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THE IMPACT OF THE RECOVERY ACT 

ON ECONOMIC GROWTH 

HEARING 

BEFORE THE

JOINT ECONOMIC COMMITTEE 

CONGRESS OF THE UNITED STATES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

OCTOBER 29, 2009 

Printed for the use of the Joint Economic Committee 

( 

(II) 

JOINT ECONOMIC COMMITTEE 

[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress] 

HOUSE OF REPRESENTATIVES 

CAROLYN B. MALONEY, New York, Chair 

MAURICE D. HINCHEY, New York 

BARON P. HILL, Indiana 

LORETTA SANCHEZ, California 

ELIJAH E. CUMMINGS, Maryland 

VIC SNYDER, Arkansas 

KEVIN BRADY, Texas 

RON PAUL, Texas 

MICHAEL C. BURGESS, M.D., Texas 

JOHN CAMPBELL, California 

SENATE 

CHARLES E. SCHUMER, New York, Vice 

Chairman 

JEFF BINGAMAN, New Mexico 

AMY KLOBUCHAR, Minnesota 

ROBERT P. CASEY, JR., Pennsylvania 

JIM WEBB, Virginia 

MARK R. WARNER, Virginia 

SAM BROWNBACK, Kansas, Ranking Minority 

JIM DEMINT, South Carolina 

JAMES E. RISCH, Idaho 

ROBERT F. BENNETT, Utah 

GAIL COHEN, Acting Executive Director 

JEFF SCHLAGENHAUF, Minority Staff Director 

(III) 

C O N T E N T S 

MEMBERS

Hon. Carolyn B. Maloney, Chair, a U.S. Representative from New York .......... 1 

Hon. Kevin Brady, a U.S. Representative from Texas ......................................... 2 

Hon. Sam Brownback, Ranking Minority, a U.S. Senator from Kansas ............. 4 

Hon. Maurice D. Hinchey, a U.S. Representative from New York ...................... 5 

WITNESSES

J. Steven Landefeld, Director of the Bureau of Economic Analysis, U.S. Department of Commerce, Washington, DC .......................................................... 6 

Karen Dynan, Vice President, Co–Director of the Economic Studies Program 

and Robert S. Kerr Senior Fellow, Brookings Institution, Washington, DC ... 18 

Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship, MIT’s Sloan 

School of Management, Senior Fellow, Peterson Institute for International 

Economics, Cambridge, MA, and Washington, DC ........................................... 20 

Mark Zandi, Chief Economist, Moody’s Economy.Com, Philadelphia, PA .......... 22 

Kevin A. Hassett, Senior Fellow and Director of Economic Policy, American 

Enterprise Institute, Washington, DC ............................................................... 24 

SUBMISSIONS FOR THE RECORD

Prepared statement of Representative Carolyn B. Maloney, Chair .................... 52 

Prepared statement of Senator Sam Brownback .................................................. 52 

Prepared statement of J. Steven Landefeld .......................................................... 53 

Prepared statement of Representative Michael C. Burgess, M.D. ...................... 55 

Letter from Representative Michael C. Burgess, M.D. to Karen Dynan, Kevin 

A. Hassett, Simon Johnson, J. Steven Landefeld, and Mark Zandi ................ 56 

Prepared statement of Karen E. Dynan ................................................................ 61 

Prepared statement of Simon Johnson .................................................................. 66 

Prepared statement of Mark Zandi ........................................................................ 76 

Prepared statement of Kevin A. Hassett ............................................................... 93 

Letter from to Senator Amy Klobuchar to Karen Dynan, Kevin A. Hassett, 

Simon Johnson, J. Steven Landefeld, and Mark Zandi .................................... 117 

Response from J. Steven Landefeld to Senator Amy Klobuchar ......................... 119 

Responses from Mark Zandi to Senator Amy Klobuchar ..................................... 121 

(1) 

THE IMPACT OF THE RECOVERY ACT 

ON ECONOMIC GROWTH 

THURSDAY, OCTOBER 29, 2009 

CONGRESS OF THE UNITED STATES, 

JOINT ECONOMIC COMMITTEE, 

Washington, DC. 

The committee met, pursuant to call, at 10:02 a.m., in Room 

2237, Rayburn House Office Building, The Honorable Carolyn B. 

Maloney (Chair) presiding. 

Representatives present: Maloney, Hinchey, Cummings, 

Brady, and Burgess. 

Senators present: Brownback. 

Staff present: Paul Chen, Gail Cohen, Nan Gibson, Colleen 

Healy, Lydia Mashburn, Jeff Schlagenhauf, Ted Boll, and Robert 

O’Quinn. 

OPENING STATEMENT OF THE HONORABLE CAROLYN B. 

MALONEY, CHAIR, A U.S. REPRESENTATIVE FROM NEW YORK 

Chair Maloney. The meeting will come to order. 

First, I would like to welcome all of the panelists today and note 

we have a special delegation visiting with us from China. They are 

professors and economic leaders in their country, and they are part 

of a State Department leadership program on economics. So I am 

delighted that they are joining us here today. 

Today’s report from the Bureau of Economic Analysis on third 

quarter gross domestic product provides welcome evidence that the 

economy is moving from recession to recovery. When the President 

took office in January, our economy was on the brink of an economic disaster, and we were shedding 700,000 jobs a month. There 

was no end in sight to the recession that started in December 2007. 

The idea that the economy would achieve positive growth so soon 

would have surprised many. 

Today, it is clear that the economy is moving in the right direction. GDP rose by 3.5 percent in the third quarter, after having 

fallen for an unprecedented four straight quarters. This is concrete 

evidence of the wisdom of the Recovery Act and the positive effect 

it has had on the economy in just 8 short months. 

Last week, Dr. Christina Romer, the President’s Chair of the 

Council of Economic Advisers, presented us with compelling evidence that the economy is rebounding largely because of the Recovery Act. She testified that the Recovery Act added between 3 and 

4 percentage points to economic growth in the third quarter, far beyond what the opponents of the Recovery Act thought possible. 

2 

Another piece of welcome news is that personal consumption 

grew by 3.4 percent in the third quarter, largely due to actions 

taken by Congress and the Administration. We are finally seeing 

signs that consumers are spending more, which could spur businesses to hire more workers to meet renewed demand for their 

goods and services. 

I expect that legislation that I worked tirelessly on to end the 

most abusive practices of the credit card companies, the Credit 

Card Holders’ Bill of Rights, which Congress passed on an overwhelming bipartisan basis, will help increase consumers’ demand 

for credit and encourage creditworthy borrowers to spend. 

The Financial Services Committee recently passed a bill I also 

introduced to speed up the implementation date so that these 

measures would go into effect on December 1st. 

Despite significant legislative accomplishments that brought us 

from economic downfall, I believe we still have a long way to go before the economy fully recovers. The most pressing economic issue 

for the nation is job creation. The stimulus has helped Americans 

in need weather the storm, but we must do more to get people back 

to work. I look forward to the ideas that our distinguished witnesses have about translating our economic growth into job growth 

and their suggestions about any additional measures Congress can 

take to spur businesses to create more jobs. 

One group that I am particularly concerned about is the longterm unemployed. The longer someone stays unemployed, the harder it is for them to find work. 

The long-term unemployed are stuck between a rock and a hard 

place. First, they are suffering now, which is why the House has 

already passed legislation expanding unemployment insurance; and 

I am optimistic that it will soon pass in the Senate. Second, the 

long-term jobless, those who have been unemployed for 6 months 

or more, may suffer in the future. Even when the economy recovers, workers who have been unemployed for a long time may no 

longer have the skills necessary to be competitive in the workforce. 

We must come up with creative ways of helping the long-term unemployed maintain their skills or develop new skills so that once 

we get back on track and start creating jobs they will not be left 

behind. 

I thank our distinguished panel of witnesses for their testimony; 

and I look forward to hearing their thoughts on the most important 

issues we face, sustaining our economic progress and creating jobs 

for the American people. 

[The prepared statement of Representative Maloney appears in 

the Submissions for the Record on page 52.] 

Chair Maloney. I now recognize Mr. Brady for 5 minutes. 

OPENING STATEMENT OF THE HONORABLE KEVIN BRADY, A 

U.S. REPRESENTATIVE FROM TEXAS 

Representative Brady. Thank you, Madam Chairwoman. I am 

pleased to join you in welcoming Dr. Landefeld and other witnesses 

before the committee this morning. 

In its preliminary report released today, the Bureau of Economic 

Analysis estimates America’s real gross domestic product grew at 

an annualized rate of 3.5 percent during the third quarter of this 

3 

year. This is good economic news after three quarters of contraction 

and is directly attributable to the unprecedented $1.3 trillion injection of liquidity by the Federal Reserve Board into the U.S. economy. And it should be noted that most of the growth this quarter 

is attributable to one-time events, the Cash for Clunkers program 

and the end of inventory liquidation. 

While some may promote the stimulus as the savior of the economy, it is a claim only the Balloon Boy’s dad would make. Since 

the American Recovery and Reinvestment Act was signed into law, 

2.7 million payroll jobs have been lost, the unemployment rate is 

far above White House promises, and 49 of 50 States have fewer 

jobs. 

The size of the much-touted stimulus is minor when compared to 

the massive injection by the Fed. And last week’s honest admission 

by the Chairwoman of the President’s Council of Economic Advisers 

that the stimulus will likely be contributing little to further economic growth by mid-2010 only confirms the critics were right. The 

stimulus is too slow, too wasteful, and too unfocused on jobs. 

Even with today’s positive news, this is no time to be conducting 

an end zone dance. Some economists may say the recession is over, 

but most American families disagree. A jobless recovery is no recovery. In fact, we may well be facing a ‘‘job loss’’ recovery, as UCLA 

economist Lee Ohanian recently warned. 

To keep it in perspective, we all hope today’s report signals that 

the economy has hit bottom, but there is a real possibility we could 

bounce along the bottom for some time. Looking forward, a sustainable recovery will only occur if the private sector, not the government, is the driver of economic growth. 

Unfortunately, each day we hear reports of more and more American businesses who are delaying key investment decisions—and 

the jobs that go with it—due to uncertainty over Washington’s actions on health care, cap-and-trade, burdensome new regulations, 

and proposed higher taxes on income, energy, and investment. Concerns are rife over the growing debt and the excessive influence of 

labor unions on the decisions and policies of this White House and 

Congress. 

Amid this impulsive, government-centric environment, many 

CEOs and small business owners will hesitate to risk major sums 

of precious capital on projects whose returns could be limited or 

nullified altogether by the unpredictable political winds blowing 

through Washington on any given day. It is tough enough to predict the marketplace. Predicting the marketplace in Washington is 

overwhelming. 

If we want a sustained economic recovery, it is time to let the 

market work. In addition to restoring the primacy to the free market here at home, a sizable and proven opportunity for economic recovery lies in selling American goods and services abroad. I would 

encourage the Obama Administration and Congress to stop ignoring the one-fifth of the American workforce whose jobs are tied directly to trade. Instead, I urge Democrats and Republicans alike to 

become strong advocates for opening new markets abroad and giving American companies and workers a chance to compete and win 

on a level playing field throughout the world. A good start is with 

4 

the potential new customers in Colombia, Panama, and South 

Korea. 

America is falling behind in the international marketplace. It is 

costing us sales, and it is costing us jobs. 

As I conclude, let me tell Dr. Landefeld I appreciate the Bureau’s 

efforts to produce accurate, reliable, and timely economic data that 

are more reflective of today’s economy. In many respects, our statistical measures were developed for an earlier industrial economy, 

but private service-producing industries account today for more 

than 68 percent of our GDP. I am encouraged by your efforts so far 

to improve the measurements of research and development spending and integrate the R&D satellite account in the calculation of 

GDP by 2013. I am interested in your efforts to improve the measurement of other types of intangible expenditures, such as the development of new business models, the creation of artistic or literary originals, and the design of new products and services. Investments in these nontechnical innovations can also generate 

enormous income and wealth. 

Turning to international statistics, I would also like to hear what 

your Bureau, the Census Bureau, and the Bureau of Labor Statistics are doing to improve the measurement of trade and services. 

Dr. Landefeld, I look forward to hearing your testimony. 

Chair Maloney. The Chair recognizes the ranking minority 

member, Senator Brownback. 

OPENING STATEMENT OF THE HONORABLE SAM BROWNBACK, RANKING MINORITY, A U.S. SENATOR FROM KANSAS 

Senator Brownback. Thanks, Chairman Maloney. I appreciate 

that. And sorry for coming in late. 

I want to associate myself with Congressman’s Brady’s comments. I think he does a good job of analyzing and putting forward 

the information. Looking forward to the presentation, Doctor, and 

also the panel afterwards, to hear that. 

Before I go on—and I guess she is not in the room—but Nan Gibson, I understand, is heading over to the Council of Economic Advisers; and I want to recognize her for years of contribution. That 

is quite a move for her, and it is going to be a loss for the committee overall. She does a great job. 

Madam Chairman, I think we need to look at the specifics of 

what has taken place, and hopefully with the next panel we can. 

Because the world community is yelling at us about our fiscal policies, saying that, yes, we need to do some of these things monetarywise, although I think it is time we start looking at raising of interest rates, as the Australians have done and several other countries 

are looking at as a way of stabilizing our currency. I think what 

the Fed has done has been good overall, but it is time to start sending some signals in the marketplace to support the dollar, and it 

will be interesting to hear people coming up on that. 

Also, I am delighted to see the positive economic growth after 

having so many quarters of negative growth. But when you parse 

it, a good portion of this is auto sales. And I was supportive of the 

Cash for Clunkers program because I thought this is an economic 

stimulus, not a government stimulus, which is what I thought we 

needed. It was also $3 billion instead of the $780 billion that was 

5 

in it. And it seems to me we ought to look at ways to pull back 

on the things that stimulate the government and support the 

things that stimulate the economy as we move forward to get our 

fiscal policy under control and to stimulate the thing we want rather than the thing we can’t afford. And I would hope we could talk 

some as we move forward on this, how we can get our spending 

down and get our economic activity up, which is what we have got 

to do at the end of the day. 

I am delighted to be here, look forward to some of the interaction 

and the testimony. Thank you, Madam Chairman. 

[The prepared statement of Senator Brownback appears in the 

Submissions for the Record on page 52.] 

Chair Maloney. Thank you, and the Chair recognizes Mr. Hinchey for 5 minutes. 

OPENING STATEMENT OF THE HONORABLE MAURICE D. 

HINCHEY, A U.S. REPRESENTATIVE FROM NEW YORK 

Representative Hinchey. Well, just briefly, Madam Chairman, 

thank you very much. 

Dr. Landefeld, I look very much forward to hearing what you are 

going to tell us. Because what you are going to say is, of course, 

very important in describing the kind of circumstances that we 

have to deal with. And we know that this economic condition that 

we are dealing with is one of the most severe in the history of this 

country. It is just secondary, and secondary only because of the actions that have been taken to the collapse of 1929. It is very close 

to being a deep recession. So what is being done is very, very important. 

No question about it that the Economic Investment and Recovery 

Act is entirely significant in what has been taking place. The economic conditions that we are experiencing would be far worse if it 

had not been for that so-called stimulus bill and the money that 

is being put out into this economy, addressing the needs which 

have not been addressed adequately for decades. And even though 

a fraction of that stimulus bill has only been out there, roughly 25 

percent, maybe it is up to 30 percent now, the movement of that 

bill forward is going to continue to have significant positive effects. 

Some of us believe that that stimulus bill is only about half the 

size that it ought to be. There ought to be a lot more stimulation 

going on in the context of this economy to deal with the internal 

needs. And the main focus of attention has to be the production of 

jobs, because it is the working people of this country that determine the quality of the economy. The gross domestic product is 

based upon, to a large extent, the activities of working Americans, 

blue and white collar working Americans. So we are going to continue to do everything that we can to stimulate this economic circumstance, get it back to normal, and do so in the context of creating as many jobs as possible. 

And in the context of that also, the efforts that are being put forward now to stimulate new technology growth, particularly technology growth that is going to drive this country toward energy 

independence. All of these things are critically important, and this 

government has to be very carefully focused on the responsibilities 

6 

that it has to upgrade the quality of this economy and primarily 

upgrade the quality of the working Americans. 

So I thank you very much, Dr. Landefeld, for coming here; and 

we very much anticipate what you are going to say. 

Thank you, Madam Chairman. 

Chair Maloney. Thank you very much. 

I would like to introduce Dr. Landefeld. He is the Director of the 

Bureau of Economic Analysis. And prior to becoming Director in 

1995, he served in a number of other capacities at BEA, including 

Deputy Director and the Associate Director for International Economics. While at BEA, Dr. Landefeld has led a number of pioneering statistical and management initiatives that have been recognized nationally and internationally. 

Prior to his arrival at BEA, Dr. Landefeld served as Chief of 

Staff for the President’s Council of Economic Advisers. He has authored numerous professional articles and has received many national and international awards for his work, including the President’s Distinguished Executive Award. He holds a Ph.D. in economics from the University of Maryland. 

Welcome, and we look forward to your testimony. Thank you. 

STATEMENT OF J. STEVEN LANDEFELD, DIRECTOR OF THE 

BUREAU OF ECONOMIC ANALYSIS, U.S. DEPARTMENT OF 

COMMERCE, WASHINGTON, DC 

Dr. Landefeld. Thank you, Madam Chair, Mr. Brownback, Mr. 

Brady, and Mr. Hinchey. Thank you for inviting me to describe the 

third quarter gross domestic product and related statistics that the 

Bureau of Economic Analysis released this morning. 

These advance statistics are, as always, based upon preliminary 

source data that will be revised as more complete and accurate 

data become available. Tracking an economy that is changing as 

rapidly as the U.S. economy is changing right now is a challenging 

task, but we are committed to producing advance estimates that 

provide an accurate general picture of economic activity. That picture will become clearer as more comprehensive source data become available in the months to come. These early snapshots are 

designed to provide public and private decision makers with a reliable early read on the evolving U.S. economy. 

Let me walk you through the details of today’s release, and then 

I will be happy to answer any questions that you may have. 

The advance estimates that we released this morning show that 

in the third quarter of 2009, real GDP increased 3.5 percent at an 

annual rate. In the second quarter, the rate of decline in real GDP 

moderated, decreasing 0.7 percent, following a sharp 6.4 percent 

decrease in the first quarter of this year. Real GDP has declined 

five out of the six quarters from the fourth quarter of 2007, which 

NBER has determined was the start of this recession, to the second 

quarter of 2009. 

As you know, GDP is comprised of many different components. 

I want to discuss the highlights of changes in these components. 

In the third quarter, consumer spending, inventory investment 

by business, residential investment, exports, and government 

spending all rose. These increases were partly offset by a rise in 

imports. 

7 

The price index for gross domestic purchases, which is the broadest measure of inflation confronted by consumers, businesses, and 

government, increased 1.6 percent, following an increase of 0.5 percent in the second. After falling for the first two quarters of this 

year, energy prices rose sharply in the third quarter. Excluding 

food and energy prices, inflation actually slowed. 

Motor vehicles, which show up in all the components of GDP, 

from consumer spending to inventories, exports, and imports, 

raised real GDP in the third quarter by 1.7 percentage points. Excluding the effects of motor vehicles, real GDP increased 1.9 percent in the third quarter. 

Consumer spending, which accounts for over two-thirds of GDP, 

increased 3.4 percent in the third quarter, following a decrease of 

1 percent in the second. Motor vehicle purchases, spurred by the 

Cash for Clunkers rebates in July and August, accounted for a 

large share of this increase in the quarter, although real spending 

on other durable goods, nondurable goods, and services also rose. 

Residential construction rose in the third quarter for the first increase in 15 quarters, prior to which it had subtracted almost a full 

percentage point from GDP growth over that period. 

Business nonresidential fixed investments—investments in new 

plants, offices, equipment, and software, that is—fell in the third 

quarter but at a slower pace than in the second. Business spending 

on durable equipment and software rose in the third quarter. And 

the rate of decline in investment in nonresidential structures also 

slowed in the third quarter. 

