[Joint House and Senate Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 115-234
THE ECONOMIC REPORT OF THE PRESIDENT
=======================================================================
HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
MARCH 7, 2018
__________
Printed for the use of the Joint Economic Committee
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
U.S. GOVERNMENT PUBLISHING OFFICE
29-401 WASHINGTON : 2018
JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
HOUSE OF REPRESENTATIVES SENATE
Erik Paulsen, Minnesota, Chairman Mike Lee, Utah, Vice Chairman
David Schweikert, Arizona Tom Cotton, Arkansas
Barbara Comstock, Virginia Ben Sasse, Nebraska
Darin LaHood, Illinois Rob Portman, Ohio
Francis Rooney, Florida Ted Cruz, Texas
Karen Handel, Georgia Bill Cassidy, M.D., Louisiana
Carolyn B. Maloney, New York Martin Heinrich, New Mexico,
John Delaney, Maryland Ranking
Alma S. Adams, Ph.D., North Amy Klobuchar, Minnesota
Carolina Gary C. Peters, Michigan
Donald S. Beyer, Jr., Virginia Margaret Wood Hassan, New
Hampshire
Colin Brainard, Executive Director
Kimberly S. Corbin, Democratic Staff Director
C O N T E N T S
----------
Opening Statements of Members
Hon. Erik Paulsen, Chairman, a U.S. Representative from Minnesota 1
Hon. Martin Heinrich, Ranking Member, a U.S. Senator from New
Mexico......................................................... 3
Witness
Hon. Kevin Hassett, Chairman, Council of Economic Advisers,
Washington, DC................................................. 5
Submissions for the Record
Prepared statement of Hon. Erik Paulsen, Chairman, a U.S.
Representative from Minnesota.................................. 34
Prepared statement of Hon. Martin Heinrich, Ranking Member, a
U.S. Senator from New Mexico................................... 35
Prepared statement of Hon. Kevin Hassett, Chairman, Council of
Economic Advisers, Washington, DC.............................. 37
Article titled ``One last time on who benefits from corporate
taxcuts'' submitted by Representative Maloney.................. 44
Article titled ``No, the GPO Tax Plan Won't Give You a $9,000
Raise'' submitted by Representative Maloney.................... 47
Response from Dr. Kevin Hassett to Questions for the Record
Submitted by Vice Chairman Lee................................. 49
Response from Dr. Kevin Hassett to Questions for the Record
Submitted by Senator Heinrich.................................. 51
Response from Dr. Kevin Hassett to Questions for the Record
Submitted by Senator Klobuchar................................. 53
Response from Dr. Kevin Hassett to Questions for the Record
Submitted by Representative Maloney............................ 53
Response from Dr. Kevin Hassett to Questions for the Record
Submitted by Representative LaHood............................. 55
Response from Dr. Kevin Hassett to Questions for the Record
Submitted by Representative Schweikert......................... 55
THE ECONOMIC REPORT OF THE PRESIDENT
----------
WEDNESDAY, MARCH 7, 2018
Congress of the United States,
Joint Economic Committee,
Washington, DC.
The Committee met, pursuant to call, at 2:00 p.m., in Room
216, Hart Senate Office Building, the Honorable Erik Paulsen,
Chairman, presiding.
Representatives present: Paulsen, Beyer, Handel, LaHood,
Maloney, Comstock, Adams, Schweikert, and Delaney.
Senators present: Heinrich, Lee, Klobuchar, Cassidy,
Hassan, Portman, and Peters.
Staff present: Theodore Boll, Colin Brainard, Gerardo
Bonilla, Daniel Bunn, Kim Corbin, Barry Dexter, Alaina
Flannigan, Connie Foster, Natalie George, Colleen Healy, Matt
Kaido, Allie Neill, and Alex Schibuola.
OPENING STATEMENT OF HON. ERIK PAULSEN, CHAIRMAN, A U.S.
REPRESENTATIVE FROM MINNESOTA
Chairman Paulsen. We will call the hearing to order. Good
afternoon, and welcome to the Joint Economic Committee's first
hearing of 2018. This is my first hearing as Chairman. As
Members know, I have worked with many of you before and, as you
know, as Senator Klobuchar knows, I'm from Minnesota, where we
work hard and we work together.
In that spirit, I look forward to working with Ranking
Member Heinrich and Vice Chairman Lee, as well as the other
members of the Committee.
I especially want to extend a very warm welcome to our
newest member, Representative Karen Handel from the State of
Georgia.
And with that, we will begin. We are witnessing a sea
change in the American economy, one that is boosting
opportunities, supercharging growth, and restoring prosperity
to our Nation. For eight years the last Administration
struggled to find government-based solutions to a financial
crisis that hit American workers hard. But now we have a new
Administration with a very different approach, and I think few
can deny that things have changed very rapidly.
The job of this Committee is to understand what changed and
why. We all want more workers to rejoin the labor force, more
businesses to invest, and more wages to rise.
I believe our work here, in gauging the economy's long-term
potential, can inform us on the policies that foster that
growth.
Chairman Hassett, we welcome you here today. Some very good
things have happened since you testified before this Committee
in October of last year. We have passed historic tax reform
legislation, the Tax Cuts and Jobs Act, and the response of
businesses has been overwhelmingly positive, exceeding
expectations.
Consumer confidence is up. Americans are seeing more take-
home pay. Many will spend less time preparing their taxes next
year, and businesses are paying special bonuses, giving their
employees a raise, repatriating offshore earnings, and
investing more in the United States again.
The unemployment rate is 4.1 percent, the lowest since the
year 2000, and the number of new unemployment claims is the
lowest since 1969.
Regulatory reform is cutting back on market-choking
regulations, and is encouraging the private sector, and
contributing to the surge in business optimism since November
2016, especially for small businesses.
Economic growth in each quarter of last year substantially
exceeded growth of the corresponding quarter the year before
reaching as high as 3.2 percent in the third quarter, a number
that the last Administration had led us not to expect to happen
again.
We are in a better place every day, as this economy has
moved upwards, and it is not because government fixed it; it's
because government finally allowed the American people to fix
it.
We are trusting the American people to keep more of their
money and to spend it as they see fit, rather than micro-
managing their lives. America's economy isn't getting
overheated, it's just getting started.
Figure one, which is on the screen, uses the phrase
``Constrained Potential.'' The potential is everyone in the
audience here in their capacity as productive members of
American society, and the constraint part is, well,
unfortunately potentially everyone here on the dais in our
capacity as elected officials.
This chart does show something very interesting. The color
lines show how the Congressional Budget Office has lowered its
projection of the economy's output potential each successive
year since 2008.
In other words, this is a graphic representation of the
American Government lowering expectations year by year. The
black line at the bottom, however, represents actual production
as rising, closing in on the bottom potential line only after
eight long years.
Potential GDP should not change much from year to year, yet
this chart shows constant revision. And why? The answer is: The
continuous addition and tightening of policy constraints from
2008 to 2016. Removal of these constraints is a return to
normalcy, not an artificial boom.
What happened for the last eight years was a regulatory
crackdown that diverted and constrained Americans from their
pursuits. And those expectations should never have been that
low to start, because we should have had confidence in the
American worker.
I would be remiss if I did not mention the President's
concerns about our trade policy and discussion in recent weeks
about tariffs. We are all deeply concerned about unfair trade
practices by bad actors in other countries, and I know American
workers want to compete fairly. That is because--and I know the
President knows this as well--our workers are the best in the
world. And when they compete internationally, America wins.
I look forward to hearing from you, Chairman Hassett, how
these tariffs might be crafted so they address specific
distortions caused by unfair trade practices and how we are
going to avoid these tariffs simply becoming a tax increase on
consumers and American manufacturers.
Chairman Hassett, we thank you again for appearing before
the Committee today and extend our thanks, as well, to the
Council of Economic Advisers for preparing the Economic Report
of the President.
I will now yield to Ranking Member Heinrich for his opening
statement.
[The prepared statement of Chairman Paulsen appears in the
Submissions for the Record on page 34.]
OPENING STATEMENT OF HON. MARTIN HEINRICH, RANKING MEMBER, A
U.S. SENATOR FROM NEW MEXICO
Senator Heinrich. Thank you, Chairman.
Before I get started, I want to welcome our new Chairman,
Chairman Paulsen. We have known each other for a few years now,
and I am really looking forward to working with him this year.
Chairman Hassett, thank you for being here today to discuss
The Economic Report of The President and the State of the
Economy. And I wish I were as optimistic as the Chairman about
the policies put in place since you came before this Committee
in October.
I am going to be pretty direct. The Republican tax bill
serves special interests and will cost our children dearly for
generations to come. Rushed through with no bipartisan input,
the GOP tax law jeopardizes our fiscal position and further
tilts the scales in favor of large corporations, and especially
wealthy individuals.
While the law's impacts on economic growth are debatable,
the impact on inequality is clear. Independent analysis shows
that within 10 years more than half of working families will
pay higher taxes than they would have before the new GOP tax
law. And meanwhile, the wealthiest 5 percent walk away with an
astonishing 99 percent of the tax benefits.
Chairman Hassett, you and the President have promised again
and again, most recently in The Economic Report of The
President, that tax reform will increase average family income
by at least $4,000. But that is simply not what we are seeing.
If we wanted to reform the Tax Code to help the middle
class, we could have simply cut taxes for the middle class.
Pretty straightforward. And it would have directly given
working people in New Mexico and around the country much-needed
resources to pay the bills, put their kids through college, and
save a little something for retirement.
Instead, Republicans chose to cut taxes for large
corporations and for the super-wealthy, and left Americans
hoping that those cuts would somehow trickle down to workers.
History has shown again and again that is not what happens.
And the early evidence this year confirms who the big winners
are. So far, corporations have announced more than $210
billion, with a ``b,'' dollars in stock buybacks, benefiting
executives and wealthy shareholders.
While there have been some bonus and wage announcements,
they total just $6 billion. Six billion to two hundred and ten
billion. A fraction of the money going to executives and the
investor class. It is not just the immediate impacts that are
concerning. The whole strategy is misguided.
The massive increase in deficits constrains our efforts to
tackle the problems that we should have been focused on in the
first place, like fixing our broken infrastructure and making
more accessible and affordable a whole range of post-secondary
education options, from apprenticeships and vocational
education, to community college and four-year universities.
Think about how we could have invested $1.5 trillion
dollars spent on the tax bill. We could have erased every
student loan in this country. Every single one. One recent
study shows that canceling student debt for the 44 million
Americans who hold it would boost economic output and create up
to 1.5 million new jobs in a single year. Of course we could
have invested that $1.5 trillion in infrastructure.
The Administration's infrastructure plan commits barely any
real money to the cause. They say they want to spend $200
billion in Federal dollars, but its budget makes more than $200
billion in cuts to existing infrastructure programs from
transit to highways to water.
In other words, the long-awaited plan invests no new net
Federal dollars. The $1.5 trillion hole dug because of the tax
bill could have actually funded our infrastructure plan.
Instead, the Administration is hoping that somehow State
and local governments and the private sector will pay for
roads, for bridges, ports, schools, VA hospitals, and on and
on. But the private sector has little interest in investing in
sparsely populated low-traffic rural areas that desperately
need infrastructure investment. And the tax law further limits
already cash-strapped States' abilities to raise new revenues
by capping State and local tax deductions.
It is less a plan and more a hope. You often hear that
budgets are a reflection of values. That is true. But the
massive tax giveaway, maybe even more than the recent White
House budget, reveals Republican priorities.
My Republican colleagues could have joined with Democrats
to invest in children, to invest in workers, education, our
long-term economic success. Instead, they handed out goodies to
large corporations and the uber wealthy, and risked our long-
term economic health.
Chairman Hassett, my focus is on what we can do now, and
moving into the future. I am interested to get your insight
today on how the Administration plans to work with us in making
the investments that will help families succeed in today's
economy.
I look forward to hearing your perspective.
[The prepared statement of Senator Heinrich appears in the
Submissions for the Record on page 35.]
Chairman Paulsen. Thank you, Ranking Member Heinrich.
I would now like to introduce our distinguished witness,
Chairman of The President's Council of Economic Advisers, Dr.
Kevin Hassett.
Dr. Hassett earned his Ph.D. in Economics from the
University of Pennsylvania. Prior to joining the
Administration, Dr. Hassett was the Director of Research for
Domestic Policy with the American Enterprise Institute. He has
served as an economic adviser to multiple Presidential
campaigns. In addition to prior experience working as a senior
economist with the Federal Reserve Board of Governors, Dr.
Hassett has been a visiting professor at New York University
and as an Associate Professor at Columbia University.
Chairman Hassett, we appreciate you joining us today, and
you are now recognized for your testimony.
STATEMENT OF HON. KEVIN HASSETT, CHAIRMAN, COUNCIL OF ECONOMIC
ADVISERS, WASHINGTON, DC
Chairman Hassett. Thank you, Chairman Paulsen, and Ranking
Member Heinrich, Vice Chairman Lee, and members of the
Committee, for inviting me to discuss the Economic Report of
The President.
Our Report outlines the economics of an agenda focused on
improving growth by reforming the Tax Code, eliminating
unnecessary regulations, investing in infrastructure,
addressing cyber crime, and improving the conditions that made
it hard for America's middle class to recover from the
Recession.
First, on taxes and growth. A review of the literature and
our own modeling finds that the average household could get a
$4,000 wage increase from the new law once the law's full
effects get absorbed by the macro economy.
We have already seen that 4.7 million workers have received
raises, bonuses, or improved benefits as of today. By our
calculations, companies have already announced investments of
over $191 billion.
We also have now modeled the effects on the individual
side, finding they could increase GDP by 1.3 to 1.6 percent in
10 years. I also want to mention share buybacks.
Monies previously offshore are being sent back to the U.S.,
a one-time adjustment of the stock of trillions of dollars of
old profits that were locked in foreign subsidiaries. One would
expect this. No economist would make the case that the American
economy would be better off if these monies were still locked
offshore.
Share buybacks today are not mutually exclusive to long-run
wage gains that accompany American capital formation that will
accumulate this year and in the future.
Second, on deregulation and growth. There have been
demonstrable harmful effects on the economy of over-regulation.
