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THE STIMULUS: TWO YEARS LATER

HEARING

BEFORE THE

SUBCOMMITTEE ON REGULATORY AFFAIRS,

STIMULUS OVERSIGHT AND GOVERNMENT

SPENDING

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

FEBRUARY 16, 2011

Serial No. 112–4

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.fdsys.gov

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

DARRELL E. ISSA, California, Chairman

DAN BURTON, Indiana

JOHN L. MICA, Florida

TODD RUSSELL PLATTS, Pennsylvania

MICHAEL R. TURNER, Ohio

PATRICK T. MCHENRY, North Carolina

JIM JORDAN, Ohio

JASON CHAFFETZ, Utah

CONNIE MACK, Florida

TIM WALBERG, Michigan

JAMES LANKFORD, Oklahoma

JUSTIN AMASH, Michigan

ANN MARIE BUERKLE, New York

PAUL A. GOSAR, Arizona

RAU ́ L R. LABRADOR, Idaho

PATRICK MEEHAN, Pennsylvania

SCOTT DESJARLAIS, Tennessee

JOE WALSH, Illinois

TREY GOWDY, South Carolina

DENNIS A. ROSS, Florida

FRANK C. GUINTA, New Hampshire

BLAKE FARENTHOLD, Texas

MIKE KELLY, Pennsylvania

ELIJAH E. CUMMINGS, Maryland, Ranking

Minority Member

EDOLPHUS TOWNS, New York

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, District of

Columbia

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

DANNY K. DAVIS, Illinois

BRUCE L. BRALEY, Iowa

PETER WELCH, Vermont

JOHN A. YARMUTH, Kentucky

CHRISTOPHER S. MURPHY, Connecticut

JACKIE SPEIER, California

LAWRENCE J. BRADY, Staff Director

JOHN D. CUADERES, Deputy Staff Director

ROBERT BORDEN, General Counsel

LINDA A. GOOD, Chief Clerk

DAVID RAPALLO, Minority Staff Director

SUBCOMMITTEE ON REGULATORY AFFAIRS, STIMULUS OVERSIGHT AND GOVERNMENT

SPENDING

JIM JORDAN, Ohio, Chairman

ANN MARIE BUERKLE, New York, Vice

Chairwoman

CONNIE MACK, Florida

RAU ́ L R. LABRADOR, Idaho

SCOTT DESJARLAIS, Tennessee

FRANK C. GUINTA, New Hampshire

MIKE KELLY, Pennsylvania

DENNIS J. KUCINICH, Ohio, Ranking

Minority Member

JIM COOPER, Tennessee

JACKIE SPEIER, California

BRUCE L. BRALEY, Iowa

(III)

C O N T E N T S

Page

Hearing held on February 16, 2011 ....................................................................... 1

Statement of:

Brill, Alex M., research fellow, American Enterprise Institute; Andrew

B. Busch, global currency and public policy strategist, BMO Capital

Markets’ Investment Banking Division; Chris Edwards, director, Tax

Policy Studies, CATO Institute; and Josh Bivens, economist, Economic

Policy Institute .............................................................................................. 49

Bivens, Josh ............................................................................................... 85

Brill, Alex M. ............................................................................................. 49

Busch, Andrew B. ...................................................................................... 60

Edwards, Chris .......................................................................................... 67

Taylor, John B., Ph.D., Mary and Robert Raymond professor of economics

at Stanford University and George P. Shultz senior fellow in economics

at Stanford University’s Hoover Institution; Russell Roberts, Ph.D.,

professor of economics, George Mason University, J. Fish and Lillian

F. Smith distinguished scholar, Mercatus Center, research fellow, Stanford University’s Hoover Institution; and J.D. Foster, Ph.D., Norman

B. Ture senior fellow in the economics of fiscal policy, the Heritage

Foundation ..................................................................................................... 6

Foster, J.D. ................................................................................................ 23

Roberts, Russell ......................................................................................... 18

Taylor, John B. .......................................................................................... 6

Letters, statements, etc., submitted for the record by:

Bivens, Josh, economist, Economic Policy Institute, prepared statement

of ..................................................................................................................... 88

Brill, Alex M., research fellow, American Enterprise Institute, prepared

statement of ................................................................................................... 51

Buerkle, Hon. Ann Marie, a Representative in Congress from the State

of New York, prepared statement of ........................................................... 103

Busch, Andrew B., global currency and public policy strategist, BMO

Capital Markets’ Investment Banking Division, prepared statement of .. 62

Edwards, Chris, director, Tax Policy Studies, CATO Institute, prepared

statement of ................................................................................................... 69

