mind.
    First of all, I think we need a better method of evaluating 
the regulations that we put forth. Any time a regulation is 
suggested, say an environmental regulation, both sides go into 
very predictable corners. I could write the press release from 
both teams. One says it's going to crash the economy; one says 
it's not.
    In fact, the truth of course always lies somewhere in 
between. But I think where the argument gets weighted in a way 
that is actually harmful to longer term growth is that we 
almost never consider the benefit side of any regulation.
    So for example, environmentally, I mean most businesses 
will tell you that climate change, more volatile weather, 
unpredictability of the environmental impacts, rising water 
levels particularly for businesses in any coastal area, are 
extremely problematic. But often our regulatory analysis only 
looks at the costs, not the benefits. So I would balance that 
out.
    My second point gets to something you said earlier. I know 
you think a lot about the Federal Reserve and ways in which 
they can operate to help the economy more effectively. Well if 
you actually look at the last three business cycles, they ended 
because a financial bubble inflated. A real estate bubble. A 
dot.com bubble. And a housing bubble.
    And part of that has to do with insufficient oversight of 
the Federal Reserve toward financial markets. Former Fed 
Reserve Chair said we don't really look at bubbles. That's not 
our thing. We can only try to mop up the damage afterwards.
    To her credit, Chair Yellen and now Vice Chair Fisher feel 
differently about that, and have expressed the views that--have 
recognized how important financial regulation, financial 
oversight, is so that we can prevent the next business cycle, 
the very one we're in, from inflating another damaging bubble.
    Chairman Brady. Just a thought, my view, that wasn't simply 
a housing bubble. It was a credit-fueled housing bubble.
    Dr. Bernstein. I agree.
    Chairman Brady. The Federal Reserve kept interest rates too 
low for too long. The Federal Government was encouraging banks 
and its own Fannie and Freddie to buy, frankly, and invest in 
mortgages that didn't have true value underlying them. And 
combined with a lot of other factors, were part of it.
    Here's my point, and I'll finish up on regulation. If you 
took a look at the last 10 years of federal regulation, out of 
every 1,000 federal regulations only 3 had a cost/benefit 
analysis done prior to its imposition.
    So in only 3 out of 1,000 did we ask the simple question: 
What are the benefits? What is the economic cost? And part of 
that--and when it was done, it was done by the same agency 
proposing the regulation. So agency bias, as you would imagine, 
ended up in a result that, hey, we think this is a good 
regulation.
    It's my view that we would be smarter about our regulatory 
scheme if all agencies, not just Executive and independent 
agencies, including the Fed, had to do real cost/benefit 
analysis ahead of a regulation that was transparent. You could 
see what the factors were going into that before these were 
imposed.
    Because I think there is a way to hit those goals, but to 
do it in a much smarter way with much less cost to the economy. 
I think it is one of the major drags today.
    Mr. Kudlow. Where's OIRA?
    Chairman Brady. What's that?
    Mr. Kudlow. Where is OIRA?
    Chairman Brady. It is due----
    Mr. Kudlow. It started in the Reagan years, mandated by 
Congress. Isn't that supposed to do that?
    Chairman Brady. It should, but I noticed out of the 3,500 
federal regulations year-before-last, only 14 underwent a true 
cost/benefit analysis. So I think there's actually a bipartisan 
area of agreement that could be explored in that area.
    Representative Maloney. And I would like to help the 
Chairman on this. I find this fascinating, the give-and-take 
between these two economists. May I ask another question that 
is raging before Congress right now?
    Chairman Brady. If we can do it in a minute.
    Representative Maloney. One minute. Okay, one of the 
disagreements we've had between the two Parties was over 
extending unemployment insurance, because of the high number of 
people that were unemployed.
    Now last month's job numbers were wonderful, the best stock 
market--you mentioned the stock market, Mr. Kudlow, 17,000, 
best in history. And unemployment was down. And for the first 
time it was because workers are there, not that people have 
stopped looking for work.
    Now both sides are claiming credit. The Democrats on the 
programs and policies that President Obama put forward; and the 
Republicans are claiming credit that we did not extend the 
unemployment benefits, therefore we saved money that 
contributed to this economic growth.
    Yet many economists are saying that if we had extended 
long-term unemployment benefits to those people that were truly 
trying to find a job, that our economy would have strengthened.
    What is your position between these two? And this is 
something that commentators are writing about right now, 
conservative and liberal, on opposing sides. I would like to 
hear, if we could, both of these distinguished guests.
    Dr. Bernstein. I can be very brief, which I know you would 
like. As we've noted, the share of the labor force that's long-
term unemployed has come down significantly. And that's a good 
thing.
    But it is still highly elevated. And every time this 
metric, the share of the unemployed who are long term has been 
this high, as high as it is now, even with its improvement, 
Congress has implemented another round of extended unemployment 
compensation, emergency unemployment compensation.
    So I think it is absolutely warranted, another round. But I 
think you have to watch the indicators to see when they get 
back down to more normal levels.
    Representative Maloney. Mr. Kudlow.
    Mr. Kudlow. Just briefly, I think extending the emergency 
unemployment insurance would discourage growth and would 
discourage jobs. And I would lead that to----
    Representative Maloney. Why?
    Mr. Kudlow. Because you're reaching a point now with food 
stamps, disability, unemployment insurance, as I mentioned in 
earlier testimony, Professor Casey Mulligan of Chicago did the 
work on this, you're creating incentives not to work.
    And in fact, the really hard part is, if you leave food 
stamps, leave unemployment, leave disability, it doesn't pay. 
You lose your subsidy and you're in a higher marginal tax rate. 
The cliff is so steep with these programs----
    Chairman Brady. A significantly higher tax rate.
    Mr. Kudlow. It could be as much as 90, 80, 90 percent. And 
by the way, the CBO has done work on this, too. In fact, it was 
Casey Mulligan who turned the CBO around on some of this.
    All I'm saying is, as a safety net matter I would agree 
with Jared. Extend unemployment insurance, as a safety net 
matter. But we're five years plus into this recovery. So I 
don't believe that safety net is anything but a discouragement 
to searching for good jobs. And if--you know, if our state 
wants it, let the state do it. I would push this to the lowest 
level.
    By the way, it doesn't come cheap. You've got to pay a 
higher payroll tax at the state level.
    Chairman Brady. I want to thank you both for being here. 
There's a reason you were invited. We wanted this type of 
quality discussion, frankly. We think there ought to be more of 
this type of discussion in Washington among lawmakers. Thank 
you for your insight.
    I know Members may have some questions they'll submit to 
you for the future, but again thank you both, Dr. Bernstein, 
Mr. Kudlow, for being here today.
    The hearing is adjourned.
    (Whereupon, at 3:47 p.m., Tuesday, July 15, 2014, the 
hearing in the above-entitled matter was adjourned.)
                       SUBMISSIONS FOR THE RECORD

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