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Modernization and Improvement

The Stimulus: Two Years Later

[Unofficial Transcript] [Mr. Jordan] The Subcommittee on Regulatory
Affairs, Stimulus Oversight and Government Spending will come to order. I thought I would start today with the mission
statement of the Oversight Committee, just to try to always remind us what our focus
should be. We exist to secure two fundamental principles: first, Americans have a right
to know that the money Washington takes from them is well spent; and second, Americans
deserve an efficient, effective Government that works for them. Our duty on the Oversight
and Government Reform Committee is to protect these rights. Our solemn responsibility is
to hold Government accountable to taxpayers, because taxpayers have a right to know what
they get from their Government. We will work in partnership with citizen watchdogs to deliver
the facts to the American people and bring genuine reform to the Federal bureaucracy. Again, I want to welcome all the Republican
members who are here this morning. It is great to have you as part of the Committee, and
we may introduce the rest of our team as they arrive. It is a busy day, as you all know,
here on Capitol Hill. I am also pleased to have as our Ranking Member
Mr. Kucinich, a good friend of mine from the great Buckeye State, whom I have enjoyed working
with on a number of issues over the past two Congresses. So it is great to have you, as
well as the Ranking member of the full Committee who has joined us today, Mr. Cummings. We
appreciate your presence as well. I will start with an opening statement, then
we will have time for Mr. Kucinich’s opening statement, then get right to our great panel.
Unfortunately, as you can see, the two individuals we invited from the Administration, former
member of the Administration and current member of the Administration, have decided not to
come. We think that is unfortunate, and we will talk about that a little bit later. Two years ago, the President signed the single
most expensive piece of legislation in American history, more expensive than the entire Vietnam
War or all the Apollo missions. An official report released in January of 2009 by the
Office of the President-Elect and the Vice-President-Elect made very specific promises for the stimulus.
This record-breaking spending spree was supposed to keep unemployment under 8 percent, and
by today it was supposed to be at 7 percent. Instead, of course, the unemployment rate
has been at or above 9 percent for 21 consecutive months. In our State of Ohio it has been higher
than that for that same time period. Thirteen point nine million Americans remain
unemployed. But that doesn’t tell the whole story. Over the same time period, almost 100,000
people have dropped out of the work force in our State of Ohio. We now know the disappointing
truth: the stimulus failed. It failed to meet the Administration’s goals for job creation,
it failed to meet the Administration’s goals for growth, it failed to meet every meaningful
performance standard, every metric of economic activity, basically every single market test
of prudent public policy. Two years ago, the Administration sold the
American people on a long-discredited Keynesian pipe dream: that the Federal Government could
spend our way out of a recession. Today, taxpayers are left with a larger national debt, compounding
interest, and nothing to show for it except the longest period of record unemployment
since the Great Depression. Today we will hear from some of the world’s
foremost experts on fiscal policy, who will assess the collateral damage to the Nation’s
global reputation, our economic recovery and credibility gap between this Administration’s
lofty promises and the real world consequences of failed economic policy. What we will not hear, however, is an explanation
from the Obama Administration, an administration, by the way, that promised unprecedented levels
of oversight and accountability for this very bill. Unprecedented accountability, indeed.
It is unconscionable that the Administration has refused to provide any witness who can
account for the goals set forth for the stimulus when it was conceived. This level of obstruction
and defiance of the Congress does not reflect the values and vision for transparency and
accountability the President promised on many occasions. When the stimulus was proposed to Congress,
the halls of the Capitol were filled with Administration officials, lobbying hard for
its passage. The charts and graphs and projections were everywhere. Members of Congress were
told that failure to pass the stimulus would result in prolonged recession, that that passage
would be a boon to the growth. The American people were told that the President had the
best economic advisors, armed with the most reliable economic modeling, to get the Country
back on the right path. But now the White House refuses to answer
for the failure of their experiment with the American people’s money. We invited two
of the architects of the economic rationale for the stimulus to testify here today, Dr.
Christina Romer and Dr. Jared Bernstein. Both refused to appear. We have given the Administration
the opportunity to discuss the stimulus in the context of the policy’s original goals,
metrics and promises. Today there are two empty chairs where Dr. Romer and Dr. Bernstein
should be sitting. When an opportunity comes to explain the Administration’s position
on the design and goals of the stimulus, no voice will be heard. The oversight of the stimulus is not about
extracting a pound of flesh or scoring political points. This Subcommittee, however, has a
duty to the American people to seek to understand how the stimulus was conceived and why it
failed, so that taxpayers are not subject to this sort of economic misadventure again. The budget released by the President this
week reaffirmed the need for hearings like the one we are having today. The budget revealed
that the Administration is unwilling to answer the mandate put forth by the American people
last November, that they want Washington to stop wasting their tax dollars. The budget
showed that spending would be higher than it was in 2009 and 2010, when we were in the
midst of the downturn. Federal spending this year will be $3.8 trillion and comprise an
astonishing 25.3 percent of GDP and result in a deficit of $1.65 trillion, the highest
since World War II. Call it investment, call it whatever you want,
our economic position is extremely fragile, and we are in danger of losing the future.
The longer it takes to get us on a pro-growth track, the worse off we will be. This hearing,
in my mind, is the first step in understanding why the President’s policies have failed,
why doubling down with more spending and more borrowing will only result in more of the
same poor results that have left our great Nation in its precarious economic situation. With that, I would yield time to our distinguished
Ranking Member, the gentleman from Ohio, Mr. Kucinich. [Mr. Kucinich] Mr. Chairman, it is good to
be here today. I want to point out that in terms of the invitations,
that your staff invited one private citizen and one public citizen who were unable to
attend today’s hearing. I have been informed that the Administration offered to provide
two other high-level Administration officials, notably a deputy secretary of Commerce, and
a deputy assistant secretary for transportation policy from the Department of Transportation.
And I have been told that your staff declined and further said the Administration didn’t
want to make anyone available to talk about the stimulus program. I just want to point out for the record that
two top Administration officials were ready and willing to come today. And I think it
is appropriate that we review the stimulus. I have no problems with that whatsoever. My point of view, a little bit different,
I think that the Recovery Act was too small. Our economy is still fragile, we have an unemployment
rate of over 9 percent. The depth of the recession was greater than predicted. Those who argued
that the stimulus package was too small accurately predicted the severity of the recession was
much worse than any economist initially thought. The Blinder-Zandi report people, critical
of the ARRA’s effect on job creation, said “Critics who argue that the ARRA failed
because it did not keep unemployment below 8 percent ignore the fact that A, unemployment
was already above 8 percent when the Stimulus Act was passed, and B, most private forecasters,
including Moody’s Analytics, misjudged how serious the downturn would be. If anything,
this forecasting error suggests that the stimulus package should have been even larger than
it was.’‘ The same report also notes: “While the strength
of the recovery has been disappointing, this speaks mainly to the severity of the downturn.
Without the fiscal stimulus, the economy would arguably still be in recession, unemployment
would be well into double digits and rising, and the Nation’s budget deficit would be
even larger and still rising.’‘ So Americans need to get back to work, which
means our Government is going to need to continue to spend in order to increase demand for goods
and services. Public spending is necessary to get us out of this recession. We gave significant
tax breaks to the private sector. If the private sector hasn’t that to create jobs, if the
money that went to Wall Street didn’t cause the private sector to create jobs, then the
public sector has a responsibility to create the jobs in order to get us out of this recession. Today, throughout the day, I will be pointing
out that the Recovery Act succeeded in avoiding a recession that could have been worse, that
there was an increase in GDP and job growth, that the stimulus impacted the recession quickly,
and that according to Blinder and Zandi, there was a great depression averted. I want to point out that, and I am not the
only one who has pointed this out, as a matter of fact, there is a book that has just been
released recently called The Great American Stickup. It talks about how Republicans and
Democrats enriched Wall Street while mugging Main Street. So we are both here trying to
clean up a mess that has actually been created by people in both parties. And when you look at deregulation, deregulation
was a failed policy. We have had a full Committee hearing where we had people testify about
the financial service industry was inadequately regulated for decades. And you have somebody
in one of the publications today trying to still discount rules on derivatives, which
sets the stage for another boom-bust cycle. And then you have to look at the war. CRS
has a report that says the cost of the war for the last, since Iraq and Afghanistan have
come into our awareness, has been about $1.2 or $1.3 trillion. Now, this Administration
has actually accelerated spending in Afghanistan. And the Democrats, my party, accelerated spending
in Iraq in 2007. Both parties have responsibilities here. But
the cost of this, the wars are taking our ability to do a budget, they are just destroying
it. And when you consider now that we have more information about the war in Iraq being
based on untruths, when we have more information about the corruption of the Karzai administration
and the total loss and waste of American taxpayers, we see that policy changes are called for,
and both parties are going to have to come together and do something about it. One thing that I have confidence in is that
Mr. Jordan and I do have the ability to work together. We may not agree on things, but
we do have an ability to work together, and maybe this working relationship can create
circumstances where we can come up with some common sense approaches that will enable our
Country to get back on good footing. So I am glad to be here with you. Let’s
go to the witnesses. [Mr. Jordan] I thank the gentleman. I would
just point out a couple of things about his comments. This Administration has certainly
increased spending on everything. That is true. And again, two deputy secretaries offered
as witnesses by the Administration I think just did not meet the test, when you think
about this being the most expensive piece of legislation in American history. We wanted
the architects, we wanted the people who put it together, who were the ones who understood
the modeling and the reasons that they put the bill together. We wanted them here. Frankly, when you think about the mission
of this Committee, it seems very appropriate when we are talking about the amount of taxpayer
money that was put into this legislation, to have the folks who put it together to come
and testify. [Mr. Kucinich] May I respond briefly? [Mr. Jordan] Certainly. [Mr. Kucinich] I agree with the gentleman,
that the gentleman as chair has a right to ask anybody to testify. And I am disappointed
that the two witnesses were not available. On the other hand, they did offer replacements.
Now, the replacements may not have been to your liking, I can understand that. [Mr. Jordan] If the gentleman would yield,
I would think the witnesses offered by the Administration would not be to anyone’s
liking. As the gentleman indicated, this should not be partisan. And in fact, as the gentleman
highlighted some of the spending that was done in the past Congress, you and I both
voted against the TARP bailout and some of the other things. We do agree one some issues. I would think Republicans and Democrats both
would say, the witnesses offered by this Administration were not appropriate for a piece of legislation
of this magnitude. [Mr. Jordan] I want to say again, the gentleman
is correct in having the right to ask anybody that you think is important to be able to
get the answers from to appear before this Committee. That is just unquestioning. I am
just sating that someone was offered, and they were turned down. So thank you. [Mr. Jordan] I thank the gentleman. Let’s go now to our distinguished panel.
Before that, members have seven days to submit opening statements for the record. We will
now recognize our distinguished guests. We first have Professor John Taylor, Ph.D., the
Mary and Robert Raymond Professor of economics at Stanford University and the George P. Shultz
Senior Fellow in Economics at the Hoover Institution. I actually hears Mr. Taylor speak a few weeks
ago out in California, and it is great to have you with us today. Professor Russell Roberts, Ph.D., is the J.