Business inventory investment provided a positive contribution 

to the change in real GDP, as businesses drew down their inventories at a slower rate than they had in the second and first quarters. Therefore, more sales were of goods and services produced in 

the third quarter than out of inventories. 

Real exports of goods and services increased 15 percent in the 

quarter. This is the first increase in real exports in five quarters. 

Real imports of goods and services registered an even larger increase than exports, rising 16 percent in the quarter. The rise in 

imports partly reflects the strengthening of GDP, but spending on 

imports is subtracted in the computation of GDP because they do 

not represent U.S. production. 

Turning to spending on goods and services by the Federal Government, it increased 8 percent in the third quarter, slowing from 

an increase of 11 percent in the second. The slowdown in the rate 

of Federal spending was accounted for by defense spending. Spending by State and local governments fell 1 percent in the third quarter, in contrast to an increase of 4 percent in the second. 

Turning to the American household, real disposable personal income, that is personal income less personal taxes adjusted for inflation, was boosted in the second quarter by provisions of the American Recovery and Reinvestment Act of 2009. Coming off the tax 

reductions and government benefits included in the Recovery Act, 

real disposable personal income declined in the third quarter after 

increasing in the second. The third quarter personal savings rate 

was 3.3 percent, compared to 4.9 percent in the second. 

Since the second panel at this morning’s hearings will address 

the effects of the Recovery Act, let me conclude by describing how 

8 

it is reflected in GDP and the national accounts. BEA’s national accounts include the effects of Federal outlays and tax cuts included 

in the Recovery Act, but because most of the outlays are in the 

form of tax reductions, grants to State and local governments, and 

one-time payments for retirees, their effects in GDP show up indirectly through their effects on consumer spending, on State and 

local government spending, and residential investment. Thus, 

BEA’s accounts do not directly identify the portion of GDP expenditures that is funded by the Recovery Act. That is what the second 

panel is going to provide you with. 

I would now be glad to answer any questions that you may have. 

[The prepared statement of J. Steven Landefeld appears in the 

Submissions for the Record on page 53.] 

Chair Maloney. Thank you very much for your testimony. 

Can you measure the direct impact of the Recovery Act on the 

third quarter of GDP? Can you measure how it contributed to the 

3.5 percent? 

Dr. Landefeld. Well, unfortunately, our job as the producers of 

the national accounts is to produce estimates of what did happen. 

And because most of what was in the Recovery Act was in the form 

of things like one-time payments to Social Security retirees, reductions in taxes, outlays to State and local governments, certainly, for 

example, some of those State and local governments had less sharp 

cuts than they otherwise would have, but to know what the impact 

of that was requires some kind of economic model which the second 

panel can tell you about in terms of what the effect would be. So, 

to sum up, our job is to tell you what happened, and the economist’s job is to tell you why it happened. 

Chair Maloney. Well, would you be able to point out how much 

of the increase in the GDP, when you are telling us what happened, how much of it is due to increases in consumer spending or 

government spending? Is there any way you can track that? 

Dr. Landefeld. Yes. Certainly we are able to tell you, for example, that consumer spending rose at a rate of 3.5 percent and that 

the largest single component of that was the Cash for Clunkers 

program, or I should say the increase in auto sales which were 

spurred by the July and August Cash for Clunkers program. 

Those are the kinds of things that we can tell you about in terms 

of the effect on GDP. What the other factors were and how much 

was precisely due to those transfer payments or tax reductions is 

difficult to tell without sort of the counterfactual as to what would 

have happened to, say, spending on motor vehicles during the quarter without the Cash for Clunkers program. 

Chair Maloney. You noted that for the first time the residential 

building and investment is increasing. Do you think that that was 

the home buyer tax credit? Can you tie why that is happening? 

Dr. Landefeld. Well, certainly you would look to that as one of 

the factors. Because we had residential investment which had subtracted half a percentage point from growth in the second quarter, 

added half a percentage point to growth in the third quarter; and 

that is, as I said in my testimony, the first time we have seen that 

happen in 15 quarters. So presumably those lower interest rates 

and other factors are at work there. 

9 

Chair Maloney. And what components of GDP contributed the 

most to growth this quarter? 

Dr. Landefeld. Well, the biggest increase was in the personal 

consumption expenditures, which added 2.4 percentage points to 

growth of that 3.5 percent growth rate in real GDP. 

Other important components included the inventory investment, 

slowdown in inventory investment, which added about a point to 

real GDP growth. Exports rose, adding 1.5 percentage points to 

real GDP growth. And government added about a half a percentage 

point to growth. 

And, finally, I would note, as I said in my testimony, that imports rose, which is generally considered a sign of a healthy U.S. 

economy. But they are a subtraction, so they subtracted 2 percentage points from real GDP growth. 

Chair Maloney. Are changes in U.S. net exports consistent with 

growth in Latin America and Asia? 

Dr. Landefeld. It is hard to tell in any particular period what 

is driving it. Certainly the factors include the dollar, the growth in 

other countries, the growth rate in particular domestic demand. 

That is, the financial needs of foreign nations factor into those 

movements. So it is hard to tell. 

Generally, you tend to find during downturns in the economy the 

trade deficit tends to improve; and, as we are coming out, we are 

seeing a little bit of a change in that. But pinning it down to Latin 

America would require I think looking at the changes in exports 

and imports from and to Latin America, which is possible. We 

would be glad to provide you with that answer if you would like 

that. 

Chair Maloney. And you said that net imports subtracted from 

GDP this quarter. Can you tell us if this is due to the increase in 

oil prices or did consumers just consume more? 

Dr. Landefeld. Well, that particular figure I cited, which is a 

plus 2 percent for—I am sorry, minus 2 percent for imports, plus 

1.5 percentage points for exports, is in real, that is, inflation-adjusted terms. So we have taken out of that the increase in oil prices 

in terms of its effect on the quantity of oil or barrels of oil. As I 

said, that is not a factor in that number except to the extent to 

which there was a reaction in terms of domestic demand to consume less as a result of higher prices in the quarter. 

Chair Maloney. And you testified that net exports contributed 

to growth this quarter by 1.5 percentage. And what goods or services contributed the most to this growth? 

Dr. Landefeld. I don’t have a decomposition of that handy. Let 

me see if I can get that for you. I am sorry. 

Chair Maloney. Thank you. If you could get that later. 

Senator Brownback. 

Senator Brownback. Thanks, Madam Chairman. 

I wanted to go at this same export area, but I guess you don’t 

know what areas of exports grew for us? 

Dr. Landefeld. Hold on. Thank you. 

Senator Brownback. Because that is an impressive increase, 

the 14.7 percent on exports. 

Dr. Landefeld. I can tell you in terms—actually, I have gotten 

some numbers here. 

10 

First of all, the increase was pretty widespread in terms of exports. In terms of the largest increases, industrial supplies and materials were first, contributing 5 points to the—5 percentage points 

to the overall—well, that is the biggest. Let me put it—it is a little 

complicated to explain it in terms of the way the table runs. But 

industrial supplies and materials were first. Automobile vehicles, 

engines, and parts were second in leading the increase. But virtually all of the categories showed increases in the quarter. 

Senator Brownback. Now, is that—would that be reflective of 

a decline in the dollar? 

Dr. Landefeld. Having once been head of our international 

group, it is very tricky to try to pin quarterly changes in exports 

and imports to the dollar. It tends to be more of a phased type of 

effect. But certainly that would be one factor one would expect to 

be boosting U.S. exports. 

Senator Brownback. The rising imports you cited could be oil. 

But is that also Cash for Clunkers because of the stimulation of the 

auto market and a lot of those were imports? 

Dr. Landefeld. Part of that could be, because the automotive vehicles, engines, and parts was the largest single category in the 

rise in imports, followed by industrial supplies and material, which 

exclude petroleum. And, actually, the amount in real terms that petroleum contributed was relatively small to the increase. But, you 

know, you have a question of how much came in that quarter that 

was sold versus went into inventories that quarter. So, once again, 

based on our data, it would be difficult to tell stimulation associated with Cash for Clunkers. But that is the largest category. 

Senator Brownback. And the Cash for Clunkers, you are saying without that, growth for the quarter is 1.9 percent. 

Dr. Landefeld. Right. 

Senator Brownback. So that one is a big impact in that quarter. 

Dr. Landefeld. Yes, it is very big, 1.7 percentage points of the 

rise. 

Senator Brownback. And you were saying it is hard then to 

determine in anything else there of the stimulus program or other 

items their impact on the overall quarter. But that one you cite to 

as a policy. 

Dr. Landefeld. We cite that as one of the factors. We don’t attribute the full increase to that. We cite it as a factor that helped 

spur sales, but we don’t cross that line, if you will, to say that was 

the source. 

Senator Brownback. It looks like you are pointing still to problems in the commercial real estate sector, lack of investment in offices, plants. That is still problematic. 

Dr. Landefeld. Yes, that is still in decline, yes. 

Senator Brownback. And you don’t track credit, consumer 

credit? 

Dr. Landefeld. No, the Federal Reserve Board tracks those as 

part of their flow of funds and balance sheet statements. 

Senator Brownback. It seems to me that is one of the areas 

we continue to have a consumer deleveraging, that the credit continues to decline even though there is lots of money out there, at 

least the Fed is putting a lot of money out there. The lack of use 

11 

or borrowing within the system is profound, given the level of 

money that is out there. 

Dr. Landefeld. I think Dr. Dynan on the next panel is an expert 

in many of those financial aspects and their impact on consumer 

spending and saving behavior. 

Senator Brownback. Okay. Thank you. 

Thank you, Madam Chairman. 

Chair Maloney. Mr. Hinchey. 

Representative Hinchey. Thanks, Madam Chairman. Thank 

you, Dr. Landefeld. 

Could you tell us how you would describe the alteration in the 

general economic circumstances over the course of the last 6 

months, particularly with regard to consumer spending and employment? 

Dr. Landefeld. Well, first, let me say, in terms of employment, 

that is the purview of the Bureau of Labor Statistics; and it is wellknown there is a significant lag between changes in real GDP, as 

has been much discussed, and changes in employment. The last recession we had real GDP turned up seven quarters before employment turned up there. So I really can’t discuss the employment effect. 

Representative Hinchey. You can’t talk about the circumstances of the employment and the alteration of that employment over the course of the last 6 months? 

Dr. Landefeld. No, that is really the purview of the Bureau of 

Labor Statistics in terms of trying to describe those changes. 

I can talk about consumption spending. And certainly the picture, with a 3.4 percent increase in this quarter, is much improved. 

You had big decreases in those categories, particularly in the third 

and the fourth quarter. A lot of that has been a function of households’ very large loss in net worth that they have had over time. 

That has had significant impact on households, because they had 

previously relied on capital gains to fund their increases in net 

worth. With the collapse in housing and stock prices, households 

have embarked on efforts to rebuild their balance sheets; and, not 

having available some of those capital gains they had in the past, 

they appear to be doing it much more out of saving out of current 

income. 

Our saving rate here declined to roughly 1 percent, a low, from 

rates of like 7 percent in the mid-1990s to virtually 1 percent or 

zero recently. It bounced up in the second quarter partly in response to the increase in personal income associated with transfers 

in the Recovery Act to 4.9 percent in the second quarter. It has 

come down a bit to 3.3 percent in the current quarter, which is still 

low by historical standards but relative to what we have seen in 

recent years is quite a bit higher than what we have seen. 

So that is an important factor to be borne in mind in terms of 

why consumer spending became so weak, why we are seeing what 

we have seen right now, which was basically the flip side of it is 

that drop in the saving rate as we saw more consumption and a 

little less income in the quarter. It is behind the evolution of the 

consumer spending. 

As I said, though, the mechanism by which that is going to affect 

jobs is something BLS or the next panel can explain to you. But, 

12 

in general, what you see is that when the economy begins to improve, businesses wait to hire until they see a sustained recovery 

and an increase in capacity utilization to a point at which they 

wish to expand operations. 

Representative Hinchey. So if I am hearing you accurately, 

the circumstances are more positive in the third quarter than they 

were in the second quarter. 

Dr. Landefeld. Absolutely, yes. 

Representative Hinchey. What about the first quarter? 

Dr. Landefeld. The first quarter was a very large decline—I am 

sorry, we had a slight increase. I was thinking about the decrease 

in GDP. We had a slight increase. Your bigger decreases were in, 

actually, in the fourth quarter, where consumer spending fell 3.1 

percent. In the third quarter, where it fell 3.5 percent, you saw a 

lot of effect in those two quarters. So it is certainly much improved 

since the latter half of last year. 

Representative Hinchey. Just one last question. Do you have 

any idea about what congressional actions taken over the course of 

the last several months have had the most positive effect on the 

economy, or are you unwilling to talk about that? 

Dr. Landefeld. It is not in my mission. The Bureau of Economic 

Analysis is a statistical agency and doesn’t do policy. 

Representative Hinchey. Thank you. 

Chair Maloney. Mr. Brady. 

Representative Brady. Thank you, Doctor. 

There is a concern that—a growing concern not only in the jobless recovery but a job loss recovery, that we continue to shed jobs 

at an alarming rate, that the growth numbers today are won off 

a much smaller economic base than it was a year or so ago in that 

most of the growth are one-time events or Federal Government 

spending that can’t be sustained. In the job creation area, there 

has been a lot of conjecture and promotion about the stimulus. 

But the Associated Press today said that, after careful review in 

looking at the 30,000 jobs the White House has claimed from contracting through the stimulus, that those job numbers are significantly overstated. The AP reports that in some cases the job numbers were 10 times higher than the actual jobs created. In other 

cases, one job was counted four times. And in the case of a Georgia 

community college, the 280 jobs that were claimed by the White 

House, actually none came from the stimulus. 

From the data you have, can you substantiate the claim that the 

Obama stimulus bill has created or saved up to 1.1 million jobs? 

Dr. Landefeld. In brief, I think that is a question that needs to 

be addressed to the next panel. Because if you want to think about 

the difficulty of it, we saw, for example, state and local spending 

fall 1 percent in real terms in this quarter. 

Representative Brady. Sure. 

Dr. Landefeld. The question is, what would it have been otherwise? I know my wife is a school teacher in Prince Georges County, 

and they were confronting and released a budget with much larger 

cuts than they ultimately enacted. And at least the stated reason 

was offsets from—— 

Representative Brady. Can I ask you this? On the data that 

you have—we have the numbers today based on one-time events 

13 

like cars and inventory, an increase in Federal Government spending. But when you look at personal income, the driver of future demand, personal income is down, current disposable income is down, 

real disposable income is down 3.4 percent. Looking forward, can 

you build a sustainable recovery based on one-time events like 

Cash for Clunkers or temporary government spending? Or are we 

going to need a private-sector recovery driven by demand by U.S. 

consumers? 

Dr. Landefeld [continuing]. In terms of the decrease, yes, indeed, you did see that decrease. But partly what you were seeing 

was an increase as a result of those one-time effects, which began 

to diminish, although many of them still remain in the third quarter number. Extension of unemployment benefits and those kinds 

of things carries through to further quarters. Once again, in terms 

of private versus public sector, that has to be a question for the 

second panel. 

Representative Brady. If personal income, disposable income is 

going down, does demand normally go up at that point? 

Dr. Landefeld. My only point was perhaps somewhat similar to 

yours, is that that increase you saw and then the following decrease was essentially coming off that bubble. So if I do what might 

be a trend line of growth, it is not clear—you might not see that 

decline. I don’t know what the counterfactual is. But I am just saying that part of the reason for the decline was the one-time increase of $250. 

Representative Brady. From an economic standpoint, is continued decline in personal disposable income troubling? 

Dr. Landefeld. Yes. 

Representative Brady. All right. Thank you. Yield back. 

Chair Maloney. Thank you. 

Mr. Cummings. 

Representative Cummings. Thank you very much. 

Mr. Landefeld, in lay terms, can you explain how the change in 

each component of the GDP shows itself to the general public, especially during a recession? 

Dr. Landefeld. Well, I would think the general public should be 

heartened by not only the stronger consumer spending, which as 

we have discussed earlier was in great part related to motor vehicles, which was presumably related to the CARS program, but the 

news on residential housing probably is good news to many people 

in terms of their circumstances. 

It is also heartening that businesses have slowed their rate of 

running down their rate at which they are running down their inventories. Because instead of selling out of inventories, then more 

tends to come out of production, and that requires people at some 

point to produce more products when you are not having it come 

out of inventories. 

The strengthening of investment also is good news, because that 

indicates that businesses are beginning to get back into expansion 

of their capacity, which means it has implications for the labor 

markets and employment in the future. 

Representative Cummings. So you see this as very positive, 

this report? 

14 

Dr. Landefeld. I think the news today of 3.5 percent increase 

and the components in it are hopeful news. 

Representative Cummings. During a recession, are there typical changes to the composition of the GDP that you can identify? 

Dr. Landefeld. Yes. Well, certainly you tend to have—well, first, 

as I mentioned in answering one of the earlier questions, you tend 

to have some improvement in net exports to the trade deficit which 

tends to occur because of weakness in U.S. and overseas demand 

and other factors that tend to occur. You have households do tend 

to pull back a bit on their spending, although that is difficult to do 

when your income is declining. You have to still spend something 

on the basics. And what tends to react very quickly will tend to be 

your inventories on the part of businesses, because those are the 

buffer stocks, if you will, to changes in demand. 

Representative Cummings. And how does the composition of 

the GDP compare in this recession versus previous economic 

downturns? 

Dr. Landefeld. In general—actually, I have a sheet here which 

shows the compositional changes. I think consumer spending is certainly one that tends to stand out, not with all recessions, because 

every recession is a little different. But certainly one of the things 

we are seeing in this downturn has been the sharp fall of consumer 

spending. 

For example, in the 2001 recession, you had actually consumer 

spending continue to grow. Whereas we have had a significant decline in consumer spending, which is related to that phenomena of 

households having lost a lot in terms of their investments and their 

net worth and now having to save more out of current income to 

try and rebuild those. 

Representative Cummings. And what relationship would the 

job loss have to that? 

Dr. Landefeld. Well, since consumer spending is two-thirds of 

the U.S. economy, it is a very important determiner of what is 

going to happen to both the U.S. economy and in turn then their 

needs for employment. 

Representative Cummings. And has loosening fiscal policy always been a hallmark of governmental responses to recession? 

Dr. Landefeld. You know, I would really rather not comment on 

monetary policy. But that is one of the prescriptions, to increase liquidity. 

Representative Cummings. All right. That is okay. That is 

okay. 

We heard last week from Dr. Romer about the impact of the Recovery Act on the economy. In her calculations about how much of 

the change in GDP can be apportioned to the stimulus, do you 

agree with the conclusions of Dr. Romer and the Council of Economic Advisers? 

Dr. Landefeld. As I said earlier, we present the basic data that 

the Council of Economic Advisers and others use to attempt to 

identify what those grants, tax reductions, and one-time payments, 

what their effect will be. We can identify them, we can tell you 

where they are in showing up in incomes, but we can’t tell you how 

much it stimulates demand. 

15 

Representative Cummings. Just a moment ago you talked 

about the fact that the—I guess you were talking about the Cash 

for Clunkers program, and you seemed to be able to do some relationship analysis with regard to consumer spending. Did I misunderstand you? 

Dr. Landefeld. What I was trying to say—and I may have been 

inarticulate in that regard—is that during a quarter when the 

Cash for Clunkers was in effect in late July and August, we saw 

a very sharp rise in motor vehicle sales. And I can tell you with 

precision how much motor vehicles contributed to the rise in consumer spending and how much the overall contribution of motor 

vehicles was to GDP, but exactly how much is a result of the Cash 

for Clunkers is something that is for CEA. And I do believe they 

did an analysis of how much of the Cash for Clunkers was a stimulation of demand versus a rearrangement of demand over time. 

Representative Cummings. And from this report is there any 

way that we can determine whether these positive numbers are an 

anomaly or a true upward trend? 