For example, business dynamism has suffered a decline. 2009
marked the first time that more firms died than were born in
the United States since the Census Bureau began compiling its
Business Dynamics Statistics. It is likely that regulatory zeal
slowed both dynamism and overall growth. We find that if the
U.S. had OECD product market regulation that was the same as
Germany, we would increase annual growth by point one percent
per year. If we deregulate further to the level of the
Netherlands, we could get growth at 2.2 percent per year.
Third, we examined why the middle class cannot seem to get
ahead. The labor income of the typical household at the middle
of the income distribution is still below where it was at the
start of the 21st Century.
The last Administration's tax and transfer policies
worsened the wound through their effect on the labor market.
The median American's inflation-adjusted household income from
working took nine years to recover to its pre-Recession level
after the Great Recession, the longest this type of recovery
has taken since at least 1979.
Government policies decrease the incentive to work,
contributing to the historic decline in Americans participating
in the workforce, and the continued stagnation of wages, along
with the Baby Boom retirements.
But in the end these government policies hampered the
economic success of the very middle class households they are
intended to help. Changing course can help address the low
labor force participation rate, we believe.
I would also like to touch on immigration. The President's
immigration policies focus on a merit or skills-based approach,
bringing in immigrants who are highly productive and skilled,
as opposed to those who simply arrive through a family
relationship and who may have low or no skills, shows why a
head count is not the way to think about the impact of
immigration on growth.
Former CEA Chairman Eddie Lazear has written about the
relationship between the education levels of prospective
immigrants and the economic effects their admission could
rationally be expected to have. I agree with this analysis.
Looking at infrastructure, another of the President's
priorities, in 2014 total congestion cost peaked at $160
billion, wasting 6.9 billion hours in delays, and 3.1 billion
gallons of fuel.
A $1\1/2\ trillion investment in infrastructure could add
.1 to .2 percentage points to economic growth over the next
decade, and improve productivity and the quality of life.
The President has focused on the high cost of drugs. Among
members of the OECD, Americans pay more than 70 percent of
patented biopharmaceutical profits that fund drug innovation.
This is very asymmetric. There are also several factors that
affect health and health care costs, such as smoking, obesity,
and opioid abuse, which have contributed to the decline in
American life expectancy for the second year in a row.
We also looked at economic policy issues on the horizon
like cyber, as we were charged to do in the Forty-Six
Employment Act, Mr. Chairman. Our analysis finds that malicious
cyber-attacks inflicted over $100 billion of damage on our
economy in 2016, on top of the threat this poses to our
national security.
There is a market failure that leads private firms, which
we document in the Economic Report, many of which face risks
correlated with one another to invest less in cyber security
than would be economically optimal, and to not report crimes
that are targeted towards them.
And perhaps the topic of the day, which I know that we will
go into more in the question and answer period, trade. Trade
has been beneficial, for sure, but it has left some American
communities worse off.
The Administration is seeking to improve America's position
with respect to international trade. Other countries at times
violate market principles and distort the functioning of global
markets.
American firms face higher barriers to selling their
products abroad, and fewer barriers to selling their own
products here in the United States than their peer firms in the
group of high-income G-20 countries.
For example, let's just look at cars. We put a 2\1/2\
percent tariff on our imports into the U.S. And for countries
that we have free trade deals with it is even zero. Whereas,
China puts a 25 percent tariff on our cars that we ship to
China. And even the EU puts a 10 percent tariff on cars that we
try to sell into the EU.
Brazil puts 35 percent tariffs on U.S. cars. Or look at
monitors. We have a 2 percent tariff on monitors. China has a
24\1/2\ percent tariff, and the EU has a 14 percent tariff on
our monitors.
There are lots and lots of examples of these asymmetries
that we document in The Economic Report, and I think that that
is why the President is right when he emphasizes that our trade
deals need to level the playing field.
I would like to conclude with the overall economic
outlook--2017 growth and real gross domestic product exceeded
expectations and increased to 2\1/2\ percent, up from 1.8
percent during the four quarters of 2016.
We are the first Administration, I would add, to miss the
forecasts in their first year by having an estimate that was
too low in many years. The unemployment rate has fallen to 4.1
percent, the lowest since 2000.
Now our baseline forecast is that we will have 2.2 percent
growth through 2028. But if all of the President's policies are
enacted, the policy inclusive forecast is that we will have
real GDP growth of about 3 percent a year, although it is less
than that in the second five years.
So we are conservative relative to previous Administrations
that, on average, have had a median forecast of 3.1 percent.
And as I have testified before, I believe in the importance of
transparency about the forecasting methods. And I know that as
we begin our conversation about The Economic Report that we
will have plenty of points that we disagree about, but I hope
you will agree that we have got a very transparent report; that
we describe the model that we use to do the baseline; we
describe how we get from the baseline to 3 percent with lots
and lots of chapters on economic policies that review economic
literatures with something like 60 pages of references, and
give you a range of the balance of the predictions from the
literature.
With that, I know that there is a long, long history of
this Committee and the Council of Economic Advisers working
together, and I am pleased that I also have a personal history
with this Committee that goes back more than a decade, and I
look forward to taking questions from so many of my friends and
acquaintances.
Thank you, Mr. Chairman.
[The prepared statement of Dr. Hassett appears in the
Submissions for the Record on page 37.]
Chairman Paulsen. Thank you, Chairman Hassett. We will now
begin the questioning period. I would just remind members to
keep their questions to five minutes.
Chairman Hassett, the Tax Cuts and Jobs Act is the most
important economic legislation that we have seen enacted in
years. By lowering the corporate, pass-through, and individual
rates we have created a more even-handed, simple, and pro-
growth tax system.
Can you give a little bit of an expansion, or talk a little
bit more about some of the improvements that you believe this
legislation is actually bringing to our economy?
Chairman Hassett. Yes, and thank you very much for that
question. And it in part allows me to address comments made by
Mr. Heinrich that I think that, as an economist, as I modeled
the Tax Bill that we just looked at, I think of there being a
corporate side and an individual side. And I know the
individual side contains small businesses, and so on, too.
But on the corporate side, we got the rate from 35 percent,
which was the highest rate in the developed world, down to 21
percent. But also, we introduced a whole bunch of rules, some
of them quite technical like deemed tangible income, and I know
the members of this Committee have studied them all and know
them well, that make it so that firms can no longer reduce
their U.S. tax burden easily by moving their activity abroad.
An example that I find really stunning that I studied
extensively before as we were debating the Tax Bill, is that if
you and I, Chairman Paulsen, had a company that made say hockey
pucks, because you're from Minnesota, then if we had been
making hockey pucks in the U.S. forever and ever, then what we
could do is we could say, hey, let's start making hockey pocks
under the old code in Ireland. Then what we would do is we
would make our hockey pucks in Ireland, and then sell them to
the parent in the U.S. and say we sell a hockey puck for $10.
We would pay our Irish sub $11 for the hockey puck. The U.S.
parent would post a loss. There would be massive profits in
Ireland not taxed by the U.S. And then we would take that loss
and carry it back and get a refund on our past taxes from the
Paulsen-Hassett hockey pucks.
And so we had created this world where we were subsidizing
with tax refunds the offshoring of jobs. And I think that we
have fixed that. And I know that President Obama had a proposal
that did many similar things in the tax bill that we did. On
the individual side, that is the majority of the cost of the
tax bill. And I think that about $700 billion of the cost on
the individual side is from the refundable child credit.
And I, as an economist, can say that, you know, we can
disagree a lot about redistribution perhaps and what the top
marginal rate should be and so on, but I think we all agree
that our society should equalize opportunity. And I think that
the refundable child credit was a very costly thing in the
bill, but that it does--it is one of the things that is really
targeted towards the best way to address opportunity. And that
is to get money to families with kids.
Chairman Paulsen. Chairman Hassett, let me also talk to you
a little bit about free trade and tariffs, which are issues
that have now dominated the discussion here on Capitol Hill
since the President's remarks just last week on possible
Section 232 action. Like many of my colleagues, I am concerned
about the proposed tariffs on both steel and aluminum.
I do believe that if these tariffs are implemented with a
broad brush it will have the potential to backfire and cost us
jobs at home, force consumers to pay higher prices for goods,
and ultimately hurt our economy.
Can you talk a little bit about the direct negative effects
of these proposed 232 tariffs, as well as the possible
downstream effects that could occur depending on how the
international community reacts, should these tariffs be applied
to all steel and aluminum imports?
Chairman Hassett. You know, Mr. Chairman, you know that my
solemn job as Chairman of the Council of Economic Advisers is
to provide the President with objective advice about the
economics of his decisions. And I can assure you that I take
that responsibility extremely seriously, and that we do that.
If we are going to analyze--and, these actions that have
been in the news over the last week or so of course are still
in development. There is discussion about how to treat Canada
and Mexico that is an ongoing discussion.
But looking back at the academic literature, President Bush
had steel tariffs that I think the academic literature agreed
was a big positive for the steel industry, and then caused some
harm to downstream steel-using industries.
I can say that the 232 is a national security matter. I am
not a national security expert, but even if you were to take
those relatively small net costs to society from the analysis
of the Bush steel approach, then it would be easy to envision
national security benefits that would exceed those costs. And
more importantly, though, I think let's think again about cars.
So we have a 2\1/2\ percent tariff on European cars shipped
into the U.S. They charge a 10 percent tariff on our cars going
over to Europe. That kind of asymmetry is something that has
been the focus of I think every trade representative that I've
ever known trying to fix it, and they've failed.
President Trump is very, very serious when he says that he
is a free-trader, and that he is pursuing symmetry and
reciprocity. And, you know, I think that having--taking strong
action is a good way to start negotiations and to try to move
other countries towards a more free-trade equilibrium. If we
could succeed at doing that, then the benefits of that for us
and for the global economy could be enormous.
Chairman Paulsen. Thank you. With that, I now recognize
Senator Heinrich for a period of five minutes.
Senator Heinrich. Thank you, Chairman.
I am just going to jump off your question there. I am
curious if the President is interested in reciprocity and
proportionality, so much of our challenge there in terms of
abuse has been with China not with Canada. Why make the first
move with regard to Canada, instead of tackling the problems
that we all have recognized exist in our trade relationship
with China?
Chairman Hassett. You know, I am not the person who sets
the schedule for which moves that we make when. I can assure
you, as you can see in The Economic Report, that the Council of
Economic Advisers has taken very seriously our responsibility
to measure things like the intellectual property theft from the
U.S. by Chinese firms and the Chinese Government, and quantify
it. So we've got numbers in there of more than $100 billion.
And as you know----
Senator Heinrich. Prioritize where we have seen the worst
abuses. Going on to wages, the Council of Economic Advisers has
estimated that the corporate tax cuts just passed by my
Republican colleagues would lead to a $4,000 increase in
average household income.
We have seen a few companies that have announced one-time
$1,000 bonuses, but we have not seen anything really
approaching a $4,000 permanent wage increase that's been
predicted. So, Chairman Hassett, if you want to guarantee
families $4,000 in their income, why not just cut out the
middle man and give them a $4,000 tax cut in their income
taxes?
Chairman Hassett. You know, I think that the problem from
the point of view of modeling the economy is that ultimately
you have to have a theory of where wages come from.
If wages are being supported by high productivity, then we
can give people a pay raise and sustain it for many, many
years. Productivity basically only comes from two places. One
is that we give workers more capital to use. Or, two, we give
them training so that they have more human capital.
And by chasing our hockey puck firm overseas to Ireland,
what we basically did is we removed capital from the economy.
And we mentioned in the report, by the way, that capital
deepening's contribution to wage growth in the second four
years of President Obama's term actually went negative for the
first time in U.S. history, back to the Second World War. And
it wasn't a policy that President Obama pursued. It was the
absence of a tax reform that fixed this problem where everybody
was moving everything offshore.
And so I think if we want workers' wages to go up--and you
know that I do--then we have to either train them better, or
give them more capital to use. And what we were doing before we
changed the tax law is we were chasing the capital offshore.
And without capital there was no productivity growth. And
without productivity growth, there was no wage growth.
Senator Heinrich. So talking about tax reform, for years we
heard the mantra of tax reform being about lowering corporate
taxes, but broadening the base. This certainly lowered
corporate taxes. It's why it comes with a $1.5 trillion price
tag. Where was the broadening of the base?
Chairman Hassett. Oh, on the corporate side, Mr. Heinrich,
I think that the net cost after the international changes was
about $300 billion. And so imagine if we started with a 35
percent rate and moved it down to 21 percent, if we didn't have
any base broadening then we would have lost a heck of a lot
more revenue than $300 billion.
Senator Heinrich. I am looking forward to seeing how this
models out over time, or how the models match up to reality.
As you know, shareholders are receiving about 30 times as
much as workers through stock buyback. That is just from the
public numbers of what has been released with regard to the
ratio of bonuses, the ratio of raises to actual buyback
announcements.
Is there anything the Administration is planning to do to
encourage that corporations use more of this new windfall to
build that capital in their workers?
Chairman Hassett. Yes, thank you very much for that
question because this is a very, very important thing to have
clear in all of our minds. There was a whole bunch of
previously earned profits sitting offshore. Some estimates were
as high as $3 trillion, but say $2- to $3 trillion that was
offshore, and was offshore in December.
And now that $3 trillion is coming home. And a lot of that
money is for firms like Apple, and Microsoft that have enormous
profitability. And, you know, they just had it parked in their
foreign sub and they're bringing it home. The wage growth that
the models put out, that we talk about in The Economic Report,
comes over time from capital formation.
Now some of that money coming home will be turned into
investment. Some of it will be turned into bonuses. Some of it
will be put in the bank. But there is a cumulative stock of
about $3 trillion that is coming home right now. And it is
better that it is home than we leave it over there.
But the wage growth comes from the capital investment. But
not just the firms that made profits in the past made, but the
firms that are going to make profits in the future make as
well.
Senator Heinrich. I am over my time, Mr. Chairman, but I
would just make the point that I think Apple is seeing that
real money. My constituents are still waiting for their real
increase in wages.
Chairman Paulsen. Vice Chairman Lee, you are recognized for
five minutes.
Vice Chairman Lee. Thank you very much, Mr. Chairman. And
thank you, Mr. Hassett, for being with us again today. It is
always a pleasure to have you in front of the Committee.