Fish and Lillian F. Smith Distinguished Scholar at the Mercatus Center, and Professor of Economics
at George Mason University. And Dr. J.D. Foster is the Norman B. Ture
Senior Fellow in the Economics of Fiscal Policy at the Heritage Foundation. It is the policy of the Committee that all
witnesses be sworn in before testifying. So if you would please rise and raise your right
hand. Do you solemnly swear or affirm that the testimony
you are about to give this Committee will be the truth, the whole truth and nothing
but the truth? [Witnesses respond in the affirmative.] [Mr. Jordan] Let the record reflect that all
witnesses answered in the affirmative. Thank you, and we will start with Mr. Taylor. [Mr. Taylor] Thank you, Mr. Chairman, Ranking
Member Kucinich, for inviting me to speak today. My research on the Stimulus Act of 2009 shows
that it had no significant positive impact on the economy that we can measure. And indeed,
I think the legacy in terms of increased debt and uncertainty is harmful for the economy. In my view, this really shouldn’t come as
a surprise. Research on previous types of discretionary, counter-cyclical actions like
this from the past, from the 1970s, even more recently than that, shows problematic results,
if you like. What I have tried to do in my written testimony is provide facts, provide
what actually happened, rather than trying to simulate models about which there is considerable
disagreement. When you look at the facts of ARRA, you see
according to the Department of Commerce, according to the Bureau of Economic Analysis, three
main ways in which the money went out. It is important to trace the money. First, the
Federal Government purchases goods and services, including infrastructure. Second, grants to
the States with the intent that they would increase infrastructure spending. And third,
temporary transfer payments to individuals such as a $250 check sent out last year, in
2009, mainly. When you look at these carefully, you see
some really striking facts. First of all, a very small amount of infrastructure spending
came from the Federal level. It is amazing, only .04 percent of GDP went to infrastructure
spending from the Federal level. This is by any measure immaterial and could not plausibly
be a factor in the recovery that is sometimes mentioned. Economists sometimes debate the
size of the multiplier. It is irrelevant when the thing the multiplier is multiplying is
so teeny. When you look at the grants to the States,
of course, these were substantial. But you also look at what the States actually did
with the funds. They did not increase infrastructure spending. In fact, they didn’t even increase
purchases of goods and services as measured in the national income for all accounts. Instead,
it looks like these funds were used to reduce the amount of borrowing and perhaps increase
other kinds of transfer payments to individuals. Again, it just couldn’t have had an effect
based on what the data show. Then finally, the temporary transfer payments
to individuals, which were substantial of magnitude, the purpose, of course, was to
jump start consumption, people would spend this money. But when you look at what happened,
they didn’t spend the money. For the most part, it too was used, they have increased
saving, draw down some of the debt and reduced the borrowing. This was not the way it was
supposed to work. This in fact is what economics would tell
you: temporary payments like this do not stimulate consumption in an appreciable magnitude. We
have seen that in the past. We saw that even back as short ago as 2008. Again, this is
what one would have predicted. When I look at the, if you like, cross-checks
of these data to see, in the aggregate, how much Government purchases stimulated the economy,
there is no correlation between that and the recovery. Instead, you see private investment,
you see net exports driving whatever recovery we have had. So when I look at this overall,
it seems to me, looking at the data, looking at the facts, tracing where the money went
in the aggregate, using data provided by the Department of Commerce, you see a very small
effect, I would say even immaterial. I would just conclude by saying, in addition
to that, I think the legacy of the increased debt and in addition, the tendency that the
stimulus packages themselves had to distract people from dealing with the longer-term debt
and spending problems that we have to address was also detrimental. I would be happy to
answer any questions you may have, Mr. Chairman and the members of the Committee. [Mr. Jordan] Thank you, Dr. Taylor. Dr. Roberts? [Mr. Roberts] Thank you, Chairman Jordan,
Ranking Member Kucinich, and distinguished members of the Subcommittee. Over the last two years, the American Recovery
and Reinvestment Act of 2009 has injected over half a trillion dollars into the U.S.
economy in hopes of spurring recovery and creating jobs. The results have been deeply
disappointing. Job growth has been anemic, while our deficit has grown, limiting our
future policy options. Fourteen million workers are unemployed. The
unemployment rate among African Americans is over 15 percent. This is an American tragedy. What went wrong? Why were the predictions
so inaccurate? There have been two explanations. One is that the economy was in worse shape
than we realized. The only evidence for this claim is circular, the standard Keynesian
models under-predicted unemployment. I prefer a simpler explanation. The models that justified
the stimulus package were flawed. Those models were broadly based on the Keynesian notion
that the road to recovery depends simply on spending. In the Keynesian world view, all
spending stimulates, somehow subsidizing university budgets in the Midwest or paying teachers
in West Virginia helps unemployed carpenters in Nevada. It may be good politics; it is
lousy economics. This isn’t the first time the Keynesian
world view was wildly inaccurate in predicting the impact of changes in Government spending.
Look at World War II. We frequently hear from Keynesians and others that the military spending
in World War II ended the Great Depression. Certainly unemployment fell to zero because
of the war. But did the work create prosperity or boom?
There was a boom for the industries related to war. There was little prosperity for the
rest of the Country. The war was a time of austerity. Government spending didn’t have
a multiplier effect on private output, it came at the expense of private output. How about the end of the war, when Government
spending plummeted? Paul Samuelson, a prominent Keynesian, warned in 1943 that when the war
ended, the decrease in spending, combined with the surge of returning soldiers to the
labor force, would lead to “the greatest period of unemployment and industrial dislocation
which any economy has ever faced.’‘ He was not alone. Many economists predicted disaster. What happened? Government spending plunged
from 40 percent of the economy to less than 15 percent, and prosperity returned to America.
Unemployment stayed under 4 percent between 1945 and 1948. There was a short and mild
recession in 1945 while the war was still going on, but the economy boomed when Government
spending shrank and price controls were removed. We are told that the failure of the current
stimulus proves it simply wasn’t big enough to get the job is done. It is equally plausible
the opposite is true, that Government intervention in the economy prevented the recovery. The
truth is, our knowledge of the complex system called an economy, as modern as the United
States, is woefully inadequate and may always remain that way. We ask too much of economics.
Even our best attempts to measure the job impact of the stimulus make this clear. In November of 2010, a few months ago, the
CBO estimated the stimulus had created between 1.4 and 3.6 million jobs, not a very precise
estimate. But even this estimate was more of a guess than an estimate. The CBO estimates
didn’t use any actual employment data after the stimulus was passed. Instead, they based
their estimates on pre-stimulus relationships between Government spending and employment,
relationships that failed to predict the magnitude of our current problems. The CBO’s results, and those of other forecasters
using multi-equation models of the economy are not science. They are pseudo-science,
what the economist F.A. Hayek called scientism, the use of the tools and language of science
in unscientific ways. So where does that leave us? Let’s get back
to basics. When you are in a hole, stop digging. Stop running deficits of over $1.5 trillion
and counting. Act like grown-ups, get your fiscal house in order. Stop spending 25 percent
of what we produce. Stop wasting my money and giving it to your friends. Stop passing
legislation that makes it hard to figure out what the rules of the game are going to be.
Get out of the way. Make Government smaller and give us a chance to do what comes naturally,
seeking ways to make profit, avoid loss and work together. That is the only sustainable
path to recovery and prosperity. Thank you very much. [Mr. Jordan] Thank you, Dr. Roberts. Dr. Foster? [Mr. Foster] Thank you, Mr. Chairman, members
of the Committee. I appreciate the opportunity of testifying before you today. At best, economic stimulus efforts based on
deficit spending and tax cuts with little or no incentive effects have done no harm,
at best. It is possible to stimulate the economy during and after recession by improving incentives
to work and produce, by reducing uncertainties regarding future policy, by expanding foreign
markets for our goods and services. Recent efforts have been unsuccessful because they
did none of these things. Regulations increased, uncertainty increased, tax distortions were
left in place, and efforts toward free trade have been anemic. Stimulus can work, but has not worked, because
the Administration took the wrong approach, emphasizing incentive-neutral tax relief and
massive increases in deficit spending. As he often remarks, President Obama inherited
a ballooning budget deficit. His response, to push the deficit higher. And with this
most recent offering, he has reached new highs. Fortunately, recovery is underway. Uneven,
stronger in some areas than others, but recovery nonetheless. The underlying strengths of our
free market system are once again at work. But make no mistake, our economy is recovery
despite, not because, of stimulus efforts. The heart of the Administration’s policy
is the equivalent of fiscal alchemy. Alchemy is the art of transmuting metals, referring
specifically to turning lead into gold. Fiscal alchemy is the attempt to turn Government
deficit spending whenever and wherever and on whatever into jobs. Regarding near-term
stimulus, it is not a matter of how wisely or how foolishly the money is spent, nor how
quickly nor slowly, or whether some is saved or not, any more than the phase of the moon
or adding a bit more wolf’s bane enhances the prospect for lead to become gold. The basic theory of demand side stimulus is
beguilingly simple. The economy is under-performing; demand is too low. Increase demand by deficit
spending, and voila, the economy is stronger and employment is up. One wonders then why
Government should not simply increase deficit spending much, much more and create instant,
firm employment. Why indeed? The answer is that demand has shifted, but not increased,
because Government must somehow fund this additional deficit spending and it does so
by borrowing, reducing the resources available for the private sector. Suppose you take a dollar from your right
pocket and put it in your left pocket. Do you have a new dollar to spend? Of course
not. Deficit spending shifts demand from private to public sector. Or imagine the level of
water in a bathtub represents the total level of demand in our economy. Now, suppose you
pour a bucket of water into the bathtub. You would expect the level of water to rise. But
where did the water in the bucket come from? It came from dipping the bucket in the bathtub
in the first place. You may make a splash, as the President did with the stimulus, but
when the water settles, in terms of the water level, total demand, nothing has changed. There are some telltale signs that it has
intentionally or inadvertently fallen for demand side stimulus alchemy. One involves
talk of multipliers. One must first believe deficit spending can boos total demand before
investigating multipliers. One must first believe lead can become gold to investigate
the advantages of incantations over potions. Another tell-tale sign is references to whether
amounts are saved or spent. Whether deficit spending monies are saved or spent matters
not a whit to the immediate level of economic activity. If spent, then private demand falls
by the amount borrowed to fund the spending. If saved, then all that has happened is a
shifting of portfolios. Government debt is higher, private savings is higher, but total
demand is again unmoved. Support for demand side theory often comes
from observing that private saving might be parked in unproductive locations, and well
it might. But unless saving is withdrawn entirely and held in cash, it remains part of the financial
system. And banks and other financial institutions are lending those to somebody else to use.
And if the saving is withdrawn and held in cash, out of a distrust of the financial system,
then there is nothing about a government selling prodigious amounts of debt that is likely
to reassure that fearful saver to put the savings back into the financial system for
Government to borrow. Because the deficit today is so enormous,
the Nation’s policy options, aside from halting or reversing the regulatory onslaught,
are severely limited, confined essentially to expanding free trade and cutting spending
deeply to restore fiscal balance. Unfortunately, in his budget, the President punted, as the
Washington Post, among others, opined. It is therefore up to the Congress to act. Near-term
efforts to cut spending are essential, but must be seen as but the first step in a steady
march against Government spending, including reforming the major entitlement programs to
stabilize these programs and to restrain Government spending. The best fiscal policy now is to
get the Nation’s fiscal house in order by cutting spending repeatedly. Thank you, Mr. Chairman. [Mr. Jordan] Thank you. I thank the witnesses. Look, I think the American people are asking,
when does this stop? I have been saying for months, if big Federal Government spending
was going to get us out of this mess, well, for goodness sake’s, we would have been
out of it a long time ago, because that is all the Government has done for two plus years.
And frankly, it did start even under the previous Republican Administration. As Mr. Foster pointed
out, it has been taken to new levels with this Administration. So I think instinctively, the American people
understand the stimulus didn’t work, transfer payments, propping up States, bailing out,
they know it didn’t work. But I also think they are beginning to realize that not only
did it not work, it caused harm, as evidenced by the record debt that we have in front of
us. And frankly, I think as Dr. Foster pointed
out, and maybe our others as well, I still remember the first principle they teach you
in Economics class, this crowding out concept, or opportunity cost. When you take resources
and devote them to one thing, by definition they can’t be used somewhere else. Frankly,
the more efficient private sector where they can’t be used. So I think the American people get it. My
question goes right to where Dr. Foster left off, so we’ll start here and work backwards.
This budget, as I begin to look at it and delve into it, that the President unveiled
on Monday, I think continues the same pattern. It is the same old, same old. It is big Government
spending. It is now a record deficit on top of a record deficit on top of a record deficit. So give me your thoughts on this budget, and
frankly, the tax increase and the spending contained in it, how harmful that is going
to be as we again try to get below 10 percent unemployment, get back to a more normal economy,
and frankly, a growing economy. We will start with Mr. Foster and work back. [Mr. Foster] I think this budget, if it were
enacted, would be extremely harmful to our economy for a number of reasons. One, it is
an enormous increase in the national debt with the deficit projected at $1.6 trillion,
finally breaching clearly the 10 percent of our economy level. This is creating more and
more uncertainty as to — [Mr. Jordan] Let me interrupt. I think this
is common sense. You have to be at 3 percent of GDP or below, I would argue below that,
frankly, just to have any type of sustainable deficit that you are carrying. Would you agree? [Mr. Foster] Depending on the rate of interest,
a normal long-term rate of interest something on the order of 2.5 percent to 3 percent is
sustainable. We are well beyond that. [Mr. Jordan] Exactly. [Mr. Foster] And oddly, we are in a situation
where we are far more irresponsible, frankly, than all of our European friends, who recognize
the situation they are in. The stimulus that that deployed didn’t work, either. And they
are now embarking on a strenuous program, a painful program, of getting their spending
under control and their deficits under control, because they realize that that is the key
to short-term and long-term prosperity. Short-term because these deficits are creating uncertainty.
