[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
U.S. GOVERNMENT PRINTING OFFICE
89-403 WASHINGTON : 2014
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
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
[GRAPHIC] [TIFF OMITTED]