Dr. Landefeld. Again, our job is not prediction, but it is heartening to see across-the-board improvement in so many components 

of GDP in this quarter. 

Representative Cummings. I see my time is up. Thank you, 

Madam Chair. 

Chair Maloney. Thank you so much. 

Congressman Burgess. 

Representative Burgess. Thank you. 

Thank you, Dr. Landefeld, for being here. 

I want to stay on that point that Mr. Cummings was raising a 

moment ago. Because you said, if I heard you right, that the 3.5 

percent increase in GDP—and you talked about the components 

within that 3.5 percent, but also Cash for Clunkers is indeed one 

of those components, so I guess the anxiety that we have here on 

this side of the dais is what happens? There is no more Cash for 

Clunkers. Was this the equivalent of pouring Red Bull into the 

economy and now we are going to have to come down from that 

caffeinated sugar high that we were able to provide in the summer? 

Dr. Landefeld. Well, again, you know, I can’t look to the future. 

I think it is worth noting that you would still have had a 1.9 increase in real GDP, which is welcome, is a positive growth rate, 

given how long it has been since we had one. 

The other thing I think is useful to look into in considering this 

is that you did have real spending on durable goods, other durable 

goods, nondurable goods, and services also increased. So that provides some—— 

Representative Burgess. I don’t think there is any question, 

and I think you have got it in your testimony, that the savings rate 

during the downturn took a—was markedly different from where 

it had been before. When you look at something like a Cash for 

Clunkers infusion into the economy, what is ahead, what is next 

as far as the decisions that people are likely to make as far as that 

accumulated money they have in that savings? Cash for Clunkers 

obviously was a way to get them to sort of shake them loose and 

bring them back into the marketplace. 

16 

You also have to worry about people who perhaps got back into 

the marketplace who shouldn’t have gotten back into the marketplace and did we create a subprime loan problem within the automotive industry that will manifest itself in 6, 8, 12 months time, 

whenever those notes come due and people have not gotten employment or are not able to repay those loans. 

Dr. Landefeld [continuing]. Again, I am going to defer to the 

next panel. I know many of them have looked at out quarters 

through 2010 and beyond in terms of the effect of the stimulus act 

and other governmental actions in terms of longer-term effects. 

Representative Burgess. Well, let me see then if I can ask you 

something that perhaps you can answer. 

The analogy that we heard back in 2007, early 2007, in regards 

to the Iraq war, we had kind of the competing visions long hard 

slog, last throes of the insurgency. So I heard on one of the news 

shows this morning that we should be playing Happy Days Are 

Here Again, and someone else said maybe those green shoots are 

just the weeds growing in the parking lot that has no cars in it. 

So what is your concept of the end of the recession at the Bureau 

of Economic Analysis? What does economic recovery really mean to 

your Bureau? 

Dr. Landefeld. First of all, our Bureau doesn’t do that. The National Bureau of Economic Research is the official arbiter of the 

end of recessions. In general, though, in terms of real GDP, it is 

interpreted as several quarters of sustained growth in real GDP. 

Representative Burgess. So if we see even that 1.7 percent 

growth of GDP which could be sustained without Cash for 

Clunkers, then as a technical matter the recession is over, even 

though 10 percent of our population, or 17 percent of our population, depending upon who you want to read, is still out of work. 

Dr. Landefeld. Some people would use it, but I think they 

would look at it as several sustained quarters of real GDP growth, 

not just one. 

Representative Burgess. Several sustained quarters being 

more than one? 

Dr. Landefeld. Yes. 

Representative Burgess. Okay. Let me just ask you briefly, because you have referenced trade and the trade balance in your testimony. What is the effect of having—we have had several free 

trade agreements that are pending but not enacted. Panama comes 

to mind. I think North Korea is another one. What is the effect of 

having this undone work out there? Is it at this point hurtful or 

helpful to our overall recovery? 

Dr. Landefeld. I think pinning that to an event in a particular 

quarter would be extraordinarily difficult, even if I were in the 

business of trying to do so. 

Representative Burgess. But over the next year, the effect on 

the economy of—would we be helpful if we would pass these pending free trade agreements? I mean, Congress has sort of languished 

on Colombia for many months. 

Dr. Landefeld. As an economist, we are all in favor of free 

trade. 

Representative Burgess. You are in favor of free trade. 

17 

Dr. Landefeld. Historical experience and most people in the 

postwar era and sources of growth, free trade is part of that. As 

to any particular legislation—— 

Representative Burgess. Let the record show that was an affirmative answer. Thank you. 

[The prepared statement of Michael C. Burgess, M.D. appears in 

the Submissions for the Record on page 55.] 

[A letter from to Representative Michael C. Burgess, M.D. to 

Karen Dynan, Kevin A. Hassett, Simon Johnson, J. Steven 

Landefeld, and Mark Zandi appears in the Submissions for the 

Record on page 56.] 

Chair Maloney. Thank you. I would like to thank you very 

much for your work and for your testimony today. 

I would now like to introduce our second panel and ask them to 

come forward. 

First, Dr. Karen Dynan is Vice President and Co-Director of the 

Economic Studies Program and the Robert S. Kerr Senior Fellow 

at the Brookings Institution, where she focuses on macroeconomics 

and household finance issues. She joined the Brookings Institution 

in September 2009, after 17 years at the Federal Reserve Board. 

She also served as a Senior Economist at the White House Council 

of Economic Advisers. She has published research papers; and they 

cover a range of issues, including household consumption and savings decisions, household financial security, mortgage servicing, 

and the efforts of financial innovation on economic vitality. She received her Ph.D. in economics from Harvard University in 1992. 

Dr. Simon Johnson is a Ronald A. Kurtz Professor of Entrepreneurship at MIT’s Sloan School of Management. He is also a Senior 

Fellow at the Peterson Institute for International Economics in 

Washington, DC; a co-founder of http://baselinescenario.com, a 

widely cited Web site on the global economy; and a member of the 

Congressional Budget Office’s panel of economic advisers. Mr. 

Johnson appears regularly on NPR’s Planet Money podcast in the 

Economist House Calls feature and is a weekly contributor to the 

newyorktimes.com’s Economix, and is very active in many ways. 

Professor Johnson is an expert on financial and economic crisis. 

As an academic and in policy roles and with the private sector over 

the past 20 years, he has worked on severely stressed economic and 

financial situations around the world. He received his Ph.D. from 

MIT. 

Dr. Mark Zandi is the Chief Economist and Co-Founder of 

Moody’s Economy.Com, where he directs the company’s research 

and consulting activities. Moody’s Economy.Com, a division of 

Moody’s, provides economic research and consulting services to 

businesses, governments, and other institutions. His research interests include macroeconomic, financial, and regional economics. Recent areas of research include studying the determinants of mortgage foreclosure and personal bankruptcy, an analysis of the economic impact of various tax and government spending policy, and 

an assessment of the appropriate policy response to bubbles in 

asset markets. Dr. Zandi received his Ph.D. at the University of 

Pennsylvania. 

Welcome. 

18 

Dr. Kevin Hassett is the Director of Economic Policy Studies and 

a Senior Fellow at the American Enterprise Institute. His research 

areas include the U.S. economy, tax policy, and the stock market. 

Previously, he was a senior economist at the Board of Governors 

of the Federal Reserve System, a professor at the Graduate School 

of Business at Columbia University, and a policy consultant to the 

Treasury Department during the George W. Bush and Clinton Administrations. He also served as a top economic adviser to the 

George W. Bush and John McCain Presidential campaigns. He 

holds a Ph.D. in economics from the University of Pennsylvania. 

I welcome all of you; and, beginning with Dr. Dynan, you are recognized for 5 minutes. And let’s proceed with testimony. 

STATEMENT OF KAREN DYNAN, VICE PRESIDENT, CO–DIRECTOR OF THE ECONOMIC STUDIES PROGRAM AND ROBERT S. 

KERR SENIOR FELLOW, BROOKINGS INSTITUTION, WASHINGTON, DC 

Dr. Dynan. Chair Maloney, Vice Chairman Schumer, Ranking 

Members Brady and Brownback and members of the committee, I 

appreciate the opportunity to appear before you today to discuss 

the outlook for consumer spending and the broader economic recovery. 

Beginning with the outlook for consumer spending, the available 

information suggests that the fundamentals will support only moderate growth over the next couple of years. One factor that should 

restrain consumption will be tepid growth in households’ labor income. Although the rate of decline in payroll employment has 

abated in recent months, we are unlikely to see substantial gains 

in the near future. If employment and average hours worked rise 

only slowly, labor income could advance rapidly only if compensation per hour rose rapidly. However, with the unemployment rate 

at its highest levels since the early 1980s, compensation is likely 

to continue to move up quite sluggishly. 

Under current law, consumption will also be restrained by a significant increase in tax payments over the next few years, as several key tax provisions expire. The temporary higher exemption 

limits for the AMT are scheduled to expire at the end of 2009. If 

allowed to do so, this tax will apply to many more taxpayers. In 

addition, the 2001 and 2003 tax cuts, along with the Making Work 

Pay tax credit, are scheduled to expire by the end of 2010. 

Other forces should damp consumption growth relative to aftertax income growth. The most powerful would be the massive declines that we have seen in household wealth. In a recent study, 

I estimated that the ratio of nonpension wealth to income for the 

median household is now below any levels seen during the past 

quarter century. This should induce households to reduce their consumption and increase their saving in order to rebuild their wealth. 

Statistical studies suggest that one fewer dollar of wealth leads 

to a permanent decline in the level of household consumption of 

about three to five cents, with the effect occurring gradually over 

a few years. Based on these results, declines in wealth should 

damp consumption growth this year by between 2 and 3.5 percentage points and hold down next year’s consumption growth by between half and 1 percentage point. 

19 

Consumption will probably also be held down by greater precautionary saving, as the severe recession may have led households 

to revise upward the amount of risk they see in their economic environment. For some households, the precautionary response will 

take the form of reduced borrowing. Borrowing should also be 

crimped by a more restrictive supply of credit, as lenders see higher risk in lending to households and regulatory actions restrict 

lending. 

All told, I expect that consumer spending will move up at a modest pace in coming quarters. Moreover, none of the other major 

components of private demand seem poised for a sharp recovery. 

In the housing sector, a strong rebound in construction is unlikely. The stock of unsold new homes remains high, and housing 

demand will be damped by the weak financial situations of many 

households and tight mortgage lending for people not qualified for 

government-supported loans. 

Moreover, the sharp rise that we have seen in foreclosures poses 

a downside risk to this already weak housing outlook. Although the 

rate at which lenders initiate foreclosures may ease with improving 

economic conditions and new foreclosure prevention programs, the 

rate at which distressed properties are coming to market is still 

building. 

In addition, neither business investment in equipment and structures nor net exports are poised to contribute significantly to the 

near-term recovery. Thus, I share what seems to be the consensus 

view that we are not likely to see the rapid snapback in activity 

that has followed many previous recessions. 

As a consequence, many analysts are exploring policy actions 

that might spur demand. Pushing back the date at which the personal tax provisions expire would provide more support for consumer spending. However, it is imperative that policymakers form 

a plan to bring revenues back in line with spending over the longer 

run. 

Among more targeted policy changes, additional aid to State and 

local governments would reduce the need for cutbacks in employment by those governments. Even if one thinks that State governments should restrain their activities over time, the abrupt cutbacks forced by falling tax revenue in this recession have not 

served the broader economy well. 

Another way to encourage job creation is to offer tax credit for 

firms that hire new workers. Designing effective tax incentives for 

hiring is difficult, though, as a tax credit for all job creation tends 

to distribute money to many firms that would have done the same 

hiring anyway. 

There are several possibilities that would help households who 

have lost their jobs sustain their spending and thereby bolster the 

overall recovery. First is extending unemployment insurance for 

those who are scheduled to exhaust their benefits by the end of this 

year. Second would be temporary assistance for meeting the mortgage obligations of laid-off workers. This would help support their 

spending and, by making mortgage defaults less likely, reduce the 

downside risks to the housing outlook. 

Another way to support the housing market would be to extend 

the first-time home buyer tax credit, which is scheduled to expire 

20 

on December 1st. This would spur some new home sales, but it 

might be a costly way to accomplish this goal, as most of the home 

buyers who would receive the credit would probably have bought 

homes without it. 

Thank you very much. 

[The prepared statement of Karen Dynan appears in the Submissions for the Record on page 61.] 

Chair Maloney. Thank you very much. 

Dr. Johnson. 

STATEMENT OF SIMON JOHNSON, RONALD A. KURTZ PROFESSOR OF ENTREPRENEURSHIP, MIT’S SLOAN SCHOOL OF 

MANAGEMENT, SENIOR FELLOW, PETERSON INSTITUTE FOR 

INTERNATIONAL ECONOMICS, CAMBRIDGE, MA, AND WASHINGTON, DC 

Dr. Johnson. Thank you. 

Until August of last year, I was the Chief Economist at the International Monetary Fund; and I would like to put my remarks in 

a cross-country comparative perspective. I would like to speak specifically about the Recovery Act and then very briefly make the 

comparison with Japan, its experience in the 1990s, which many 

people think is relevant to the United States today, and conclude 

by talking about the adjustment process in the United States and 

how we are doing in that regard. 

So on the fiscal points, first of all, I would say that I am usually 

a skeptic with regard to fiscal policy. I think discretionary fiscal 

policy earned a bad reputation for good reason in most industrialized countries; and I share the view and the IMF shared the view 

that, until about 2007, this was not a good way to respond to impending recession. 

However, I think that circumstances were very different in 2008 

and the beginning of this year. We were facing an extremely severe 

financial crisis. 

I think Mr. Brady made very good points about the actions of the 

Federal Reserve in counteracting the crisis. But it is important 

when you face a major disaster—remember, it is a global financial 

disaster that we are looking at—to also react with discretionary 

expansional fiscal policy. Particularly in the United States, there 

are automatic stabilizers. The increase in payments to people who 

lose their jobs and the reduction in taxes are weaker than in almost any other industrialized country. So I think the Recovery Act 

was well designed. 

And as you may recall, I testified before this committee about 

this time last year in favor of a major fiscal stimulus; and I think 

that it had a positive effect in terms of reducing the job losses, in 

terms of sustaining confidence, which has obviously been shaken 

very badly, as we just heard. 

And I would emphasize in terms of its global impact. You must 

remember at the G–20 summit in April, President Obama and his 

Treasury team were able to take a leadership role and were able 

to corral support from across the world—G–20 represents 90 percent of world GDP—in favor of supportive fiscal policy and as well 

support for the IMF and other measures that have turned out to 

be very timely and appropriate. 

21 

Having said this, I would stress I am not in favor of two more 

stimulus. I think Chairman Maloney put her finger on the key 

problem we face right now, which is jobs. I think output is actually 

going to recover faster than the consensus. Again, the experience 

from many crises across many different kinds of countries is when 

you go down sharply you can come back sharply. This is not going 

to be one of the fastest recoveries on record, for sure. But the key 

issue is going to be the link between output and jobs, and there I 

would also strongly support extension of unemployment insurance. 

I think measures to address the problems of long-term unemployed—Chairwoman Maloney, as you were speaking, I was thinking we should look more carefully at the experience of Australia 

and the United Kingdom, who introduced some serious innovations 

in this area. I can share those with your staff. I didn’t put them 

in my written testimony. I think that is the key issue. 

Further investment in providing skills to people who have not 

done well in this country over the last 20 years—they can’t stay up 

with the modern globalized economy, with information technology 

and so on—is very important, even more important now. These are 

going be to the long-term unemployed, and I think supporting community colleges is one way to do that specifically. 

So my second point—my second set of points is about Japan, and 

I think it is very important to distinguish and be very clear on the 

differences between Japan in 1990 and the United States today. 

Now, we both had credit booms and we both obviously had a massive amount of overborrowing. But in Japan it was the corporate 

sector, and in Japan it wasn’t associated with a big current account 

deficit. They were not spending beyond their means. They just 

went crazy with investment. 

The Japanese corporate debt at the moment of collapse and crisis 

was 200 percent of GDP. And they put that money into real estate, 

but they also put it into crazy amounts of manufacturing capacity. 

It took them 10 years to work that off. 

That is a very different problem from what we are facing, which 

is much more about the household sector and an adjustment at the 

country level—and I think Senator Brownback said this—to overspending. There has to be an adjustment process; and the right 

way to do this adjustment process, as I think you all know, is to 

have a downward movement in consumption, to have a movement 

in the real exchange rate, to have the kind of increase in our exports that we are beginning to see in the data. And this reorientation of the economy will come with a fall in our income and then 

we can get back onto a rapid growth path. 

I think, seen in those terms, our adjustment process is proceeding well. The Japanese strategy through the course of the 

1990s was to try and buffer themselves against having to make 

their kind of adjustment, slightly different situation, with a repeated fiscal stimulus and very easy monetary policy. That wasn’t 

a good choice for Japan particularly. They should have taken the 

adjustment much more in terms of the balance sheets of the corporate sector, they should have more bankruptcies, and they should 

have more explicit up-front recapitalization of their banking system. 

22 

And the United States I think is in the same boat. We should 

make this adjustment, and we are making this adjustment. I think 

the Recovery Act should be seen as a large one-time buffer against 

this very big financial shock; and, seen in those terms, it implemented well. 

My final points are about what can prevent this adjustment. 

What held up Japan and what has prevented other countries from 

adjusting appropriately in a timely fashion to this kind of shock? 

And let me take up also Mr. Brady’s points about small business 

and the importance of an entrepreneurial, private-led recovery, 

which I completely believe in. That is the experience. 

The major problem we have right now, major problem Japan had 

actually over the past 20 years, major problem we have now is in 

the financial sector. We didn’t recapitalize the banks fully. The 

banks I think have done an enormous amount of damage—the biggest banks have done a enormous amount of damage to small 

banks and to small business, and that problem still remains. That 

is a problem that has been building for 20 or 30 years in this country. It can’t be fixed in 6 months. 

But that is a macroeconomic issue, the imbalances and the poor 

incentives and the problems, including around credit cards. Chairman Maloney, as you said, these are first-order macroeconomic 

issues. 

So while maintaining the path or the process of macroeconomic 

adjustment while allowing the dollar to depreciate in real effective 

terms—and here, of course, the Chinese renminbi is something of 

an issue which we can come back to talk about, because that is not 

helpful, again, in the global picture. But if we proceed down this 

path of macroeconomic adjustment, the major risks we face in the 

future are going to come out of the financial sector. 

Thank you. 

[The prepared statement of Simon Johnson appears in the Submissions for the Record on page 66.] 

Chair Maloney. Thank you. Dr. Zandi. 

STATEMENT OF MARK ZANDI, CHIEF ECONOMIST, MOODY’S 

ECONOMY.COM, PHILADELPHIA, PA 

Dr. Zandi. Thank you for the opportunity to be here, Madam 

Chairwoman and the rest of the committee. My remarks are my 

own and not that of the Moody’s Corporation. These are my views. 

I would like to make three points in my remarks. 

First, the recession is over. The great recession is over, and the 

recovery has begun, and that is largely due to the monetary and 

fiscal stimulus that has been provided to the economy. 

I don’t think it is any accident that the recession has ended at 

the same time that the stimulus provided the maximum benefit to 

the economy. My estimate is that the stimulus package that was 

passed in February has contributed somewhere between 3 and 4 

percentage points to growth, which would suggest that, without 

that stimulus, the economy would still be in negative territory, still 

contracting. 

In terms of jobs, I do think it has resulted in over a million additional jobs. The number of jobs in the economy would be a million 

less than is currently in the economy if not for that stimulus. In 

23 

my view, the most efficacious aspects of the stimulus have been the 

aid to unemployed workers and the aid to State government. That 

has gotten into the economy very rapidly and has forestalled very 

significant cuts in spending, government programs, and forestalled 

tax increases, which would have been very debilitating at this time. 

The other aspects of the stimulus, including the first-time home 

buyers’ tax credit, Cash for Clunkers, also very important. But the 

UI and State government help, the most important things. So that 

is point number one. 