Foster, J.D., Ph.D., Norman B. Ture senior fellow in the economics of

fiscal policy, the Heritage Foundation, prepared statement of ................. 25

Roberts, Russell, Ph.D., professor of economics, George Mason University,

J. Fish and Lillian F. Smith distinguished scholar, Mercatus Center,

research fellow, Stanford University’s Hoover Institution, prepared

statement of ................................................................................................... 20

Taylor, John B., Ph.D., Mary and Robert Raymond professor of economics

at Stanford University and George P. Shultz senior fellow in economics

at Stanford University’s Hoover Institution, prepared statement of ........ 8

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THE STIMULUS: TWO YEARS LATER

WEDNESDAY, FEBRUARY 16, 2011

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON REGULATORY AFFAIRS, STIMULUS

OVERSIGHT AND GOVERNMENT SPENDING,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The committee met, pursuant to notice, at 10 a.m., in room HVC

210, Capitol Visitor Center, Hon. Jim Jordan (chairman of the committee) presiding.

Present: Representatives Jordan, Buerkle, Labrador, Kucinich,

and Cummings.

Staff present: Chris Hixon, deputy chief counsel, oversight; Molly

Boyl, parliamentarian; Tyler Grimm, professional staff member;

Mark D. Marin, senior professional staff Member; Justin LoFranco,

press assistant; Ben Cole, policy advisor and investigative analyst;

Linda Good, chief clerk; Laura Rush; deputy chief clerk; Adam

Fromm, director of Member liaison and floor operations; Jeff

Wease, deputy CIO; Drew Colliatie, staff assistant; Mike Bebeau

and Gwen D’Luzansky, assistant clerks; Carla Hultberg, minority

chief clerk; Lucinda Lessley, minority policy director; Dave Rapallo,

minority staff director; Suzanne Sachsman Grooms, minority chief

counsel; Cecelia Thomas, minority deputy clerk; and Alex Wolf, minority professional staff Member.

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

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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 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 passage would

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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 unemVerDate 11-MAY-2000 12:42 Jul 26, 2011 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\67173.TXT KATIE PsN: KATIE
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ployment 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

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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. KUCINICH. 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 stating 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 7 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 heard Mr.

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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

hands.

[Witnesses sworn.]

Mr. JORDAN. Let the record reflect that all witnesses answered

in the affirmative. Thank you, and we will start with Mr. Taylor.

STATEMENTS OF JOHN B. TAYLOR, PH.D., MARY AND ROBERT

RAYMOND PROFESSOR OF ECONOMICS AT STANFORD UNIVERSITY AND GEORGE P. SHULTZ SENIOR FELLOW IN ECONOMICS AT STANFORD UNIVERSITY’S HOOVER INSTITUTION; RUSSELL ROBERTS, PH.D., PROFESSOR OF ECONOMICS, GEORGE MASON UNIVERSITY, J. FISH AND LILLIAN F.

SMITH DISTINGUISHED SCHOLAR, MERCATUS CENTER, RESEARCH FELLOW, STANFORD UNIVERSITY’S HOOVER INSTITUTION; AND J.D. FOSTER, PH.D., NORMAN B. TURE SENIOR

FELLOW IN THE ECONOMICS OF FISCAL POLICY, THE HERITAGE FOUNDATION

STATEMENT OF JOHN B. TAYLOR, PH.D.

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 1970’s, 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 0.04 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 someVerDate 11-MAY-2000 12:42 Jul 26, 2011 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\67173.TXT KATIE PsN: KATIE
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times 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.

[The prepared statement of Mr. Taylor follows:]

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Mr. JORDAN. Thank you, Dr. Taylor.

Dr. Roberts.

STATEMENT OF RUSSELL ROBERTS, PH.D.

Mr. ROBERTS. Thank you, Chairman Jordan, Ranking Member

Kucinich, and distinguished members of the subcommittee.

Over the last 2 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 woeVerDate 11-MAY-2000 12:42 Jul 26, 2011 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\67173.TXT KATIE PsN: KATIE
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fully 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 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 multiequation models of the economy are not science. They are pseudoscience, 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 $11⁄2 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.

[The prepared statement of Dr. Roberts follows:]

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Mr. JORDAN. Thank you, Dr. Roberts.

Dr. Foster.

STATEMENT OF J.D. FOSTER, PH.D.

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

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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 moneys 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.