In your report, one of the many things that you discuss
that I think is interesting and helpful is that a mounting body
of academic and economic research indicates that excessive
regulation negatively affects productivity growth by
misallocating labor and creating restrictions on entry.
These are things that weigh heavily on the economy. When I
first started following this a couple of decades ago, the drain
on the economy was about $300 billion annually. It is up to $2
trillion annually now. So this has not simply grown with
inflation. There has been a very significant uptick in the
burden imposed on the economy by the Federal regulatory system.
The Administration has made some significant strides to
roll back ineffective, duplicative, and intrusive otherwise
excessively burdensome regulations. In fact, Director Mulvaney
has announced that OIRA accomplished a staggering ratio of 22
regulations removed or rescinded for every new one promulgated,
which I think is a fantastic development and one that I hope
will continue throughout this Administration and moving forward
into the future.
Shrinking the regulatory footprint of our Federal
Government, and encouraging agencies to spend their money more
wisely is something I have long cared a lot about, and it is
something I have focused on ever since I came to the Senate
over seven years ago.
In the 114th Congress, I introduced the Regulatory Budget
Bill that would have required the President to submit in his
annual budget request an analysis of the cost of compliance
with Federal regulations that each agency is in charge of
implementing and enforcing. And also to do that with regard to
proposed regulations.
My bill also would have prevented agencies from issuing
certain guidance documents setting out policies or
interpretations of statutes unless they had provided adequate
notice and opportunity for comment, as is required under
existing law. And it would have required the GAO to provide
reports and estimates for specified regulations.
Tell me, Mr. Hassett, how could improved agency-wide cost/
benefit analysis help the economy to continue to grow? And how
could it provide more opportunities for more business owners to
invest in hiring new workers, rather than in spending so many
resources on complying with existing regulations?
Chairman Hassett. Thank you for the question, Mr. Lee. You
know, I think that one of the surprising things for me about
the movement in consumer and business sentiment last year was
how quickly it went up really, really fast and enormously, even
though it wasn't even clear that the tax bill would pass and so
on.
And digging around, I understood better than I have in the
past, because I'm not a regulatory economist, how regulations
squash innovation and entrepreneurship. And one of the main
problems is that when you have new regulations, then firms have
to sort of stop what they are doing and hire a bunch of lawyers
and engineers to figure out how are we going to comply with
this new regulation? And it can be really quite costly. One
estimate from Doug Holtz-Eaken's think tank suggested that
there were literally millions and millions of man-hours that
were saved last year because people were not looking at all
these new regulations and figuring out what to do.
But old regulations, firms figure out how to deal with
them. But then it becomes kind of a barrier to entry. And so if
you are a big rich firm, then your guys figured out how to deal
with the regulations; but somebody who might want to enter and
compete with you has to navigate this really complicated thing
where maybe there's 10 regulations in your space, and half of
them disagree with one another. And so I think the benefit from
deregulation are clear.
And regulations were growing--it is really hard to measure
regulations, but I would say over the last decade about 8
percent a year. In other words, faster than the economy. And so
if you are wondering why people were depressed about the future
of the regulatory costs that they might be facing, it was
because there were so many more regulations.
Now of course many regulations are important, and they are
good, and we want clean air and clean water, and so we have to
expose them to, as you say, the cost/benefit analysis.
Vice Chairman Lee. But they are not cost free, and the
costs that they impose, as you point out, some regulation is
appropriate and indeed necessary, but it is not as if those
regulatory costs can simply be deemed to be borne by big,
wealthy corporations.
Chairman Hassett. It is the startups that don't happen very
often that you can think of as bearing the costs of those.
Vice Chairman Lee. The startups that don't happen. The jobs
that do not arise, since we know that most if not all net job
growth occurs within startups. But it also gets paid for by
consumers. Disproportionately speaking, we are talking about
poor and middle class consumers who pay higher prices on
everything they buy.
Thank you.
Chairman Paulsen. Thank you. And now Representative Beyer,
you are recognized for five minutes.
Representative Beyer. Thank you, Mr. Chairman, very much.
And, Chairman, thanks for being here.
In both the CEA Report and in your testimony you stressed
the benefits of deregulation for growth, per your conversation
with Senator Lee. But I want to focus slightly different.
Because we know from both historical and unfortunately recent
events that very few factors can impact growth negatively more
than a financial crisis. Hence, the downturn--that's upside
down here, I've got to get it rightway up--that dark black line
was the financial crisis.
Is there any evidence that the deregulation of the
financial sector improves the stability of the financial
sector?
Chairman Hassett. You know, you are right to point to the
fact that there is a big academic literature on the history of
financial crises. Rineheart and Rogoth looked at 700 years of
that and found that it is typical for economies to grow slowly
after that for up to a decade.
If you dig into their data a little bit more, which I have
done, then you see that a lot of big, negative growth comes in
the first half. And that usually by, you know, seven or eight
years in you start to go back to normal growth.
That did not happen in the U.S. And we have to look at the
causes for why growth started to disappoint, and we did not go
back to the old normal. And I think that one of the factors
is--and this is something that I think there is bipartisan
support for, is that our financial regulations made it a little
bit too hard on community banks. A lot of community bank
closures, and the community banks tend to be the ones that are
financing the entrepreneurship and so on.
So I think that financial regulation to preserve stability
is important to avoid the next financial crisis. But after we
have done it, it is important to study the costs and benefits
of those regulations. And again I think that there is, very
much bipartisan support, for the current measures to try to
help the community banks.
Vice Chairman Lee. You talked a lot about buybacks already.
It is increasingly clear that firms are using, as Senator
Heinrich said, almost 30 to 1. And I confess, massive stock
buybacks weren't part of the Administration's messaging on this
tax cut bill. I appreciate your notion that it is better to
have the $30 trillion home.
But if it is not being used for R&D, and it is not being
used for investment, and it is not being used for worker
things, and in fact I think most of what we see is that they
are used to artificially inflate the value of the shares, both
by competing for share price and restricting the number of
shares. And the person that helps the most are the CEOs whose
pay plans are based on stock price and overall market value.
Aren't we really in trouble here with a great leap of faith
that somehow putting a lot more money in the share buybacks is
going to lead to greater wage growth?
Chairman Hassett. You know you and I agree about a lot of
stuff, but on this buyback thing I just disagree. I wrote a
paper with Alan Auerbach who has come as a Democratic witness I
think before this Committee in the past, on what drives
buybacks. And we have this very special one-time thing going on
where there are at least trillions of dollars offshore that are
suddenly--they're suddenly able to bring them home, and firms
are investing them. They are giving bonuses. They are putting
money in the bank, and they are buying back shares and
increasing dividends. And that is how capital markets work.
But imagine if I own a share, and then a firm buys it back.
It says if they gave me a dividend, they're giving me some
money and it's coming because I made an investment in their
firm, well then I as an investor will presumably go out and buy
some other equity in some other firm. And so what that will do
is that if you have a big firm like Apple say that has already
done all of the investment plans that it plans to, and does not
need the money that it is sending home to build a new factory,
then it might buy back the shares. And then the people who
owned Apple will go out and buy equities in firms that are new
and innovative. That is how capital markets work, but churn in
capital markets is what drives growth.
Vice Chairman Lee. Let me try one more question. The
President keeps talking about, he has repeatedly recently
claimed that there is a $17 billion trade deficit with Canada.
And yet your report talks about actually a new trade surplus
with Canada and with Singapore.
So can you educate him on our Canadian trade surplus,
please?
Chairman Hassett. The President is very well educated on
these matters. He, I think--I haven't looked at his specific
reference that you're talking about, but some people for some
purposes emphasize the goods trade deficit, and some people
emphasize the goods and services trade deficit. And I think in
The Economic Report to the President we looked at both.
Vice Chairman Lee. Is a good surplus or deficit more
important than the services surplus?
Chairman Hassett. I think it depends on, you know, what the
conversation is about; that it is pretty common for jobs
producing goods to have higher salaries than jobs producing
services. And so there are definitely many conversations where
the goods surplus is the more relevant metric.
Vice Chairman Lee. Mr. Chairman, I yield back.
Chairman Paulsen. Thank you. Representative Handel, you are
recognized for five minutes.
Representative Handel. Thank you very much, Mr. Chairman.
And thank you, Chairman Hassett, for being here.
I would like to go back to the tax cut bill, if possible,
because I think I need to get some clarity from you. I hear the
critics saying that the lower tax rates are going to
disproportionately benefit the most wealthy earners out there.
Yet what I hear in my District in the Sixth District of Georgia
is something quite different.
Kim, a single mom who works for a construction company, she
is actually seeing an additional $260 a month. That is more
than $3,100 a year in her paycheck. And for a single mom with
her daughter in college, that is really significant.
So can you give some clarity around how the tax cuts really
are affecting in a real-life scenario across the different
income brackets, particularly for low- and middle-income
earners?
Chairman Hassett. Sure. I think that I have already
addressed one thing that I think is very important, which is
the big increase and refundability of the child credit. Also,
the Treasury was really quite efficient at changing
withholding, so that already in February people saw their take-
home pay go up.
The individual side of the tax cuts affected almost every
taxpayer, and there are many, many of them. And I think one
reason why the polling about the tax cuts changed so much in
February and March is that people began to see what is real
money to them.
I think that we have to remember that the tax bill just
passed in December, and our estimate of the wage effect is
really something that happens after the investment, the capital
accumulation has occurred, and that is something that will be
spread out over years.
I think that if history is a guide, then as popular as the
tax cuts are now because people saw their take-home pay go up,
they are going to be even more popular in a few years because
of all the new capital that has come online pushing up
productivity and pushing up wages.
Representative Handel. Great. Thank you. I want to move to
something that you said in your testimony about the real need
to educate and train better the U.S. workforce so that we will
have enough people to fill these jobs.
As you know, about 6 million jobs are left unfilled here in
the U.S. and employers really are very concerned that
applicants lack the necessary skill sets. So what is your
perspective about the balance between the emphasis of a
traditional four-year college degree versus vocational and
technical education, and how we can better marry that up to
meet the demands of this growing economy?
Chairman Hassett. Well I know that this is something that
is a big focus of many in the Administration, especially
Secretary DeVos, and I think that as an economist what I would
always side with, you know, markets should speak and people
should choose the professions that they want to do, and that we
should help them finance their investments in human capital.
But that we shouldn't pick winners and losers.
And, you know, I think that you might choose to have a low-
paying job because it is something that you love. And one of
the beauties of America is that we don't assign people to this
or to that. But I think that our education policy could do a
much better job at helping people acquire specific technical
skills. And, you know, there are ways that one could think of
to help encourage that, by making more monies available for
such investments.
Representative Handel. Thank you. Let me move very quickly
to the debt and get your quick thoughts about the impact of the
pro-growth policies in the Tax Cuts and Jobs Bill to help us be
on a better fiscal footing.
Chairman Hassett. I think that the President prioritized
the tax bill in the first year, understanding that the game
that we played with our hypothetical hockey puck example was
harming America's workers, and that they desperately needed
their help, our help.
Then, you know, in the fullness of time I think every
economist will tell you that the entitlements are exploding and
that we haven't, you know, in present value we haven't yet
worked out a way to pay for them.
I in my prior life even testified before this Committee on
fiscal consolidation and the potential growth benefits of that.
But I think the President and the team were right to prioritize
the tax bill because we had this gaping wound that was harming
American workers that we had to fix.
Representative Handel. Alright, thank you so much, Mr.
Chairman. I yield back.
Chairman Paulsen. Thank you. Senator Klobuchar is
recognized for five minutes.
Senator Klobuchar. Thank you very much, and
congratulations, Mr. Chairman, and welcome, Mr. Chairman.
I wanted to follow up on the last questions from the
Congresswoman. We have a relatively low unemployment rate in
our State, in Minnesota, and the Economic Report shows that
even with overall low rates across the country the prime age
male participation rate remains still lower. But the Federal
Reserve noted earlier this year that there was a shortage of
qualified workers across job sectors, particularly in
manufacturing.
Last year, 68 percent of our manufacturers in Minnesota
said they were having trouble finding workers. And I know you
just responded that it would be good to try to encourage
different education programs to do that so we have people going
into these areas. But could you comment on that lower number
with men, and then what you think we should do about it?
Chairman Hassett. Sure. I think that one point that we try
to emphasize in The Economic Report, Senator, is that the
retirement of the Baby Boomers is not the whole story. There
are many reasons why labor force participation, especially from
prime-age males, has declined. Some of those involve higher
marginal tax rates discouraging work especially among older
people.
We talk about the prevalence of substance abuse. I think
you might have seen our reference in the report to our big
study in the fall of the impact of opioids on the U.S. And I
think that there are many, many things that we are going to
have to do to improve labor force participation.
But the thing that I thought was a good news part that was
really bipartisan or nonpartisan good news in that part of The
Economic Report was that labor force participation does respond
some to policy. And so when we see potential GDP estimates that
were sort of doomed for low growth for a really long time, they
often come from the fact that the decline in labor force
participation is expected to continue, and we in The Economic
Report highlight a number of things that we think we can do to
help with that.
And I am not trying to filibuster you, I promise----
Senator Klobuchar. We do that in the Senate----
[Laughter.]
Chairman Hassett [continuing]. But I think that the biggest
thing that will do that is just the wage increases.
Senator Klobuchar. Okay----
Chairman Hassett. If they happen the way we say, then that
will draw people back to the labor force.
Senator Klobuchar. On the opioid side, I just hope--I was
there when the President signed the Order, and Senator Portman
and Whitehouse and a few others and I have introduced the CARA
Bill, and I just hope that the Administration gets behind some
of these solutions. Senator Manchin has an idea of funding
treatment with a per milligram tax on opioids. We have issues
with prescription drug monitoring and other things. So that
would be helpful if we get action, in addition to the report.
Chairman Hassett. We have all hands on deck on that
problem.
Senator Klobuchar. Okay, good. Okay, then a second topic I
want to focus on was just immigration reform. Again as I look
at this low unemployment rate, the Administration's decision to
end DACA has created tremendous uncertainty for dreamers.
In looking at states across our Nation, one recent study
estimated that ending this policy would cost the country over
$400 billion over the next 10 years. I was part of the Common
Sense Caucus Group that came up with what we thought was a
solution. I would prefer just to pass the Dream Act, get this
done, and then we would not have the economic impact of having
all of these hundreds of thousands of kids have to leave, 97
percent of them who work or are in school.