Point number two, the recovery that we are now in will be tentative and fragile through all of 2010. Unemployment will continue 

to rise. It will probably hit 10 percent when we will get that report 

next week. It will be in the double digits all of next year. 

The recovery has a number of very significant head winds. Let 

me just name a few of them. 

First, hiring. All the improvement in the job market—and there 

has been improvement in the sense that the job losses are abating—all of that is due to fewer layoffs. There is no hiring. The reasons for that are numerous, but let me just mention two. 

First is a lack of credit, particularly for small business. They rely 

on credit cards and small banks, and they are not getting credit. 

And second is confidence. Businesses have been put through the 

proverbial wringer, and they experienced life-threatening events 6, 

9, 12 months ago, and it is going to take a while before they feel 

comfortable going out and hiring. So hiring is a problem. 

Second, the foreclosure crisis. It continues unabated. This suggests that house prices, which have stabilized this summer, are 

going to fall again beginning next year. Nothing works well in our 

economy if house prices are falling. It is a corrosive on household 

wealth. No bank is going to extend credit freely as long as house 

prices are falling. 

Third, commercial real estate. That is a really substantive problem. Prices have fallen even more in commercial real estate than 

in housing. You mix that with a lack of liquidity, the only lenders 

are a few life companies, and the fact that many mortgage loans 

are coming due, we are going to have many commercial loan defaults. That is, of course, going to hurt commercial construction, 

but it also hurts many of the small banks that have very large 

commercial loan portfolios. And that is another reason why they 

are not extending credit to small business, which is key to the job 

machine. 

And then, finally, State and local government, they did receive 

help. It has been very important, as I mentioned, but their fiscal 

year 2011 budgets are going to be just as bad. Tax revenues continue to plummet. If they don’t get more help, they have got a very 

large problem. They are going to have to cut programs, jobs, and 

raise taxes beginning this time next year. 

So, in my view, I think we will avoid falling back into a recession, but the risks of recession are uncomfortably high. And if we 

fall back into a recession, that would be particularly worrisome. It 

is not going to be easy to get out of it. We have got a zero percent 

interest rate, and we have got a $1.4 trillion deficit. We just cannot 

go back into recession. 

24 

Finally, point number three, what should policymakers do about 

this? Let me say two things. 

First, I think at the very least you should extend a number of 

the provisions in the ARRA that are expiring this year. That would 

include the aid to unemployed workers. That is a slam dunk. The 

higher conforming loan limits, that should be extended. The firsttime home buyer tax credit, that should be extended. Bonus depreciation, net loss carryback, that should be extended; and net loss 

carryback should be expanded. SBA lending, some provisions in the 

ARRA that made it a little bit easier will expire at the end of this 

year. They should be extended, and the SBA program should be adjusted. A couple of things you could do to make it much more effective. 

Then, finally, the second thing I would do is, if we got into next 

year and the economy is not engaging, if we don’t get the more sanguine view that Dr. Johnson expressed and the economy is not engaging, I would consider a number of different things. Certainly aid 

to state and local government, very, very important. Work share 

programs, I think that is a very innovative way of helping to make 

the UI program more effective. And I would also consider expanding foreclosure mitigation. The current loan modification plan is 

not working well. And then, finally, perhaps a payroll tax holiday 

with a job tax credit twist. I think that would also be very helpful. 

But I would wait until we got into next year before considering 

that, given the costs that are involved. 

Thank you very much. 

[The prepared statement of Mark Zandi appears in the Submissions for the Record on page 76.] 

Chair Maloney. Thank you for sharing your testimony. 

Dr. Hassett. 

STATEMENT OF KEVIN A. HASSETT, SENIOR FELLOW AND DIRECTOR OF ECONOMIC POLICY, AMERICAN ENTERPRISE INSTITUTE, WASHINGTON, DC 

Dr. Hassett. Thank you, Madam Chairman, Ranking Members 

Brady and Brownback and members of the committee. 

My written testimony is rather long. You might be able to save 

yourself a trip to the gym if you carry it around for the rest of the 

day. I will try to go through the highlights as quickly as possible. 

The first part of my testimony concurred with the analysis of Dr. 

Zandi. I discuss time series models of recessions that have proven 

very effective in the past at dating them in a manner consistent 

with the judgments ultimately given by the National Bureau of 

Economic Research. I think the best of those is by a macroeconomist at the University of California named Marcelle Chauvet, 

and she has informed me that the recession ended in July and 

maybe August. But that is I think a call that one could have a 

great deal of confidence in. 

I think that as we look forward that means that we can expect 

many quarters of positive growth, but we should be anxious because of the concerns raised by my fellow panelists that that 

growth will be disappointing. Accordingly, I think that we need to 

think about, well, what are we going to do now? With that in mind, 

I think looking back at the stimulus and thinking about how well 

25 

it worked is very important because we might well find ourselves 

in a circumstance where we want to reconsider those issues. 

Now, most of the advocacy for stimulus involves simulations from 

computer models. The empirical literature that looks at what actually happens and data is very mixed. There is a wide range of multiplier estimates. Countries that have big deficits can sometimes 

actually achieve stimulus through non-Keynesian policies. There is 

big literature on this that actually reduced the debt with tax increases and reductions of government spending. And higher government spending actually reduces growth in the long run as well, 

which is a concern as we think about what we are going to do next. 

I think these disappointing results are consistent with the balance of the literature, as summarized in my written testimony; and 

they are rather bad news for the U.S. Government—debt has expanded so rapidly during the government bailout that one might 

expect the high debt results to apply for us. And, in that case, the 

short-run positive effects that we saw last year might be minimal 

and might even be worse going forward. 

Now, the large expansion of government spending also creates 

something of a problem for policymakers. I guess that is you. If you 

unwind the spending all at once, then you may even optimistically 

only postpone some subset of the recession from this year. If the 

government spending spike is not unwound, then the long-run negative growth effects of large government kick in. 

Now the consumption stimulus—and now my remarks focus on 

the part of my testimony regarding mailing checks to people—is 

viewed by proponents as a macroeconomic success if it leads to a 

short-run increase in consumption. A neoclassical skeptic would 

emphasize that the increased saving or reduced consumption by 

those who anticipate future taxes might offset the increased consumption by Keynesian consumers who rush out to spend the 

checks that we mailed them last spring. 

I have two figures in my testimony that shed some light on how 

we might think about the scale of those effects which might cast 

some doubt on assertions of big-growth effects in the most recent 

quarter. 

Figure one suggests that—and there I assume that the deficits 

that we have received in 2009 and 2010 are ultimately going to 

have to be paid for by future taxes, which are increased according 

to the current distribution of taxes. And so, you know, if you pay 

this percent—an income group that pays this percent right now, we 

are going to expect that in the future we will get that much of the 

current deficit from them—and you can see that the future tax increases associated with deficits, which many occur because of the 

economy, not because of explicit policies that you have made, those 

tax increases are very large relative to the stimulus checks. That 

suggests that people who are really rational and thinking ahead 

would rationally save a lot of money this year in anticipation of future tax hikes. 

And it might be that, even though we see that low-income people 

who of necessity consume the money we mailed them because they 

need it right now, might consume more right now because of the 

stimulus checks over the previous quarter, that high-income people 

might save more, and that might offset it. 

26 

The second chart in my testimony, which is taken from an analysis by John Taylor of Stanford and Hoover, suggests that the macroeconomic data lead one to conclude that these factors might be 

present and should make us a little cautious about what has happened when we mailed checks in the past and what would happen 

were we to do so again. 

For policy alternatives, the biggest problem with the approach 

that we have taken so far is that we have taken fixing things off 

the table this year. We have focused our policy efforts on temporary 

measures. Yet our Tax Code is so broken that there are ample opportunities to improve the current economy without creating hangover effects associated with the removal of Keynesian stimulus. 

These policies would make permanent changes to provide an immediate boost to the economy and would run a smaller risk of creating 

a hangover. 

And I give two examples in my testimony that I think probably 

don’t pass any reasonable partisan test of being associated with either party. I think probably everybody in both parties might oppose 

both of them. But I give an example of the kind of thing that I 

think Congress should be thinking about. 

First, the indexing formula for Social Security could be changed 

from wages to prices. A recent analysis by the Social Security Administration found that over a 75-year time horizon this would improve the long-run budget condition by $4.5 trillion in present 

value. If some fraction of that revenue were recycled, say through 

a reduction in the payroll tax, as suggested by Mr. Zandi, then one 

might see both a consumption increase and a positive fiscal consolidation effect that would lead us to a higher growth trajectory. 

Alternatively, the government—this is the second policy that I 

speculate about in my written testimony—the government could 

announce today that the corporate tax rate would gradually be reduced from 35 percent to 25 percent, while again covering any expected revenue loss from that with the introduction of a valueadded tax that did not take effect for a number of years. The declining corporate tax would act like an investment tax credit today, 

giving investors an incentive to pull their deductions forward into 

the high-tax period. The future-value-added tax would induce individuals to consume today before the consumption is taxed in the future. In addition, the move toward a consumption tax would improve the long-run efficiency and vitality in the economy and help 

fix the deficit problem. 

Such policies would, the literature suggests, stand a much better 

chance of providing significant and sustained growth than those 

that have already been adopted. To the extent that the high level 

of unemployment motivates additional policies, I would urge you to 

consider permanent changes that can have a big kick now. 

[The prepared statement of Kevin A. Hassett appears in the Submissions for the Record on page 93.] 

Chair Maloney. Thank you so much. 

We have been called to a vote on three different items, but I 

would quickly like to ask, since many of you noted that job creation 

is a major challenge now in our economy and in our country, what 

components of GDP should we focus on as far as job creation is concerned? Anyone to comment. What components of GDP? 

27 

Dr. Hassett. He is the leading expert on this. 

Dr. Zandi. Well, I think the key thing is probably business investment would be the thing to watch. Obviously, businesses have 

to make decisions about hiring and investment; and if they are investing and if investment spending is picking up, that would be 

suggestive of better credit conditions, of more confidence, that they 

feel like they can go out and expand. And that would also mean 

that they are probably also going to begin to hire. 

Now, on that front, we have got some reasonably good news. Investment spending in the third quarter in equipment and software 

turned positive after just completely cratering late last year and 

early this. So that would suggest that we are moving in the right 

direction. But the increases are very small and also suggestive of 

relatively modest hiring going forward. If I were going to pick a 

component of GDP to focus on to gauge the direction of hiring, it 

would be equipment and software investment. 

Chair Maloney. And what can Congress do to spur that? 

Dr. Zandi. I would suggest two things. I am sorry. Two things. 

One is, I would provide more incentive to the SBA program, because this is a way to get credit to small businesses that are a key 

to the job engine. 

Just one quick statistic. Establishments that employ fewer than 

20 employees account for 25 percent of all of the jobs in our economy, but they accounted for 40 percent of all the job creation in the 

last economic expansion. The key impediment to hiring and investment among small businesses is the lack of credit. The SBA program could play a big role. 

Three suggestions: One, increase the size of the maximum SBA 

loan, which the President has already proposed, a very good idea. 

Second, increase the loan guarantee in the current ARRA. The loan 

guarantee is 90 percent. I would raise that to 95 or 97.5 percent, 

temporarily. And then third, and most importantly, there is an interest rate cap on the rate that the small business lenders can provide. It is 275 basis points over prime. That means that the current 

maximum loan rate is 6 percent or below. No one is going to make 

a loan at 6 percent in this credit environment. You should increase 

that. You should double that. And if you did those three things, 

credit would start to flow more freely to small business; and that 

would be very, very helpful. 

Chair Maloney. Thank you. 

We have 8 minutes left in our votes, so we are going to have to— 

Dr. Johnson—but then we are going to adjourn to go vote. Why 

don’t you stay? Absolutely. Yes, but Dr. Johnson has a point to 

make, and I think you should continue. 

Senator Brownback. I won’t do anything untoward. 

Chair Maloney. Pardon me? 

Dr. Johnson. Just to answer your question on sectors, I think 

the export sector is really critical. Part of the counterpart of the 

statement that we have been overspending, we are living beyond 

our means is we have been unable to compete, unable to generate 

enough revenue from exports to pay for what we import. That is 

an adjustment that we are going to have to make. 

And I think the key longer term issue there is skills. We know 

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cated people in our society, we do well in that dimension, but in 

terms of the least educated 50 percent and in terms of the practical 

skills they have. Do they have technology skills, as Mr. Hinchey 

said? 

There is a bright future for this country in terms of technology 

generation. But who are the workers? Who is going to use that? 

You need to have competitive workers with good skills. Otherwise, 

those jobs are going to go straight offshore. 

Chair Maloney. Thank you. 

Mr. Brownback is recognized. 

Representative Hinchey. I just wanted to ask a brief question 

of Dr. Dynan. What do you think that we might do to improve the 

economic benefits of working class people across this country? Because, as we know, they drive about two-thirds of the GDP. So the 

main focus of our attention should be on the middle-income working class people. What do you think the most effective thing is that 

we could do to upgrade the quality of their economy and the quality of their lives and, therefore, the quality of the economy? 

Dr. Dynan. As I said in my remarks, I think that extending— 

as Mark just said, I think that extending UI benefits is a slam 

dunk. I think that is very important to support the spending of 

those that have lost their jobs. 

And I think also, on the topic of people that have lost their jobs, 

I think that current foreclosure prevention programs aren’t doing 

a very good job of helping homeowners who are struggling to make 

their mortgage payments because they have lost their job and have 

experienced a sharp decline in income. So I would offer assistance 

to those households to help them make their mortgage payments 

until they could find another job. 

Representative Hinchey. Mr. Johnson. 

Dr. Johnson. I think it is about skills. The reason median income hasn’t gone up much—perhaps it has even declined over the 

past 20 years in this country—is because the least educated people, 

people who haven’t finished high school or just finished high school 

with barely any college, are not competitive in the world economy; 

and they are not going to become competitive unless they have opportunities to increase their skills. And that is what you have got 

to focus on. The community colleges are the most obvious place to 

help these people, but there are other ways forward as well. 

Representative Hinchey. Thanks very much. 

Senator Brownback [presiding]. Thank you. 

You are all mine. I have been looking forward to this. I have got 

a bunch of questions here. So if you guys got a little bit of time, 

I have some questions here. 

Dr. Johnson, I want to start with you and your testimony, because you say things it looks like to me that I have been thinking 

for some period of time. I wanted to ask and see if I am getting 

this right. 

The Chinese exchange rate has been pegged to the U.S. dollar, 

effectively giving them the advantage to come into this marketplace 

without what would normally happen in a situation like what we 

had. We had this huge trade imbalance, and their currency should 

appreciate versus ours depreciating. Is it time to take the club out 

to get that exchange rate down? And, clearly, it should be different 

29 

in these two economies and that that would help get that imbalance in our trade imbalance down. But absent taking the club 

out—we have jawboned it for a long time. Is it time to take the 

club out on that? 

Dr. Johnson. I would hesitate to use the word ‘‘club’’ in this context. There are mechanisms. It is a huge problem. It is a huge 

problem. It has been with us a while. It has been put on the back 

burner by this Administration. I think that is a mistake. 

Senator Brownback. For credit purposes, I take, more than 

anything. 

Dr. Johnson. Well, I think for purposes of not wanting to destabilize the global system and not wanting to have a big trade rally. 

When you say take the ‘‘club’’ out, the key issue is what exactly are 

you going to do. If you threaten trade sanctions unilaterally, that 

is going to raise the issue of retaliation. If you go through the IMF, 

which is what the previous Administration tried to do, it is a sensible approach, but it didn’t work. The IMF has completely been 

unable—— 

Senator Brownback. What should we do? 

Dr. Johnson [continuing]. I think the WTO should have the responsibility for overseeing exchange issues just like it does for unfair trade practices. 

Senator Brownback. They don’t have that now. 

Dr. Johnson. They do not currently at this time, that is right. 

But they could get it. It has to be negotiated. Many other countries 

other than ourselves are very uncomfortable with the Chinese exchange rate arrangement, particularly now as the dollar depreciates. As you said, the renminbi should be appreciating. Against 

the dollar it is pegged so it doesn’t move against the dollar, and 

against the euro or other major currencies it is actually depreciating, which makes no sense. 

The Chinese foreign exchange reserves, which passed 2 trillion 

this year, are on their way to 3 trillion, probably the middle of next 

year. That is 20 percent of the U.S. economy. 

Senator Brownback. It seems this is a real mercantilist strategy on the Chinese part, that they stimulate and keep their economy going. We get the cheap goods, but that doesn’t work on a 

long-term basis for us. Do any of the rest of you have another strategy or a tool here, absent us just using the blunt instruments that 

we have? 

Dr. Johnson. Well, the WTO is not a blunt instrument. The 

WTO is a very well-calibrated instrument with a lot of legitimacy 

that we use for—— 

Senator Brownback. I understand. But we don’t have—we 

can’t take a currency case to the WTO. 

Dr. Johnson [continuing]. No. I know this Administration could 

launch an initiative to bring currency cases under the auspices of 

the WTO. As I say, lots of other countries around the would support us in that initiative. That is a much safer, much better way 

to proceed than unilateral—— 

Senator Brownback. I thought you said they didn’t have the 

authority, the WTO didn’t have the authority to bring a currency 

case. 

30 

Dr. Johnson [continuing]. They have to get that authority from 

the membership. I am saying that is a doable thing. That is a sensible course for us to take up. 

Senator Brownback. Nobody else has a better idea? 

Dr. Zandi. I take a different perspective. I think you are correct 

that the yuan is significantly undervalued, probably 25 to 30 percent undervalued vis-a`-vis the dollar, and that it would be appropriate for the yuan to appreciate in value. But I think the most desirable way for that to occur is over time. So 3, 5 percent appreciation over time. 

Senator Brownback. Any WTO case would take time. 

Dr. Zandi. In fact, beginning in 2005, the Chinese started to 

allow their currency to appreciate. 

Senator Brownback. Pretty modest relative to the imbalance. 

Dr. Zandi. Three to 5 percent every year. I think that would be 

the most appropriate path going forward. If they stick to that, I 

think that is what we should plan for. 

Senator Brownback. Dr. Johnson, I want to ask you on a separate issue here. You put in your testimony that the largest banks 

need to be broken up. Excess risk-taking should be taxed explicitly. 

I couldn’t agree more with it. The Federal Reserve Chairman out 

of Kansas City, Tom Hoenig, has testified in front of this panel and 

he has a proposal that we are working with now to get in statutory 

form to allow a process put in place to move away from the too big 

to fail policy. 

Have you looked at any of the outlines, what he or others have 

put forward on this too big to fail? 

Dr. Johnson. I may not be aware of his latest proposal. I certainly talked to him earlier this year. I testified before the committee at the same time. We were absolutely on the same page. It 

has very much a bipartisan issue. The too big to fail banks are a 

major risk to our current economic situation, and there are various 

mechanisms that you can consider how to implement it. I am very 

open to proposals. I think we should be flexible and try them all. 

It is a very serious problem. 

Senator Brownback. Is there any disagreement in the panel on 

this? 

Dr. Zandi. I disagree in the sense that I think it makes no sense 

to try to work to break up large banks, that we have to embrace 

the fact that we are going to have institutions that are too large 

to fail and therefore design policies with that in mind. I think it 

is a privilege to be too large to fail because they are getting a taxpayer benefit, these institutions, and therefore they should pay for 

it in the form of higher capital ratios, more stringent liquidity ratios, greater regulatory oversight, perhaps even higher deposit insurance premiums. The mechanism proposed to levy fees on these 

institutions, if in fact one of their colleagues fails and it costs taxpayers money, then all these institutions should pay for compensation. 

Senator Brownback. Dr. Zandi, if you did that, don’t you then 

push business to these guys? Because you are basically saying, 

Now we have an official government policy of too big to fail, and 

we are not going to let you fail. And their risk ratios, I would 

think, would be different from the level just below them and cerVerDate Nov 24 2008 14:25 Jul 08, 2010 Jkt 055916 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 C:\DOCS\55900.TXT SHAUN PsN: DPROCT
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tainly several levels below them. It seems you almost push business to them. 