[The prepared statement of Mr. Foster follows:]

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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 backward.

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 longterm rate of interest something on the order of 21⁄2 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 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 is the

key to short-term and long-term prosperity. Short-term because

34

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 3 years, 4 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 2, 3 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

35

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 information referred to follows:]

[NOTE.—No insert/information provided.]

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.

36

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 1970’s, 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. OK, 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.

37

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

38

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. OK, I have seven questions. I will come back to

you, I promise. Yes or no?

Mr. ROBERTS. A little bit, yes. Surely.

Mr. CUMMINGS. OK. Dr. Foster.

Mr. FOSTER. On net, no.

39

Mr. CUMMINGS. OK. 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. OK, 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. OK, 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. OK. 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.

40

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 benefited from that are benefiting. 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 benefited, 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.

41

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. OK, let me go to Mr. Foster, and then I want to followup 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 is the problem.

Mr. JORDAN. OK, 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 is 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. OK, 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.

42

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 FiVerDate 11-MAY-2000 12:42 Jul 26, 2011 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\67173.TXT KATIE PsN: KATIE
43

nancial 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 10-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.

44

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 information referred to follows:]

[NOTE.—No insert/information provided.]

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 reaVerDate 11-MAY-2000 12:42 Jul 26, 2011 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\67173.TXT KATIE PsN: KATIE
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sons 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 is 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 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, conVerDate 11-MAY-2000 12:42 Jul 26, 2011 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\67173.TXT KATIE PsN: KATIE
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sumers 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

1970’s 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

47

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

48

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 hands.

[Witnesses sworn.]

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.

49

STATEMENT OF ALEX M. BRILL, RESEARCH FELLOW, AMERICAN ENTERPRISE INSTITUTE; ANDREW B. BUSCH, GLOBAL

CURRENCY AND PUBLIC POLICY STRATEGIST, BMO CAPITAL

MARKETS’ INVESTMENT BANKING DIVISION; CHRIS EDWARDS, DIRECTOR, TAX POLICY STUDIES, CATO INSTITUTE;

AND JOSH BIVENS, ECONOMIST, ECONOMIC POLICY INSTITUTE

STATEMENT OF ALEX M. BRILL

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 2-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 28,

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

50

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 $221⁄2

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, 2 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.

[The prepared statement of Mr. Brill follows:]

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Mr. JORDAN. Thank you, Mr. Brill.

Mr. Busch.

STATEMENT OF ANDREW B. 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 2 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 2 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 2008, the financial markets reacted positively upon hearing the news that a large stimulus

61

package was being discussed and debated in Washington, DC. 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 10, 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, Moodys.com, obviously, in November 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 U.S. 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.

[The prepared statement of Mr. Busch follows:]

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Mr. JORDAN. I appreciate that testimony, Mr. Busch. You can finish up when we get to questions.

Mr. Edwards.

STATEMENT OF CHRIS 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 Web

site at Cato, downsizinggoverment.org. We go through every Department, we talk about the various failures of all the programs.

But second, 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

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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 policymaker’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 high 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.

[The prepared statement of Mr. Edwards follows:]

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Mr. JORDAN. Thank you, Mr. Edwards.

Dr. Bivens.

STATEMENT OF JOSH 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

United States 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 2000’s 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 2000’s.

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 was not the essential problem, you

have to answer the question, then, why did almost 9 million people

lose their jobs in a 2-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

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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 1970’s 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 2 years, fiscal support

works.

Third, the timing was right. Basically GDP contracted at about

a 5 percent annual rate in the 9-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 9-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.

Last, just a couple of words on the really easy debating point deployed against ARRA, the sort of ritual trotting out of the RomerBernstein 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 6 month period in late 2008, early 2009. The blue chip consensus was GDP

would contract by 11⁄2 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

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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.

[The prepared statement of Mr. Bivens follows:]

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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 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 OK. 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,

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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 3 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 RomerBernstein 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 3 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.

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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 5 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,

‘‘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 organizaVerDate 11-MAY-2000 12:42 Jul 26, 2011 Jkt 000000 PO 00000 Frm 00101 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\67173.TXT KATIE PsN: KATIE
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tions 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 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

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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 kind of an approach, which would parallel

what happened during the New Deal with the WPA, 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 moneys?

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

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ployment, 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, $11⁄2 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 judgment being made that for some

reason, Congress thought 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.

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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

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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 moneys 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, 2 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 adjourned.]

[The prepared statement of Hon. Ann Marie Buerkle follows:]

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