Uncertainty is the enemy of prosperity. [Mr. Jordan] Well said. Dr. Roberts? [Mr. Roberts] The reason that uncertainty
is the enemy of prosperity is we need investments, and investments require risk-taking. If the
future is uncertain and people are nervous about the future and have anxiety about it,
they are less likely to take risks. We have done a bunch of things in the last three years,
four years, to reduce the incentives for risk-taking. And worse, the risk-taking we have encouraged
has been imprudent. We need prudent risk-taking. So we have the uncertainty about the deficit,
the fact that future tax increases are coming. But we don’t know the nature of that burden,
how it is going to be financed. We have uncertainty about the stability of the system itself.
We are financing out deficit right now, very short-term interest borrowing, which is great
when interest rates are low. But when interest rates rise it could be very, very expensive.
I am very concerned about that. There is regulatory uncertainty. We have passed
massive regulation of the health care and financial sectors, two large parts of our
economy. It would be one thing if we passed the legislation that was in place. But of
course, the rules aren’t written yet, so how do people know to go forward? And finally, we have done a bunch of bailouts
that said, if you are bad at what you do, we are going to give you money anyway. So
prudent risk-taking has been discouraged. [Mr. Jordan] You made me think of one thing
here. We will finish with Dr. Taylor, but if you can address this question, too. And
this is one area where we may have some agreement with the President. Corporate tax rates. I
am actually to the point where I think it is frankly unpatriotic not to be for lowering
the corporate tax rate when you think about where we compare with our competitors around
the globe. So I would like your thoughts on that, to, as you evaluate te budget, Dr. Taylor,
in the last 30 seconds here. [Mr. Taylor] I think the most sensible thing
is to reverse this spending binge of the last two, three years. I think that would be so
beneficial to the economy, to show the courage of our Government to be able to do that, start
reducing the debt. On the taxes, I agree, the corporate tax makes us uncompetitive. I would say the firmest thing to say to convince
the American people is, we are not going to increase anybody’s tax rate for the foreseeable
future. That would provide certainty, remove a lot of the doubts and concerns people have
about investment. And the only way you are going to get unemployment down is to encourage
private investment. That is what the data shows, that is what history shows. [Mr. Jordan] Well said, thank you. The gentleman from Ohio, Mr. Kucinich. [Mr. Kucinich] I thank the gentleman. I have some questions for Professor Taylor,
but before I begin, I just want to make some observations here. To have this discussion
about the state of the economy without getting into the fact that the tax cuts that were
sponsored by the Bush Administration cost us $1.2 trillion, that the wars, which both
parties have participated in, have cost us roughly about $1.2 trillion, we have a trade
deficit right now of $497.8 billion, according to the latest U.S. Census. NAFTA, GATT, China
trade. Millions of jobs have been lost. It has been the work of both parties. We have maybe close to 15 million people unemployed.
And when you look at the boom-bust cycle that was created by the lack of regulation of over-the-counter
derivatives, Warren Buffett himself in 2002 condemned these over-the-counter derivatives
as financial weapons of mass destruction. This is as recounted in Bob Scheer’s book,
The Great American Stickup. When you look at the $700 billion bailout,
which Mr. Jordan and I both voted against, when you consider that Wall Street is recovering
and Main Street is not, that stock prices are going up, but the regulations that need
to be in place to stop it are the boom-bust cycle, it is still pretty shaky as to whether
we will be able to avoid that. I think that the testimony that we have here
is very interesting. But maybe you don’t even have enough time to get into this, but
it is inevitably incomplete. We have to have a complete picture of how we got to where
we are. And it has to be really not driven by partisanship, which I don’t see my colleague
here as a very partisan person, but it has to delivered, we have to focus on the fact. Now, Professor Taylor, your testimony concludes
with these statements: “Many evaluations of the impact of ARRA used economic models
on which the answers are built-in.’‘ And you also say that “approach makes less use
of simulations of existing econometric models, although it uses general theories, such as
the permanent income theory or similar theories of Government behavior.’‘ Now, Professor Taylor, earlier this month,
Dartmouth economists, writing for the National Bureau of Economic Research, published a paper,
which I move to put into the record, without objection, that found a positive effect of
the stimulus on a State by State basis. The authors acknowledge that their approach probably
understated the effect, although it was nonetheless significant. [The referenced information follows:] [Mr. Kucinich] Professor Taylor, is it your
testimony today that the NBER analysis of the stimulus was erroneous, because as you
said, many studies had the answers built in? [Mr. Taylor] The NBER study you are referring
to I do not know. [Mr. Kucinich] Well, I want to have staff
— [Mr. Taylor] I can answer with respect to
my own studies of this, and also NBER publications. They show, when you look at where the money
went, it did not increase infrastructure spending at the States. So it is very clear in the
data. [Mr. Kucinich] Well, I can say that, as far
as the infrastructure spending as a percentage of the ARRA that I would have preferred that
it had all been for infrastructure. But it wasn’t. However, this NBER paper is in fact
critical of your work. And what the authors wrote were that other model-based evaluations,
such as Cogan, Taylor, I think they are referring to you, and Wieland, conclude that the Government
spending multipliers are significantly smaller than those claimed by advocates. Again, their conclusions are based entirely
from existing models and gain nothing from the actual data, I want to stress that, from
the actual data on employment before and after the implementation of the ARRA. So isn’t
it true that much of your testimony here today would be subject to criticism from these authors,
which in fact is the same criticism you make against others? [Mr. Taylor] No. [Mr. Kucinich] I just like to see economists
arguing. [Mr. Taylor] Well, I can answer no, it doesn’t
apply to what I testified about today. It applies to other work that I have done in
the spirit of simulating models. My whole point of this testimony is to go beyond the
disagreement about the models and look at what actually happened. That is what I am
doing, and I think it is very clear, when you look at the data. I couldn’t agree more
than you have to go beyond the models. [Mr. Kucinich] Well, let me ask you this.
Would you have said, let’s say, all $787 billion should have gone into infrastructure
spending? Or would it be your position we shouldn’t have spent anything in trying
to stimulate the economy? [Mr. Taylor] As a matter of what actually
Government can do, why do you think such a small amount went to infrastructure at the
Federal level? I think people were told, you just can’t get the money out the door that
fast. Instead, the idea was to send grants to the States. But they’re not going to
get the money out that fast, either. It is a matter of what is feasible and capable.
And our experience, not just in this case, but in the 1970s, we tried to do the same
thing, send grants to the States, hoping that they would spend money on infrastructure.
They didn’t do that, they did exactly the same thing as here. We didn’t look at those. [Mr. Kucinich] Mr. Chairman, are we going
to have another round? [Mr. Jordan] Yes. [Mr. Kucinich] Then I will get back to this
question. Thank you, Dr. Taylor. [Mr. Jordan] And if I could, Mr. Taylor, is
it true that the actual data shows that unemployment has been at record levels for the last 21
months, when it was projected to be at 8 percent? [Mr. Taylor] Yes. [Mr. Jordan] Okay, thank you. The Vice Chairman of the Subcommittee, the
gentlelady from New York, Ms. Buerkle. [Mr. Buerkle] Thank you, Chairman Jordan,
and thank you all for being here this morning for this very important discussion. I always
thought it was just a bit counter-intuitive that we would take a trillion dollars out
of private sector and give it to the Government to redistribute back to the private sector
with all sorts of strings attached, and hope that it would help our economy and job creation. My first question, I will just refer to something
that the gentleman from Ohio mentioned regarding the tax rates, and continuing the tax rates,
and what they add to the deficit. Because that is something we hear as an excuse or
a reason not to extend the current, the tax rates from 2001-2003. I would like you to
comment on that before we get into the stimulus a bit. [Mr. Taylor] I think the agreement to extend
the tax rates that are in the law currently is a very important stimulus to the economy.
Economics tells us that more permanent changes like that, something that has been in the
law for a while, is much more beneficial for people’s spending decisions and investment
decisions. I would like to see that extended even further. I think that would be quite
beneficial and a good stimulus, more beneficial than the temporary types of changes being
proposed. [Ms. Buerkle] Thank you, Dr. Taylor. Dr. Roberts? [Mr. Roberts] I think it is important to remember
that we cut tax rates, and that had a stimulating effect, that Professor Taylor is talking about.
But if you cut revenues and you don’t cut spending, all you have done is substitute
taxes tomorrow for taxes today. I think the single most important thing that Congress
can do now is to cut spending, because that is an implicit tax on the private sector.
We spend way too much money to the Government sector, we need to spend less. [Ms. Buerkle] Thank you. Dr. Foster? [Mr. Foster] I agree with Dr. Taylor that
it is terribly important that we extend for a much longer period of time, if not make
permanent, the tax relief that was enacted under President Bush. That uncertainty about
the outcome of that policy had a major depressive effect on the economy last year. And those
decisions will feed on into next year at reduced investment, which is going to be a driver
of going forward. But it is also terribly important to get the
spending down now. That is probably, at this stage, the most stimulative policy that we
can enact, get spending under control, the deficit down, reassure credit markets that
we do intend and will get our fiscal house in order. [Ms. Buerkle] Thank you. My next question,
and it is to all three of you again, do you think that the economy would have improved
and would have recovered without the stimulus? Dr. Taylor? [Mr. Taylor] Yes. I think that the beginnings
of the recovery preceded the stimulus. When you look at the factors in the economy that
drove the increase in growth, there are private investments, also net exports, not really
the Government purchases. So very much so. I think that in fact, at this point in time,
you can point to the stimulus and related reasons for the higher debt as holding back
the strength of the recovery at this point. It has been disappointing, especially last
year. We hope it is picking up. But I think it would have been better without this kind
of a stimulus. [Ms. Buerkle] Thank you. Dr. Roberts? [Mr. Roberts] The only thing I would add to
that is the funneling of money, Federal tax money to the States encourages their misbehavior.
I think it is extremely important that people live within their means, learn to change their
behavior. And we continue to enable that, and we just push off the day of reckoning
down the road. I think that is irresponsible, and I think we ought to be changing those
incentives. [Ms. Buerkle] Thank you. Dr. Foster? [Mr. Foster] As I testified, I believe we
could have enacted stimulus that would have helped. But the President chose a different
path. He chose a path that was not going to be effective, because you do not add money
to the economy by first taking money out of the economy. That is the fundamental flaw
of the theory. Thus I think on balance we would have been better off. At best, this
policy did no harm, at best. [Ms. Buerkle] Thank you. And I am sure we
will get to this. My time is soon to expire. I would like to hear from all three of you
regarding what your recommendations are to grow our economy and to really get at the
root of this problem. What can we do as a Congress to help improve the economy of the
United States? [Mr. Taylor] Three things, and this is before
the stimulus. First is to make sure we are not going to increase tax rates. It is not
necessary to do that to deal with the deficit, and it would be beneficial to growth. Second, lay out a plan to get the debt explosion
over with. We have projections by CBO of debt just skyrocketing. Lay out a plan so they
score it to come back down to reasonable levels. That will reduce uncertainty, if people get
faith back in our Government. And third, I think it is important to address
this spending binge we have had recently, spending going from 21 percent to 25 percent
of GDP, and not really coming down very much is something that should be addressed. That
will stimulate the economy, because the jobs come from the private sector. [Ms. Buerkle] Thank you. We can maybe continue
those later? [Mr. Jordan] Sure. We now turn to the distinguished
Ranking Member, the gentleman from Maryland. [Mr. Cummings] I want to thank the Chairman
for calling this hearing. And I want to thank our witness for doing an outstanding job. As a member of the Joint Economic Committee,
we have had Mr. Zandi appear, Mark Zandi, who was the advisor to John McCain, Senator
McCain, when he was running for President, come and testify before us. And he testified
and acknowledged that the Recovery and Reinvestment Act had significant effect on the economy.
He said something else that I found very interesting. He said that, a lot of people think Economics
is a science where everybody is going to disagree. He said you are going to have some disagreement.
But I find that I must tell you that it concerns me when I have a chorus of folks saying all
the same things. So I just want to ask a few questions, and
I would just like a yes or no answer. Dr. Taylor, you talked about the facts, just the
facts. And I want to go to some of the facts and see what you all think of this, and the
things that we do know, the things we know. And I just want a yes or no answer on these,
and then if I have time, we can come back and you can explain. Over 75,000 total projects have been started
across the Country under the Recovery Act. Have they had any positive effect, yes or
no? Yes or no, just yes or no, and I am going to come back. [Mr. Taylor] I am sure some of them have a
positive effect. But the question — [Mr. Cummings] Okay, I have seven questions.