Dr. Zandi. No. First, you have to raise the cost of being big. So, 

as you get bigger, there are costs involved. And so their costs of 

capital isn’t a competitive advantage against smaller institutions. 

Second, don’t identify institutions as too big to fail. 

Senator Brownback. The marketplace will. 

Dr. Zandi. Not necessarily. They are not Fannie Mae and 

Freddie Mac. They are not guaranteed by the Federal Government. 

Who knows whether a $10 billion bank or a $5 billion bank or a 

$15 billion bank is too big to fail? Lehman Brothers was a small 

broker-dealer and they were too big to fail. 

So I don’t think if you identify them before the fact that the market will figure it out, or at least to the point where it makes a big 

difference. 

Senator Brownback. Dr. Johnson. 

Dr. Johnson. I completely agree with you, Senator Brownback. 

In fact this is legislation that is being discussed today. If you want 

to go this route of regulating them ex ante and putting these extra 

costs on them, the market is going to see this. If they have a limit 

on their capital ratio or a hard leverage ratio, for example, of 

course you can figure out which ones are in this too big to fail 

privilege category. 

You can’t have it both ways. You can’t create a privileged category and make that secret. The list has to be known. Mervyn 

King, the Governor of the Bank of England, spoke to this directly 

last week, he said there are two ways forward, regulate the big 

guys or break them up. King said regulating them is not going to 

work. They are going to always get ahead of the regulators. They 

are far too big and powerful and pay their people a lot of money 

to do that. You have to break them up. 

Dr. Zandi. You don’t have to identify them. As they grow in size, 

when they hit certain size benchmarks, they then get different fees 

and restrictions imposed on them. So at $5 billion in assets it is 

one thing, $10 billion, another; $15 billion. It is not like you are 

saying you passed over some benchmark and therefore you are too 

big to fail. You wouldn’t do that. 

Senator Brownback. This will be an extended debate, and several of us are going to try to make sure we have it because I think 

we need to have this as an actual debate and an actual policy 

issue. I sure tend to look at it that the market will identify it. 

But I appreciate your arguments, and we are going to try to put 

this bill forward, the Hoenig bill in the Senate, get a number of cosponsors if we can on it and try to get policy debate moving forward. 

Dr. Hassett, you talked about permanent changes in the Tax 

Code so you don’t create the hangover. I like that thought. Maybe 

it has the Red Bull analogy; the same way. You juice the thing 

then there is a fallback on it. I take it your permanent changes are 

suggesting that you favor capital formation and you discourage consumption, would be the overarching policy move that you would say 

in taxes at the Federal level. 

Dr. Hassett. That is the right objective in the long run. In the 

near term you can achieve that long-run objective if you do someVerDate Nov 24 2008 14:25 Jul 08, 2010 Jkt 055916 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 C:\DOCS\55900.TXT SHAUN PsN: DPROCT
32 

thing that causes people to transfer future consumption to today, 

like putting in a value added tax in the future is one example. People won’t rush out to spend money today, but ultimately we would 

have the benefits of a consumption tax, which would stimulate additional capital formulation. 

I think that given the massive imbalance we have right now we 

have to take these permanent measures seriously. If when we had 

passed the stimulus package we had made this minor adjustment 

to the benefit formula that I mentioned in my testimony for Social 

Security benefits, then the long-run fiscal balance of the U.S. would 

be significantly better and we would have had a stimulus bill, and 

one would guess that that would have made the stimulus bill more 

effective. 

Senator Brownback. Seems to me that that is something we 

are going to have to do long term to maintain economic competitiveness for us, is just to try to stimulate capital formulation and 

probably tax more on the consumption side of the equation. 

Do any of you disagree with that policy bent for the U.S.? I say 

that partially, too, because we are so consumer driven as a society 

and it does not look like to me that is long-term sustainable, the 

level of consumerism that we are dependent on. 

Dr. Dynan or Dr. Johnson. 

Dr. Dynan. I agree with you. I think one component is personal 

savings needs to rise. I identified a number of things in my testimony that are going to cause the personal saving rate to be substantially higher than it was prior to the crisis. I think it does 

put—I think the downside of that is that it will lead to a more 

modest recovery. It is going to take longer to get back to full employment. It is going to leave—— 

Senator Brownback. But we will be different when we get 

back. 

Dr. Dynan [continuing]. Yes. It will be more solid and sustainable. 

Senator Brownback. I guess that is the thing I look at. We are 

going to go through pain here. We are going through pain, but let’s 

get on the other side and show something for it. 

Dr. Dynan. I think it will be more solid and sustainable both 

at the household level and at the national level. 

Senator Brownback. Dr. Johnson. 

Dr. Johnson. I agree on the consumer side. I think you have an 

increase in the household savings rate, as Dr. Dynan is saying. The 

issue at the national level is going to be what happens to the government saving or dissaving. Here, the big issue coming is obviously Medicare. The United States is not unique in this. All industrialized countries face a substantial fiscal adjustment, between 4 

and 8 percentage points of GDP, assuming you go back to near full 

employment, in order to stabilize the public debt levels at 40 to 60 

percent, whatever you think is reasonable in these countries, in the 

face of rising health care costs. 

The only reason we are a bit more upfront about it in this country is because the CBO has a more honest accounting projection of 

future health care costs than does the European Union, for various 

interesting reasons. But if you put those numbers on a comparable 

basis, we and the European Union and all the rest of the OECD 

33 

are in the same very difficult boat, and this is about where do you 

get the revenues to finance that or what other spending do you cut 

in order to finance these commitments that are coming down the 

road. That is the big deal breaker on savings and on public finances and on sustainability. 

Dr. Zandi. Can I say I think Dr. Hassett’s two suggestions are 

fantastic. I think they are wonderful ideas. I think indexing Social 

Security to wages as opposed to inflation is an entirely appropriate 

thing to do. 

Secondly, reducing the corporate tax rate and making that up 

through some form of VAT is also an excellent idea. I think it highlights a very important point, and that is while we are talking 

about stimulus and the fact that that does add temporarily to the 

near-term budget deficit, it is also very important for policymakers 

to have another track for policy, considering things to do about the 

long-term fiscal situation. Because if you are able to credibly address that through these kind of suggestions, then that will buy 

you more freedom and latitude to run near-term budget deficits 

and try to get this economy moving. 

Senator Brownback. I am not a VAT—I don’t like a VAT for 

the way it is so hidden. I like taxes to be apparent and people know 

I am paying this so they know what the cost to their government 

is. I know other people maybe don’t look at it that way. But I can 

see a lot more tax on the consumption side and production, particularly us going forward and trying to be a more productive country 

and more export-oriented and less maybe consumption-oriented. 

With that, I want to conclude on this one question. The dollar 

has been declining. Is it likely to decline over the next year or so 

relative to other major currencies, and is that something that we 

should be fighting back aggressively against? 

Dr. Johnson. I think we probably agree the hardest thing to 

predict in economics is exchange rates. They really have a tendency 

to go the opposite way from what economists say. My answer is 

definitely yes. There is a tendency to depreciate, given our policy 

stance and given the fact we are providing cheap funding to big financial institutions that are allowed to go off and plow this money 

into a speculative private equity in China, for example. We have 

created a big carry tray out of the U.S. dollar. That is a downward 

pressure on the dollar. Of course, if there are major shocks around 

the world, any time there is a disaster, people come into dollars, 

because we are the ultimate safe haven. That is why it doesn’t 

quite go definitely in the direction I am saying, but the economic 

dynamics are very much supporting dollar depreciation, and you 

shouldn’t resist it. The dollar depreciation at this stage is helpful 

for us. 

Senator Brownback. Do you all agree with that, you shouldn’t 

resist the dollar depreciation? I don’t see anybody disagreeing. I see 

a couple of people don’t want to be on the record. 

Dr. Zandi. I think so far the dollar decline is what you would 

expect, given relative growth rates across the global economy. 

There are negatives. We are paying more for oil because of the fall 

in the dollar. But as we saw today, it is helping to lift exports. 

Senator Brownback. Looks like to me it is going to help us a 

substantial amount on exports over a longer term. My state is an 

34 

export state. We are grain, aviation. So you get a cheaper dollar, 

our products are cheaper overseas. We generally tend to do better. 

But a lot of people really don’t like the falling dollar. 

Dr. Zandi. I think what concerns them is they are worried if the 

dollar starts to decline in a disorderly way, that would be symptoms of bigger problems. It would mean interest rates are rising, 

that would mean stock prices would be falling. It is that, I think, 

concern that this weakening in the dollar might lead to something 

more serious, large declines that are indicative of a broader economic problem. 

Senator Brownback. I can see that. It sure looks like to me we 

could start to raise interest rates some here and that the Australians were rewarded for doing that. The Fed fund rate, I am 

talking about. To support the dollar. But each of you are saying we 

shouldn’t resist this fall. 

Dr. Johnson. I wouldn’t move the Federal funds rate to support 

the dollar. I think the issue is what is happening—— 

Senator Brownback. The Aussies were rewarded for that. 

Dr. Johnson [continuing]. Right, but I am saying I don’t think 

we should be aiming to support the dollar. I don’t think that is the 

right policy goal here. The big constraint on raising the Federal 

funds rate, and I agree with you, we may get to the point where 

that is a good idea, because I am expecting a stronger recovery 

than my colleagues here, is that the banks are not well capitalized. 

So the recapitalization of the banks, the strategy being used now 

is the same strategy used in the early 1980s when Mr. Volcker was 

chairman of the Fed, which is keep short-term interest rates low, 

allow recapitalization through the yield curve, which the strategy 

can work, but in order to do it you have to keep the yield curve 

positively sloped for a number of years—2 years, 3 years, 5 years. 

If you fear raising interest rates because of what it will do to your 

banking system and because of how that will lead to further failures or further problems, with any kind of banking system that is 

an issue. I think that is where we are on monetary policies right 

now. That is a very unfortunate constraint that comes from weakness and the lack of capital. 

Senator Brownback. Are the banks that weak they need us to 

provide that yield curve for them to do that? 

Dr. Johnson. Absolutely. If you look at the impact of the discussion around GMAC right now, look at how that has affected credit 

default swap spreads, for example, of the major banks, including 

Goldman Sachs, including Bank of America. People are very surprisingly nervous, given the way the world economy is coming 

back. The global economy outside the United States and outside 

the European Union is very strong right now. People are extremely 

worried about the financial system because our banks don’t have 

that much capital. I know we taught ourselves after the stress test 

that everything is well capitalized; don’t worry. Unfortunately, that 

is not how the market sees it. 

Senator Brownback. So the fact that these banks are sitting 

on large wads of cash right now, not lending it out, they are basically playing this yield curve right now and it is a way to heal and 

that they just need to sit there and sleep for a while. Is that what 

you are recommending to our banks; kind of like you got the flu, 

35 

so why don’t you just lay and rest and drink lots of Fed funds for 

a while? 

Dr. Johnson. My recommendation is quite different from that. 

It includes breaking them up and includes recapitalizing them. 

Senator Brownback. Effectively, that is what you are saying, 

because they are not loaning money. The amount of credit that 

they are putting out is pitifully small and we are all looking at this 

thing saying, wait a minute, we shot big wads of money out here. 

I voted against a bunch of it, but it happened. I agreed with what 

the Fed has done, but now you are basically saying they need to 

kind of just sit there and play this Fed fund yield curve. 

Dr. Johnson. Remember, as Dr. Dynan said, consumers don’t 

want to worry so much. That is the counterpart of this increase in 

household savings, is they are cutting down on their borrowing. So 

in a sense I don’t think a bank should be—their feet should be held 

to the fire particularly for this. I think that is coming from the demand side. There are many other things you should be taking to 

the banks, including the lack of the capital, the way they are going 

back to very high risk strategies on a low capital base. 

Lehman Brothers, the day it failed, according to a conference call 

2 days before they failed, had 11.6 percent Tier 1 capital. Okay? 

That is what the major banks in the U.S. are holding right now. 

People don’t think that is enough capital, and they are right, given 

the strategies of these banks, given the way they are managed, 

given the fact they are too big to manage properly, let alone too big 

to fail. 

Dr. Dynan. I will just echo what Simon said. It is true household credit has been falling quite impressively in the last few quarters, but it is very difficult to separate the effect of demand on supplies; very natural when consumer spending contracts to see a contraction in household borrowing because they just need less credit 

to finance their spending. 

There are measures that show that banks are less willing to lend 

than they were previously. That also is a normal response to a lot 

of risk being out there in the economy. With the unemployment 

rate close to 10 percent, it is normal for banks to be less willing 

to lend. 

Senator Brownback. The guy that is kind of new, I wouldn’t 

put him a rock star, but he is a radio star in the Midwest, is Dave 

Ramsey. He has got billboards up in the Kansas City area that say: 

Act your wage. And he is all about burning credit cards and doing 

things on debit cards and just how it is that you get your own kind 

of fiscal house in order. 

And people love the guy. They listen to him and say oh, okay, 

this is kind of very practical. But you can see people in their efforts 

to kind of unwind their credit position that they are in and just 

say, okay, I had a near-miss here, or we almost had this or that. 

I am kind of scared of this. How do I get backed away from that 

credit ledge? 

Sure, it is kind of an interesting social phenomenon to see. And 

you see the numbers in personal savings rates, and looks like all 

the government transfers—we are doing a big portion of that—are 

going just to heal personal balance sheets. Just wise. It doesn’t 

benefit the economy. 

36 

Cash for Clunkers, the auto dealers I was talking to were saying, 

We had a different person come in that bought in this. The person 

that came in generally bought with cash. So it was somebody that 

doesn’t normally buy new. They usually by something already partially depreciated because they don’t want to pay the new price. 

But when they did the calculus on this, they said, I can do this. 

So they brought the old Ford Explorer in and traded it in on a 

newer one, and the numbers and dollars worked. And it was a different customer that came in. That is what they were telling me. 

I don’t know if that is backed up in the data or not. 

You all are kind to be here. This was fun for me. I am told the 

Chair wants to come back and query a little more. If you don’t 

mind, I will put us into a short recess until the Chair can return 

for further—if you need to go, I am certain she would understand. 

I am very appreciative of you being here, and thanks for entertaining me with the dialogue and the discussion. 

We are in recess. 

[Recess.] 

Chair Maloney [presiding]. I would like to call us back into 

order and apologize that we had this vote called. And go back to 

job creation. I hope our other members will join us. I rushed back. 

Maybe they are on their way. 

Dr. Dynan, you testified earlier that you were somewhat skeptical about the employer tax credit because many economists believe that the credit would be taken by many firms and that they 

would have created the jobs anyway. Others believe that because 

job creation is such a challenge right now, that these worries are 

misplaced. 

I would just like to ask all of you whether you think that an employer tax credit is a good idea, yes or no. And then also, if there 

are other measures that Congress should consider to bolster job 

creation in both the short term and the long term. I know, Dr. 

Zandi, you testified to that earlier. But if we could just get a sense 

whether you think the employer tax credit is a good idea, yes or 

no. 

You have already testified, Dr. Dynan, that you think this is a 

bad idea. 

Dr. Johnson, do you think it is a good idea or bad idea? 

Dr. Johnson. I think, unfortunately—it is tempting—I think it 

is a bad idea. 

Chair Maloney. Dr. Zandi. 

Dr. Zandi. I think it is a second-best idea. 

Chair Maloney. Dr. Hassett. 

Dr. Hassett. I think it can be a good idea if well designed. I 

think Ned Phelps of Columbia University has written a whole book 

on how an employer tax credit might be a vastly superior way to 

assist low-income workers than increasing the minimum wage, and 

I find those arguments pretty convincing. 

Chair Maloney. I would just like to go down the panel if anyone 

has other ideas of how we can bolster job creation. That is a huge 

challenge right now. 

Starting with Dr. Dynan. 

Dr. Dynan. As I said in my remarks, I think there are strong 

advantages to providing for assistance to state and local governVerDate Nov 24 2008 14:25 Jul 08, 2010 Jkt 055916 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 C:\DOCS\55900.TXT SHAUN PsN: DPROCT
37 

ments; not so much they can create jobs, it is just they are not 

forced by declining tax revenues to cut jobs. 

Chair Maloney. I would like to focus just on creating jobs. We 

did do that. We are looking at doing it again, possibly. But how do 

we create jobs? We can’t continue to just be subsidizing jobs. We 

have to be creating jobs in our economy. 

Any ideas of how to create jobs and help us with our economic 

growth? 

Dr. Dynan. I will defer to the other panelists. 

Dr. Johnson. I think in terms of broad creation, the broader adjustment process we were talking about before the break, that is 

working and it will come through. The issue I would focus on is 

what you highlight in your opening remarks, Congresswoman, 

which is the long-term unemployed. 

So the experience from other industrialized countries is very 

clear, exactly what you said, which is that people out of work for 

6 months, 9 months, start to lose the skill, start to lose the culture 

of work and it is very hard to get them reemployed. So even if output comes back, as I am expecting, you will have that unemployment. 

So the experience and the measures taken in Australia that I 

mentioned earlier are to take the process of managing the longterm unemployed out of the hands of government agencies and to 

set up—to give out contracts to private companies that have incentives to get these people back into work, get them into decent jobs, 

and have them stay in jobs. 

What that experience indicates—and this has been taken up to 

some degree also in the U.K. and in other parts of Europe—is that 

you get much more tailored solutions. It tends to be a one-size-fitsall, which can be appropriate in some circumstances, but not to the 

problem you are identifying. What the private sector tends to come 

up with is much more tailored counseling and tailored job-related 

skill creation on an individual basis, with a lot of counseling and 

a lot of psychological counseling as well to get people back into understanding what it is to work and how you hold a job. 

I think that is what you need to look at to address the problem 

you rightly identified at the beginning. 

Chair Maloney. One of the problems that we have in this country is for every job opening, there are now six applicants. And you 

read stories about a job being posted and 500 people showing up. 

What I am hearing from my constituency, some of whom are incredibly well educated with higher degrees in many different areas, 

is that the jobs are not there. 

Americans work hard. They are very dedicated people and if the 

jobs were there, I believe that our unemployment number would 

not even exist. People would take those jobs. 

So it seems to me that the biggest challenge that we have is how 

do we create these jobs. You can have a job program that tailors 

for medical services or whatever, but if the jobs are not there, there 

is no place for them to go. 

Dr. Zandi, do you want to talk more about some of your ideas on 

job creation? 

38 

Dr. Zandi. Let me rank order things in terms of what I would 

do to support the job market. First is extend the UI benefits. I 

think that is absolutely necessary. 

Second, State and local government aid, I think that is very important. 

Third, expand SBA lending, going to the point that small businesses are key to the job machine and they can’t get credit. 

Fourth, I would extend and expand the net loss carryback provision in the ARRA. I would expand it to not all businesses but certainly much larger businesses than are currently allowed to under 

the ARRA. That would provide a very significant cash infusion in 

2010, which is very, very important to many of these businesses. 

Fifth, I would look at a payroll tax holiday, broad-based payroll 

tax holiday. I think I would add a job tax credit part to it. And 

what I would do there is I would say I have got X billion dollars 

to spend on the job tax credit; first come, first served. That way, 

you create an impetus for businesses to take advantage. Because 

the key problem with the job tax credit is that businesses are not 

going to take advantage of it because it is demanding credit that 

is their biggest problem. But if you give them an impetus, they 

may come forward and they may take advantage of it. 

So, say I have got $15 billion, first come, first served, only to 

those businesses that can show that they expanded their wage and 

salary bill compared to what it was the year before. You get the 

credit. I would think that would jump-start creation quickly. 

Chair Maloney. Dr. Hassett. 

Dr. Hassett. I would disagree quite strenuously with my friend 

Dr. Zandi’s recommendations. I don’t think that we need more temporary fixes. I think what we need to do is fix things that are broken. The fact is if you look at the bipartisan support right now in 

California for reducing the corporate tax, because it is about the 

highest corporate tax State in the country—in the world, really, if 

you add California and the U.S. Federal tax. If you think about 

that and the plight at the Federal level, then there are a lot of opportunities right now for making businesses more optimistic about 

the future than they are right now. 