Could you talk about the economic repercussions of losing
this part of our workforce?
Chairman Hassett. Well, Senator, as you know my job is to
objectively advise the White House on the economics of things.
And I know that there is an ongoing negotiation now----
Senator Klobuchar. There is, but there are still economic
hard facts about dreamers holding jobs, or in school.
Chairman Hassett. Right. And I think that the economic
literature is clear that immigration has in many ways been a
big benefit to the economy; that immigrants are often more
likely to be entrepreneurs----
Senator Klobuchar. Twenty-five percent of all U.S. Nobel
Laureates were foreign born.
Chairman Hassett. But I think that also--and this is
something before I joined the Administration that I wrote
extensively about--and yet because of perhaps the bad
enforcement of existing laws, and the existing chain migration
as opposed to skills-based migration, we're probably not
getting the maximum bang for the buck out of immigration.
Senator Klobuchar. I know but I was just specifically
asking about dreamers and their economic impact, and the fact
that they are here in a different category and have been
working legally.
Chairman Hassett. And I have not done a specific estimate
of the economic impact of dreamers, but I would be happy if you
would let me table it to get back to you----
Senator Klobuchar. That would be wonderful.
Chairman Hassett [continuing]. With specifics.
Senator Klobuchar. I would really appreciate that. Thank
you.
Chairman Paulsen. Congressman LaHood, you are recognized
for five minutes.
Representative LaHood. Thank you, Chairman Paulsen, and
congratulations on your Chairmanship.
Chairman Hassett, thank you for being here today. I think
you bring a valuable voice to this Administration when it comes
to the free enterprise system, the support of capital markets
and for free trade. I want to read a quote that you had last
year regarding the economy of the U.S.:
``The success of the United States has come not from our
natural resources or its large population, but from its free
market system. Liberalized trade in broadly multilateral,
regional, and bilateral agreements is a key ingredient in the
recipe for prosperity.''
How does pulling out of NAFTA coincide with that statement?
Chairman Hassett. You know, I think--thank you for the
question--and I think that the President has said over and over
that he believes in free trade, and that he wants to negotiate
better trade deals. I am not participating in the negotiations
over NAFTA, but I know that there is a great deal of hope that
NAFTA--that the negotiations will be successful. And I think
that you would agree that if you look at like the asymmetries
that I mentioned, for example, for autos, that it would be
great if we could fix that.
And the President is a very good negotiator, and he is
intent on making the trade deals more symmetric than they are.
Representative LaHood. And you mentioned earlier your job
is to give advice. I mean do you think pulling out of NAFTA is
a recipe for prosperity?
Chairman Hassett. I think that there are a lot of benefits
that can be had from improving the symmetry of the treatment of
all of our--we have about the lowest, almost the lowest tariffs
and nontariff barriers on earth, and our trading partners very
often do not. And it would benefit American workers, and also
the global economy if people would just move towards American
policies. If they copied our policies, it would be a much
better economy. And I think you would agree with that.
But previous Presidents have tried to move foreign trading
partners in that direction and failed, and I think the
President is intent on trying to do that.
Representative LaHood. And it seems to me there is
obviously a strong debate going on on these issues, and we had
Secretary Mnuchin before the Ways and Means Committee and asked
him this, and he thought it was a good idea to renegotiate and
not pull out.
I know Secretary Purdue has said the same thing at the
Department of Agriculture. Gary Cohn had said the same thing.
Ambassador Branstad in Iowa. Do you have an opinion on that?
Chairman Hassett. I think that the best possible outcome is
a reciprocal symmetric trade deal that increases the freedom of
trade. Yes, so I think that is correct.
Representative LaHood. And then you mentioned earlier in
your statement about the President supports free trade. When we
look at the last 14 months here, what can we look at in terms
of policies or things put forth that support free trade?
Chairman Hassett. Well I think that what is happening now
is that there is a massive amount of work negotiating trade
deals and trying to improve them, and to make them more
symmetric and reciprocal. If those deals are successful, then
they would certainly improve free trade.
Representative LaHood. Well again, with all due respect, I
look back over the last 14 months. And when Ambassador
Lighthizer came in he talked a lot about bilateral trade
agreements. And I think we are all in agreement those are
positive for the U.S.
But as we sit here today, we have not seen a model or a
format or a mechanism for bilateral trade agreements. And that
is very frustrating as somebody that represents a strong
agriculture district, where Caterpillar tractors are made, and
John Deere equipment. And 40 percent of the corn and soybeans
grown in my District go somewhere else around the world.
And here we are with not one bilateral trade agreement put
forth.
Chairman Hassett. Well I think that if you and I were
negotiating trade deals that we would have no difficulty
writing a deal right away. We would have a two-sentence trade
deal that says we are going to have free trade between our
countries. The trade deals that are being negotiated have
thousands and thousands of pages, and it takes a long time to
fix them. But we are intent on doing so.
Representative LaHood. And I guess two other points. I know
you mentioned particularly on steel and aluminum that this is a
national security issue, and that is what it has been
categorized as. But I know Secretary Mattis has disagreed with
that and said it's not national security, so I would just point
that out.
And I know you referenced President Bush and his steel
tariffs that had gone on. But again, back when that happened,
I'm quoting from an article here in Business Insider,
``Manufacturers that depended on cheap steel during that era
for their supply chain were hurt. The Institute for
International Economics estimated that as many as 26,000 jobs
were lost in this country after those were inputted.''
And I guess my last comment would be: Who wins in a trade
war?
Chairman Hassett. I think that the global economy will
function better if everybody--if our trading partners move
their trade policies towards ours. And I think that American
workers would be better off if the high tariffs on our
products, like the 25 percent tariff on U.S. autos shipped into
China, the 35 percent tariff on autos shipped into Brazil, if
those are brought down. And the President is very serious about
being a tough negotiator and putting America's workers first.
Representative LaHood. Thank you for your service.
Chairman Paulsen. Representative Maloney, you are
recognized for five minutes.
Representative Maloney. Thank you, Mr. Chairman, and
congratulations on your appointment.
And, Mr. Hassett, welcome back.
Chairman Hassett. Thank you. It's great to be here.
Representative Maloney. As Chairman of the Council of
Economic Advisers, you have to straddle two very different
worlds, the economic profession and the Trump Administration.
And I would like to build on the question of my colleague on
the other side of the aisle.
You said in an interview that was published on January
30th, and I quote, ``Everybody in the Trump Administration
believes in free trade.'' End quote.
As a free market conservative economist, do you agree with
the President's policy of putting large tariffs on imported
steel and aluminum? Yes or no?
Chairman Hassett. My job in the White House has been to
provide objective analysis to the President on those policies,
and I have done so. In the end, the 232 judgment is one that's
a national security judgment. I am not a national security
expert. You mentioned that Secretary Mattis had disagreed, but
ultimately the President was elected by the American people to
protect them and to make judgments about national security, and
I support the Constitution and his right to do that.
Representative Maloney. What are the likely economic
effects? Who pays the price?
Chairman Hassett. I think that the likely economic effects
of say a steel tariff would be that we would have more steel
production in the U.S. that would benefit steelworkers and
steel firms here in the U.S. And to the extent that steel
prices are higher, then the steel-consuming industries might
find that their costs and profits--costs have gone up and
profits have gone down.
Representative Maloney. And in your report you repeat a
claim you made many times that was a major selling point for
the tax cut legislation. You write that, and I quote, ``The
corporate tax changes alone are expected to increase annual
income for families by an average of $4,000.'' End quote.
And in a September report, you call this a very
conservative estimate. Now is this based on mainstream opinion
in the field of economics about the incidence of the benefits
of corporate tax cuts on labor?
Chairman Hassett. Thank you very much for that question,
because, yes, it is. And in fact in The Economic Report we have
a chart, which I would completely be unable to find right now
sitting here at this stage, but I would be happy to do so and
send it to you, where we go over all of the academic literature
in this area and provide estimates of the wage effects from
corporate tax cuts from any number of papers, including some
published in The American Economic Review, which is like The
New England Journal of Medicine of economics.
And so critics of our analysis have asserted, falsely, that
this analysis is not mainstream. But it is mainstream. It is
citing academic peer-reviewed research in the top economic
journals, including one by myself.
And the paper that I wrote had a much bigger effect than
the one that the economic report honed in on. And I think that
that also shows my commitment to letting the staff decide what
they think the literature says. I didn't put my finger on the
scale and tell them to use my opinion.
Representative Maloney. I would like to request to place in
the record alternative opinions from economist Paul Krugman who
had an analysis where he called it ``boneheaded,'' and your
predecessor economist Jason Furman said it was ``implausible''
and a little more than far-fetched. And Larry Summers wrote
also a statement in opposition to this economic determination.
Now if I could put it in? Thank you.
[The information referred to appears in the Submissions for
the Record on page 44.]
And following the passage of the Republican tax cut
legislation, major corporations have authorized an eye-popping
$200 billion in stock buybacks. And of course this drives up
stock prices, benefiting stockholders and CEOs, but how does
this $200 billion figure compare to the total amount of wages
and bonuses you believe are a result of the tax cut? What is
the ratio? How does $200 billion in stock buybacks benefit the
American worker?
Chairman Hassett. I think again, Mrs. Maloney, to return to
the buyback issue, the buybacks right now that are coming from
the repatriated monies that were previously offshore are a one-
time thing.
If the--the papers I cited, which are not boneheaded, are
peer-reviewed in top journals are correct, which they might not
be. It's economics, right? Economics is an imperfect science.
Then after the capital formation happens, workers will get
$4,000 in say about five years from now, and then the year
after that they'll get even more.
The buybacks, the $200 billion, are a one-time thing that's
based on the trillions of dollars that were offshore in the
past. In the future, if the capital formation happens then
wages will go up and they will continue to go up over time. And
again, in a question for the record I would be happy to run
through some calculations to show you what the present value of
those wage increases might be and how they would relate to
these buybacks. But I can assure you that it is going to be
many, many times the value of the buybacks.
Representative Maloney. My time is up.
Chairman Hassett. Thank you. Representative Comstock, you
are recognized for five minutes.
Representative Comstock. Thank you, Mr. Chairman. I
appreciate the opportunity to be here today.
I wanted to focus on--I was very pleased you included this
in the report--cyber security and the economic cost of not
having the top cyber security workforce, as well as being aware
of the threats.
So I am noting in The Report you talk about 75 percent of
the cyber threat being from the outside coming in, hacking in;
25 percent being on the inside, the people who are trying to
get in and then are opportunists there.
And then while we often hear a lot about the state actors--
and that is 18 percent or so--51 percent is organized crime. So
The Report indicates that the government can create education
programs to ensure a pipeline of domestic employees for the
cyber security workforce. Could you address some of the things
we are doing there? And do we need to maybe have some--given
the need for that within the government to protect against
this, how do we compete for the cyber security workforce that
we need on the inside, given this very active growth area on
the outside? So how do we make sure that we have these high-end
workers to deal with this very, as you pointed out, big
economic threat?
Chairman Hassett. Thank you very much for the question. And
I think that the cyber chapter in The Economic Report broke a
lot of new ground. I was very proud of the economic team that
did that analysis, because it allowed us to quantify the impact
of cyber crime in the U.S. in a way that has not been done
before, by doing things like looking at announcements of cyber
attacks on firms, and then estimating the share price response
to the cyber attack.
And I think that The Economic Report of The President
serves a useful function for policymakers like yourselves when
we provide analysis that quantifies things and helps you
understand the stakes. And I think that I was surprised to see
that the cost of cyber crime annually in the U.S. is north of
$100 billion. I was astonished to see that the cost of opioid
abuse in the U.S. is north of $500 billion a year. These are
extremely pressing problems.
Some of the solutions will involve training cyber security
professionals. But other solutions certainly are the topic of
future discussion and research.
Imagine if pirates were attacking port cities and stealing
$100 billion a year, how we would respond. And it seems like
this cyber cost that we discuss in the economic report has
received a much smaller response than that. And our hope is
that by quantifying the numbers that we help people prioritize
their own thinking about future policies.
Representative Comstock. Thank you. And then you actually
mentioned my second question on the opioid abuse and that cost
being so significant. And I know as I travel throughout my
District, inevitably whether I am at a Rotary Club or a Chamber
or a business talking about their needs, I hear certainly about
workforce development that we have addressed here and I
appreciate hearing, but part of the workforce development
problem is the opioid abuse and the drug abuse, and not being
able to get employees who can pass drug tests.
So if you might address that, on some of the best ways that
we can deal with this economic threat. I mean obviously we have
task forces and we are working on this a lot, but maybe if you
can just highlight the intersection of all the problems created
by that on the economic side?
Chairman Hassett. Right. I think that so far in The
Economic Report what we have done on opioid abuse is to dig
deeply into quantifying the problem.
There is an ongoing effort I know on the Hill, but also in
the White House, that is a massive effort to come up with
solutions. On a personal level, I can say that my home town,
Greenfield, Massachusetts, was the feature of one of those
Anthony Bourdine's ``On The Road'' shows. And he was talking
about how such a beautiful town could be a center of opioid
abuse, where there was a massive amount of suffering and death
because of it.
This is very personal for me, and I can assure you that
there are going to be focused solutions to the problem rolled
out this year by a big task force that is working on this at
the White House.
Representative Comstock. Thank you. And I really appreciate
on both of those fronts that you have incorporated that and put
them on the economic costs, because I think it is very
important for us to be incorporating into our thinking. Thank
you.
Chairman Paulsen. Thank you, Ms. Comstock. Representative
Adams, you are recognized for five minutes.
Representative Adams. Thank you, Mr. Chairman. And thank
you, Chairman Hassett, for being here.
The Trump Administration is allowing states to impose work
requirements on Medicaid beneficiaries. Once again, in my
opinion we are not showing a lot of support for our low-income
citizens, assuming that they are not working and they are not
working by choice.
Most Medicaid recipients who can work already work. Sixty
percent of adults on Medicaid are working, and nearly 80
percent are in working families. Of those not working, more
than half are family care givers, some in school who are
already looking for work. All work requirements will accomplish
is kick people out who need Medicaid the most.