I will come back to you, I promise. Yes or no? [Mr. Roberts] A little bit, yes. Surely. [Mr. Cummings] Okay. Dr. Foster? [Mr. Foster] On net, no. [Mr. Cummings] Okay. More than 110 million,
or 95 percent of working families, have been receiving a boost in their paychecks each
week through the Making Work Pay tax credit. Has this had any positive effect on these
families, yes or no? [Mr. Taylor] Yes. [Mr. Roberts] Yes. [Mr. Foster] On the families, certainly. [Mr. Cummings] Almost 70,000 small businesses
have received nearly $30 billion in loan assistance through the stimulus. Has that had any positive
effect on those businesses? [Mr. Taylor] Yes. [Mr. Roberts] Yes, on those businesses. [Mr. Cummings] Keep your voices up, let’s
hear you nice and loud. Your testimony was loud. Come on, Dr. Foster? [Mr. Foster] Yes, on those businesses. [Mr. Cummings] All right. Under the Recovery
Act, more than 2,800 loans to farmers and ranchers were guaranteed. Has that had any
effect on the farmers and the economy? Mr. Taylor? [Mr. Taylor] I haven’t studied that. [Mr. Cummings] Okay, you haven’t studied
that? Sir, I’m sorry, I didn’t hear you. [Mr. Taylor] No, I have not studied those
particular — [Mr. Cummings] I understand, you didn’t
study it. Dr. Roberts? [Mr. Roberts] I am sure it was good for them. [Mr. Cummings] All right, but not on the economy,
right? [Mr. Roberts] I don’t know. I am not going
to say yes or no to that. [Mr. Cummings] Okay, fine. And you, Dr. Foster? [Mr. Foster] On those farmers, yes. [Mr. Cummings] But not on the economy? No? [Mr. Foster] That is correct. [Mr. Cummings] All right. More than 300,000
families have made home improvements to reduce their energy use and cut their utility bills.
Will those families be able to appreciate any results from the Recovery Act, and does
that affect the economy, the fact that we are putting people to work to do those repairs,
like in my district, and districts of almost every single, of every single member of Congress,
by the way? Mr. Taylor? Dr. Taylor, I am sorry. [Mr. Taylor] On the overall economy, no. On
the individuals, yes. [Mr. Cummings] Okay. Dr. Roberts? [Mr. Roberts] Which projects are those, the
home improvement? [Mr. Cummings] Yes, the home improvement. [Mr. Roberts] Is that the insulation and the
weather-proofing? [Mr. Cummings] Weather-proofing, retrofitting. [Mr. Roberts] Incredibly badly-run program.
Very ineffective. [Mr. Cummings] So you are saying it had no
effect on the economy? [Mr. Roberts] Not a positive effect overall.
Good for the people who worked doing it, but not for the rest of the economy. [Mr. Cummings] People that, the 15 percent
that you talked about, African American unemployment rate, as a matter of fact, it is higher in
some instances in my district. [Mr. Roberts] Yes, sir. [Mr. Cummings] But there are people who I
just witnessed doing those jobs, having a tremendous impact that would not have been
working but for. You say no effect on the economy? [Mr. Roberts] Perhaps they might have been
working. It is hard to know. [Mr. Cummings] No, they would not have been,
believe me. I live there. [Mr. Roberts] Well, I am glad for them, then.
That is great. [Mr. Cummings] Dr. Foster, how about you? [Mr. Foster] On the economy, no effect. For
those families, I can’t judge their decisions. I presume they made wise decisions for themselves. [Mr. Cummings] The Department of Housing and
Urban Development has rehabilitated over 409,000 homes and built 5,700 new homes. Will the
families who reside in those homes experience any benefits from the Recovery Act, and does
that affect the economy in a positive way? [Mr. Taylor] The individuals who benefitted
from that are benefitting. The overall economy, no. [Mr. Roberts] Ditto. [Mr. Cummings] Are you going to ditto too? [Mr. Foster] I am going to ditto, try to move
it along. [Mr. Cummings] We have a great chorus here. [Mr. Foster] Trying to help you. [Mr. Cummings] Under the Recovery Act, more
than 4,000 Department, and this is my last question, with the indulgence of the Chair,
4,000 Department of Defense construction and improvement projects have been started at
over 350 military facilities. These include the construction or improvement of military
hospitals and 25 child development centers. It also includes over 70 military family housing
improvement and construction projects. Will these projects result in benefits for anyone?
Do they affect the economy or did they affect the economy in a positive way? We will start
with you, Dr. Foster. [Mr. Foster] In the aggregate, no, sir. [Mr. Cummings] Yes? [Mr. Roberts] Don’t know. Good for them.
Who got the money? If you pay people to dig ditches and fill them back in and you give
them a $200,000 a year salary, they will be better off. [Mr. Cummings] And you, Dr. Taylor? [Mr. Taylor] Those people benefitted, the
overall economy did not. [Mr. Cummings] Thank you all very much. [Mr. Jordan] I thank the gentleman. Let me just clear up one thing. And we will
go quickly, we will have one more round, then we will get to our second panel. I wan to
just clear up this issue. Some have suggested that allowing families and individuals to
keep their money adds to the deficit. And I just fail to adopt that premise that reducing
the tax burden on the American people somehow adds to the deficit. But I want to hear it
from the experts. Are deficits and the buildup of our national debt, is that a result of
letting people keep their money, or is it a result of politicians spending too much?
Let’s just answer this simple question first. Mr. Taylor? [Mr. Taylor] The largest amount is the spending,
going forward. It is just basically, you just look at projections of why the deficit is
where it is, where it is going, why it is increased. It is on the spending side. [Mr. Jordan] Mr. Roberts? [Mr. Roberts] I just want to have the thrill
of saying I agree with Mr. Kucinich a little bit. So while I agree that the stimulating
effect of cutting tax rates has a positive incentive for economic activity, to cut taxes
and increase spending at the same time is irresponsible. [Mr. Jordan] I wondered, I heard your first
comments. [Mr. Roberts] You have to do both. [Mr. Jordan] You would stay there? [Mr. Roberts] You have to do both. [Mr. Jordan] Okay, let me go to Mr. Foster,
and then I want to follow up with another question for all of you. [Mr. Foster] Well, obviously, as an arithmetic
matter, the deficit is the difference between debt and revenues. But if you look at where
we are spending as a share of our economy, which is a simple metric, compared to any
historical norm, we are far above that, indicating that that is the problem. [Mr. Jordan] Okay, now let me ask you this.
I would argue the problem is so big, we are running record deficits, piling up $14 trillion
in debt, so big that we have to get after the spending right away. But to ultimately
deal with this thing, you have to have economic growth. There si no way you can get to a balanced
budget, get this ship headed in the right direction, get to where we need to go if you
do not have economic growth. And allowing the private sector, allowing families, small
business owners, individuals to keep more of their money, I contend, is central to having
economic growth. And I would argue lowering the corporate rate as well, and regulatory
policy, I get all that. But I would argue, keeping those taxes low,
allowing families to keep more of their money, is fundamental to getting the economic growth
we are ultimately going to need to dig ourselves out of this mess. And I would like your thoughts. [Mr. Taylor] My proposal and recommendation
is to not increase tax rates and to deal with this deficit and debt problem by reversing
the recent spending binge and getting spending back to where it was as a share of GDP. [Mr. Jordan] Okay, let me ask you this, then.
Would you agree that where the continuing resolution is, would you agree this is a good
first step in saving the taxpayers approximately $100 billion over the rest of this fiscal
year? Is it a good start? [Mr. Taylor] Yes. Getting spending back to
2008 is an excellent first step. [Mr. Jordan] Dr. Roberts? [Mr. Roberts] But it is a baby step. You have
to take a bigger step. [Mr. Jordan] It is one fifteenth of the deficit. [Mr. Roberts] It is a rounding error, it is
a deck chair off the Titanic, I mean, it is just nothing. [Mr. Jordan] I get it. [Mr. Roberts] But I think again, if you want
to cut taxes, the way you want to do that is cut spending. I agree with what Milton
Friedman said. What is important isn’t how we finance what Government does, what is important
is what Government does and how much of it. [Mr. Jordan] Because of the basic point, spending
leads to borrowing which is just more taxes. [Mr. Roberts] Which is more future taxes.
So if you cut taxes, especially if you don’t cut tax rates, you just give people money
back and you continue to spend, you haven’t encouraged economic activity. You have told
people, we are going take money out of your hide later. [Mr. Jordan] Well said. Mr. Foster? [Mr. Foster] I think there is one area in
which economists have a broad consensus at this point, whereas it is, and that is that
economic growth is the driver for deficit reduction above all. The key to economic growth,
as the President himself has said, is the private sector. And the way to get the private
sector moving forward at this point, from a Washington perspective, is greater certainty.
Don’t raise taxes. Certainty about tax policy, suspend the regulatory onslaught and get spending
under control, so they have some ability to forecast what Government is going to be doing. [Mr. Jordan] Let me just finish with one last
point with you. Earlier you said, Dr. Foster, that there was a stimulus package that could
have been put together that you actually thought would make some sense. Describe that for me.
Was it, as I suspect, was it the right kind of tax policy, right kinds of tax cuts and
some infrastructure spending? Or was it something else that you had in mind? [Mr. Foster] It certainly wasn’t infrastructure
spending. As Dr. Taylor pointed out, you can only push so much money out that pipeline.
And in the end, it wouldn’t have made any difference to the immediate economy. An effective policy, which would have been
effectively no cost, would have simply been to say, at the beginning of 2009, we will
not raise taxes. We will not raise taxes until the unemployment rate gets down to full employment,
and we can have a debate about what the tax policy should be. If we had simply done that
and eliminated the uncertainty about tax policy, our economy today would be a lot stronger. [Mr. Jordan] So you argue that the best stimulus
package at the time, early 2009, when we were in the midst of this problem, the best stimulus
approach at the time would have been to establish certainty, in essence, do nothing. [Mr. Foster] The best no-cost policy. If we
were willing to use resources, the best policy would have been to take whatever we otherwise
would have spent in the stimulus law and used it to reduce the corporate tax rate, which
even the President now acknowledges must be done. [Mr. Jordan] Great point. Thank you. We will go to the Ranking Member. [Mr. Kucinich] It is really mystifying to
hear witnesses extol taking the wraps off the private sector, when you consider that
the reason why we went into the dumper was because you had the Financial Modernization
Act passed, which permitted, which basically took down the Glass-Steagall firewalls, which
separated commercial banking from investment banking, and permitted the avalanche of over-the-counter
derivatives, the black box investing that went on, that created the crash that we had. And now we are saying, well, if only the private
sector, read Wall Street, can have its way again, look, they already took the Country
over the cliff once. I think we ought to be in a position here where we at least recognize
what happened, so that we don’t let it happen again. I don’t know if any of you gentlemen ever
testified in favor of the Financial Modernization Act, or the Commodity Futures Trading Act.
But if someone doesn’t do any back analysis and understand that Glass-Steagall actually
protected capitalism from itself, through having regulations, we have to be careful
here advocating that we just take down regulatory structures. Because in the end, the taxpayers
end up footing the bill. I was interested to hear, I think it was Dr.
Foster, I was in a discussion with staff, but I think I heard you say if you cut tax
and increase spending at the same time, it is not responsible. Did you say that? [Mr. Foster] No, sir, I think that was Dr.
Roberts. [Mr. Kucinich] Thank you for pointing that
out. So Dr. Roberts said that. I heard that, and I thought, well, I was thinking about
the Bush tax cuts. And these tax cuts helped to dig the economy into a bigger hole. They
took the tax burden off the shoulders of the rich, put the burden on the lower and middle
classes. The rich won, the economy lost. In 2001, the tax cuts were enacted. CBO estimated
that gradually rising Federal budget surplus, this is before the tax cuts were enacted,
they estimated a gradually rising Federal budget surplus, and CBO forecast a surplus
of 5.3 percent of the GDP in 2011. It was 10 years from the time they made the first
analysis. The ten-year, $1 trillion price tag attached
to the cuts played a direct role in making the forecast a pipe dream. The Bush tax cuts
that were enacted in 2001 and 2003 resulted in $1.2 trillion revenue loss from the fiscal
year 2001 to fiscal year 2010. So I would tend to agree that if you are cutting
taxes and increasing spending at the same time, you are going to get in trouble. I would
argue that the tax cuts set the stage for putting us in a position where it limited
our ability to spend, within the construct of the current way that we handle our money. Now, I want to throw one other thing into
this discussion, Mr. Chairman. Article One, Section A of the Constitution of the United
States puts the power to coin money solely in the hands of the Congress. We basically
gave that away in the 1913 Federal Reserve Act. You have the Federal Reserve with the
power, through quantitative easing, to just print money. Somebody here talked about alchemy,
which basically you are talking about creating something of value basically out of nothing.