If we continue to be the highest taxed place on Earth, other than 

pockets of Japan, then I don’t know why people would want to 

build a plant here. The average OECD tax rate is something like 

10 percentage points less than the one that we have here. And it 

is optimism of businesses that is going to kickstart the economy 

and create jobs. 

Chair Maloney. Thank you. President Obama just issued a 

statement asking Congress to extend or pass three measures related to housing. I would like the panelists to comment on them; 

if they think they will work, yes or no, and why or why not. 

First, to extend the homeowner tax credit with strong antifraud 

protections. Secondly, to extend the loan limits for mortgages and 

fund the Housing Trust Fund, which aids low-income families. 

Again, I would like to go down the panelists. Do you support 

these measures, yes or no, why or why not? What alternatives do 

you have? I must say I would also like to ask what percentage you 

think housing is of our economy. I have heard ranges from 25 to 

39 

40 percent. Housing really created this problem, in many ways; the 

subprime mortgage crisis. 

If you have other ideas of how we can get this segment of our 

economy working in a way that would move us forward. 

So starting—why don’t we start with you, Dr. Hassett, and go 

down the other way for a change? 

Dr. Hassett. I think that one of the biggest problems with the 

Tax Code is that we have built in this heavy subsidy for housing 

and that the fraud in the first-time home buyer credit is evident. 

That fraud is something that is going to be very, very hard to manage because if grandpa says he just bought a house for the first 

time, we don’t know if he owned a house back in 1960. It is going 

to be very hard to tell. 

I think what we need to do is recognize that part of the problem 

previously was that we stimulated a lot of house purchases by distorting people’s consumption decisions by giving a big tax-favorable 

treatment to housing, and that we need to move away from that 

gradually. 

Next year, as the Tax Code opens up again, then I think that 

Congress is rightly going to want to consider a proposal like that 

that was floated by President Obama’s team this year to limit the 

value of itemized deductions for high-income people. That will 

move us away from subsidizing housing. And I think that we have 

to do that if we want to address our long-run problems. There is 

a lot of money that can be had there. 

So I think throwing another short-term fix at housing is a bad 

idea; in particular, the first-time homeowner credit really should 

not be extended. 

Dr. Zandi. Well, I agree that the housing sector is oversubsidized, and those subsidies should be reduced, but this is no time 

to do it. The housing market is on life support. If we take it off, 

it will crater and take the rest of the economy with it. So I think 

this is no time to do that. 

With that in mind, and just to reinforce a point, you asked what 

percent of the economy is related to housing. I don’t know the answer to that, but what I do know is that if the housing market isn’t 

functioning properly, meaning if house prices are still falling nothing in our economy works. 

It undermines household wealth and the willingness and ability 

of people to spend. It is still the largest asset in the vast majority 

of Americans’ balance sheet. No bank is going to extend credit as 

long as house prices are falling. So we have to end this or the recovery will not gain traction. 

And that gets to what to do. I think the first-time home buyer 

tax credit is an inefficient form of tax subsidy, but it is in place 

and it would be a mistake to let it lapse. It would exacerbate conditions in the housing market. So I would extend it through at least 

mid next year as has been proposed. 

The higher conforming loan limits which also the President is advocating for Fannie Mae and Freddie Mac, that is very straightforward. It should be done. If it is not done, that is going to undermine some key housing markets across the country in California, 

in Florida, in New York. That has to be done. In fact, I would even 

40 

advocate increasing the conforming loan limit for more markets 

across the country. It is very limited right now. 

The third thing I would do and the broader thing I would consider doing is—this goes to the foreclosure crisis. The President’s 

loan modification plan is not working well. There is not a significant amount of takeup on the plan, largely because it is not significantly reducing the probability of default. 

The plan provides incentives to reduce monthly mortgage payments, but unfortunately most of these homeowners are so deeply 

under water that if anything goes wrong they will default. I spring 

a leak in the roof. If I have got to put 5K to patch the roof to live 

in it, I am not going to do that if I am $30, $40, $50,000 under 

water. 

So the loan modification plan should be changed or at least adjusted to incent principal write-down, and I think there will be 

money there to do it because the President has allocated money 

from the TARP for the loan modification plan. He is not going to 

get the takeup he thinks. So there will be extra money sitting 

there, and that money should be used to provide incentive for principal write-down for a very specific group of homeowners that you 

can identify who shouldn’t have gotten the loans in the first place. 

It was a regulatory failure that they got them. 

So I think if we don’t address the foreclosure crisis head on and 

more aggressively, there is a very likely possibility that house 

prices will continue to weaken into next year. Again, the economy 

doesn’t work well with falling housing values. 

Chair Maloney. Dr. Johnson. 

Dr. Johnson. I think the first-time homeowner tax credit should 

be phased out. I agree with Dr. Hassett it is a very inefficient way 

to try and help people. I published an article on Monday where we 

go through the alternative estimates. It is not a good way to stimulate the economy either. There are much better ways to spend that 

money. But I agree with Dr. Zandi that you don’t want to shock 

the housing market at this point; particularly, reasonable estimates 

are house prices are still somewhat overvalued relative to their medium-term fundamentals. Of course, Dr. Zandi is right, that if you 

hit people’s wealth in this way, you are going to make them more 

uncertain. They are going to want to save more and consumption 

is going to decline. 

So phasing it out is the way I would frame that. I agree—we are 

all agreeing there is too much subsidies for home ownership in this 

country relative to rent. I think Dr. Hassett is right; it is a longer 

term issue that needs to be taken on. 

In terms of specifics, I think in this regard I would emphasize 

that Fannie Mae and Freddie Mac now work for the government. 

These are branches of the government. They were taken over, as 

you know. 

In terms of loan modification in terms of how do you deal with 

people who are losing their homes, Fannie and Freddie have a lot 

of very good people who can be put to work, more focused, I would 

argue, on making sure that people get an opportunity to rent when 

they have fallen behind on their mortgages. So converting from 

home ownership to renting. 

41 

I think this fascination with home ownership and trying to boost 

the home ownership has got us into a lot of trouble, and we should 

back away from that. You need to even the playing field. 

Chair Maloney. Ms. Dynan. 

Dr. Dynan. Starting with the importance of housing to the economy, it was of course very important during the boom. I think, 

looking ahead, I agree with the other panelists, the main channel 

through which it is potentially going to affect the economy and be 

a downside risk to the economy is not through construction. Construction is so small now that any boost or any drag on construction is not going to be very important to GDP. But the channel is 

through house prices. 

I think house prices further declining could have very important 

effects on the economy, and we want to protect against that. 

With regard to the President’s proposals, I agree with the other 

panelists that extending the first-time home buyer tax credit will 

spur new sales, but it is a very expensive way to do it because you 

are going to be paying many people who would have bought a 

house anyway, and it doesn’t address the fundamental problem of 

oversupply in the housing market. 

On the conforming loan limits, I agree with Mark that that is a 

very good idea. 

I am not so familiar with the third thing he was suggesting. I 

do think it is related to something to mitigating the costs of foreclosures. And here I want to go back to what Mark said about the 

Administration’s plan to reduce foreclosures. 

I think it will help many homeowners avoid foreclosure, but I do 

agree with Mark that it is a limitation that it doesn’t address principal write-downs. Now, personally, I am not supportive of a program that would pay for large principal write-downs. I think it is 

a very expensive way to try to spare households from foreclosure. 

I think dollars could be better used trying to mitigate the cost of 

foreclosures that need to occur—people who are deeply under 

water, for whom it would be difficult to get them back in a sustainable position with regard to their mortgages. 

So I think you could take the money and put it towards offering 

homeowners assistance to relocate, to offering communities assistance in terms of dealing with vacant properties, and in other challenges that tend to hurt the neighborhood and bring house prices 

down. 

Chair Maloney. Well, actually, the third point that the President suggested is exactly what you are supporting, and that is a 

grant to States to fund construction and maintenance of affordable 

rental housing and vacant lots and so forth. 

Dr. Dynan. I do support that. 

Chair Maloney. I would like to ask Dr. Zandi, in your testimony 

you talked about work-share programs. Can you give more detail 

about expanding funding of work-share programs and what can 

Congress do to encourage businesses and states to participate in 

the program? 

Dr. Zandi. The work-share idea is a really interesting idea. I believe it is 17 states now that have work-share as part of their UI 

benefits. The idea is that if a business doesn’t lay off workers and 

42 

reduces hours for a broad base of workers, the UI would be used 

to compensate those workers in part for those lost hours. 

So what that would do is it would reduce the number of layoffs 

that would occur. It would keep people employed, just at reduced 

hours, and they would get some compensation from the UI program. This, of course, will help reduce or mitigate a whole lot of 

costs. For example, when a business lays off a worker. There are 

all kinds of severance costs. They have to rehire that worker back 

or hire another worker, there are training costs. Of course, it eliminates all kinds of costs for the workers themselves; the pain and 

suffering going through unemployment. 

So I think it provides significant benefits to the employer and to 

the employee, and it is a way of keeping people on payrolls and not 

going out into the darkness of unemployment and not being able 

to get back. 

Work share is a very effective idea. If you look at the data from 

ETA, the folks that collect this data, you can see in different states 

like California—and New York—that it is saving a lot of jobs. I 

think in New York I saw Governor Paterson’s office just released 

a press release showing that it has helped to preserve 13,000 jobs, 

I want to say, but there is a release that they just put out a day 

or two ago. Saved in the sense that these are workers that would 

have been lost, and they have been put on work-share up to this 

point. 

So the problem is to expand this more universally across the 

country. At this point, States are in no financial position to do it. 

They need some money to really set up the program, to get it going, 

to get the process going. I think that would be a reasonable thing 

for Federal policymakers to do. Perhaps an element of state and 

local government aid: Here is some seed money, set up this workshare program. Let’s get going and we will help you with it, at 

least early on, because it seems to be working quite well. 

Chair Maloney. Dr. Hassett. 

Dr. Hassett. I would encourage you, given your remarks and 

your focus on job creation, to study the German experience, because it has really been quite remarkable in this episode that unemployment in Germany hasn’t really gone up at all during this recession because their work-sharing program is so extensive. 

I think we have kind of an old-fashioned unemployment insurance system and we are seeing other countries pursue policies that 

really are more effective. And we need to study them and perhaps, 

again, if we are going to take another bite of the apple of stimulus, 

that we should really consult experts on the German program before we decide what to do with unemployment insurance. 

Chair Maloney. Thank you. I would like both of you to give us 

more information on it. I will certainly take it to my colleagues on 

both the German experience and the work-share program and look 

at possibly expanding it to a national program in the context of future aid to our states. 

I have been told that other members are coming back, some of 

them. 

I would like to get back to the small businesses and helping them 

generate jobs and certainly support the efforts of the SBA, and 

your ideas. What I am hearing from my constituents, businesses 

43 

large and small, is a lack of access to credit. The government has 

taken steps to help SBA expand. 

You mentioned, Dr. Zandi, ways we could strengthen that. Do 

you have any other ideas of ways to expand access to credit, which 

even very established profit making businesses are telling me they 

are having a terrible time. 

Any comments on how to expand access to credit? 

Dr. Zandi. Well, the other thing I suggested that would buy— 

in my view, the credit problem is a problem of time. We need to 

give the banking sector some time to get its capital where it needs 

to be and to get the confidence necessary to go out and extend credit. 

So if we can buy some time, I think the credit will start to flow 

by this time next year. So we need about a year. 

So what would really be helpful, I think, would be an expansion 

of the NOL carryback. These businesses that are really cash constrained and credit constrained are losing money. Through the 

NOL carryback they can take that loss and use it as a deduction 

against past profits and get a tax refund. So they will get a check. 

For a number of small, midsized, even reasonably large businesses, 

this is real money. It is not insignificant. 

It is costly in the first year. In fact, through my calculation, if 

you did it for all but the very largest businesses—businesses that 

employed over a thousand employees, let’s say we cut it off there, 

because I don’t think they are credit constrained, but a thousand 

and below—it would probably cost you about $60 billion in fiscal 

year 2010. 

Now that wouldn’t be the cost over the 10-year budget window 

because what you are doing is tax shifting. So you are shifting the 

tax burden out into the future and so their tax burden would rise 

and so the net cost over the 10-year budget window would be somewhere close to $15 billion. 

But you would be putting a cash infusion into the economy to 

these businesses at just the right time, and you would be buying 

time. You would be buying time. 

Chair Maloney. Thank you. Another grave challenge that we 

have right now that some of you mentioned was the commercial 

real estate industry. It is staggering. A lot of commercial real estate have told me that they are carrying buildings that are paying 

for themselves. So that they have the money coming in to sustain 

their business, yet they have balloon mortgages that are coming 

due in the next 2 years and the banks are calling them. 

And it is next to impossible to get a loan on commercial real estate now. I am told you cannot—you can have a building worth $80 

billion or $80 million, they are not going to give you a loan on it. 

I have heard it over and over again. 

So it is dried up, the credit market for commercial real estate. 

Yet, it seems to me if we have buildings that are carrying themselves, should we have a temporary program that just kicks the can 

down the street a while instead of buildings that are carrying 

themselves that we ask the government to require that the banks 

not call these balloon loans? Any other idea that you have on the 

commercial real estate side? 

44 

Again, Dr. Zandi, you pointed out that most of these commercial 

loans are with small and regional banks. So it is going to be a big, 

huge blow to the banks. In hearings that we have had at this committee and others, the Treasury Department has testified that they 

are not willing to look at any program to help commercial real estate. Their focus is keeping the heart of the economy moving, keeping the financial services—banks and institutions operating, and 

propping up these commercial—these smaller banks and regional 

banks that may face extreme challenges because of the commercial 

real estate challenge. 

It seems to me if we could figure out some way to just soften the 

blow it would help not only the banking system, but certainly the 

real estate industry, the overall economy. 

So I would like to open that up to anyone, and start with you, 

Dr. Zandi. 

Dr. Zandi. You are right, I think it is a very significant problem; 

not directly through the loss of—the defaults in commercial mortgages and its impact on construction. That is a negative, but it is 

a small negative. The real impact is through the impact on the 

banking system and then the provision of credit to everybody else, 

including, and most importantly, small business. 

So I think it is a very large problem that should be addressed. 

I will give you a couple ideas. Unfortunately, the government 

doesn’t have an easy tool. It is not like the residential mortgage 

market, where the government can step in through the FHA or 

through Fannie and Freddie or even through the Fed and do it. 

But one thing you could do is Fannie Mae and Freddie Mac do 

make multifamily mortgage loans. So commercial real estate mortgage debt outstanding is $4 trillion. To give you context, there is 

$10 trillion in residential mortgage debt, $1 trillion is multifamily 

debt. Fannie Mae and Freddie Mac could be empowered to be more 

aggressive in extending out credit to multifamily property. 

Moreover, you could empower Fannie Mae and Freddie Mac to 

provide some loans into other types of commercial real estate. 

Maybe into retail, office space. That might be a natural extension. 

Unfortunately, this will take time to do properly, but this problem is not going away. It is going to be with us for a couple or 3 

years. 

The other thing that I think would be important but is in the 

purview of the Federal Reserve is the other source of credit for 

commercial real estate is the commercial mortgage securities market, the CMBS market. At the peak of the CMBS market back 3 

years ago, it was $300, $400 billion in mortgage credit every single 

year. It is literally zero today. 

The Federal Reserve has established, through the TALP program, a mechanism to providing cheap loans to investors to buy 

CMBS, but that program is not working at all. There have been no 

CMBS TALP deals. 

So there would be a way to provide more—the Treasury could 

provide more backstop to the CMBS TALP activity to promote more 

CMBS deals, or at least get some of them going again. 

Chair Maloney. Thank you. 

Dr. Johnson. 

45 

Dr. Johnson. I am very uncomfortable with all of these proposals. I think that we can find many ways to put taxpayer money 

into the economy and we can create many justifications for it, but 

you have to draw lines. The impact on the banking system, I think, 

as Dr. Zandi said, that is what you are worried about. Not all small 

banks have this kind of experience in commercial real estate. We 

have a very competitive small banking sector. 

The idea that healthy small businesses who are creditworthy and 

who want to borrow won’t be able to borrow now obviously because 

of the disruptions, we agree with that, but won’t be able to borrow 

in 6 months or 12 months, I am very skeptical of that. 

I think there are major problems in the financial system. I emphasize them all the time. But they are in a different place than 

down here. CIT Group, just to be very concrete, 3 or 4 months came 

to the government for a bailout and said, If you don’t bail us out, 

all the small- and medium-size businesses we work with will have 

their credit disrupted. According to the evidence I have seen on 

this, they were turned down for a bailout. They are going through 

a renegotiation process with the creditors, which is what the commercial real estate developers should do, too, and what they will 

do if you don’t give them a bailout. 

My understanding is that some of the CIT Group customers are 

getting credit from other people, some are facing a 20, 25 basis 

point increase in the cost of the credit. There is no evidence that 

I have seen that what has happened at CIT has caused this kind 

of massive disruption through the rest of the credit system. 

So I am sure Fannie and Freddie could be induced into this market. They probably would be happy to have this kind of opportunity. This is how we got ourselves into trouble the last time 

around. I think you should be careful about expanding their mandates in this subsidized fashion. Once you are in, it is very hard 

to get out. 

Chair Maloney. I want to thank all of you for your responses 

and recognize my dear friend and colleague from the great state of 

New York, Congressman Hinchey. 

Representative Hinchey. Thank you very much. I am sorry I 

missed some of this because of the votes that we had, but I want 

to thank all of you very much for being here and for everything 

that you said in the context of the testimony that you presented. 

I wanted to ask at least one additional question having to do 

with this economic crisis that we are now confronting, and including in that the potential that it could get worse at some time over 

the course of the next few years, and it could get worse unless appropriate action is taken to prevent that situation from getting 

worse. 

The main cause of the economic recession that we have been experiencing was the deregulation of the banking industry, which initially came about in the context of the late 1980s into the 1990s 

by the Federal Reserve and the then-Chairman of that Federal Reserve and then ultimately the repeal of the Glass-Steagell Act in 

the legislation which was passed in 1999. 

So we see on that basis that there was a big conscientious movement over a long period of time to achieve those objectives, and the 

achievement of those objectives was not based on anything that 

46 

was positive for the country. It was based upon what was interpreted as being positive for the people who are regulating the 

banks. And so when you had the repeal of Glass-Steagall, we experienced that situation where there was no longer a separation of 

commercial and investment banks. Also, the congressional ban on 

the regulation of credit default swaps was a major part of that. 

So I think that this is something that should be on all of our 

minds. We see with the effect of the stimulus bill creating some 

positive effects, all of that. But, nevertheless, unless this situation 

is corrected, as it was done in 1933 in the context of the Great Depression and how that provision established in 1933 had such a 

positive effect on the long-term operation of the commercial investment regulatory system in this country, up until recently. 

So I wonder what you might think about this. What do you think 

that we should do, Dr. Johnson? 

Dr. Johnson. I think the way you have articulated the problem 

is exactly right. This is a major risk to the recovery. And even if 

we can get a good 2 or 3 years of solid growth and get our jobs 

back, it is still going to be a major problem. 

I think you also identified exactly the two major tendencies, the 

deregulation of restrictions around banks and the Commodities Future Modernization Act, and everything that led up to that. 

I think we need to break up the biggest banks. I would not try 

to reimpose Glass-Steagall. I think that is trying to make fish out 

of fish soup, which is a pretty hard thing to do. Once you have 

made the fish soup, you are pretty stuck with it. 

But I think you can take these very big banks that are able to 

take these massive risks and put the downside onto us—create this 

big, long-term unemployment issue. You can take them out of the 

picture. You can downsize them. Goldman Sachs, just to take one example, was a $200 billion 

bank in 1998. Now it is a trillion-dollar bank. People are telling 

you, you couldn’t possibly downsize the banks. They are essential 

to the global economy. That I would contest on absolutely every detailed point that the people make. 