So my question is: What impact will taking Medicaid from
America's working families have on our country's health,
productivity, and economic growth?
Chairman Hassett. Thank you for the question, and I think
that we all agree that, that having a job and earning success
is an objective that is worthy for every citizen, and that
there are definitely citizens that have difficulty
accomplishing that for many reasons, including the opioid abuse
that we mentioned.
I have not reviewed the literature on the impact of work
requirements on job labor force participation, but I would be
happy to do a technical analysis for you in a response.
I think in The Economic Report of The President chapter on
health we talk a lot about the focus of economic policy and
thinking on health, and how we might not have done the best job
of doing that. And that in recent years, for example, in the
U.S. the mortality has increased. The expected lifespan has
gone down. We have become less healthy I think mostly because
of the opioid abuse.
But having a policy that measures health and focuses on
improving it is something that I think that we should all agree
is a worthy objective of policy. And I think the chapter on
health in The Economic Report should help us do that because we
come up with and focus on measures of health.
Representative Adams. There have been some evaluations of
programs that impose work requirements on welfare recipients,
and they found that, for example, within five years employment
among recipients not subject to work requirements was the same
as or higher than employment among recipients subject to work
requirements in nearly all of the programs that were evaluated.
So I will be happy to share some information with you, as well.
You know, before I move on to my next question I want to
just take a second to just express my concerns about the
Administration's repeated attacks on State and local budgets.
First, the GOP tax scam handicaps State and local budgets. I am
a former member of the North Carolina House, so I understand
when things are passed down. We call them ``unfunded
mandates,'' but budgets that drastically reduce the State and
local tax deductions.
Then we have these work requirements and so forth. So the
Administration is, in my opinion, hurting our working families
by making our State and local governments pay for that.
One thing I want to ask in terms of African American
employment, unemployment, and I heard the President say at the
State of the Union that African American unemployment rose to
7.7, one of the largest increases in years.
So what specific policies--first of all I've got to tell
you that over the past few years the largest increases in
African American unemployment, we can see that. But what
specific policies is the President considering to address--
regarding the rise in African American unemployment? And it has
risen.
Chairman Hassett. In the last month, that's right. There
was a reversal of an enormous amount of progress that had been
made over the past couple of years.
This is something that, going back to even the peak of the
financial crisis I testified about. Because back then when I
reviewed the literature it was clear that in good times the
good news is that society has made an enormous amount of
progress, and the odds of African Americans and Caucasians
being hired are about the same. But that in bad times, there
was still clear evidence that African Americans
disproportionately bore the brunt of layoffs. And going back
into during the financial crisis. I testified about policies
that I would advise that we pursue back then because I saw this
thing coming.
And I think the fact that we made so much progress is
basically the result of the boom, and it is normally what one
would expect to see when the unemployment rate is low, that
they would make a lot of progress. Because the asymmetry in the
job market for African Americans, which is still a very big
problem in the U.S., tends to be that when there is a downturn
that they are the ones, the first to lose their jobs.
Representative Adams. Thank you very much. I'm out of time.
Chairman Paulsen. Senator Cassidy, you are recognized for
five minutes.
Senator Cassidy. Thank you for testifying. My understanding
is that the aluminum and steel tariffs will not apply to
finished products, rather just upon the sheets of steel and
aluminum themselves, or the aluminum bars. Is that correct?
Chairman Hassett. As far as I know on that, Dr. Cassidy,
that everything is still being finalized. I have not read the
final order on that, and so I would have to get back to you on
that. I think it will all be visible shortly, but it is not
something that--that specifically is not something I got
briefed on.
Senator Cassidy. And Senator Portman mentions to me piping,
which is important in the oil and gas industry. In that case
you may not be able to answer the rest of these, because my
question was--or my series of questions are around the fact,
has the Administration modeled the effect of these tariffs upon
companies shifting manufacturing overseas so as to make a
finished good, and then to bring it back across the border,
raising their import price if you will, so therefore it is more
profitable to construct overseas. Are they modeling that?
Chairman Hassett. At the Council of Economic Advisers, and
in the Commerce Department, and at the USTR's office there's an
enormous amount of modeling capability that we provide
analysis.
Senator Cassidy. Do you know the results of that? What I
would like to know really is if it has been modeled, what is
the expected effect of businesses offshoring to use lower----
Chairman Hassett. I am not aware of the CEA staff having
modeled the offshoring part. We have modeled the impact on the
steel industry.
Senator Cassidy. Then let me ask--I don't mean to be rude,
I just have a short period of time.
Chairman Hassett. I understand.
Senator Cassidy. Then I have a friend back home in Morgan
City, Louisiana, who has a fabrication shop, and he is
competing against Koreans who have lower labor costs, and
probably subsidized steel from China. And they will just ship
modular units into Southwest Louisiana to be put into a
petrochemical plant.
So he is competing directly with a foreign competitor. His
labor costs are high, but he's closer and transportation costs
are lower. But now with steel costs going up 25 percent. Has
that been modeled? The effect upon our domestic fabricators and
manufacturers who are directly competing with those who will
not suffer from such a tariff?
Chairman Hassett. You know, without referencing specific
deliberative work that CEA has done for the President, I can
say that the economics literature has looked at previous
episodes like this and found that there are upstream or, you
know, instream benefits to the steel industry, and downstream
harm; that the downstream harm has been cited in some of the
previous questions. But again, this 232 is a national security
judgment by the President----
Senator Cassidy. I accept that, and earlier it was
commented that General Mattis suggests it's not the case, and
that we actually have adequate domestic steel production for
our defense industry should we ever have to have a problem like
that. But I am also--you mentioned the previous effect. I am
told that under--when George W. Bush put in such a tariff, that
another effect was that dockworkers around the Nation, in the
Port of New Orleans, by tonnage, a major product shipped is
steel. And I was told that when George W. Bush put his tariffs
in, that there was just loss of employment in our ports,
specifically the Port of New Orleans, the one I am most
familiar with.
Can you comment on that? Is that something----
Chairman Hassett. I can get back to you on that. I
certainly have read the literature. Gary Hufbauer is an
economist who worked on the Bush steel tariffs and has
published papers. But the specific question of dockworkers and
the experience back then is not something that I have studied.
But it would take me just a moment and I would be happy to
get back to you.
Senator Cassidy. And then you mentioned that there is
upstream benefit for the steelworkers, and then downstream
benefit for many others. If you could reflect on when George W.
Bush did this, the net effect upon employment in the United
States, was it positive or negative? Were more jobs created
because of the tariff? Or were more jobs lost downstream?
Chairman Hassett. The academic literature found very small
net negative effects back then. And, you know, I would say that
if we were going to do a full economic analysis of this, we
would--I'm not a national security expert and so how it affects
national security is not something I have studied or
necessarily could quantify--but I think that we should also
recognize that American workers in just about every industry
are disadvantaged by the broad asymmetries that we highlight in
The Economic Report of The President where again if we try to
sell a car in Europe, they charge a 10 percent tariff. And if
we try to sell a car into China, they charge us 25 percent
tariff.
And if we can envision a world where our trade negotiators
can do a better job negotiating reciprocal trade deals, then
the benefit from that reciprocity would be enormous for
American workers, and much bigger than any of the negative
costs that would come----
Senator Cassidy. I am out of time, but it would be nice if
that were--I don't mean to be offensive when I say this--more
than conjecture, but actually have been modeled. And in some of
the stuff I am listing, it seems like it should be modeled
before something so broad is put in place.
I thank you very much and I yield back.
Chairman Paulsen. Senator Hassan, you are recognized for
five minutes.
Senator Hassan. Well thank you, Chairman Paulsen. And thank
you, Chairman Hassett, for being here this afternoon.
Mr. Hassett, your report highlights the importance of
training and retraining efforts to ensure that workers have the
opportunity to gain skills and earn a living wage. We all know
that the effectiveness of these kinds of programs is imperative
to employers' success as they look to fill positions with
qualified workers.
In New Hampshire and around the country we often see that
the individuals most in need of these kinds of programs face a
number of additional barriers to success, like accessing child
care, transportation, and mental health supports.
In February I introduced the Gateways To Career Act. It
would address this challenge by supporting individuals engaged
in career pathway programs. Grants created in this bill would
support workforce partnerships like those between community
colleges and State workforce development boards by removing
these types of barriers for students and, in turn, help
individuals earn industry-recognized credentials.
As you promote workforce training programs to help
individuals upskill, do you think it is important that we
address how to help students overcome these kind of barriers?
Chairman Hassett. I very much--and apologize that I haven't
in advance studied the Gateways proposal--but I very much look
forward to reading it and giving a detailed analysis of it. I
can say that since we finished The Economic Report and it gives
me something of an appreciation for childbirth. This is a very
big effort in a very short amount of time.
[Laughter.]
Senator Hassan. Be careful about saying that----
Chairman Hassett. Yes. But as we--yes, I know--but I think
that one thing that we have focused a lot of staff time on
lately is studying these training issues and focusing on
increasing labor force participation in communities that are
most at risk, including prisoners, and so on. And so I very
much look forward to studying the Gateways To Career Paths
proposal and comparing it to what we have been learning on our
work over the last few weeks.
Senator Hassan. Well I would love to work with you on that.
I also have another bill that I want to bring to your attention
you also get at one of these issues in your Report. You mention
in your Report that the number of young people starting
businesses is down, which is something I have been hearing
about in my State of New Hampshire.
Many times these young adults have large amounts of student
loan debt standing in their way from starting a new business,
and at times from accessing capital that is already a challenge
for new businesses to acquire.
So the first bill I introduced in the Senate was the
Reigniting Opportunity for Innovators Act, or the ROI Act. It
would pause student loan interest and payments for
entrepreneurs at the start of their businesses. And in cases
where the business is started in a distressed area, allow for
some cancellations. Would you agree that relieving the burden
of student loan debt would help to encourage young
entrepreneurs to start new businesses?
Chairman Hassett. I think that you are correct to focus on
this problem, the fact that the Millenials are the least
entrepreneurial generation that we have ever measured and is a
policy challenge that we need to take seriously. Because
ultimately if we don't have entrepreneurs driving the economy
forward, then what kind of an economy are we going to have 20,
30 years from now?
In that literature, it is certainly hypothetically possible
that one reason why is that people are capital-starved, more
capital-starved because of student debt. It is not something
I'm aware--I haven't read a paper that has connected the two,
but it is certainly economically sensible that if you are
capital starved because of high student debt you would be less
likely to start a business.
Senator Hassan. I would be happy to introduce you to some
of the students I have talked with who are studying business
and want to start their own businesses, and then faced with the
student debt they have. We used to say to people, ``Go into
business early. You don't have a mortgage yet.'' Right? But if
you have student debt at the level of a mortgage, you can't.
I want to touch on one last thing that Representative
Comstock talked about, and certainly you have talked about in
terms of the economic impact of the opioid epidemic. I come
from a State that has about the third highest mortality rate
from this epidemic. And today over 100 Americans will die from
a drug overdose, most of that from opioids.
It is over a $500 billion epidemic impact in 2015
nationally in my home State of New Hampshire of 1.3 million
people. It was a $2 billion economic impact in 2014.
So when I heard you say the White House is undertaking a
massive effort, I have to tell you that to my constituents and
to me we have not seen it. We saw a President's Commission on
the opioid epidemic come up with recommendations that every
governor in the United States is working on already through
recommendations they developed at the National Governors
Association.
We do not need a task force to reinvent the wheel here. We
need resources on the front lines for health care
professionals, to law enforcement, to treatment and recovery
providers, and we need this Administration to stop trying to
undermine Medicaid, which is where most people get substance
misuse treatment and behavioral health treatment right now who
desperately need it. So I hope you will take that message back
to the White House.
Chairman Hassett. Thank you.
Senator Hassan. Thank you, Mr. Chair.
Senator Paulsen. Senator Portman, you are recognized for
five minutes.
Senator Portman. Thank you, Mr. Chairman. So much to ask
you, Kevin, and thanks for being here and for your willingness
to step up and serve in this capacity.
On the Tax bill, I know you talked a little bit about that
in The Economic Report, and your projections on growth. Two
questions.
One, there is concern about the deficit that might be
created. And we had to use, as you know, an economic growth
number of 1.9 percent. That is the Congressional Budget
Office's official average over the next 10 years. And the one
way to look at it is to say if you had .04 percent more growth
than the 1.9 percent, then you would have enough revenue coming
in because you're going to get about $2.7 trillion for every
one point of economic growth.
What is your projection on economic growth, specifically?
And then more generally, how do you think the tax bill will end
up in terms of its impact on the deficit?
Chairman Hassett. Well thank you, Senator. And thank you
also for agreeing to introduce me at my confirmation hearing.
It seems like a long time ago. But that was very gracious of
you.
I think that you are right to think about it that if you go
out to the 10th year and we have--on the baseline of a $28
trillion economy, that if you imagine growth of half a percent
a year higher, or one percent a year higher if you like to
divide by 10, then you can see that it is very easy to envision
this tax bill generating enough growth so that it doesn't have
a negative effect on revenue.
I think that the Joint Tax Committee gave a dynamic score
of $1 trillion, but I think they really underestimated the
growth effect. I think that if we get the growth that we
project in The Economic Report to The President, and again I
think in a very transparent way, then that will add almost $3
trillion to the baseline level of GDP at the end.
And that's, you know, American money, and some of it can be
paid back in taxes, but all of it will contribute to welfare of
the American citizens.
Senator Portman. Which means the tax reform will actually
end up reducing the deficit relative to what it would have
been. And with regard to what is most important in the tax
bill, you talk about productivity. When I talk to companies
back home, of course we're talking about bonuses and increases
and contributions to 401Ks, which is great, and of course
individuals are getting more tax relief, and withholding tables
have been changed. People are finding, you know, $40, $50 in
their paycheck they didn't expect.
What is the most important single thing in this tax bill
for long-term growth in wages?
Chairman Hassett. The most important single thing in this
tax bill for long-term growth in wages is to make the corporate
rate 21 percent. Because we have ended the kind of scam, the
tax scam, where you could get a tax refund to locate a factory
offshore and to increase demand for foreign workers and reduce
demand for domestic workers. We fixed that really heinous
policy error. And the signs of its damage to the economy are
all around us and all throughout this Economic Report.