All the money the Fed creates is backed by the full faith and credit of the United States
of America. Congress is basically cut out of that deal, limited if any oversight. We
can’t even have transparency and find out what they are doing. So I am thinking that when we start to address
issues like the economy, and when we start to attack the ARRA as being somehow at the
epicenter of this whole thing, please. It is almost laughable. Because you have to talk
about tax cuts, the impact, you have to talk about the war. You must talk about the trade
deficit. And if we are really going, and to look at it from what happened under both parties,
to be able to really get to the bottom of what is going on in our economy. So I would say, I have seen your testimony
and I say to all of you, you have something to contribute to this. But there aren’t
any high priests or priestesses when it comes to the economy. I remember sitting in a committee
with Alan Greenspan, who is the final arbiter or had been on the economy. And here is what
he said: “I made a mistake in presuming that the self-interest of organizations, specifically
banks and others, were such that they were capable of protecting their own shareholders
and their equity in the firms.’‘ Now, if the best of the best gets mystified
in this town, who are we? I just say, let’s look at some facts here, and Mr. Chairman,
I want to thank you for holding this hearing, because it is the beginning of what needs
to be a long and serious discussion about not only how we got here, but where are we
going and how can we get people back to work. Without objection, I would like to put in
How The Great Recession Was Brought to an End, by Zandi and Blinder. [Mr. Jordan] Without objection. [The referenced information follows:] [Mr. Jordan] It is an amazing day. We got
Dr. Roberts who agreed with Mr. Kucinich, we got Mr. Kucinich coming full circle agreeing
with Ron Paul right here in front of all of us. [Laughter.] [Mr. Kucinich] My buddy. [Mr. Jordan] It is an amazing day. Did you want to say something? [Mr. Roberts] I just want to say two quick
things. When Alan Greenspan said he made a mistake, I think he was right. But the mistake
he made was helping Wall Street socialize its losses of my money. And I am in favor
of the private sector leading the recovery, and that would rule out Wall Street, which
has been cushioned by Federal welfare from the chair of the Federal Reserves and the
Congress going back to 1984. So the single most important thing I think we need to do
to get that straightened out is to stop bailing out losers on Wall Street, which we have done
systematically, and it is a huge problem. [Mr. Jordan] Well said. [Mr. Kucinich] This is our witness? [Laughter.] [Mr. Jordan] We are both in agreement with
that statement, Mr. Ranking Member. I yield to the gentleman from Idaho, Mr. Labrador. [Mr. Labrador] Thank you, Mr. Chairman. Gentlemen, thanks for being here. I think
to go full circle, I am actually going to say that I agree with the Ranking Member on
one thing that he has said, and that is that both parties have brought us to this brink
of catastrophe that we are at. It is one of the reasons that I ran for Congress, is because
I don’t think this is a Republican problem or a Democratic problem, it is an American
problem. We have had complacency and irresponsibility here in Congress for far too long. Now, where I do disagree, I think what happens
is that when you have what I used to call in my legislature the wingtip, or some people
call it the wingnut coalition, where the left and the right, where they end up meeting at
the same time, what ends up happening is that we reach a different conclusion. We both agree on the problem. We agree that
we have been irresponsible, but we reach a different conclusion. I think all of you said
that it is irresponsible to lower taxes and increase spending. But it seems that some
people on the other side say then the conclusion is that we should increase taxes and increase
spending. I think that is extremely irresponsible. I think what we should be doing is decreasing
spending, decreasing taxes. But I have a question. The Tax Foundation
has found, and they are talking about State levels, I have studied their State information.
At the Federal level, would it be smart for us to look at some of the exemptions that
are out there? Because I do think we need to reduce the corporate tax. In fact, I would
like to just zero it out. But at the same time, there are a lot of exemptions that are
out there that are pretty much picking winners and losers in the economy. I don’t think
the Government is very good at that. What would be your take, if we start, yes,
reducing corporate tax rates, but at the same time, looking at some of the corporate exemptions
that are out there? [Mr. Taylor] I think tax reform of that kind
makes a lot of sense. Reducing rates, if you like, and broadening the base by looking at
exemptions and loopholes. I would, though, at this point in time, say to me, the problem
si really on the spending side. And if you could get some kind of a consensus just to
leave tax rates where they are for the time being, that would create certainty and then
remove a cloud that people think taxes are going up rather than down. So I would focus on what is feasible at this
point, although it would be better to do the kind of reform you are talking about. I would
be very happy to just leave rates where they are, and work on this terrible spending problem
that we have. [Mr. Labrador] So even not reducing the corporate
tax rate? [Mr. Taylor] Well, I would like to do that.
But you have to get something through this system here. And it seems to me that spending
is — if that can help you on the spending side, if there is a tax reform like that that
can help, and that may indeed be the case. But I would say that, to me, the year 2000
spending as a share of GDP by the Federal Government was 18.2 percent. It is now 25
or so. That is a gigantic, gigantic gap to get fixed. Tax revenues, when we get back
to normal, will not be that much different. [Mr. Labrador] If I could get an answer from
the others. [Mr. Roberts] Well, the big issue here is
the corporate income tax should be zero. Most economists would agree that it should be zero.
And the reason isn’t because we should give money to corporations, it is because corporations
don’t pay the corporate income tax, consumers do. It is a hidden tax, and it discourages
investment and risk-taking. So tax simplification is a good idea. Broadening
the base is a good idea. But the big problem you have is that giving away money is more
fun that not giving it away. And that political challenge is what you have to face. [Mr. Foster] I think it would be wonderful
if we could reduce the corporate tax rate, but with budget deficits as large as they
are, that is problematic. The President has called for revenue-neutral tax reform, which
philosophically I agree with. It is very difficult to figure out exactly what loopholes you ought
to get rid of, and which are intrinsic to a corporate income tax base. But that is an
important discussion. Where we are today, however, is an economy
that is struggling to recover. And if we start on a road of corporate tax reform, that means
businesses don’t know what tax system they are going to be operating under. We just managed
to create yet another source of uncertainty. In this case, a source of uncertainty intending
to do something good. But we have to understand that this new source of uncertainty will have
a depressive effect, even while we sort through the process of corporate tax reform. [Mr. Labrador] Thank you. I have one more question. And I apologize
that I went out of the meeting, maybe you already answered this question. But I think
it was Dr. Taylor who said that we didn’t spend enough money on infrastructure, or there
was just a little bit of money of GDP spent on infrastructure. If we would have spent
the entire amount on infrastructure, would it have made a difference? Because it seems
that is what I keep hearing from the other side, is that we just didn’t spend enough. [Mr. Taylor] Of this, I think, incredibly
large package, 862 or however you want to measure it, a very small fraction went to
infrastructure. Remember it was advertised as spending, create jobs in infrastructure?
So such a small amount went to it. I think that is the reality of these packages. That
is what we found in the 1970s when we tried this. You can’t get money out the door that
fast. You can maybe accelerate spending that is already there, the permit is already approved.
That is what I would have done, just focus on accelerating some of that spending. But
it is just not feasible. So that is really why these packages, one
of the reasons why these packages fail. [Mr. Labrador] Thank you. [Mr. Jordan] I thank the gentleman. The gentlelady from New York is recognized. [Ms. Buerkle] Thank you, Mr. Chairman. The gentleman from Maryland, who has since
departed, talked about a chorus here this morning. Indeed, it is a chorus, but it could
be, we could have the sopranos here if the Administration had agreed to show up. Unfortunately,
we are only getting one side of the argument. I would like to just briefly, before I get
into this pro-growth that we have talked about, what we can do to help the economy, can you
tel me, either one of the three of you, the approximate number of Americans who have lost
jobs since the stimulus plan was passed? [Mr. Taylor] It is approximately 6 million
extra unemployed workers, not because of this but that has occurred since the depths of
the recession. [Ms. Buerkle] Thank you. We talked about reducing
spending, and the need for this Congress to really pay attention and as you mentioned,
start with the $100 billion in the CR that cut. What about, we have heard the other side
talking about tax rates and the need to increase taxes because of what they do to the deficit.
You all said that is not so, if we can keep tax rates permanent, hopefully extend those
rates permanently, what a good effect that would have. What about if we reduced those tax rates?
What if we did what Ronald Reagan did and got those tax rates down for Americans? What
do you see, what effect do you see that having in terms of a pro-growth approach to how we
are going to get this economy turned around? [Mr. Taylor] I would say very briefly, if
you are able to reduce marginal tax rates, stimulate entrepreneurial activity, stimulate
creation of jobs that way, that is beneficial to economic growth. You do, at that point,
have to think about spending, however. And as my colleague Russ Roberts indicated, I
would say that what a goal would be, and it seems to me feasible, and the American people
would like it if they understood it, would be just to return spending to where it was
in the year 2000 as a share of GDP. That is less than 19 percent. So that gives you lots of opportunities to,
I think, reduce tax rates the way you are asking about. But you really have to be sure
that you are able to bring some kind of a consensus around it. It is not going to happen
right away, to bring spending down to those levels. It was fine at that point in time.
What was so bad about spending levels at 2000 levels? So that would be the way I would look at this,
focus on the spending. [Mr. Roberts] I would just make the point,
as John pointed out, tax revenue right now is about 14 something percent of the economy,
tax revenue, and we are spending 25 percent of the economy through the Government. Now,
which is the tax rate? Is it 14 or is it 25? It is 25. It is 14 today and 11 tomorrow,
down the road. So it is a dead horse, but you have to get this horse to life. If you
want to encourage incentives and risk-taking and investment, you have to get the Government
having a smaller role in the economy and give some oxygen in the room for the private risk-takers. [Ms. Buerkle] And when you say that, and you
talk about, and Dr. Foster mentioned it as well, creating certainty for businesses, and
we heard that, no matter who you talk to, especially small business owners. We don’t
know what is going to happen with the health care bill, we don’t know what is going to
happen with the financial regs, we don’t know cap-and-trade, fortunately that is stalled
in Congress. So those kinds of things create uncertainty. What can we do in addition to extending the
tax rates permanently to create certainty that sends a message out to the private sector,
we want to help you, we don’t want to get in your way, we don’t want to impeded your
success? [Mr. Roberts] You don’t just need certainty,
you need confidence in the future. That is why I think responsible budget-cutting signals
to the world and to the entrepreneurs here in America that we can act like grownups,
that when we want more of something, whether it is the war in Afghanistan, or some other
program, we are going to cut something else back. That is what families do. When we act
irresponsibly, we tell the world we are not acting like grownups. [Ms. Buerkle] Thank you. Dr. Foster, do you
have a comment? [Mr. Foster] Yes. Implicit in the massive
budget deficit that we have today is the uncertainty about what Congress is going to do about it,
what taxes are they going to raise, if any, to close that budget deficit? What spending
are they going to cut instead? If we don’t know which they are going to do, they don’t
have certainty about the outcome of that policy. So the budget deficit and reducing the budget
deficit is part of creating the certainty that we need. That is an activist policy toward
certainty that will be very helpful to the economy. We haven’t mentioned it today,
but another area of tremendous uncertainty that has been created that is going to unfold
in the coming years is Obamacare. Now, we can have health care debates until the cows
come home, but the simple fact is, from a business’s standpoint, not knowing what
the regulations are going to be, that they are going to be fundamental in changing that
marketplace, you can’t make investments, you can’t hire. Because you don’t know
what your circumstances are going to be. This creates a regulatory freeze on businesses.
We can debate whether it was a good policy or not, but one thing is certain: this was
not a good time to be imposing this kind of uncertainty, when businesses are being asked
to invest because they are confident in the future. [Ms. Buerkle] Thank you. [Mr. Jordan] Thank you. I want to thank our distinguished panel for
your time, and for staying for a second round. We really appreciate your being here today.
