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55–916 2010

S. HRG. 111–523 

THE CHALLENGE OF CREATING JOBS IN THE 

AFTERMATH OF ‘‘THE GREAT RECESSION’’ 

HEARING 

BEFORE THE

JOINT ECONOMIC COMMITTEE 

CONGRESS OF THE UNITED STATES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

DECEMBER 10, 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. Vic Snyder, a U.S. Representative from Arkansas ...................................... 4 

Hon. Michael C. Burgess, M.D., a U.S. Representative from Texas ................... 5 

Hon. Elijah E. Cummings, a U.S. Representative from Maryland ...................... 7 

WITNESSES

Statement of Honorable Joseph E. Stiglitz, Nobel Laureate, Professor, Columbia University, Former Chairman, Council of Economic Advisers, New York, 

NY ......................................................................................................................... 8 

Statement of Dr. Russell Roberts, Professor of Economics, George Mason 

University, and the J. Fish and Lillian F. Smith Distinguished Scholar 

at the Mercatus Center, and a Research Fellow at Stanford University’s 

Hoover Institution, Fairfax, VA .......................................................................... 13 

SUBMISSIONS FOR THE RECORD

Prepared statement of Chair Carolyn B. Maloney ................................................ 36 

Prepared statement of Senator Sam Brownback, Ranking Minority .................. 36 

Prepared statement of Representative Kevin Brady ............................................ 37 

Prepared statement of Joseph E. Stiglitz .............................................................. 39 

Prepared statement of Russell Roberts .................................................................. 64 

Chart titled ‘‘Current Recession Characterized by Precipitous Fall in Private 

Sector Job Creation’’ ............................................................................................ 69 

(1) 

THE CHALLENGE OF CREATING JOBS IN THE 

AFTERMATH OF ‘‘THE GREAT RECESSION’’ 

THURSDAY, DECEMBER 10, 2009 

CONGRESS OF THE UNITED STATES, JOINT ECONOMIC COMMITTEE, Washington, DC. 

The committee met, Pursuant to call, at 10:08 a.m., in Room 210, 

Cannon House Office Building, The Honorable Carolyn B. Maloney 

(Chair) presiding. 

Representatives present: Maloney, Hinchey, Cummings, Snyder, Brady, Burgess, and Campbell. 

Staff present: Paul Chen, Gail Cohen, Colleen Healy, Elisabeth 

Jacobs, Michael Neal, Barry Nolan, Annabelle Tamerjan, Andrew 

Tulloch, Andrew Wilson, Rachel Greszler, Lydia Mashburn, Jane 

McCullogh, Ted Boll, Gordon Brady, Dan Miller, and Robert 

O’Quinn. 

OPENING STATEMENT OF THE HONORABLE CAROLYN B. 

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

Chair Maloney. The committee will come to order. 

I am Congresswoman Maloney, and I recognize myself for 5 minutes. 

For the first time since the recession began 2 years ago, the labor 

market appears to have stabilized. After month after month of punishing losses, November’s employment picture was relatively stable. 

Less than a year ago, job losses were growing more and more severe. Last November, the economy shed 600,000 jobs. Losses increased until January, when they hit a post-Great Depression 

record of 741,000 jobs lost, the last month President Bush was in 

office. 

But we turned a corner. Job losses have steadily fallen for the 

last six months. Yet there is no escaping the cruel math of recoveries. The recovery of the job market lags behind the recovery of 

the broader economy. Businesses must have more customers before 

they add employees. 

Although the labor market appears to be stabilizing, too many 

Americans remain out of work. More than 15 million workers are 

unemployed. While we have brought the economy back from the 

brink, we are not yet where we need to be in terms of job creation. 

The mission is to create high-quality private-sector jobs. Con- gress has already done a great deal of work on this front. The $700 

billion Recovery Act included a tax cut for 95 percent of American 

families and created jobs while investing in clean energy technologies, infrastructure, and education. We see those investments 

2 

paying off in the steadily improving labor market figures. The effect of the stimulus on job creation has been verified by the nonpartisan Congressional Budget Office. Just last month, we extended the $8,000 first-time homebuyers 

credit that will spur construction jobs. 