But ask yourself this: Why is a trillion dollars the right side for 

Goldman Sachs? If they were a perfectly fine bank at $200 billion, 

$250 or so in 1998, why isn’t that the right size for banks now? 

Lehman was a small broker-dealer back in 1998. It was a $600 billion bank. The bankruptcy was $640 billion when it failed. 

That is too big to fail safely. That is what we have got to avoid. 

That is what we have got to get rid of. 

Representative Hinchey. The allegation is it is too big to fail 

safely. And that is one of the reasons why there is this initiative 

to try to create these big banks so that people who are creating 

them can say, Look, I know we did a lot of bad things. We made 

a lot of mistakes. The whole place is in deep trouble. But, look, we 

are too big. You can’t just collapse this. 

Dr. Johnson. Absolutely. So the latest data we have, the CIT 

group was allowed to fail, go through its own bankruptcy. $80 billion assets. GMAC, which is currently on the table—I would suggest prepackaged bankruptcy for them, by the way, not a bailout, 

but prepackaged bankruptcy, arranged with the help of the government—this is over $200 billion in assets. 

47 

So I think they may well get a bailout. If they do, that is going 

to give you the dividing line. You want more things like CIT 

Groups, fewer things like GMAC if we are going to have a safe financial future. 

Representative Hinchey. Anyone else? One of the things that 

we have just seen, we have lost about 110 banks this year alone. 

That is likely to continue. As it continues, all of these banks, which 

are so important in communities, particularly small communities 

all over the country, it is going to have a very negative effect on 

the economic conditions there in those areas, and that is something 

that we need to try to stop, because those small banks are critically 

important to everything that goes on in those communities. 

There is another aspect of the economic circumstances that I find 

troubling, and that is the concentration of wealth in the hands of 

fewer and fewer people. We now have a set of circumstances that 

if you look at the top 1 percent, you have the same amount of 

wealth in the hands of the top 1 percent, the wealthiest 1 percent 

of the people, that you did in 1928 and 1929, right now. And if you 

look at the top 10 percent, you have a little bit more in the hands 

of the top 10 percent right now than you did in 1928, 1929. 

Now that is something else that is having the effect of downgrading the whole economic circumstances of this economy all 

across this country. Isn’t there something we should be doing about 

that? 

Dr. Johnson. I couldn’t agree more. I think it is a symptom of 

the kind of economy that we have created. And I think that has 

to be addressed through—specifically, I would say taking on the financial sector. The big banks are your major problem. It is obviously affecting the concentration of wealth. 

I think breaking them up would not undermine the dynamism of 

the economy in any way. I think we were discussing perhaps when 

you were out of the room there is a major fiscal adjustment that 

is going to be required in not just this country but all industrialized countries. If you want to stabilize public debt as a percentage of GDP, given health care costs that are coming to us and all 

other OECD countries, the state-of-the-art forecasts are a 4 to 8 

percentage point adjustment in structural fiscal positions across all 

of these countries that have to be new taxes or spending cuts. That 

is not even economics, that is just the arithmetic of stabilizing debt 

levels. 

I think in that context you need to ask who benefited on what 

basis and what are the ways. The tax on excessive risk-taking is 

an idea taken up at the G–20 level. It was in their communique 

from Pittsburgh. Buried in the fine print, but definitely there. 

This is something that would probably generate no more than 

half a percentage point of GDP in the United States. These issues 

are before us now. 

Representative Hinchey. Well, thanks very much. Madam 

Chairman, thank you very much. 

Chair Maloney. Thank you. I have one final question on credit. 

Some economists believe that the supply of credit has fallen because of actions that Congress has taken and the Administration 

and the Fed to restrict certain predatory practices in the mortgage 

and credit card markets. 

48 

Before this committee Professor Stiglitz testified this past spring 

that predatory practices reduced the demand for credit. And, on 

balance, I would like to ask any or all of you, do you think that 

restricting these practices will increase or decrease the amount of 

credit in the market? Anyone? 

Dr. Johnson. 

Dr. Johnson. I would put it this way. Predatory practices in the 

credit industry have massively damaged this economy. Why so 

many people spend beyond their means is they were lured, duped 

into various kinds of loans they couldn’t afford. If there is a reduction in credit coming out of the kind of proposal you propose, I welcome it. I think those predatory practices are appalling from a 

moral point of view and very bad economics. They have added up 

to a first order macroeconomic disaster that we are now trying to 

extricate ourselves from. 

Chair Maloney. It might create economic stability in the financial sector. 

Dr. Zandi. I certainly agree with Simon. It is almost hard to understand that if you limit predatory practices that will restrain 

credit. I think that is just silly on the face of it. But I do think the 

uncertainty created by the debate with regard to regulatory reform 

is probably playing a role in the provision of credit, that until the 

rules are defined, at least a little bit more clearly, these institutions don’t know how to do the math. When they don’t know how 

to do the math, they don’t do anything. 

So basic kinds of stuff like: Will there be a CFPA, what will it 

look like, what are the rules of that going to be? Things with regard to the securitization process, how much ‘‘skin in the game’’ do 

investors need or institutions need to be able to issue securities? 

A whole range of issues. 

So I think one of the key reasons credit—there are many reasons, and this isn’t the most important one, but one of the key reasons for the lack of credit is the still very high level of uncertainty. 

As soon as you can get that nailed down, or closer to getting it 

nailed down, I think the more likely credit will start to flow. 

Dr. Johnson. One reason there is so much uncertainty is because the credit industry has been pushing back so hard against 

the consumer protection initiatives. They are fighting this tooth 

and nail, right, in this building and around here and that is creating an enormous amount of uncertainty. So it is not something 

descended from heaven. It is really created by the opponents of 

sensible reform. 

Chair Maloney. Thank you. 

Dr. Hassett. 

Dr. Hassett. Speaking of opponents of sensible reform, I think 

that reform will move forward if we recognize that the morality of 

the previous episode is really quite challenging in every direction. 

There were predatory lenders, there were predatory borrowers. 

There were people who didn’t really think they were going to pay 

stuff back. There were a lot of people that got tricked into doing 

things and other people that did things that are incorrect. 

I think that if we look at some of the positions of lenders, that 

they come from a defensiveness that is created by a climate that 

49 

is one-sided and doesn’t recognize that they have to deal with people that don’t want to pay them back at times, too. 

Chair Maloney. Thank you. 

Dr. Dynan, you have the last word. 

Dr. Dynan. Thank you. I want to say I do think there were excesses in the middle part of the decade, no doubt, and I do think 

it is appropriate that we have regulation that protects against 

predatory policies. 

We do need to make sure that we don’t overreact. We need to remember that prior to the excesses earlier this decade, there were 

many—credit supply was increasing. And there were many advantages to that. 

That said, I agree with Dr. Johnson in that the goal of regulation 

should be to prevent credit cycles like these and meltdowns like 

these and ultimately, by lending that security to the economy, it is 

going to be a good thing. 

Chair Maloney. Thank you. I want to thank all of you for your 

hard work, for your testimony today. You gave us a great deal to 

think about and gave us some new ideas and explained others. 

Thank you so much. 

[Whereupon, at 12:45 p.m., the committee was adjourned.] 

(51) 

SUBMISSIONS FOR THE RECORD 

52 

PREPARED STATEMENT OF REPRESENTATIVE CAROLYN MALONEY, CHAIR, JOINT

ECONOMIC COMMITTEE

Today’s report from the Bureau of Economic Analysis on 3rd quarter gross domestic product (GDP) provides welcome evidence that the economy is moving from recession to recovery. 

When the President took office in January, our economy was on the brink of an 

economic disaster. 

There was no end in sight to the recession that started in December 2007. 

The idea that the economy would achieve positive growth so soon would have surprised many. Today, it is clear that the economy is moving in the right direction. 

GDP rose by 3.5 percent in the third quarter, after having fallen for an unprecedented four straight quarters. 

This is concrete evidence of the wisdom of the Recovery Act and the positive effect 

it has had on the economy in just eight short months. 

Last week, Dr. Christina Romer, the President’s Chair of the Council of Economic 

Advisers, presented us with compelling evidence that the economy is rebounding 

largely because of the Recovery Act. 

Indeed, she testified that the Recovery Act added between three and four percentage points to economic growth in the third quarter, far beyond what the opponents 

of the Recovery Act thought possible. 

Another piece of welcome news is that personal consumption grew by 3.4 percent 

in the third quarter, largely due to actions taken by Congress and the Administration. 

We are finally seeing signs that consumers are spending more, which could spur 

businesses to hire more workers to meet renewed demand for their goods and services. 

Moreover, I expect that legislation that I worked tirelessly on to end the most 

abusive practices of credit card companies, the Credit Card Holders’ Bill of Rights, 

which Congress passed on an overwhelmingly bipartisan basis, will help increase 

consumers’ demand for credit and encourage creditworthy borrowers to spend. 

The Financial Services Committee recently passed a bill I also introduced to speed 

up the implementation, so that these measures would go into effect on December 

1st. 

Despite significant legislative accomplishments that brought us from economic 

abyss, I believe we still have a long way to go before the economy fully recovers. 

The most pressing economic issue for the nation is job creation. 

The stimulus has helped Americans in need weather the storm, but we must do 

more to get people back to work. 

I look forward to the ideas that our distinguished witnesses have about translating our economic growth into job growth, and their suggestions about any additional measures Congress can take to spur businesses to create more jobs. 

One group that I’m particularly concerned about is the long-term unemployed. 

The longer someone stays unemployed, the harder it is for them to find work. 

The long-term unemployed are stuck between a rock and a hard place. 

First, they are suffering now, which is why the House has already passed legislation expanding unemployment insurance. 

I am optimistic that the Senate will pass this soon. 

Second, the long-term jobless—those who have been unemployed for six months 

or more—may suffer in the future. 

Even when the economy recovers, workers who have been unemployed for a long 

time may no longer have the skills necessary to be competitive in the workforce. 

We must come up with creative ways of helping the long-term unemployed maintain their skills or develop new skills so that once we get back on track and start 

creating jobs, they will not be left behind. 

I thank our distinguished panel of witnesses for their testimony, and I look forward to hearing their thoughts on the most important issues we face—sustaining 

our economic progress and creating jobs for the American people. 

PREPARED STATEMENT OF SENATOR SAM BROWNBACK, RANKING REPUBLICAN

Thank you Chairman Maloney for scheduling today’s hearing on ‘‘The Impact of 

the Recovery Act on Economic Growth,’’ and thank you Dr. Landefeld and other witnesses for taking the time to join us this morning. 

Before making my opening comments, I’d like to pause to recognize Nan Gibson, 

the committee’s Executive Director, to thank her for her years of service to the committee—even if it was on the wrong side of the aisle, and to wish her the best as 

she leaves us to join the staff of the Council of Economic Advisers. 

53 

This morning’s report on GDP provides uplifting news that our economy has finally returned to positive growth. Despite the significant turnaround in growth, 

from an annual rate of ¥0.7% in the 2nd quarter to an annual rate of 3.5% in the 

3rd quarter, I would like to point out that our economy has only grown by $113 billion in ‘‘real’’ 2005 dollars (at an annual rate), and that total GDP remains $128 

billion below where we were at the end of 2008. 

While the turnaround in GDP is positive news to us here in Washington, it provides little solace for the more than seven million workers who have lost their jobs 

since the start of recession and the hundreds of thousands of workers who will lose 

their jobs over the coming months. Proponents of the stimulus claimed that it would 

prevent the unemployment rate from rising above 8% or 9%, and yet it is already 

at 9.8% and will most likely be over 10% by the end of the year. 

I voted against the $787 billion stimulus package because I viewed it as a largely 

wasteful use of taxpayers’ dollars, not to mention a means to permanently increase 

the size of government. I am deeply troubled by the massive run-up in our national 

debt. Whereas we used to argue over millions of dollars, and then billions, we are 

facing annual budget deficits in excess of $1 trillion for the foreseeable future and 

our gross national debt will approach 100% of GDP within the next ten years. These 

figures are astounding and they should cause every one of us great concern and apprehension about the future we are leaving for our children and grandchildren. Our 

generation has been afforded the benefit of relatively low taxes despite high levels 

of government spending, but our children and grandchildren will pay for our fiscal 

negligence through excessive tax rates that confiscate more than half of their hardearned incomes. Meanwhile, we will be enjoying retirement benefits far in excess 

of our contributions. 

Of the $787 billion in appropriated stimulus funds which were purported to be 

spent quickly and efficiently, only $195 billion—about 25%—was spent through the 

3rd quarter of 2009. When the stimulus was passed, promises were made that the 

money would go out the door quickly. As the figures show, this has not been the 

case. 

The $195 billion in stimulus money that has been spent to date has no doubt 

caused a boost—even if temporary and artificial—to GDP growth, but in the long 

run, GDP will be lower as a result of this massive government spending package. 

Furthermore, it seems, based on comments by Administration officials which indicate that the greatest impact of stimulus was felt in the 2nd and 3rd quarters of 

2009, that there is little benefit left to be realized by the nearly $600 billion in remaining stimulus funds. 

The Administration and other forecasters who advocate Keynesian notions of government spending have provided some very rosy estimates of the effects of the stimulus on GDP growth. These estimates have been countered with less favorable estimates of relatively small stimulus impacts on GDP growth. The overly optimistic 

estimates imply that the stimulus alone is responsible for the turnaround in growth. 

This is to suggest that the massive actions taken by the Federal Reserve and the 

Treasury—to the tune of trillions of dollars, and most of which were initiated long 

before the fiscal stimulus took effect—contributed very little to the turnaround in 

growth. Regardless of whether or not one believes these massive interventions by 

the Federal Reserve were appropriate, they have no doubt contributed significantly 

to stabilizing and improving the functioning of our deeply troubled financial system. 

Were it not for these actions by the Federal Reserve and Treasury, there is little 

doubt that today’s report would not indicate the highly positive economic growth 

that it does, and credit for the recovery should be given where credit is due. 

PREPARED STATEMENT OF J. STEVEN LANDEFELD, DIRECTOR, BUREAU OF ECONOMIC

ANALYSIS, U.S. DEPARTMENT OF COMMERCE

Madame Chairman and other Members of the Committee: 

Thank you for inviting me to describe the third-quarter gross domestic product 

(GDP) and related statistics that the Bureau of Economic Analysis released this 

morning. These ‘‘advance’’ statistics are—as always—based on incomplete and preliminary source data that will be revised as more complete and accurate data become available. Tracking an economy that is changing as rapidly as the U.S. economy is changing right now is a challenging task, but we are committed to producing 

advance estimates that provide an accurate general picture of economic activity. 

That picture will become clearer as more comprehensive source data become available in the months to come. These early snapshots are designed to provide public 

and private decision makers with a reliable early read on the evolving U.S. econVerDate Nov 24 2008 14:25 Jul 08, 2010 Jkt 055916 PO 00000 Frm 00057 Fmt 6601 Sfmt 6621 C:\DOCS\55900.TXT SHAUN PsN: DPROCT
54 

omy. Let me walk you through the details of today’s release, and then I’ll be happy 

to answer any questions that you may have. 

The advance estimates that we released this morning show that in the third quarter of 2009, real GDP increased 3.5 percent at an annual rate. In the second quarter, the rate of decline in real GDP moderated, decreasing 0.7 percent, following a 

sharp 6.4 percent decrease in the first quarter. Real GDP declined in 5 out of the 

6 quarters from the fourth quarter of 2007, which NBER determined was the start 

of this recession, to the second quarter of 2009. 

As you know, GDP is comprised of many different components, and I would like 

to discuss highlights of the major components. In the third quarter, consumer 

spending, inventory investment by businesses, residential investment, exports, and 

government spending all rose. These increases were partly offset by a rise in imports. 

The price index for gross domestic purchases, which is the broadest measure of 

inflation confronted by U.S. consumers, businesses, and government, increased 1.6 

percent, following an increase of 0.5 percent in the second quarter. After falling for 

the first two quarters of the year, energy prices rose sharply in the third quarter. 

Excluding food and energy prices, the price index for gross domestic purchases increased 0.5 percent in the third quarter after increasing 0.8 percent in the second. 

Motor vehicles, which show up in all the components of GDP—consumer spending 

on autos and trucks, business and government investment in autos and trucks, investment in inventories by motor vehicle manufacturers and dealers, and exports 

and imports—raised real GDP growth in the third quarter by 1.7 percentage points. 

Excluding the effects of motor vehicles, real GDP increased 1.9 percent in the third 

quarter after decreasing 0.9 percent in the second quarter. 

Consumer spending, which accounts for over two-thirds of GDP, increased 3.4 percent in the third quarter, following a decrease of 0.9 percent in the second. Consumer spending on durable goods increased 22.3 percent. Motor vehicle purchases, 

spurred by ‘‘cash for clunkers’’ rebates in July and August, accounted for most of 

this increase, although, real spending on other durable goods, nondurable goods, and 

services also increased in the third quarter. 

Residential construction rose by 23.4 percent in the third quarter, the first increase in 15 quarters. Prior to the third quarter increase, residential investment fell 

at an average annual rate of 20.9 percent since the fourth quarter of 2005. 

Business nonresidential fixed investment—investments in new plants, office buildings, equipment, and software—fell 2.5 percent in the third quarter, compared with 

a decrease of 9.6 percent in the second. Business spending on durable equipment 

and software rose 1.1 percent in the third quarter after falling 4.9 and 36.4 percent 

in the second and first quarters of 2009, respectively. The rate of decline in investment in nonresidential structures decreased 9.0 percent after decreasing 17.3 and 

43.6 percent in the second and first quarters, respectively. 

Business inventory investment provided a positive contribution to the change in 

real GDP, as businesses drew down their inventories at a slower rate than they had 

in the second quarter. Therefore, more sales were of goods and services produced 

in the third quarter and less out of inventories. Inventories fell about $131 billion 

in the third quarter, compared with a decrease of about $160 billion in the second 

quarter and a decrease of about $114 billion in the first. 

Real exports of goods and services increased 14.7 percent in the third quarter, in 

contrast to a decrease of 4.1 percent in the second. This is the first increase in real 

exports in 5 quarters. Real imports of goods and services increased more than exports, rising 16.4 percent in the third quarter, in contrast to a decrease of 14.7 percent in the second. 

Spending on goods and services by the federal government increased 7.9 percent 

in the third quarter, compared with an increase of 11.4 percent in the second. The 

slowdown in federal spending was accounted for by defense spending. Spending by 

state and local governments fell 1.1 percent in the third quarter, in contrast to an 

increase of 3.9 percent in the second quarter. 

Turning to the American household, real disposable personal income, that is personal income less personal taxes adjusted for inflation, declined 3.4 percent in the 

third quarter after increasing 3.8 percent in the second. The third-quarter decline 

reflected the pattern of tax reductions and government social benefits provided for 

by the American Recovery and Reinvestment Act (ARRA) of 2009, including the 

Making Work Pay Credit and the one-time payments of $250 to recipients of social 

security and other benefits. Excluding these tax reductions and government social 

benefits from ARRA, real disposable personal income decreased 2.0 percent in the 

third quarter after decreasing 0.9 percent in the second. The third-quarter personal 

saving rate was 3.3 percent, compared with 4.9 percent in the second quarter and 

3.7 percent in the first. 

55 

Since the second panel at this morning’s hearing will address the effect of the 

ARRA, let me conclude by describing how it is reflected in GDP and the national 

accounts. BEA’s national accounts include the effects of the federal outlays and tax 

cuts included in the ARRA. Because most of the outlays and tax reductions from 

ARRA during the last three quarters were in the form of grants to state and local 

governments, tax reductions for individuals and businesses, and one-time payments 

to retirees, their effects on GDP show up indirectly through the effects on GDP components such as consumer spending, residential investment, and state and local government spending. Thus, BEA’s accounts do not directly identify the portion of GDP 

expenditures that is funded by ARRA. During each of the second and third quarters, 

the Making Work Pay Credit lowered personal taxes and raised disposable personal 

income about $50 billion (annual rate). During the second quarter, ARRA provided 

payments of $250 to beneficiaries of social security and other programs that raised 

disposable personal income about $55 billion. ARRA also provided special government benefits for unemployment assistance, for student aid, and for nutritional assistance; these special benefits raised disposable income about $49 billion in the 

third quarter and about $35 billion in the second quarter. ARRA also funded grants 

(such as Medicaid) and capital grants (such as highway construction) to state and 

local governments of about $75 billion in the third quarter and $85 billion in the 

second quarter. 