You have been very helpful. We are going to move right to our second panel
and hear testimony. So if the staff could get that set up for them, we will go as quickly
as possible, listen to testimony, have one quick round of questioning for the second panel. Mr. Andrew Busch is the Global Currency and
Public Policy Strategist for BMO Capital Markets’ Investment Banking Division. Mr. Alex Brill
is Research Fellow at the American Enterprise Institute for Public Policy Research. Mr.
Chris Edwards is Director of Tax Policy Studies at the Cato Institute. And Dr. Josh Bivens
is an economist at the Economic Policy Institute. It is the policy of the Committee to swear
witnesses in, so we will do this again quickly, gentlemen, if we can. Raise your right hand.
Do you solemnly swear or affirm the testimony you are about to give this Committee will
be the truth, the whole truth and nothing but the truth? [Witnesses respond in the affirmative.] [Mr. Jordan] Let the record show the witnesses
answered in the affirmative. We will start with Mr. Brill, we will just move down the
line. [Mr. Brill] Thank you, Chairman Jordan and
Congressman Kucinich and other members of the Subcommittee, for the opportunity to appear
before you this morning to speak on the stimulus bill. Its two-year anniversary presents an appropriate
time to evaluate the legislation’s effectiveness. There are many metrics by which one could
assess this massive Federal policy. But in my testimony today, I will focus on just two:
overall cost and “shovel-readiness.’‘ For better or worse, the ARRA was enacted
because majorities in the House and Senate believed that a large fiscal stimulus could
make a positive contribution to the economy by stimulating aggregate demand. Under that
premise and the assumption that the stimulus bill spending was not completely offset by
a decline in private activity, the effectiveness of the legislation depends, quite simply,
on the stimulus spending occurring in a timely fashion. In my testimony this morning, I would
like to emphasize three points. First, we should recognize that the bill was
rushed through Congress at a blazing speed. H.R. 1 was introduced on January 28th, 2009,
and signed into law on February 17th. A hodge-podge of policies, ranging from high speed rail
to health information technology to home weatherization, hundreds of pages and thousands of projects. Second, the official cost estimate of the
stimulus bill has varied over time, but always under-estimates the true cost. The key to
securing votes for final passage of the bill in the Senate was to reduce the final cost
to $787 billion. Since that time, CBO has re-estimated the cost of the bill, once as
high as $862 billion, and currently to be a cost of $821 billion. But all of these estimates fail to include
the additional costs, already in excess of $60 billion, incurred when Congress extended
certain portions of the bill. In fact, I would note that President Obama’s fiscal 2010
budget included items to make over one-third of the stimulus bill permanent. Third, and most importantly, the stimulus
bill has done an extremely poor job at actually spending money in a timely way. Regardless
of your view about the multiplier effect, the economic factor by which an injection
of fiscal stimulus could, at least in theory, result in more activity down the line, the
bill could not possibly be effective or cost-effective if the money is not spent in a timely fashion. While certain activities did occur quickly,
such as additional checks to Social Security recipients or unemployment benefits and transfers
to the States, none of these policies constitute the much touted “shovel-ready’‘ activity
and the “reinvestment’‘ that was the heart of this legislation. For example, the
Department of Energy should never have been awarded a single dollar in stimulus funding.
At the end of calendar year 2009, they had spent only 5 percent of their allocated funds.
At the end of 2010, two-thirds of the Department of Energy’s funds remained unspent, roughly
$22.5 billion. The Department of State, FCC, NEA, NSF, USAID, and the Corporation for National
Community Services have collectively spent only 37 percent of their funds as of last
December. At the end of 2009, they had spent collectively only 8 percent of their funds. Even the Department of Transportation, which
was supposed to ground zero for shovel-ready projects, had at the end of 2010 spent 56
percent and had nearly $20 billion left to spend. Billions more from other departments. In my written testimony, I detail examples
of programs that have, two years after enactment, spent only 2, 3, 4, 9 and 10 percent of their
available funds. In conclusion, while labor markets in the
U.S. economy remain weak, and a robust economy has yet to materialize, the worst of the recession
is long over. If the stimulus bill was ever appropriate, and I think it was never appropriate,
it was in 2009, not in 2011, and certainly not in 2012 and beyond. I urge the Committee,
given its jurisdictional responsibility, to continue to investigate carefully the causes
that have resulted in this bill, which was intended to be timely, targeted and temporary,
to be implemented so slowly. Too much money was put into this bill in the
first place. Too little of it was spent at the time the economy was the weakest. Clearly,
Government is not good at fiscal policy to turn the economy. And I hope the Committee’s
work will help dissuade future Congresses from repeating these same mistakes. I will be happy to answer any questions. [Mr. Jordan] Thank you, Mr. Brill. Mr. Busch? [Mr. Busch] Thank you, Subcommittee Chairman
Jordan and Ranking Member Kucinich. I want to thank you for the opportunity to appear
today. I was born in Ohio, I just was there recently
and frequently speak, I was at the city of Galena, they had an economist briefing there
recently. So it is always great, always great to be in front of fellow Ohioans. I just want to share my views regarding the
American Recovery and Reinvestment Act of 2009, specifically the results two years after
enactment on the economy and the financial markets. As you may know, I am the Bank of
Montreal’s Global Currency and Public Policy Strategist. I have worked in the financial
markets since 1984. So my role is to analyze factors influencing
the financial markets and provide guidance to our clients on the potential outcomes of
policy. I have had the distinct pleasure of writing commentary on a daily basis since
1999, and wrote throughout the financial crisis of 2008. So reform and oversight of our Nation’s
programs to create economic growth and financial stability are critically important, obviously.
Bank of Montreal thanks you, Mr. Chairman, and all the members of the committee for their
upcoming work on these topics over the next two years. To reclaim its position of financial and economic
leadership, the United States needs to understand the short-term and long-term impacts of the
American Recovery and Reinvestment Act of 2009. So for the financial markets, the ARRA
Act was at best an economic disappointment; at worst a potential fiscal disaster. In the fall of 2008, the economy and the financial
markets were in the midst of turmoil, generating from the failure of Lehman Brothers, the Federal
Government takeover of Fannie Mae and Freddie Mac and the collapse of the subprime loan
markets. This created an environment of fear and uncertainty in the financial markets that
led investors pulling out of their funds in risky assets and placing them into the safe
havens of U.S. Treasury securities. By the end of 2008, both the Dow Jones industrial
average and the yield on the U.S. 10-year note fell by nearly 50 percent. This extreme
panic led to spreads between U.S. Treasury securities and other market securities, such
as high yield, investment grade debt and large bank debt, to widen significantly and rapidly.
As an example of the panic, the commercial paper market nearly froze completely when
the primary reserve fund broke the $1 barrier. At this time, many large corporations lost
the ability to fund themselves using this critical market. The entire financial system
appeared to be at risk of seizing up, and was in need of stabilization. The economy
was deteriorating rapidly, as businesses were unable to either receive credit from their
bank or tap the debt markets for funding. One of the key questions before President-Elect
Obama and the incoming Congress was how to stimulate the economy in the most efficient
and timely way. In late December of 2008, the financial markets reacted positively upon
hearing the news that a large stimulus package was being discussed and debated in Washington,
D.C. At that time, the news flow varied from a package between $500 billion to $700 billion,
which included tax cuts and new spending programs. Contributing to the market optimism was the
description of the package by then-Chair nominee designate, Council of Economic Advisor Christine
Romer and office of the Vice-President Elect Jared Bernstein. This is the Job Impact of
the American Recovery and Reinvestment Plan. So in the report of January 10th, 2009, Romer
and Bernstein laid out their findings and expectations for economic growth for a $775
billion program. It is critical to understand that the market’s
expectations for economic and employment growth from the plan were raised due to these findings.
They estimated that the aggregate effect of the recovery package on Q4 2010 GDP would
be to increase it from $11,770 odd trillion to $12 trillion, $2.2 trillion. They stated
the effect of the package would increase GDP by 3.7 percent and increase jobs by nearly
3.7 million. They went on further to predict that the plan
would make the unemployment rate 7 percent by Q4 2010 from the 8.8 percent that would
result in the absence of the plan. The authors predicted a 678,000 increase in construction
jobs, using calculations and estimates of effects on industry by economic Mark Zandi.
His report was The Economic Impact of a $600 Billion Fiscal Stimulus Package,,
obviously, in November of 2008. Since the housing sector was a key variable
in the financial crisis, the return of jobs to this sector was particularly optimistic
and appealing to the markets. At that time, there were many factors influencing the financial
markets. However, this outlook was a contributing factor toward the rally in the U.S. stock
markets that took the Dow up almost 13 percent in December. Subsequently, the markets became
skeptical of the predicted outcomes by Romer and Bernstein, as newspapers, bloggers, research
began to break down the sections of the plan, the costs of the plan, and the potential increase
in the fiscal deficits. The sovereign United States credit default
swap price rose from 20 in October to 59.7, a stunning 300 percent increase. So the honeymoon
for the stock markets was over, and they slid until March, when the Federal Reserve Chairman
appeared on 60 Minutes and stated that no major financial institution would fail. I will just submit the rest, and move on. [Mr. Jordan] I appreciate that testimony,
Mr. Busch. You can finish up when we get to questions. Mr. Edwards? [Mr. Edwards] Thank you, Mr. Chairman and
Ranking Member, for allowing me to testify today on the stimulus and Federal spending. There has been a huge increase in Federal
spending over the last decade, under President Clinton from 18 percent to 25 percent today.
Part of that, of course, was the $800 billion stimulus, which sadly, I believe, was a very
costly, Keynesian policy failure. I note that the amount of Keynesian stimulus
in the economy in recent years wasn’t just the $800 billion. It was the total amount
of deficit spending in recent years: half a trillion in 2008, and about one a half trillion
for the three subsequent years. So that is about $5 trillion of so-called Keynesian stimulus
and yet we still have very high unemployment and a recovery that is more sluggish than
in previous recoveries. Now, economists continue to debate how much
of a sort of a sugar high you can get from this sort of Keynesian stimulus in the short
term. There is no doubt in the long term that this will damage the economy. Why? Because
all that Government spending reduces private spending. And there are two basic causes of damaged
caused by the spending. One, you are transferring resources from the more productive private
economy to the less productive Government sector of the economy. There is all kinds
of evidence for that. We have a website at Cato, We go through
every Department, we talk about the various failures of all the programs. But secondly, transferring money from the
private to the public is not cost-less. It causes what economists have called deadweight
losses, the extraction, the forcible extraction of the funds from the private sector through
taxation causes these deadweight losses. So for example, President Obama, let’s say
he wants to spend $10 billion more on high speed rail, the cost to the economy is not
$10 billion, it is $15 billion or $20 billion. Martin Feldstein says that every dollar the
Government spends causes $2 of private sector damage. The sad reality is, the United States is not
a small Government Country any more. OECD data shows us a total Federal-State-local
spending now at 42 percent of GDP. In my testimony, I show that ratio over the last couple of
decades. The United States used to be substantially lower than other OECD countries. The gap has
been closing. And I fear that we are just going to become another sort of stagnant European
welfare state if we keep all this spending going. Let me jump quickly to State and local spending,
because a big stated cost for the stimulus package was to help State and local governments
who were struggling with the recession. We have been bombarded with news stories in the
last couple of years about how State budgets have been supposedly devastated and radically
slashed. The reality is really different, and I have Department of Commerce data in
my testimony that shows total State and local spending has not been cut at all through the
whole recession. It rose rapidly from 2000 to 2008, it was exactly flat in 2009, started
rising again in 2010. Total State-local spending was, as a share of the economy, was actually
up over the last decade. So despite two recessions this last decade,
State and local spending is actually higher than it has ever been. So there is a real State budget crisis, and
that is ahead, as you know. The bond debt has been growing rapidly in the States, they
have huge pension and unfunded health care obligations. But here is a key point, I think, from a Federal
policy maker’s perspective. The States are in radically different positions with regard
to their budget gaps, with regard to their bond debt. Some States, like Nebraska, have
virtually no borrowing, no bonds. Other States, like Massachusetts, have huge amount of borrowing. Pension obligations, some States, like Ohio,
are very unfunded pension obligations. Other States, it is quite low. So the States are
in radically different positions here. I think this is one of the problems with Federal bailouts
and Federal aid, is that it is very unfair, and I think bad economics, to punish the well-managed
frugal States for the benefit of the poorly-run and spendthrift States. So on the one hand, I am not for Federal bailouts.