We extended tax relief to small businesses. We are boosting 

funding for small business loans via the Small Business Administration. These two initiatives should spur hiring. 

Earlier this week, President Obama announced a new job creation agenda with three key initiatives to accelerate job growth. 

First, we need to focus on small businesses. Small businesses are 

the engine of the American economy. By helping small businesses 

expand investments and access credit, they can fuel job growth. 

Second, we need to invest in our future by rebuilding America’s 

crumbling infrastructure. Finally, we need to focus on green jobs. 

Smart, targeted investments in energy efficiency can help create 

jobs while improving energy security and saving consumers money. 

Congress and the President will work together to aggressively 

pursue a job creation agenda that speeds the labor market recovery. Of course, some of those initiatives will require new spending, 

and we are committed to transparency regarding the cost of our 

initiatives. 

But let me be clear: While putting Americans back to work today 

may require deficit spending, the dangers of inaction are even more 

costly. If we do not invest in job creation, we will pay later in the 

form of higher payments to unemployment insurance, food stamps, 

welfare, and other entitlements for a ballooning number of out-ofwork Americans and their very hard-hit suffering families. 

Nearly 6 million Americans have been unemployed for 6 or more 

months. Over 3 million Americans have been unemployed for over 

a year. Research shows that the longer a worker is out of work, the 

harder it is for him or her to gain employment. We must invest in 

these workers with aggressive job creation policies, coupled with 

targeted job training initiatives. Otherwise, we face a long-term 

cost burden far more expensive than smart spending on job creation investments today. 

Our challenge today is immense. While the economy may be on 

the road to recovery, the labor market remains on shaky footing. 

We Americans are a hard-working, resilient people, but the millions who have been battered by the economic storm need our help 

today in getting back to work, and I am confident that we are up 

to the task. 

I am thrilled that we are joined today by Dr. Joseph Stiglitz, one 

of America’s brightest economic minds, who is here to help us learn 

more ways to accomplish our goal of a rapid and complete labor 

market recovery. And I welcome also Dr. Roberts. Thank you both 

for being here. 

I now recognize Mr. Brady for 5 minutes. 

[The prepared statement of Representative Maloney appears in 

the Submissions for the Record on page 36.] 

OPENING STATEMENT OF THE HONORABLE KEVIN BRADY, A 

U.S. REPRESENTATIVE FROM TEXAS 

Representative Brady. Thank you, Madam Chair. 

3 

I would like to ask unanimous consent to insert the opening 

statement of Senator Brownback into the record. 

Chair Maloney. Without objection. 

[The prepared statement of Senator Brownback appears in the 

Submissions for the Record on page 36.] 

Representative Brady. I join the chairwoman in welcoming Dr. 

Stiglitz and Dr. Roberts and look forward to hearing the views of 

these two distinguished economists. 

The economy remains the number one issue for Americans and 

my constituents in Texas. They are apprehensive, in some cases 

frightened, about the direction the economic policy has taken in 

Washington. 

A new Bloomberg survey of the American public reveals the vast 

majority of the Nation, 60 percent, believe the stimulus has had no 

effect or is actually hurting the economy. More troubling, nearly 

half say they feel less financially secure today than they did when 

President Obama first took office. And their pessimism grows about 

the willingness and the ability of the government to reduce the 

staggering deficit. 

The recent hastily arranged job summit and calls by the President for Stimulus II are further signs that this administration’s 

economic policies are failing the American public. Consumers are 

frightened by the debt and their job future and are understandably 

reluctant to spend. Businesses of all sizes are worried, reluctant to 

add new workers while Washington promotes higher health care 

costs, energy costs, more regulation, and new taxes. 

The White House and this Congress have taken their eyes off the 

economic ball, opting instead to pursue ideological agendas that 

contribute nothing to our economic recovery and, in fact, fuel fear 

among job creators along our Main Streets. We need to stop ‘‘frightening the horses’’ if we hope for a stable and reliable economic recovery led by our local businesses, rather than the government. 

The United States is at an economic crossroads. The road to the 

right is a free market economy in which the decisions of Americans 

acting as entrepreneurs, consumers, workers, investors, and savers 

are determinative, while the road to the left is a social market 

economy in which the Federal Government plays a controlling role. 