And again, think about it. Capital formation's contribution
to productivity growth went negative for the first time in U.S.
history at a time when we were not in a recession, because we
were chasing all of our capital offshore. And I think that we
fixed that.
Senator Portman. And that will result in more investment,
which results in higher productivity, which results in higher
wages. And to me that is the most exciting part of this bill,
and we have yet to see all the benefits of that and won't for
many years, but it ultimately will make the biggest difference
for my constituents, I believe.
With regard to opioids, we talked a lot about it today. I
focused a lot on this notion that we don't really have 4.1
percent unemployment, as good as that sounds, when we look at
what the new numbers are on Friday, and they are probably going
to be good for the month of February, and again we're seeing
good economic growth. But if you go back to the labor force
participation rate before the Great Recession, the unemployment
number today would be 8.9 percent. Think about that.
People are shocked to think about really we're living in
kind of a 9 percent unemployment environment, even though we
say it is closer to 4 percent, and who are these people who are
outside of the workforce? And when you do those studies, as you
know, you find out that opioids play an amazingly large role.
I appreciate you raising that issue, and the Brookings
study by you colleague, Mr. Kruger, is one of course, but also
BLS has its own study out there that's very similar saying that
roughly 47--43 to 47 percent of men who are currently of prime
working age, able-bodied men, are taking pain medication on a
daily basis. And his conclusion is that about 31 percent of
those people who are out of the workforce are related to
opioids based on his further questions on whether it's a
prescription drug or not.
This is shocking to people. And we look at the economic
impact in many ways, but one we have to look at is this lack of
opportunity for access to a workforce that we desperately need.
Do you agree with that?
Chairman Hassett. Yes, I agree with that. And you mentioned
Alan Kruger, who was my predecessor as the Chairman of the
Council of Economic Advisers. I have spoken at length with Dr.
Kruger, Professor Kruger, about his study. It is filled with
really interesting food for thought and helpful insights that
will help us address this problem as we move forward.
And so I think you are right to mention that work. It is
extremely important work and very well done, and I have spoken
with Dr. Kruger about it.
Senator Portman. I hope it encourages us to do even more on
the opioid crisis. We've got the funding now and we've got to
make sure it is well spent. WeCare 2.0, my colleague, we talked
earlier to sponsor that.
I thank you, Mr. Chairman, and thank you, Dr. Hassett.
Chairman Hassett. Thank you, Senator Portman.
Chairman Paulsen. Thank you, Chairman Hassett. If you don't
mind, we would like to just give members a second round of
questions. This will be a lightening round, so we will limit
members' questions to three minutes per member, if you will.
I will just begin. You just mentioned, we just had a
conversation about the lower unemployment rate. Job creation
has actually been fairly strong recently. Economic growth has
improved over the last year and was a lot better than expected
not long ago.
If the Administration is undertaking various initiatives to
stimulate the economy even further, can you comment a little
bit on the effectiveness of different approaches to stimulate
the economy? And I am thinking purely of the supply side versus
the demand side stimulus.
Chairman Hassett. Yes, thank you. This is something that I
have studied at length throughout my career. The one thing that
I think we know from a massive amount of work both studying the
U.S. economy and the variation across states and the variations
across countries is that if we have an attractive corporate tax
code, then it fosters higher growth, higher capital formation,
and especially higher wage growth, which is something that has
disappointed enormously in recent years.
And so I would say that the growth from the tax bill is
going to be front and center. It is going to be something that
we are going to experience. It is the reason why, you know,
many Wall Street firms are now forecasting what used to be
impossible, that we would have growth above 3 percent this
year. But moving forward, the President has a very aggressive
agenda on infrastructure and other things that also have
positive growth effects. And I think that if the agenda is
adopted, that it is extremely defensible that we could turn
away from the new normal of low growth to just normal.
Chairman Paulsen. Thank you. Member Heinrich, you are
recognized for three minutes.
Senator Heinrich. Chairman, I am going to go back to this
graph that the Chairman provided for us. You know, we've got
two different groups of lines here. We've got lines that are
just projections that are not real data, and then we have got
the line that really concerns me.
The part of this line that really concerns me is this part
here [indicating], which is the financial crisis from a few
years ago. And I think we probably do all agree that there is
huge bipartisan support for a reduction in over-regulation to
small community banks, to credit unions, small community credit
unions. But this week the Senate is considering banking
legislation that would also roll back some important safeguards
that protect consumers and Main Street from risky behavior by
large banks.
Large banks are earning record profits. They just had their
tax rate slashed, as you know. Why is now the right time to
expose consumers again to the kinds of systemic risk that got
us into this financial crisis in the first place?
Chairman Hassett. I would have to study the specifics of
the bill that you are talking about, and it is not something
that I have done. So----
Senator Heinrich. You haven't followed the bank
deregulation bill that's on the floor?
Chairman Hassett. I would have to read carefully where it
is right now. I have not been updated on that. There's been a
lot of other stuff going on.
Senator Heinrich. If, God forbid, that--you know, I hope I
am wrong--but if this banking bill were to lead us into another
financial crisis, would this Administration want to oppose any
public bank bailouts for banks that took on too much systemic
risk?
Chairman Hassett. I have not discussed that with the
President.
Senator Heinrich. Well the legislation is on the Floor this
week. That is why I am asking these questions, because now is
the time to get it right. If we wait until it is passed, then
the words are what the words are on paper. So I would look
forward to your input.
Chairman Hassett. I would be happy to get that to you.
Senator Heinrich. Thank you.
Chairman Paulsen. Representative Handel, you are recognized
for three minutes.
Representative Handel. Thank you. I want to touch on
infrastructure since we have not really heard from you on that.
There are a lot of different viewpoints on the subject, that we
should spend more and do so while the interest rates are low.
The Administration isn't spending enough. The Federal
Government shouldn't borrow more. It is no longer the right
time, with near full unemployment.
So can you share with us your thoughts and give us some
clarity to the debate, and what you recommend, and what your
thinking is on how we should move forward on infrastructure
funding?
Chairman Hassett. Right. And thank you for that, because we
have a big chapter on infrastructure here, and the President
has a very ambitious plan. And I think that we have not been
able in the U.S. to attract much private capital into the
infrastructure space in part because of the obstruction of
government regulation and the fact that it can take, as the
President has emphasized, up to 10 years to get a project
approved.
And I think there are many things we can do to draw more
capital into the infrastructure space. Some of it is direct
government spending, but some of it is also streamlining
regulation and making it so that, you know, if you could get
approval say in two years, and if there was one government
agency that was a single point of contact, then it would be a
lot easier to convince investors to invest in expanded
infrastructure projects in the U.S. But right now I think the
regulatory and government policy uncertainty around those
investments is so high that it is just very, very hard to get
investors to decide to participate in such projects.
Representative Handel. Thank you.
Chairman Paulsen. Well with that, I would like to thank
Chairman Hassett again for testifying before the Committee
today, and remind members that should they wish to submit
questions for the record the hearing record will remain open
for five business days.
And with that, this hearing is adjourned.
Chairman Hassett. Thank you, Mr. Chairman.
[Whereupon, at 3:33 p.m., Wednesday, March 7, 2018, the
hearing in the above-entitled matter was adjourned.]
SUBMISSIONS FOR THE RECORD
Prepared Statement of Hon. Erik Paulsen, Chairman, Joint Economic
Committee
Good afternoon and welcome to the Joint Economic Committee's first
hearing of 2018.
This is my first hearing as Chairman. I have worked with many of
you before, and as you know, I'm from Minnesota, where we work hard and
we work together.
In that spirit, I look forward to working with Ranking Member
Heinrich and Vice Chairman Lee, as well as the other Members of the
Committee. I especially want to extend a warm welcome to our new
member, Representative Karen Handel, from the State of Georgia.
We are witnessing a sea change in the American economy, one that is
boosting opportunity, supercharging growth, and restoring prosperity to
our Nation.
For eight years, the last Administration struggled to find
government-based solutions to a financial crisis that hit American
workers hard. Now we have a new Administration with a very different
approach, and I think few can deny that things have changed rapidly.
The job of this Committee is to understand what changed, and why.
We all want more workers to rejoin the labor force, more businesses to
invest, and more wages to rise. I believe our work here, in gauging the
economy's long-term potential, can inform us on the policies that
foster that growth.
Chairman Hassett, we welcome you here. Some very good things have
happened since you testified before this Committee in October of last
year. We have passed historic tax legislation--the Tax Cuts and Jobs
Act--and the response of businesses has been overwhelmingly positive,
exceeding expectations.
Consumer confidence is up, Americans are seeing more take-home pay,
many will spend less time preparing their taxes next year, and
businesses are paying special bonuses, giving their employees a raise,
repatriating offshore earnings, and investing more in the United States
again.
The unemployment rate is 4.1 percent, the lowest since the year
2000, and the number of new unemployment claims is the lowest since
1969.
Regulatory reform is cutting back on market-choking regulations and
is encouraging the private sector and contributing to the surge in
business optimism since November 2016, especially for small businesses.
Economic growth in each quarter of last year substantially exceeded
growth of the corresponding quarter the year before reaching as high as
3.2 percent in the 3rd quarter, a number the last Administration had
led us not to expect again.
We are in a better place every day as this economy has moved
upwards, and it is not because ``government'' fixed it. It's because
government finally allowed the American people to fix it.
We are trusting the American people to keep more of their money,
and to spend it as they see fit, rather than micromanaging their lives.
America's economy isn't getting overheated. It's just getting started.
Figure 1, which is on the screen, uses the phrase: ``Constrained
potential.'' The potential is everyone in the audience here in their
capacity as productive members of American society. The constrained
part is, well, unfortunately, potentially everyone up here on the dais
in our capacity as elected officials.
This chart shows something interesting. The color lines show how
the Congressional Budget Office lowered its projection of the economy's
output potential each successive year since 2008. In other words, this
is a graphic representation of the American government lowering
expectations, year by year.
The black line at the bottom, however, represents actual production
as rising, closing in on the bottom potential line only after eight
long years.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Potential GDP should not change much from year-to-year, yet this
chart shows constant revision. Why?
The answer is: The continuous addition and tightening of policy
constraints from 2008 to 2016.
Removal of these constraints is a return to normalcy, not an
artificial boom. What happened for the last eight years was a
regulatory crackdown that diverted and constrained Americans from their
pursuits. Those expectations should never have been that low to start
with, because we should have had confidence in the American worker.
I would be remiss if I did not mention the President's concerns
about our trade policy, and discussion in recent weeks about tariffs.
We are all deeply concerned about unfair trade practices by bad actors
in other countries, and I know American workers want to compete fairly.
That's because, and I know the President knows this, our workers are
the best in the world, and when they compete internationally, America
wins. I look forward to hearing from you, Chairman Hassett, how these
tariffs might be crafted so they address specific distortions caused by
unfair trade practices, and how we are going to avoid these tariffs
simply becoming a tax increase on consumers.
Chairman Hassett, we thank you again for appearing before the
Committee today and extend our thanks as well to the Council of
Economic Advisers for preparing the Economic Report of the President.
__________
Prepared Statement of Hon. Martin Heinrich, Ranking Member, Joint
Economic Committee
Before I get started, I wanted to welcome our new chairman.
Chairman Paulsen, I'm looking forward to working with you this year.
Chairman Hassett, thank you for being here today to discuss the
Economic Report of the President and the state of the economy.
I wish I were more optimistic about the policies put in place since
you came before this Committee in October.
I'm going to be direct: the Republican tax bill serves special
interests and will cost our children dearly for generations to come.
Rushed through with no bipartisan input, the GOP tax law
jeopardizes our fiscal position and further tilts the scales in favor
of large corporations and wealthy individuals.
While the law's impacts on economic growth are debatable, the
impact on inequality is clear.
Independent analysis shows that within 10 years, more than half of
working families will pay higher taxes than they would have before the
new GOP tax law.
Meanwhile, the wealthiest 5 percent walk away with an astonishing
99 percent of the tax benefits.
Chairman Hassett, you and the President have promised again and
again--most recently in the Economic Report of the President--that tax
reform will increase average family income by at least $4,000. But,
that is not what we are seeing.
If we wanted to reform the tax code to help the middle class, we
could have simply cut taxes for the middle class.
Straightforward.
And it would have directly given working people in New Mexico and
around the country much needed resources to pay the bills, put their
kids through college, and save a little something for retirement.
Instead, Republicans chose to cut taxes for large corporations and
the super wealthy, and left Americans hoping that those cuts would
somehow trickle down to workers.
History has proven--again and again--that's not what happens.
And the early evidence this year confirms who the big winners are.
So far, corporations have announced more than $210 billion in stock
buybacks, benefiting executives and wealthy shareholders.
While there have been some bonus and wage announcements, they total
just $6 billion--a fraction of the money going to executives and the
investor class.
It's not just the immediate impacts that are concerning; the whole
strategy was misguided.
The massive increase in deficits constrains our efforts to tackle
the problems we should have been focused on in the first place--like
fixing our broken infrastructure and making more accessible and
affordable a whole range of post-secondary education options--from
apprenticeships and vocational education to community college and 4-
year colleges.
Think about how we could have invested the $1.5 trillion spent on
the tax bill. We could have erased every student loan in the country.
Every single one.
One recent study shows that canceling student debt for the 44
million Americans who hold it would boost economic output and create up
to 1.5 million new jobs in just one year.
Of course, we could have invested that $1.5 trillion in
infrastructure.
The Administration's infrastructure plan commits barely any real
money to the cause. They say they want to spend $200 billion in Federal
dollars, but its budget makes more than $200 billion in cuts to
existing infrastructure programs--from transit to highways to water.
In other words, the long-awaited plan invests no new net Federal
dollars. The $1.5 trillion hole dug because of the tax bill could have
actually funded our infrastructure plans.
Instead, the Administration is hoping that somehow State and local
governments and the private sector will pay for roads, bridges, ports,
schools, VA hospitals and on and on.
But the private sector has little interest in investing in sparsely
populated, low-traffic rural areas that desperately need infrastructure
investment.
And the tax law further limits already cash-strapped states'
abilities to raise new revenues by capping SALT deductions.
It's less a plan, and more a hope.