But as a last point, the Federal Government has and continues to impose lots of costs
on State governments, most recently with the health care plan, before that with the No
Child Left Behind law. All those regulations and costs are poured down on the State governments,
which I think is bad Economics and also unfair. That is the end of my comments, and thank
you. [Mr. Jordan] Thank you, Mr. Edwards. Dr. Bivens? [Mr. Bivens] I would like to thank the Chairman
and the members of the Committee for inviting me today. I am going to start with a quick overview
of the origins of what we now call the Great Recession and the rationale for the Recovery
Act, and then just provide a little bit of overview of my assessment of it. Sometimes the origins of recessions are hard
to see. Not so with what we call the Great Recession. Between 1997 and 2006, the real
price of homes roughly doubled. They had been roughly stable for almost 100 years before.
Because the stock of housing in the U.S. is enormous, this added greatly to the wealth
of American households, and housing wealth and the debt associated with it, as well as
huge activity in the homebuilding sector, was the foundation for the 2000s business
cycle. This was obviously unsustainable. Home prices
fell by about 30 percent between 2006 and 2009. This erased about $7 trillion to $8
trillion in wealth from American households’ balance sheets, and consumer spending, just
as predicted by a long range of economic theory and evidence, collapsed. Homebuilding collapsed,
residential investment took about 3 percentage points off GDP, as homebuilders realized they
had built too much during the 2000s. These initial shocks to spending then cascaded
throughout the economy. Businesses stopped investing because customers were not coming
through the door. Why would you build another factory when the factory you have is producing
output that is not selling? So essentially, the economy suffered a shock
to aggregate demand. To deny this, to say that that was not the essential problem, you
have to answer the question, then, why did almost 9 million people lose their jobs in
a two-year period. American workers didn’t wake up January 2008 with no skills. American
factories didn’t become obsolete in a month. American managers didn’t forget how to organize
production. We didn’t suffer from an inability to supply goods and services, we suffered
from an inability to demand them. And to be clear, I am using demand in an economist’s
way, desire backed by purchasing power. Purchasing power was gone. It was erased by the housing
bubble. So by most measures, the shock to private
sector spending caused by the bursting housing bubble was bigger than the one that led to
the Great Depression. We didn’t have a Great Depression mostly because we now have a central
bank that leans much more aggressively against private sector spending shocks, and we allow
budget deficits to rise to finance public spending to stem the gap caused by retreating
private spending, when you are in a recession. So that was a big reason why we did not see
the economy spiral into a depression. ARRA was part of that, pushing back against
the shock to private sector spending. In my judgment, it worked largely as advertised.
We have a gross domestic product that is probably about $500 billion higher today than it would
have been if we had not passed it. We probably have about 5 million full-time equivalent
jobs that we would not have had at ARRA not passed. And this judgment is based on three considerations.
First, virtually all private sector forecasting firms, people whose money depends on being
more correct about short-term economic trends, say that ARRA added a lot to output and employment. Second, these effects are in line with what
research says you should expect from doing something like ARRA in an economic environment
like we have seen for the past couple of years, very high unemployment, very low interest
rates, very low inflation. When one looks at research that says fiscal support cannot
help the economy, it invariably is looking at the wrong episodes. Like the previous panel
talked about looking at the 1970s and World War II, Government spending didn’t help. Well, it wasn’t supposed to help in those
episodes. You did not have very high unemployment along with very low inflation and very low
interest rates in those episodes. When you look at episodes like what we have seen for
the past two years, fiscal support works. Third, the timing was right. Basically GDP
contracted at about a 5 percent annual rate in the nine months before the Act was passed.
It grew at roughly 2 percent — I am sorry, contracted at 5 percent before it was passed,
grew by 2 percent in the nine months after it. Same thing for employment growth. And then also contrary to a lot of what has
been written, it helped arrest the decline in consumer spending. That is exactly what
you would expect, given that two-thirds of the Act was tax cuts and transfer payments
to individuals. Lastly, just a couple of words on the really
easy debating point deployed against ARRA, the sort of ritual trotting out of the Romer-Bernstein
forecast. An earlier panel said that people who say that the Romer-Bernstein forecast
was wrong just because they underestimated how bad the economic shock was said, there
is no evidence for that, you can’t prove it. Of course you can prove it. You can look
at what economic forecasters were saying at the time. And I actually had a figure, I am not sure
if we are able to blow it up or not, it is in my testimony, it shows the consensus blue
chip forecast for what was going to happen in that sort of six month period in late 2008,
early 2009. The blue chip consensus was GDP would contract by 1.5 percent. It actually
contracted by closer to 5 percent. That gap between the blue chip forecast of what was
going to happen and what actually happened equals about 2 percentage points of unemployment.
In short, the difference in the forecast in Romer-Bernstein for what actually happened
versus what they forecast to happen with ARRA is because they followed the consensus forecast
about the underlying health of the economy. It does not affect their estimate of how effective
ARRA was. We would have about 3 to 4 million fewer jobs,
had we not passed ARRA. And the fact that they underestimated the degree of the private
sector spending shock that was hitting the economy in real time doesn’t affect that. So essentially, I think the Recovery Act worked
largely as advertised. I think the biggest problem with it, its boost to the economy
is gone. By the first quarter of 2011, it is adding zero to economic growth, and yet
we still have 9 percent unemployment. Thank you. I would be happy to answer any
questions. [Mr. Jordan] I thank the gentlemen for their
testimony. Let me start with Mr. Brill. I was intrigued
by your comment that, whether you embrace the multiplier effect doctrine or not, it
seemed to me your testimony’s conclusion was, it really doesn’t matter, because the
bureaucracy was so inefficient at actually allocating the dollars, moving the dollars
out, that that was a problem as well with this stimulus bill. Am I correct, and can
you elaborate? [Mr. Brill] That is correct. Admittedly, some
dollars did move quickly. Things were you simply needed to print a check or transfer
funds, those payments did occur relatively quickly, and it is noted in my testimony. However, an enormous percentage of the dollars,
and when we think about enacting legislation and the cost-effectiveness of that bill, that
legislation, an enormous amount of the money was delayed. It was delayed because, quite
simply, the Government, while it is good at spending money, turns out not to be very good
at spending it very quickly. So there are numerous departments that have engaged in
large, complex projects that require permitting, consideration, architectural designs and other
things. To get those dollars spent will take years. Some of that was understood at the beginning.
That doesn’t make it okay. Of course, CBO did note that this bill will have budgetary
effects throughout the decade. But what we see at this point is how many programs have
really yet to even begin. [Mr. Jordan] And frankly, there is a continuation
of them in the budget proposal that we got Monday from the President. I think of one
example that jumps out in my mind is the so-called high speed rail, which I think is just not
effective, not where we need to go. But there is a continuation of this in the current budget. [Mr. Brill] Absolutely. A number of policies,
I am less specific with a specific review in the current budget, although high speed
rail is a perfect example. From the budget that came out in conjunction with the stimulus
bill, over a third of those policies that the President asked to make permanent, in
other words, he was seeding in the bill long-term permanent spending policies. [Mr. Jordan] Thank you, Mr. Brill. Mr. Edwards, I was intrigued by your testimony,
when you got into the States and the different situations they face. I was wondering if you
could elaborate. When I look at what some States are doing versus the choices made by
others, the most obvious example to me right now is New Jersey versus Illinois. New Jersey
where the Governor came in and said, we are not going to raise taxes, we are going to
reduce spending and we are going to try to create a climate which I would argue is conducive
to economic growth, versus what they are doing in Illinois, which is raising taxes significantly. Can you elaborate on the choices being made
there and those two models, or those two decisions by Governors and the legislatures in those
States? [Mr. Edwards] Right. I mean, we do have a
Federal system, the States should be allowed to go in their own direction, that is great.
That is one reason why I don’t like the Federal intervention downwards, either spending
or regulation. Because I think it stifles good diversity in the States. We want the
States to try different things, with their education systems and investment and all kinds
of stuff, so that hopefully, if New Jersey is moving ahead with public sector union reforms,
that is great. That can provide a good model for other States. So I like that diversity. But it is also true that the Federal Government
imposes a lot of these costs, like with the health care law and the No Child Left Behind
Law that I think are really damaging. [Mr. Jordan] Mr. Bivens, I want to give you
a chance to participate here as well. If I understood your testimony, basically it would
have been worse had we not done what was done in 2009. Obviously I disagree, and I think
much of the panel disagrees. And I would argue, just based on the stated goals of the authors
of the policy, who again failed to be with us this morning, we didn’t meet the goals
they said. I understand your comments and your testimony, well, they were using faulty
data or data that wasn’t up to speed at the time they made the decision. But the idea that we are going to spend $800
billion of taxpayer money and the promise was to keep unemployment at a certain rate
and it would be even lower today, I still am struck by, I guess I still reach the same
conclusion that I think frankly most Americans have reached, which is the only thing we got
from the stimulus was three years of record deficits and the highest level of national
debt we have ever experienced. [Mr. Bivens] I would say what the real promise
of the Romer-Bernstein report was that we would have 3 to 4 million more jobs than the
economy would have produced had we not done it. In that one, I think their judgment is
right and it is supported by the CBO and other forecasters. And just one other point, too, just between
December 2008 when they wrote that report and March 2009, the month after ARRA was passed,
the economy lost 3 million jobs in those three months. That is essentially that 2 percentage
point unemployment gap between what they predicted and what happened right there. The fact that
they did not realize that they were sitting on sort of an exploding private sector economy
around them, I think it doesn’t speak greatly of their economic forecasting ability, but
nobody got that in real terms. But that does not change the effectiveness
of the policy, or their evaluation of it. [Mr. Jordan] And that is my point. They were
pretty darned specific in the number of jobs that would be, well, I will say it this way,
where employment would be. They were specific down to 137.6 million. They were specific.
So at least you would be critical of the fact that they made these specific projections,
at a minimum, you would be critical of that? [Mr. Bivens] That is right. I would be more
critical that they took the blue chip consensus as a given and as a good forecast, when it
clearly wasn’t. I don’t think they were trying to break any new ground in forecasting,
I think they were just trying to take off the shelf, these are reasonable things people
will not argue with this forecast. And the thing they grabbed that people would not argue
with turned out to be very wrong. Because frankly, most of the profession was caught
very flat-footed by how bad the recession was. [Mr. Jordan] Let me give you one quick question
on that, Mr. Bivens. As an economist who supports the stimulus, if you were involved in putting
this together, don’t you think, wouldn’t you want to come in front of a panel in Congress
looking at your work product and defend it? [Mr. Bivens] Sure, yes. Obviously the stakes
for me are a lot lower, so I don’t know how it would have turned out if I had been
an architect of it. But yes, I think there is ample reason to defend the stimulus package
on its merits, and I think it should be done. [Mr. Jordan] Mr. Edwards, then I will move
to Mr. Kucinich. [Mr. Edwards] Mr. John Taylor had a very good
paragraph in his written testimony where he basically said, the problem with a lot of
these macro models is that they assume the results that, the results are assumed, they
are programmed in. So if you have a Keynesian macro model and you have a big increase in
Government spending, the result is already baked in the cake that you are going to get
GDP larger. And he says this is true with both the CBO model and Mark Zandi’s model
and other sorts of models. I agree with Russ Roberts that we should be
very suspicious of all these macro models, frankly. They are wrong, time and time again. [Mr. Jordan] And the model to look at, frankly,
is what happened. The best evidence is what actually took place, is look at the facts.