To the right, Congress would gradually reduce Federal budget 

deficits by restraining the growth of Federal spending and pruning 

unnecessary or ineffective programs. Reforming health care on this 

path would focus on empowering patients and lowering costs. 

To the left, Congress would continue its reckless spending. Reforming health care on this path would focus on empowering the 

Federal bureaucracy and expanding health care entitlement benefits with little consideration about long-term costs. 

To the right, Congress would direct the Treasury to sell its 

shares in Chrysler, Citigroup, GMAC, and General Motors and to 

truly privatize Fannie Mae and Freddie Mac as quickly as possible. 

Once again, the market will determine which companies prosper or 

fail. 

To the left, Congress would establish an industrial policy of the 

United States, determining winners such as green technologies and 

losers such as oil and natural gas production based on political criteria. Housing is one of the few sectors of the U.S. economy in 

4 

which the Federal Government has pursued an industrial policy. 

The collapse of the housing bubble and the insolvencies of Fannie 

and Freddie should warn us about the dangers of mixing public 

purpose and private profits. 

To the right, necessary regulations would be as simple as possible and fairly enforced. Old regulations would be regularly reviewed, and regulations that have proved costly, ineffective, or unnecessary would be eliminated. 

To the left, new regulations would multiply. The cost or effectiveness of regulation would matter little so long as their intent is 

good. 

To the right, Congress would stabilize the Federal tax burden as 

a percent of GDP at its post-World War II average. Congress would 

reform the Federal income tax system to encourage both domestic 

and foreign investors to make job-creating investments in the 

United States, rather than forcing them abroad. 

To the left, Congress would allow the Federal tax burden to rise 

as a percent of GDP. Congress would inevitably be forced to increase the income and payroll tax rates paid by nearly all Americans, not just the wealthy. 

To the right, Congress would aggressively pursue new customers 

around the globe, tearing down barriers and creating U.S. jobs by 

approving the pending free trade agreements with Colombia, Panama, and South Korea and engaging in dynamic growing markets, 

such as the Asia Pacific region. 

To the left, Congress would block these agreements, withdraw 

from the global marketplace, and impose protectionist measures 

that block access to the U.S. market at the behest of a few labor 

leaders and other activists. 

History both here and abroad proves that the right road leads us 

to the same economic growth, rising personal income, and expanding job opportunities, while the left road leads to stagnation. 

The question before our distinguished economists Dr. Stiglitz and 

Dr. Roberts today is which road would you choose? 

I yield back. 

[The prepared statement of Representative Brady appears in the 

Submissions for the Record on page 37.] 

Chair Maloney. Thank you very much. 

Congressman Snyder. 

OPENING STATEMENT OF THE HONORABLE VIC SNYDER, A 

U.S. REPRESENTATIVE FROM ARKANSAS 

Representative Snyder. Thank you, Madam Chair. 

I don’t normally do opening statements. But I have got to tell 

you, listening to some of my Republican colleagues in Washington 

here talk about deficits is a bit like listening to Bonnie and Clyde 

at a job interview to be a bank security guard. 

Have we forgotten the history of the last couple decades? 1997, 

the Balanced Budget Act of 1997 under Bill Clinton’s leadership? 

It was a bipartisan bill. Newt Gingrich was Speaker. I voted for it. 

It led to surpluses in fiscal years ’98, ’99, and 2000. Remember 

those days? Surpluses as far as the eye can see. Alan Greenspan 

testifying, gee, we may pay down the national debt too fast. That 

5 

was not a dream, was it, Dr. Stiglitz? That really happened. Testified we might pay down the national debt too fast. 

Then what happened? A new team in town. President Bush 

comes in. An economic plan in April of 2001 that I did not vote for. 

I think it was one of the best votes I have made here. And instead 

of having budget surpluses as far as the eye can see, we are now 

back into the worst indebtedness that the United States has ever 

seen. 

All of us are concerned about the indebtedness, but to hear folks 

talking about that somehow this has been created in the last 9 or 

10 months of the Obama administration is just foolhardy. It just 

doesn’t make any sense. 

In order to solve problems we have to understand the cause of 

the problems, and the cause of the problems was a bad economic 

policy over the last 8 or 9 years. 