My colleagues and I now would be glad to answer your questions. 

PREPARED STATEMENT OF REPRESENTATIVE MICHAEL C. BURGESS, M.D. 

It’s easy for all of us sitting here to talk about any alleged economic growth 

brought about by the February $787 billion stimulus bill. We’re all employed. But 

the reality is twofold. 

First, while I did not vote for this stimulus bill, $787 billion was made available 

for spending to stimulate the economy, but as of today, only $173.2 billion has been 

spent. Why hasn’t the other $613.8 billion been spent? 

We should have Jared Bernstein here, who oversees the stimulus efforts for the 

Vice President, to inform us why a mere 22% of stimulus dollars have been spent. 

Second, President Obama sold the stimulus on the idea that it would stop unemployment and Members of Congress voted for this stimulus bill to stop the tide of 

job losses, so unless you can show that unemployment has gone down, there is no 

economic growth. 

And the jobs just aren’t there. 

Since the stimulus passed, 15.1 million Americans are unemployed. This is nearly 

DOUBLE the number of unemployed Americans since before the stimulus passed 

last February. 

15.1 million Americans unemployed is nothing compared to the same Bureau of 

Labor Statistics report which states that 17 percent of all American adults—or one 

out of every six civilians—are (1) not working or looking for work but say they want 

and are available for a job; (2) discouraged workers; or (3) workers who want to 

work full-time but due to the economy had to settle for part-time work. This is the 

‘‘U-6’’ report by the Department of Labor and it’s this 17% unemployment number 

which has all of us deeply concerned. 

How many Americans are taking their law degrees and going to work picking up 

garbage? For some this might sound like a promotion, but the reality is there are 

many hardworking Americans who want to work and so take a part time job in the 

hopes of finding a better job. 

So knowing that 35.6% of unemployed have been without work for more then 27 

weeks is unacceptable when there was legislation passed by this Congress less then 

eight months ago to stimulate the economy with 72% of its funds not spent. 

What’s being spent apparently isn’t working. 

If it’s not being spent, then don’t spend anymore. 

At a time when our national deficit is skyrocketing and our national debt is beyond our ability to even comprehend, we need some perspective. With the stimulus 

bill, we could have paid off the $550 billion in outstanding student loan debt in the 

U.S. and still have $237 billion left over. 

There are currently 1,509,180 elementary school teachers in the U.S. With the 

stimulus bill, we could have paid every elementary school teacher’s salary in the 

U.S. for ELEVEN YEARS. 

But instead, we used the stimulus bill to lose nearly seven million jobs. 

That’s not economic growth no matter how you try to qualify it, and we shouldn’t 

have to pay for incompetence. 

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1 Robert S. Kerr Senior Fellow, Vice President, and Co-director, Economic Studies Program. 

The views expressed are my own and do not necessarily reflect the views of other staff members, 

officers or Trustees of the Brookings Institution. 2See Karen E. Dynan, ‘‘Changing Household Financial Opportunities and Economic Security,’’ 

forthcoming in the Fall 2009 issue of the Journal of Economic Perspectives. The comparison is 

based on data from 1962 Survey of Financial Characteristics of Consumers; the 1983, 1989, 

1992, 1995, 1998, 2001, 2004, and 2007 Surveys of Consumer Finances; and an imputation of 

the wealth of respondents to the 2007 Survey of Consumer Finances as of the end of 2008. Since 

Continued 

PREPARED STATEMENT OF KAREN E. DYNAN, BROOKINGS INSTITUTION 1

Chair Maloney, Vice Chairman Schumer, Ranking Members Brady and Brownback, and members of the Committee, I appreciate the opportunity to appear before 

you today to discuss the outlook for consumer spending and the broader economic 

recovery. 

THE OUTLOOK FOR CONSUMER SPENDING

I will begin with the outlook for consumer spending on goods and services, as it 

is the largest component of GDP, and it played an important role fueling the economic expansion earlier in the decade. The available information suggests that the 

fundamental determinants of consumption will support only moderate growth in 

consumption over the next couple of years. 

One factor that will probably restrain consumption will be tepid growth in households’ labor income. As you know, the sharp decline in aggregate demand for output 

has led to one of the largest percent declines in employment since the Second World 

War. Payroll employment has fallen by more than 7 million since the recession 

began, and, although the rate of decline has abated in recent months, we are unlikely to see substantial gains in employment in the near future. When labor demand picks up again, firms are likely to increase workers’ average hours—which fell 

noticeably during the downturn—before increasing the number of workers they employ. Firms tend to pursue this strategy because raising hours is less costly and 

easier to reverse than hiring new workers if the recovery proves transient. Of 

course, longer workweeks would increase workers’ earnings, but the magnitude of 

this response is also likely to be muted. 

If employment and average hours worked rise only slowly, labor income could advance rapidly only if compensation per hour rose rapidly. However, compensation 

has been moving up quite sluggishly in recent quarters, and, with the unemployment rate at its highest level since the early 1980s, it is likely to continue to do 

so. 

Of course, one caveat to this perspective is that household income is not independent of consumer spending. If, for example, the other fundamental determinants 

of consumption were to change in a favorable way, then consumer spending would 

likely grow more rapidly, which would, in turn, feed back into greater strength in 

income. However, as conditions stand now, the most likely outcome is for lackluster 

income growth over the next couple of years. 

Under current law, consumption will also be restrained by a significant increase 

in tax payments over the next few years, as several key tax provisions expire. First, 

the temporary higher exemption limits for the Alternative Minimum Tax (AMT) are 

scheduled to expire at the end of 2009; if allowed to do so, many more taxpayers 

will be subject to the AMT. Second, the tax cuts provided by the Economic Growth 

and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax 

Relief Reconciliation Act of 2003 (JGTRRA), along with the Making Work Pay tax 

credit enacted in the American Recovery and Reinvestment Act (ARRA), are scheduled to expire by the end of 2010. 

Moreover, additional forces should damp consumption relative to after-tax income. 

Compared with the situation prior to the crisis, saving is likely to represent a markedly higher share of after-tax income, and consumption is likely to represent a 

markedly lower share of after-tax income. 

The most powerful of these forces is the massive declines that we have seen in 

household wealth. In the years leading up to the financial crisis, the saving needs 

of many households were met by substantial capital gains on homes and on holdings 

of corporate equities. However, the sharp reversals in the prices of these assets over 

the past couple of years have changed the picture dramatically. I recently studied 

data from surveys of household finances done in 1962, 1983 and then every three 

years since 1989. I estimated that recent declines in asset prices have reduced the 

ratio of non-pension wealth to income for the median household below the levels 

seen over the past quarter-century and similar to the level seen in the early 1960s. 2

62 

the end of 2008, movements in home prices and equity prices have had opposing effects on 

household wealth. 

Households above the median have been left with about as much wealth relative 

to income as their counterparts in the late 1980s and only slightly more than their 

counterparts in the early 1960s. Meanwhile, households at the 25th percentile have 

seen their wealth-to-income ratio fall to the level recorded in the early 1960s, and 

households at the 10th percentile have negative wealth for the first time in at least 

half a century. 

The recent declines in wealth should have the opposite effect of the earlier increases in wealth—they will likely induce households to reduce their consumption 

and increase their saving in order to rebuild their wealth. Indeed, the weight of evidence from statistical studies over the years suggests that one fewer dollar of wealth 

leads to a permanent decline in the level of household consumption of about three 

to five cents, although this range does not encompass the conclusions of every researcher. For the most part, the evidence in these studies also suggests that households move toward their new lower levels of spending gradually over a period of one 

to three years. 

Applying the results of these studies to the declines in wealth that households 

have seen over the past couple of years, I estimate that wealth effects should damp 

consumption growth this year by between 2 and 31⁄2 percentage points and hold 

down next year’s consumption growth by between 1⁄2 and 1 percentage point. In 

doing this calculation, I assumed that household wealth rises at about the same rate 

as disposable income through the end of next year. The negative wealth effects could 

be even larger if stock prices turn down again or house prices continue to fall (a 

topic to which I will return later in my remarks). 

The personal saving rate will probably also be boosted by factors beyond wealth. 

Earlier this decade, many analysts came to the view that the economy had entered 

a ‘‘Great Moderation,’’ a marked long-run reduction in economic volatility. The experience of the past couple of years has presented a substantial challenge to that view. 

Many households have likely revised upward the amount of risk they see in their 

economic environment. Accordingly, one would expect households to reduce their 

spending so as to raise their precautionary savings. 

Part of this increase in precautionary saving may occur as a reduction in borrowing. Households have just had a vivid lesson about the risks associated with 

high leverage, and many will be more reluctant to take on large amounts of debt 

to fund spending. 

Households’ borrowing to finance consumption is also likely to be crimped by a 

more restrictive supply of credit. Since the financial crisis and economic downturn 

began, lenders have sharply reduced their willingness to extend credit to households. With unemployment rates remaining very high in coming quarters, lenders 

are likely to continue to see heightened risk in lending to households for some time 

to come. Further, the supply of credit seems unlikely to return to the levels seen 

earlier this decade even after the economy returns to full strength, as lenders, like 

households, have probably marked up their expectations of economic volatility over 

the long run. Regulatory actions should serve to reinforce the greater restrictiveness 

of lenders; indeed, the Federal Reserve and Congress have already taken steps to 

restrict some types of mortgage lending and certain practices among credit card 

lenders. 

All told, I expect that consumer spending will move up at a modest pace in coming 

quarters because of weak income growth as well as higher saving and lower borrowing. Although this outlook contributes importantly to my expectation of a relatively weak overall recovery, I should note that higher household saving and lower 

household borrowing have the important positive aspect of leaving the economy in 

a more solid and more sustainable position. At the household level, the restructuring of balance sheets will leave households less vulnerable to disruptions to their 

incomes and to unexpected spending needs. At the national level, higher saving will 

help to correct what many analysts believe are unsustainable imbalances in trade 

and capital flows between countries. 

THE OUTLOOK FOR THE BROADER ECONOMY

Turning to the broader economy, I share what seems to be the consensus view 

that we are not likely to see the rapid snapback in activity that has followed many 

previous downturns. As with consumer spending, the most probable outcome seems 

to be a moderate expansion of economic activity over the next couple of years. 

To be sure, the consensus view may not turn out to be correct. Two years ago, 

for example, most analysts did not foresee the deep recession that we have experiVerDate Nov 24 2008 14:25 Jul 08, 2010 Jkt 055916 PO 00000 Frm 00066 Fmt 6601 Sfmt 6621 C:\DOCS\55900.TXT SHAUN PsN: DPROCT
63 

3See Larry Cordell, Karen E. Dynan, Andreas Lehnert, Nellie Liang, and Eileen Mauskopf, 

‘‘The Incentives of Mortgage Servicers and Designing Loan Modifications to Address the Mortgage Crisis,’’ in Robert W. Kolb, ed., Lessons from the Financial Crisis (forthcoming). 

enced. Similarly, the recovery could well be stronger or weaker than most forecasters now expect. 

That said, although the economy appears to have reached a turning point, none 

of the major components of private aggregate demand seem poised for a sharp recovery. As I have just described at length, consumer spending is unlikely to expand 

robustly over the next year or so. Indeed, consumer spending has rarely led the way 

out of downturns in the past. All recoveries are different, of course, but, on average, 

the saving rate has tended to move sideways after the economy hits bottom, implying that consumer spending has generally increased as rapidly as income and overall economic activity. 

In the housing sector, the long contraction appears to have come to an end, with 

residential construction, home sales, and homes prices all showing signs of firming 

in recent months. Indeed, homes are much more affordable than they were a few 

years ago, with national home prices now down more than 30 percent from their 

peak in 2006 and interest rates on conforming mortgages roughly 1.5 percentage 

points below their average over the past decade. However, a strong rebound in construction seems very unlikely. The stock of unsold new homes remains very high, 

particularly when measured relative to sales. In addition, housing demand will likely be held back for some time by the weak financial situations of many households. 

Moreover, many households that are not qualified for government-supported mortgages—either with backing from the government-sponsored enterprises or through 

the Federal Housing Authority or the Department of Veterans Affairs—are finding 

it extremely difficult to obtain a mortgage. 

One downside risk to this already soft outlook stems from the foreclosure crisis. 

In 2008, lenders initiated more than 21⁄4 million foreclosures, up from a pace of 11⁄2

million in 2007 and an average of less than 1 million over the preceding three years. 

With various foreclosure moratoria expiring in early 2009, the rate at which foreclosures were initiated shot up to an annual pace of 3 million. 3 Foreclosure starts 

generally affect housing markets with a substantial lag, as the foreclosure process 

can take many months or even years to complete. Thus, although improvements in 

economic conditions and this year’s government initiatives to prevent foreclosures 

may damp the foreclosure start rate, the rate at which distressed properties are 

coming to market is likely still building. We lack good estimates of how large the 

influx will be and how it will affect the housing market, but one cannot dismiss the 

possibility that these properties will depress housing construction and home prices 

yet further. 

Business investment in equipment and structures is likely to be held down by the 

large amount of excess capacity. Falling demand for manufactured products over the 

past two years has left capacity utilization in that sector extremely low relative to 

historical norms. Outside of manufacturing, the financial sector, which traditionally 

has invested heavily in high-tech equipment, has shrunk markedly and is likely to 

stay much smaller than its pre-crisis size. More broadly, weak demand for output 

should damp business investment in many sectors. Business spending on structures 

is likely to be particularly sluggish, amid high vacancies in the office sector and very 

tight financing conditions for firms that do wish to start new projects. 

Business investment in inventories is probably contributing to growth in the second half of this year. The sharp reduction in demand for goods led businesses to 

liquidate their holdings of inventories at a staggering rate in the first half of the 

year. But, with the recent stabilization of demand, the pace of destocking should be 

slowing, and, at some point, firms will begin to rebuild inventories. This pattern appears to have been boosting production of late and should continue to do so for several quarters. However, inventory investment cannot be counted on as a source of 

sustained growth as its effects on production tend to be neutral once inventories are 

brought in line with sales. 

Foreign growth has picked up of late, particularly in many Asian nations. This 

recovery has led to an increase in demand for U.S. exports. However, imports have 

also turned around with the firming of domestic demand. On balance, net exports 

appear to be contributing little to the U.S. recovery at this point. 

In sum, economic activity is on track to expand over the next couple of years but 

only at a modest pace. As a result, the economy is unlikely to see full employment 

for many years, prolonging the current economic distress for millions of households. 

64 

4See Congressional Budget Office, ‘‘The Budget and Economic Outlook: An Update,’’ August 

2009. 5For more discussion of the Home Affordable Modification Program and its limitations, see 

Larry Cordell, Karen E. Dynan, Andreas Lehnert, Nellie Liang, and Eileen Mauskopf, ‘‘Designing Loan Modifications to Address the Mortgage Crisis and the Making Home Affordable Program,’’ Federal Reserve Finance and Economics Discussion Series Paper No. 2009-43, October 

2009. 

POLICY OPTIONS

In light of the expected slow pace of the recovery, many policy analysts and other 

observers are considering possible policy actions to spur demand for output and employment. Some of these policy actions would be broadly stimulative, while others 

would have narrower, targeted effects. 

As I noted earlier, under current law, households’ disposable income will be reduced by the expiration at the end of this year of the higher exemption limits for 

the Alternative Minimum Tax and the expiration by the end of next year of the 

2001 and 2003 tax cuts and the Making Work Pay tax credit. According to the Congressional Budget Office (CBO), these developments will depress disposable personal 

income in 2011 by a projected $300 billion or nearly 3 percent. 4 Pushing back the 

date at which these provisions expire would provide more support for consumer 

spending. 

That said, policymakers should be mindful of the long-term need for fiscal discipline. Even with the expiration of these tax provisions, CBO projects that U.S. 

budget deficits will be more than 3 percent of GDP five to ten years from now and 

that federal debt held by the public will be rising relative to GDP. High budget deficits reduce saving and investment and, in turn, damp economic growth; they also 

risk inducing a crisis in which the holders of U.S. debt lose their appetite for that 

debt. Thus, while it may make sense for Congress to take steps that reduce taxes 

on households in the short run, it is imperative that policymakers form a plan to 

bring revenues back in line with spending over the longer run. 

More targeted policy changes can generally be divided into those that bolster job 

creation and those that provide other relief to households that have suffered job 

losses. In the former category, additional aid to state and local governments would 

reduce the need for cutbacks in employment by those governments and by related 

private-sector entities. Even if one thinks that state governments should restrain 

their activities and employment over time, the abrupt cutbacks enforced by falling 

tax revenue in this recession have not served the broader economy well. 

As another strategy for encouraging job creation, some analysts have proposed offering tax credits for firms that hire new workers. Designing and implementing effective tax incentives for hiring is difficult, however. One challenge is that, in the 

dynamic U.S. job market, many firms are creating jobs even in tough economic 

times. Therefore, a tax credit for all job creation tends to distribute money to many 

firms that would have done that same hiring anyway. On the other hand, restricting 

a tax credit to employment increases that would not otherwise have occurred is 

hard. 

With regard to initiatives that provide other types of relief to households that 

have suffered job losses, several possibilities would help households sustain their 

spending and thereby bolster the overall recovery. For example, the efforts that 

Congress is making to extend unemployment insurance for those who are scheduled 

to exhaust their benefits by the end of this year would be helpful. Likewise, an extension of the subsidy of COBRA health-insurance premiums for laid-off workers 

would also be helpful. 

Policymakers could also adopt policies to help homeowners who have lost their 

jobs meet their mortgage obligations. The Administration’s loan modification program, the Home Affordable Modification Program, should help many borrowers for 

whom a moderate permanent adjustment to mortgage payments would make those 

payments sustainable over the long run. However, the program is not well-suited 

to cases where homeowners have suffered large temporary declines in income, because the required modifications will often be too costly to qualify for the program. 5

Nor do costly permanent modifications make sense for these cases, as they should 

not be needed once the homeowners have found other jobs. Instead, temporary assistance for meeting mortgage obligations would help support the spending of laidoff workers, and, by making mortgage default less likely, reduce the downside risks 

to the housing outlook that I noted above. 

Another way to support the housing market would be to extend the first-time 

homebuyer tax credit, which is scheduled to expire on December 1st of this year. 

This approach would likely spur some new home sales. However, as my colleague 

Ted Gayer at the Brookings Institution has argued, the tax credit may be a costly 

65 

6See Gayer, Ted ‘‘Should Congress Extend the First-time Homebuyer Tax Credit?’’ at http:// 

www.brookings.edu/opinions/2009/0924ltaxlcreditlgayer.aspx. 

way to accomplish this goal, as most of the homebuyers expected to receive the credit would probably have bought homes without the credit. In addition, to the degree 

that the tax credit simply shifts additional households from renting to owning, it 

does not address the fundamental problem of oversupply in the housing market. 6

CONCLUSION

Recent economic data point to a decided firming of economic activity. A great deal 

of uncertainty surrounds the question of the strength and speed of recovery, but the 

most likely course for the economy seems to be gradual expansion. Consumer spending on goods and services, the largest component of aggregate demand for output, 

is likely to be held to a modest upward trajectory over the next of couple years by 

weak income growth, higher saving, and lower borrowing. Likewise, the fundamental determinants of other major components of private demand appear to be 

supportive of only moderate growth in these categories. Policymakers have some options that would bolster the recovery and increase the speed with which the economy returns to full employment; considerations of such actions should be mindful 

not only of the short-run benefits but also of the potential long-run costs, particularly in terms of the budget deficit. 

Thank you very much. 

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