Thank you. We will go now to five minutes for the Ranking
Member, Mr. Kucinich. [Mr. Kucinich] Just building on what Mr. Edwards
said about the macro models, Mr. Chairman, the Romer-Bernstein report was released a
month before the Recovery Act was signed into law. What is interesting is that they had
a qualification in this report. I want to quote it to you: “It should be understood
that all of the estimates presented in this memo are subject to significant margins of
error. The uncertainty is surely higher than normal now, because the current recession
is unusual, both in its fundamental causes and its severity.’‘ So they qualified what they were saying. I
think it is important that we know that, since we are focusing on that report. I also want to say in relationship to what
Mr. Brill said about high speed rail, I think it would be important for this Committee to
look into the relationship between commerce and transportation’s role in increasing
the efficiency of commerce or not. I think it is very important that we get into that,
so we don’t just reject out of hand certain approaches that could actually end up helping
the economy. I think high speed rail is one of those discussions we ought to have. Now, Dr. Bivens, in your written testimony
— [Mr. Brill] Could I comment on that? [Mr. Kucinich] I have to get this question
to Dr. Bivens, but thank you. Dr. Bivens, in your written testimony you state that “private
sector macroeconomic forecasters are in near-universal agreement’‘ about the positive impacts
the ARRA has had on gross domestic product growth and on unemployment. We know that the
non-partisan Congressional Budget Office agrees. We know that private economists like Mark
Zandi agree. We know that organizations like the Center on Budget and Policy Priorities,
as well as your organization, the EPI, agree. Can you explain why so many forecasters agree
about the positive results of the stimulus? [Mr. Bivens] Yes, like I said quickly in my
testimony, it is in line with a long line of research that looks at the efficacy of
fiscal support provided to economies that look like the U.S. economy today, characterized
by very high unemployment, very low rates of inflation, very low interest rates. When
you provide fiscal support in an environment like that, the research shows that it works
very well. And I will say one thing, this idea that the
results are baked into all these models, that is actually not true. These multipliers are
not taken from the air, these multipliers come out of the data, when people look at
the effect of fiscal support done in environments like we have today. They look at the historical
record, they say, when you provided this fiscal support when unemployment was high and inflation
and interest rates were low, what happened? And you use those multipliers estimated from
real data. They are not plucked from the air. [Mr. Kucinich] You characterized the Recovery
Act as small, relative to the economic shock it was meant to absorb. If the stimulus was
larger, do you think the unemployment rate would be lower than it actually is today? [Mr. Bivens] Absolutely. [Mr. Kucinich] What step does Congress need
to take, in your opinion, to get more Americans back to work? [Mr. Bivens] I think it needs to look at those
parts of the Recovery Act that worked very well and continue or expand them. [Mr. Kucinich] For example? [Mr. Bivens] Unemployment insurance. The fact
that that has been extended for another 13 months as part of the deal, that is a very
good thing. It is going to support a lot of jobs. I would look at some of the other safety
net programs, food stamps are very good, economic stimulus, let alone. [Mr. Kucinich] Explain why that is. [Mr. Bivens] Essentially, the goal of economic
stimulus is to get money spending quickly throughout the economy. And people who get
food stamps and people who receive unemployment insurance are by definition people who are
cash-strapped, they are not going to sock it away in savings, they need to spend it
on necessities in the here and now. So the money circulates through the economy very
quickly. I would also say I think the infrastructure
spending, which has taken a big longer to get online, that is actually a good thing.
We have 9 percent unemployment today. The idea that we have missed the boat on infrastructure
spending, helping the economy if a project rolls out next month, we haven’t missed
the boat. We are going to have very high unemployment for a very long time. The CBO says we don’t
get back to pre-recession unemployment until 2016. So the idea that some of these projects
are still coming online I think is a very good thing. [Mr. Kucinich] And in line with that, where
Mr. Brill talked about how it takes a while for Government spending to actually get into
the system, would you say that if the Government were to plan a massive rebuilding of America’s
infrastructure, beginning, let’s say, this year, with the aim at putting Americans back
to work, would you think that that kind of an approach, which would parallel what happened
during the New Deal with the WPA, that that kind of an approach would benefit the economy,
would stimulate the economy, would prime the pump of the economy and enable people to get
back to work? [Mr. Bivens] Yes. I think it would be very
good in the short term, and I think it would add to productivity growth, even in the long
term, and make us grow faster even when the recession is over. [Mr. Kucinich] Thank you, Mr. Chairman. I
think one of the things that we can do in our collaboration on this Subcommittee is
to bring people together to find out how we can create jobs to get America back to work.
I look forward to working with you in that. I thank the witnesses. [Mr. Jordan] I thank the gentleman. I now yield to the gentlelady from New York,
Ms. Buerkle. [Ms. Buerkle] Thank you, Mr. Chairman. Thank you all for being here this morning.
A couple of questions, sort of out of context. First of all, Mr. Brill, you talked about
the slowness at which the money was spent. I wondered if you had any ideas as to why
it happened that way. And then beyond that, and this is to anyone
on the panel, is there a way to know how much stimulus money remains unspent at this time? [Mr. Brill] Thank you. I think that there
are a number of reasons that large amounts of the money remain unspent. Just as a point
of reference, the CBO estimated last month that in the current fiscal year, fiscal year
2011, there will be $148 billion in stimulus funding, and over the remaining years of the
budget window, there will be another $148 billion in fiscal stimulus spending. The reasons for the delays I think are numerous.
It depends likely agency by agency or department by Department. Many of these programs are
large, complex building projects, where simply, to get the project designed and approved,
put online, permitting requirements that were necessary, environmental assessments that
were necessary in order for certain construction projects to begin, takes a lot of time. There
are some projects that are in the midst of being completed, bridges half built. And there
are certainly billions of dollars in other projects that have not yet even begun. [Ms. Buerkle] So your estimate for the amount
right now that is unspent of the stimulus money? [Mr. Brill] Beyond the current fiscal year,
is $148 billion and to be spent in this current year, an additional $148 billion. So some
of that $148 billion is, we are midway into the fiscal year, so I would ballpark it at
about $200 billion in unspent dollars. [Ms. Buerkle] Thank you. Does anyone else have a comment regarding
any estimate, unspent stimulus monies? Dr. Bivens, my question to you, we have heard
several times throughout the course of the morning that perhaps the stimulus, the amount
of the stimulus wasn’t enough, and that was the reason why we did not see the robust
economic recovery that we had hoped for. My question to you is, if the intention was to
keep unemployment, say, at 6 or 7 percent, what would that amount, what should the amount
of the stimulus have been? What could we have spent to achieve that rate of unemployment? [Mr. Bivens] To achieve that rate of unemployment,
it may have been impossible to ever keep unemployment going above 7 percent, given the quickness
and the severity of the shock from the housing bubble. That said, I think the economy could
have easily absorbed a stimulus package almost twice as big, say, $1.5 trillion, without
running into the remotest risk of, say, overheating the economy or providing too much support
or doing anything like sparking higher inflation or high interest rates, which is supposed
to be the downside of doing too much fiscal support. We could have had a stimulus package
twice as big and not even flirted with any of those troubles. [Mr. Edwards] Can I make a comment on that?
One of the problems I see with this sort of Keynesian stimulus approach is that economists
like Mark Zandi and others, they say, oh, we supported this big stimulus and it has
gotten the Government much deeper into debt, which is going to create this giant burden
in the future on young people. At the same time, people like Mr. Zandi are saying, oh,
we need a plan to reduce spending and get these deficits under control, we need a credible
plan to reduce these deficits. If you are a Keynesian economist, you can
never have a credible plan to reduce deficits, because we might have a recession again in
2013 or 2014, and what would Mr. Zandi want? He would want another trillion dollar stimulus.
You can go on this endless cycle, stimulus, stimulus, stimulus. I think it is a complete
dead end. I think there is a giant moral judgement being made that for some reason, Congress
thought that that goosing people’s income and consumption now during this recession
was a lot more valuable than the damage and harm that is going to be done by young people
with this heavy burden of taxes and deadweight losses and interest payments that they are
going to have to bear. So a short-term goose for long-term pain,
I don’t think that Congress should be in the business of making that sort of value
judgment. [Ms. Buerkle] Thank you very much. I yield
back. [Mr. Jordan] I Thank the gentlelady. The gentleman from Idaho, Mr. Labrador, is
recognized. [Mr. Labrador] Mr. Busch, we keep hearing
about this consensus among the forecasters. Do you agree with Dr. Bivens that there is
a consensus amongst the forecasters that the stimulus had a net positive effect? In your
opinion, were financial markets aided by the stimulus? [Mr. Busch] Right, I think there is a consensus
among Keynesian economists that it had an effect. One of the things I wanted to point
out, and I am sorry I screwed up my testimony, but one of the things I would like to see,
if we are to believe Romer’s model and the way that they formulated it, why don’t we
extend it further and look at her research that she did on taxes? Because if you look
at the stimulus bill and you say, well, we spent $800 billion, that is great, it does
this and this and this, but you don’t tell the whole story. That money has to come from
some place. If we use Romer’s research and let’s say,
the United States borrows 40 cents on every dollar. So that means of $800 billion, you
are looking at the borrowing of $280 billion. And if it is a negative three to one, you
are back to $600 billion, and you are only going to use $200 billion of the $800 billion
as any kind of stimulus. I would love to see that in bills put forward
into Congress. Any time you are looking at spending, have the effect of how much you
are going to borrow to pay for this and what the downside in taxes is going to be. Because
I think that would really focus and clarify for a lot of the members the impacts. So I would disagree, again, with the Keynesians,
that is what they argue, they only fail because we didn’t spend enough. The financial markets
looked at it this way, that way more than what Congress did, there were beneficial effects
from what the Federal Reserve did on a short-term basis. But both what Congress has done and
what the Federal Reserve has done come with costs. Congress obviously has to find a way
to pay for what they did. The Federal Reserve will find a cost in inflation very soon, if
not already, by what they are doing. [Mr. Labrador] Mr. Brill, do you have any
comments about that? [Mr. Brill] I would just add the fact that
the argument that was put forth in the but-for case is a tricky one. It is actually a tricky
one on both sides. I think that we shouldn’t have too high expectations for economists
to be good fortune tellers, especially at turning points in the economy. But the lesson
from that, I think, is that Congress needs to be wary. We live in a world where there
are business cycles, and there will be a recovery and there will be a future recession. When
we come to the next point where economists are concerned about the economy, and it seems
that we are in recession, there will be calls again for fiscal stimulus. We should keep in mind that it is difficult
to predict what the future course of the economy is going to be. Therefore, it is difficult
for Congress to craft policies, both to envision the right policy as well as for the Executive
Branch to execute on those policies. As was discussed in the previous panel, stable fiscal
policy, policies that have low tax rates, low marginal tax rates, and stable low spending
rates, not policies that have huge, ballooning deficits like the ones we face, are the ones
that are likely to minimize the business cycle risks that we face. [Mr. Labrador] Dr. Bivens, is there a moment
where we are spending too much? You are saying, I was really surprised to hear that unemployment
insurance and food stamps actually creates jobs. That to me was pretty incredible to
hear. Is there a moment that we spend too much money on these things? Because I think
if we are spending $100 billion, if we create so many jobs, why not spent $1 trillion? Why
not spend $5 trillion? If spending Government money is creating jobs, then let’s spend
it all. [Mr. Bivens] That is pretty easy. You reach
the limit when you run the risk of overheating the economy by sparking inflation or high
interest rates. That is the textbook case for macroeconomics, you provide fiscal support
until you run the risk of overheating the economy in that way. And we are in no danger
of doing that. Core rates of inflation are at 60-year lows. Interest rates are at 60-year
lows. We are just running into none of the danger signs of having done anything like
too much. So $5 trillion, yes, I think that would be
too much. I think in terms of the current political debate, we are in absolutely zero
danger of doing too much and overheating the economy through too much fiscal support. [Mr. Busch] Could I just make one quick comment
on that? [Mr. Jordan] Sure. [Mr. Busch] Greece felt the same way at some
point. And I think that is really the issue. At some point, the financial markets are not
going to allow the United States to borrow indefinitely at the rates that they are. So
if you try to expand and again, expand budget deficits, at some point they are going to
turn on you. And again, the United States is borrowing at exceptionally low interest
rates. That could change, as we have seen since November when interest rates have gone
up 100 basis points. [Mr. Jordan] And if you question the Federal
Reserve Chairman, he would indicate that they can pull back at the appropriate time. I think
that is a big if. But that is the argument that you hear, and I would assume Dr. Bivens
would say that. But again, I think that is scary, when you
are looking at a handful of people who think they can out-guess and out-perform and guess
and have the right timing and beat the market and figure out ahead of the — I just think
that is a scary place to go. One last thing, if I could. Mr. Brill, you
gave a $200 and some billion figure. The facts that we are getting, or the numbers we are
getting on stimulus dollars that have not been spent are much less than that. We are
hearing 92 percent of the stimulus dollars are out the door. So I assume some of those monies are already-obligated
dollars, but haven’t been out the door, but they are already in contract? Tell me,
if you would, where you are getting that number, real quickly. [Mr. Brill] Sure, exactly, the difference
being the allocated funds versus dollars spent. So the Government has successfully decided
what to do with most of the money, two years after enactment. [Mr. Jordan] But hasn’t written a check? [Mr. Brill] But hasn’t actually written
the check. [Mr. Jordan] Thank you. I want to thank the witnesses for your insight,
and appreciate your spending some time with us. We are adjourned. [Whereupon, at 12:05 p.m., the committee was

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