You often hear that budgets are a reflection of values.
That's true. But the massive tax giveaway--maybe even more than the
recent White House budget--reveals Republican priorities.
My Republicans colleagues could have joined with Democrats to
invest in children, workers, education and our long-term economic
success. Instead, they handed out goodies to large corporations and the
uber-wealthy and risked our long-term economic health.
Chairman Hassett, my focus is on what we can do now, and in the
future. I'm interested to get your insight on how the Administration
plans to work with us on making the investments that will help families
succeed in today's economy. Thank you for your testimony. I look
forward to your perspective.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Response from Dr. Kevin Hassett to Questions for the Record Submitted
by Vice Chairman Lee
James Madison said in Federalist No. 10 that different economic
interests arise in every society and often have sharply conflicting
views on government policy. History has shown that reciprocal
international trade promotes prosperity for American consumers and
producers. In the ``Economic Report of the President,'' you point to
the fact that the manufacturing and mining sectors lost 9,000 and
98,000 jobs, respectively, in 2016. These statistics, no doubt, have
influenced the President's intention to levy tariffs on steel and
aluminum imports under Section 232. However, research published by the
Trade Partnership Worldwide finds that these proposed tariffs could
result in net job losses of nearly 146,000 jobs, notwithstanding any
employment increases in the steel and aluminum industries. Meanwhile,
the Tax Foundation estimates that implementation of these tariffs could
cost U.S. firms nearly $9 billion--a cost which will undoubtedly be
paid for by American consumers. In your opinion, Dr. Hassett, do the
benefits of these proposed tariffs outweigh the costs to the broader
economy? Could these new taxes actually counter the positive effects of
the historical tax cut we just passed in December?
CEA provides objective economic analysis based on the best
available evidence, and assists with the evaluation of the economic
tradeoffs implied by a set of current or prospective policy decisions.
The purpose of the present Section 232 actions is to prevent imports
from impairing U.S. national security [by ``weakening our internal
economy'']. That determination by its nature requires, in addition to
the economic costs and benefits intimated in the question, the
consideration of national security concerns. But national security
consideration are not CEA's core expertise, and it is ultimately up to
the President to weigh both the economic and national security
implications of policy choices as he formulates policy.
In the long-run, however, the distinction between national security
and economic concerns can blur more than in the short-run. It is tough
to understand the history of the U.S. economy since World War II, for
instance, without some reference to the Cold War and its aftermath. But
CEA is not well-positioned to assess impacts of the Section 232 that
accrue through national security driven channels at this point in time.
The Opioid crisis has taken not just a social and medical toll on
the country but has been an economic drain as well. In November 2017,
the Council of Economic Advisers calculated the cost of opioid
overdose, abuse, and dependence in 2015 at $504 billion. A nonprofit
group estimated that the Opioid Crisis has cost the United States more
than $1 trillion since 2001. That number is likely to increase by $500
billion in 2020. The crisis continues to grow unabated across the
country. How has this crisis affected labor-force participation,
productivity, and overall economic output?
The likely direction of the effect of the opioid crisis on economic
activity seems unambiguous: it is likely to be negative, and drag down
labor-force participation and economic output. Its effect on
productivity is less easy to develop an intuition for, but also likely
to be negative.
That said, the paucity of high-quality data on the subject
complicates attempts to discern the magnitudes as well as the direction
of this effect. But one empirical analysis on this subject comes from
Alan Krueger of Princeton University and former CEA Chair under
President Obama. Using data from 2010, 2012 and 2013, Krueger estimates
the number of Americans aged 25-54 who took pain medication on the
previous day, separately by gender. Pain medication includes opioids,
but is not limited to opioids as it also includes over-the-counter pain
medications. These rates are far higher than that for illicit drugs.
(Pain medication also is not an illicit drug if it is accompanied by a
valid prescription.) These numbers show less variation across labor
market status. Nearly 50 percent of men who were not in the labor force
took pain medication on the previous day over these years and nearly 20
percent of employed and unemployed men did the same. For women, the
rates are higher among the employed and unemployed, but lower for those
not in the labor force. Krueger's estimates imply that 862,000 prime-
aged persons (aged 25 to 54) were out of the labor force in 2015 as a
result of opioid dependence growth. We note that these estimates should
be considered as first approximations with a large standard deviation.
In the chapter of the Report that focuses on the labor market, the
Council of Economic Advisers notes a shift in the way that teens and
young adults are spending their time outside of work and school--
notably, a reduction in time teens spent on ``organizational, social,
and religious activities'' and an increase in time spent on activities
less important to human capital development, such as ``personal care
activities, which include sleeping and grooming.'' Even though the data
cannot specifically answer whether time spent on social media and the
internet might play a factor, would you infer that this shift in teen
time use over the past decade is connected to the rise of smartphone
and social media use, and what implications might that have on how
adolescents form connections and relationships pertinent to developing
social capital and engaging in associational life?
As noted in the question, one cannot infer the effect of
smartphones or social media from the data we have. Nor does there seem
to be research that allows one to make a causal inference about the
effect of the use of smartphones or social media on labor market
outcomes. The intuition that the increasing attraction of activities
like smartphones and social media competes for limited time and
attention with activities that increase engagement in associational
life does seem fair. And there is interesting research on the effects
of social media in disciplines beyond economics, which are beyond CEA's
area of expertise.
Evidence on the effect of increasing time spent on smartphones and
social media that meets the standards of the economics profession for
causal inferences about its effect on outcomes like those in the labor
market, then, does not yet exist. But CEA will continue to follow the
cutting-edge of research on this and other topics in order to provide
the best possible analysis of this important topic.
In the chapter focusing on the labor market, the Council of
Economic Advisers notes geographic immobility as a factor in labor
force participation rates, whereby workers are unable to move to
stronger job markets due to issues like occupational licensing
requirements, land use regulations, or inability to sell a home. For
those mired in high unemployment areas and lower levels of labor force
participation, do you believe that there may be a ``brain drain''
effect taking place as well, whereby those going on to receive higher
education aren't coming back?
There is some evidence for a ``brain drain'' of the type described.
The data do suggest that Americans with more education are more likely
to move. This relationship between education and probability of moving
manifests in the data both between 2001-2010 and between 1981-1990,
even as the overall rate of migration for all education groups has
fallen over time.
But the relationship between geographic mobility and economic
prospects is one for which it is easy to imagine many possibilities.
For instance, one would also imagine that those who are most-distressed
in a given area would be the most-motivated to want to move.
There is some evidence for the ``brain drain'' described, and CEA
looks forward to continuing to analyze the important issue of
geographic variation in economic outcomes as well as geographic
mobility in particular.
In the chapter focusing on health, the Council of Economic Advisers
identified five ``determinants of health in industrialized countries:
health behaviors, genetics, social circumstances, environmental and
physical influences, and medical care'' in the context of poor health
and premature death. Scholars Anne Case and Angus Deaton note in their
research on ``deaths of despair'' that premature deaths such as these
are ``about much more than economic circumstances'' focusing on `` . .
. the decline in labor force participation, the decline in marriage
rates, the rise of cohabitation, the rise in out of wedlock births, and
of parents living apart from children that they barely know. We discuss
the decline in the quality of jobs, the increasing lack of opportunity
for people without a bachelor's degree, as well as changing religious
practices.'' Would you agree that social factors and shifts in work and
family life among more vulnerable Americans have played a significant
role in their declining health trends?
The economics literature documents that economic factors, like
unemployment, can have non-trivial effects on health outcomes. Sullivan
and Von Wachter (2009), for instance, is just one of the economics
papers that employs a methodology with the econometric rigor you need
to make causal inferences about the effect of economic fluctuations on
health outcomes at the individual level. And they document that such
effects can exist: for instance, one of the effects documented is the
effect of job displacement on the probability of suicide. Though job
displacement may seem like an economic rather than social factor, job
displacement's consequences (including the probability of suicide) are
such that the effects documented in the paper are plausibly also
interpretable as relevant to the relationship between social factors
and suicide as well.
But, unlike Sullivan and von Wachter (2009), the seminal Case and
Deaton research on the increase in ``deaths of despair'' does not come
from any attempt at causal inference. Instead, Case and Deaton have
identified and described a trend that previously was not documented.
The social value of the documentation in trends in ``deaths of
despair'' by Case and Deaton is difficult to overstate. But the task of
documenting a trend in society is different in nature from the task of
identifying its underlying causes through a methodology that allows
causal, rather than only descriptive, inference. And Case and Deaton
have documented the trend rather than identified its cause.
That said, the type of causal econometric analysis epitomized by
Sullivan and von Wachter (2009) suggests the possibility that the
social and economic causes identified can explain some nonzero fraction
of the trend identified by Case and Deaton. But Case and Deaton's
findings are fairly new, and research has so far failed to identify
explanations for the trends in mortality in a particular place (the
United States) across particular moments in history (the last few
decades) that have been so meticulously documented by their path-
breaking work. Given the gravity of the issue, it is important that
research correctly identify the causes of the trend rather than proceed
on the assumption that the types of social and economic mortality
effects identified in other contexts is necessarily what explains the
particular phenomenon Case and Deaton documented.
__________
Response from Dr. Kevin Hassett to Questions for the Record Submitted
by Senator Heinrich
1.) As discussed in the final minutes of the hearing, the Economic
Growth, Regulatory Relief, and Consumer Protection Act (S.2155) is
making its way through the Senate and is expected to be taken up by the
House soon. The bill would exempt many banks with $250 billion or less
in assets from stricter regulations, even though many banks in this
asset range received taxpayer bailout money during the financial crisis
and some, such as Countrywide and IndyMac, were even at the center of
the crisis.
As a senior economic advisor to the President, do you believe there
is no risk in unwinding these regulations that have kept our financial
system safe?
As an economist evaluating a prospective change in regulation, it
seems unwise to reduce the question of whether the costs outweigh the
benefits on a net (rather than gross) basis to the question of whether
any particular gross cost or benefit is zero. As an economist, there is
no reason to think S.2155 would be an exception to this framework. Even
in a world with risks to repealing regulations that exceeded zero, the
benefits to repeal could still very plausibly outweigh the costs.
In the context of banking regulation, the tradeoff tends to be
between compliance and other costs of regulation on the cost side and
financial stability and other intended goals of risk-reducing
legislation on the benefit side. It is important to get this tradeoff
right. As the Treasury Department wrote in their recent report ``A
Financial System That Creates Economic Opportunities: Banks and Credit
Unions,'' financial regulations should be tailored to accomplish the
objectives of clear and transparent standards that do not impose undue
burdens and that are based on the size and complexity of the bank's
balance sheet and businesses. Insufficient tailoring results in bank
regulators misallocating staff time and resources by focusing on firms
that do not present the greatest risks to the financial system.
Further, the magnitude of regulatory requirements applicable to
regional, mid-sized, and community banks that do not present risks to
the financial system requires such banks to expend resources on
building and maintaining a costly compliance infrastructure, when such
resources would be better spent on lending and serving customers.
2.) In 2007, banks with less than $250 billion in assets
collectively held more than $1.6 trillion in assets. Collectively,
these small and medium sized banks were larger than all but one bank at
the time, and received more than $46 billion in bailout funds.
In your opinion, what sort of risk does $1.6 trillion in assets
pose to the financial system and the economy if those assets suddenly
become junk?
The failure of smaller banks, while potentially having an impact on
local economies, typically does not pose a risk to the financial
system. The focus of banking regulations for many decades has focused
on such institutions applying proper prudential standards to their
business. The proposed legislation does not change this focus. In
addition, the proposed legislation contains measures that would attempt
to target regulation such that only banks which pose a risk to the
financial system bear the additional costs of additional regulatory
compliance. And as an economist, targeting regulation such that the
incidence of any additional costs correspond with an increase in
expected benefits is difficult to oppose.
3.) You recently acknowledged that corporations are using
repatriated earnings to buy back more of their stock and increase
dividends to shareholders, not investing in their workers as you had
previously predicted would occur right away. While testifying before
the Joint Economic Committee you suggested this is a one-time buy back
that will eventually translate to downstream wage increases. However,
history has confirmed that this is not the case. Moreover, in a recent
survey, only two percent of workers surveyed have received a raise,
bonus, or additional benefits attributed to the tax bill.
How do you reconcile what history has confirmed and what workers
are saying with what you have promised working families?
First, tax cuts are being used for wage increases and investments
in the workforce. As of April 3, 2018, employee bonus announcements
attributable to the TCJA affected almost 5.5 million workers, according
to Administration tabulations.
Second, the TCJA passed only months ago. As the economy adjusts to
the new long-run equilibrium, then, you'd expect the benefits to grow.
To the extent that you would expect to observe the effects of the
TCJA in a new long-run economic equilibrium within a few months--and
there is no economic reason to think this would be the case--you would
expect only a fraction of the effect to yet be visible in the data. The
developments since the TCJA's passage, if anything, are what you would
expect to see if the long-run equilibrium was what CEA described: the
effects appear to be in the expected direction, and their full
magnitudes will take more than a few months to appear in the data.
Third, it is a mistake to think of the wage and investment effects
of the TCJA as mutually exclusive: investment effects complement wages,
as increased investment today is a harbinger of higher wages in the
future. Chapter 1 of the Economic Report of the President (2018), along
with other research from CEA, documents the mechanism that relates
investment to wages: productivity. Testifying to the relationship
between capital and wages, the link that runs through productivity, the
Report also documents the historic slowdown in capital deepening that
has accompanied the historic slowdown in wage growth observed in recent
years. In the light of the complementary relationship between
investment and wages, the $201 billion in new corporate investments
announced since the passage of the TCJA attributed to the legislation
seems like a harbinger of TCJA-induced wage gains in the future--not
evidence of their absence.
Finally, I would note that it is not clear that there is much of a
historical analogue for the Tax Cuts and Jobs Acts (TCJA). There were
other instances of changes to tax legislation enacted under George W.
Bush that are sometimes invoked as parallels similar to this question
but that differ economically from the TCJA
4.) In the hearing, you mentioned that immigration and immigrants
play a significant role in growing the economy, emphasizing the
importance of immigration on entrepreneurship in America. Yet, the 2018
Economic Report of the President remains completely silent on the
matter.
As Chairman of the Council of Economic Advisers, and as an
objective source to the President, please outline the economic benefits
of both high and low skilled immigration and its importance to the
economy in great detail.
There are as many ways to discuss the effects of immigration on
economic activity as there are ways to measure economic activity.
In the U.S., the debate about immigration has tended to focus on
the volume of immigration rather than the skill-level of prospective
immigrants. But a look at immigration systems around the world suggests
that the skill levels of prospective immigrants are one topic that
could, from the perspective of the U.S., appear as an interesting area
for analysis.
In comparison to other countries, the U.S. does not maintain a
skills-based immigration system. DHS data show that, of the 1.2 million
green cards issued in 2016, 60,000 (5 percent) were ``employment-
based'' and granted on the basis of the recipient's future labor market
contributions. Foreign-born U.S. residents contribute less, on average,
to U.S. GDP than the average for native-born Americans, although the
gap has been shrinking over time. In contrast, Australia maintains a
skills-based immigration system in which more than two-thirds of visas
were awarded based on recipient skills and their potential contribution
to the Australian economy. A shift in U.S. immigration policy towards a
more skill-based approach would provide a boost to U.S. GDP and reduce
any pressure incoming, lower-skilled migrants might place on the
incomes of lower wage Americans.
__________
Response from Dr. Kevin Hassett to Questions for the Record Submitted
by Senator Klobuchar
Over 97% of all Deferred Action for Childhood Arrivals (DACA)
recipients are currently working or attending school. One recent study
from the Center for American Progress estimated that ending DACA would
cost the United States over $400 billion over the next 10 years. At
your hearing, you stated that you have not conducted an estimate of the
economic impact of ending DACA but would be happy to conduct such a
study and report the results.
Please provide an analysis of the likely economic impact of ending
DACA and terminating work authorization for DACA recipients.
The net economic effect of any change to the status quo with
regards to DACA and work authorizations depends on the policy that
follows the change to the status quo. It is all but impossible, then,
to forecast the effects of a scenario that entails the end of a
specific policy but offers no information on the policy regime that
follows the end of the status quo.
Nonetheless, any analysis involving DACA illustrates the complexity
of the economic analysis of immigration, and the importance of the
composition as well as the volume of immigration in determining the
expected economic effects of immigration.
__________
Response from Dr. Kevin Hassett to Questions for the Record Submitted
by Representative Maloney
1) In the Economic Report of the President, you project real GDP
growth over 3.1 percent in 2018 and above 3 percent annually through
2020. In contrast, the President has said many times that he expects
GDP growth over 4 percent, and on Dec. 6, 2017, he said at a Cabinet
meeting that ``I see no reason why we don't go to 4, 5, even 6
percent.'' Do you think this is realistic? You said at the hearing that
your job is to give the President objective advice. What objective
advice did you provide or would you provide to the President about his
statement?
Historically, when the economy achieves growth of 3.0 percent over
the four quarters of a calendar year, very rarely does that occur
through repeated quarterly observations of 3.0 percent annualized
growth. Rather, in any given quarter, we tend to observe growth rates
that are higher or lower than 3 percent in a given quarter. If growth
rises to 3.0 percent at an annualized rate, then, it seems very likely
growth in some quarters will exceed 3 percent. There is no reason to
doubt that growth in such a year could rise to the values the President
mentioned in at least one quarter. That said, however, growth would
have to be lower than 3 percent in at least one other quarter of the
year if it were higher than 3 percent in at least one quarter in order
for it to average to 3 percent for the year as a whole.
2) During the campaign last year, Donald Trump said that the U-3
unemployment rate published by the Bureau of Labor Statistics is
``phony,'' ``false,'' ``fake,'' ``a complete fraud,'' and ``total
fiction.'' Do you agree with him that the U-3 is a bogus indicator of
unemployment in the United States? A year later, he now takes credit
for the same U-3 unemployment rate--pointing to the fact that it
continued to drop during his Administration to 4.1 percent. Which time
was he wrong about whether the U-3 is a reliable indicator?
Reasonable people can disagree on when the U-3 is an appropriate
measure of labor market performance. There are good arguments in favor
of using it in some circumstances, and good arguments against U-3's
relevance in other circumstances. It is not the case, then, that there
is any contradiction of logic that necessarily arises by doubting the
U-3's relevance as a metric of labor market health at one point in time
but not at another. No labor market statistic is a perfect measure in
every set of circumstances.
To dive into the weeds: the U-3 measure of unemployment is defined
as (number of unemployed) divided by (the number of unemployed plus the
number of employed). This measure misses a potentially important part
of the population who are ``not currently looking for work'' but, under
certain conditions, could and would work. So in that sense it has some
limitations in measuring tightness in the labor market--during
recessions it fails to show the importance of movements out of the
labor force from employment by discouraged workers. And, during
recoveries, it fails to acknowledge the potential movement back in the
labor force of these discouraged workers to employment. Looking solely
at U-3 unemployment rates, then, misses these ``discouraged workers''
and the true impact of the Great Recession on employment. Likewise, the
low current unemployment rates that have resulted from our long but
slow recovery may understate the number of ``potential workers'' who
are currently on the sidelines but who are likely to come back in the
labor force by ``looking for work'' and/or finding it and becoming
employed.
3) In the Economic Report the President, you write extensively
about the economic benefits of deregulation. I'd like to consider the
case of the Consumer Financial Protection Bureau, which has written new
rules concerning predatory payday lenders, established new mortgage
standards, banned forced arbitration, written rules to protect users of
pre-paid cards, and proposed regulations to protect consumers against
other predatory practices. Is there an economic rationale for such
regulations? What is the cost to consumers and to businesses that don't
prey on their customers when there is a lack of such regulation? How do
fair and strong regulations help markets and the economy as a whole?
Which of the regulations listed above would you roll back?
There can be a rationale for regulation in most sectors of the
economy, including consumer financial regulation. But the possibility
of a rationale for regulation does not preclude the possibility that
the costs of a regulation exceed its benefits. As an economist, the
task at hand when it comes to any specific regulation promulgated by
the CFPB or another agency is figuring out whether the benefits in fact
outweigh the costs in practice, rather than to imagine circumstances in
which the benefits in principle could outweigh the costs.
The economic rationale for any regulation depends on whether the
benefits, in aggregate, outweigh the costs, in aggregate. CEA would
demur from commenting on specific CFPB regulations. But CEA would point
out that, even abstracting away from the distinction between producers
and consumers, even a regulation that harms some consumers could
benefit other consumers. Regulations, in consumer finance as elsewhere,
have unintended costs in addition to the intended benefits intimated in
the questions. And, from an economic perspective, as the Economic
Report of the President explains, the challenge is to weigh the
totality of these costs and benefits in order to ensure only those
regulations for which the intended and unintended benefits exceed the
intended and unintended costs remain in place.
4) Nearly years ago, we experienced what former Federal Reserve
Chair Ben Bernanke called the ``the worst financial crisis in global
history, including the Great Depression.'' This led to a devastating
recession that Barack Obama inherited from his predecessor.
From the worst of that recession until the end of the Obama
administration:
Unemployment dropped almost in half from its recession
peak of about 10 percent to under 5 percent.
African-American unemployment was cut nearly in half,
from over 16 percent to approximately 8 percent.
Hispanic and Latino unemployment was cut more than in
half, from approximately 13 percent to under 6 percent.
We experienced 80 consecutive months of private-sector
job growth, and saw the creation of over 15 million jobs.
Household wealth increased by more than $35 trillion
Housing prices recovered overall, and
The Dow rose 12,000 points.
How would you compare the economy Donald Trump inherited from his
predecessor to the economy Barack Obama inherited from his predecessor?
Do you agree with President Trump's claim that the economy was a
disaster at the end of the Obama administration?
One reasonable way to benchmark the performance of the economy
under any President is to look at how their policies influenced the
performance of the economy relative to a counterfactual in which the
President's policies did not happen. Invoking statistics that show
declines from recession peaks to make an inference about the positive
the impact of President Obama's policies, however, does not seem to be
an exercise that is grounded in the economics literature. The economics
literature shows that deeper recessions tend to be followed by faster
recoveries. And so statistics documenting the upturn in the economy
relative to recession troughs, it seems, do not necessarily show that
Obama's policies had a positive impact on the recovery. In fact, in the
Economic Report of the President (2018), we find that Obama's policies
in fact slowed growth in the recovery years relative to what it would
otherwise have been.
Chapter 3 of the Economic Report of the President (2018) focuses on
two indicators of macroeconomic performance and their trajectory during
the course of the recovery period under Obama: GDP per capita, and
median income. More importantly, in measuring longer-term trends in
economic growth, the economics profession focuses on a peak to peak
measure of a given business cycle rather than fluctuations (peak to
trough to peak) within it. Doing so, the growth rate of real GDP from
the beginning of this business cycle until President Trump took office
(2007-2016) averaged 1.4 percent per year, the slowest growth of any
post-World War II business cycle. The same is the case for GDP per
capita. Moreover, the post-recession recovery in the median American's
total household income after the 2008 downturn was the slowest on
record. It is this slowness in the economic growth of this business
cycle and the lack of progress of the ``middle class'' as measured by
median income that includes years when both President Bush and
President Obama held office which motivated President Trump's economic
policies in his first year.
It is worth noting that the evidence that Obama's policies slowed
growth appears the strongest for the years towards the end of President
Obama's second term.
__________
Response from Dr. Kevin Hassett to Questions for the Record Submitted
by Representative LaHood
According to NOAA, the 2017 Atlantic hurricane season was the first
time that three Category 4 hurricanes--Harvey, Irma, and Maria--made
landfall in the United States and its territories in one year. It was
estimated earlier this year that the insured losses from these three
hurricanes came in at $100 billion.
In terms of the tragic California wildfires from last fall, Aon
Benfield estimated insured losses at $8 billion late last year.
While it is not discussed a lot, our property and casualty
insurance sector and our State-based insurance regulatory regime has
been very effective in terms of having solvent insurance companies pay
out the promises made via their insurance contracts with their
policyholders. We all remember the 2007-2008 housing bubble burst and
the negative impact of that bubble bursting on homeowners and the
Federal Government's response through creation of TARP and enactment of
Dodd-Frank. The conservative solvency-based regulatory regime here in
the U.S. does a pretty good job in terms of ensuring that property and
casualty insurance companies have the wherewithal to pay out claims as
a result of a hurricane, wildfire, or other covered loss.
Chairman Hassett, would you care to comment on the importance our
domestic property & casualty insurance sector plays in terms of playing
the role of an economic ``shock absorber'' in a post-natural disaster
scenario and any suggestions for improving our insurance regulatory
regime?
The U.S. insurance industry is the largest, most competitive, and
most diverse in the world. The industry provides important retirement
planning tools for individuals, and its products allow both commercial
and individual policyholders to obtain protection for a range of risks.
Relying on the financial security provided by this risk transfer,
policyholders are able to direct resources that they otherwise would
have to reserve for such uncertainties to productive economic activity,
such as capital investment.
The complexity of the tradeoffs involved in insurance policy seem
difficult to overstate, and property & casualty insurance seems to be
no exception to this rule. Regulations to increase the ability of
insurers to withstand ``extreme'' scenarios, for instance, may have the
unintended consequence of harming consumers who are among the most-
vulnerable and least able to withstanding property damage by raising
premiums to levels they would find difficult to afford.
As you point out, the domestic property & casualty insurance
markets in the U.S. appear to have withstood recent events without
experiencing distress at the industry level. Policyholders received
what they were promised in exchange for their premium payments. Given
the implications that the affordability of property and casualty
insurance can have for households, and the nonrandom distribution of
households' ability to absorb financial shocks, an assessment of
expected costs and benefits that does justice to the complexity of the
subject at hand would be required before--as an economist--it would
make sense to offer recommendations to improve a system that appears to
be functioning well in the status quo.
__________
Response from Dr. Kevin Hassett to Questions for the Record Submitted
by Representative Schweikert
How will uncertainty in the access to foreign markets affect the
ability for U.S. companies to plan long term, specifically in the
circumstance of NAFTA, where companies are having to build and plan for
complicated capital investment intensive cross border supply chains?
Given the environment of uncertainty surrounding the NAFTA
renegotiations, what are the short-term consequences to the economy of
companies being unable to plan for the future? With major portions of
the economy unable to plan long term, what is the potential for this
instability to freeze up capital investments domestically?
The economics literature documents that, holding everything else
constant, policy uncertainty decreased economic activity across a range
of margins of adjustment. One of these margins is capital investment.
But, in a historic trade negotiation, focusing on the short-term
effects of the negotiation itself is tantamount to focusing on a
transaction cost while ignoring the intended long-run consequences of
the transaction itself.
While I cannot comment on any specific ongoing trade negotiation,
the President intends to deliver long-term benefits by reducing the
asymmetries between U.S. trade barriers and those of our foreign
counterparts. And the economics literature would certainly support the
notion that there would be long-run benefits to the U.S. economy if
foreign counterparts lowered their barriers to U.S. exports. It would
be difficult to make much sense of the net effects of any ongoing trade
policy issue, however, without situating the short-term costs in the
context of the long-term benefits the trade policy in question is
intended to deliver.
Tariffs on aluminum and steel based on Section 232 of the Trade
Expansion Act of 1962 (19 U.S.C. 186c) could lead to the protection of
several thousand jobs, at the expense of tens of thousands of jobs
being lost. How would a trade dispute that cost tens of thousands of
American jobs affect the U.S. economy and economic growth?
CEA provides objective economic analysis based on the best
available evidence, and assists with the evaluation of the economic
tradeoffs implied by a set of current or prospective policy decisions.
The purpose of the present Section 232 actions is to prevent imports
from impairing U.S. national security [by ``weakening our internal
economy'']. That determination by its nature requires, in addition to
the economic costs and benefits intimated in the question, the
consideration of national security concerns. But national security
considerations are not CEA's core expertise, and it is ultimately up to
the President to weigh both the economic and national security
implications of policy choices as he formulates policy.
In the long-run, however, the distinction between national security
and economic concerns can blur more than in the short-run. It is tough
to understand the history of the U.S. economy since World War II, for
instance, without some reference to the Cold War and its aftermath. But
CEA is not well-positioned to assess impacts of the Section 232 that
accrue through national security driven channels at this point in time.
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