I want to say just a word about the Stimulus Act. I just want 

to read, Madam Chair, if I might, from the CBO report that came 

out just in the last few weeks. 

‘‘CBO estimates that in the third quarter of calendar year 2009 

an additional 600,000 to 1.6 million people were employed in the 

United States and real gross domestic product, GDP, was 1.2 percent to 3.2 percent higher than would have been the case in the 

absence of the Stimulus Act. 

Now is that good enough? Hell, no, it is not good enough. But 

let’s not pretend that somehow there have not been positive benefits. We have certainly seen that in Arkansas with some of the infrastructure projects that have gone on, the tax cuts for millions of 

Americans that have helped. 

I just think that, as we look ahead, time does not start today. 

The history of this country started a couple of centuries ago, and 

we need to learn from what has happened in the past with regard 

to our policies. We have an opportunity I think to get this country 

going in the right direction, but it will be more difficult if we somehow reform history as we move forward. 

Thank you, Madam Chair. 

Chair Maloney. Thank you very much. 

I understand Mr. Campbell is placing his opening comments in 

the record. All members have time to put that in the record. 

Chair Maloney. Dr. Burgess. 

OPENING STATEMENT OF THE HONORABLE MICHAEL C. 

BURGESS, M.D., A U.S. REPRESENTATIVE FROM TEXAS 

Representative Burgess. Thank you, Madam Chair. I will be 

brief. 

I am grateful for the witnesses we have today. I think this gets 

to one of the fundamental questions that needs to be answered and 

perhaps one of the fundamental differences we have between us on 

different sides of this dais up here: Who is the better person for 

creating jobs in this economy? Is it the government or is it the private sector? 

The Federal Government currently employs over 1.8 million people. Wal-Mart, a similar number, and no one can doubt that WalMart has been a profitable enterprise. The Federal Government, 

not so much, a debt of $12.1 trillion; and we will go up sometime 

6 

before the end of this month another $1.8 trillion on our debt limit. 

So if we were a business, we would clearly not be in business any 

longer. 

Now the stimulus bill passed in the spring, the $787 billion stimulus bill. The academic conversation about who was the appropriate creator of jobs was one that was had at that time. With that 

vote, it was determined that the public sector was the appropriate 

creator of jobs. And once we crossed irrevocably that bridge—the 

belief that the government knows better than the private sector on 

how to create jobs—it doesn’t matter how much money we spend. 

It is now expected that the Federal Government must spend the 

money. 

However, the government can’t continue to spend and spend our 

way into what might be described as a more normal unemployment 

number. Ben Bernanke said on Monday that he expects unemployment to stay between 9.3 and 9.7 percent over the next year. At 

that rate, we wouldn’t get back to what many of us would like to 

see in an unemployment rate for 6 years. And today we hear that 

in just 1 week, 474,000 more Americans have filed for unemployment. 

If we consider this, the Federal Government has spent $787 billion to create a number of jobs that we can’t actually really determine. Not even the head of the stimulus board is willing to certify. 

But even assuming that nearly a million jobs have been saved or 

created, that is a cost of roughly $800,000 per job, if you believe 

that the government is the right person to do that. Then compare 

that with the certain fact that it costs the private sector somewhere 

between $55,000 and $90,000 to create a job, and that is a job with 

some benefits, perhaps health insurance, perhaps some retirement 

package. Now whether you are good at math or not, it doesn’t matter. But that savings of nearly $700,000 if the private sector creates a job versus what the public sector spends is significant. 

So as Congress, as a legislative body, we must consider what we 

can do to encourage the private sector to help create jobs. 

The reauthorization of the highway infrastructure bill is one that 

we could consider. We put some money into the infrastructure in 

the stimulus bill. Some people would argue we didn’t do enough in 

that regard. But we have been sitting on a reauthorization pretty 

much all year, and that is something that we could do. President 

Eisenhower, of course, led the way with the creation of the interstate system, and certainly that was a job creator when that program was begun. 

Most importantly, we have got to stop damaging the environment 

for the small business and the entrepreneur that personally goes 

to work every day, trying to think of how to get ahead and how to 

grow their business. We spend so much time up here renaming 

post offices, but maybe that is a good thing. Because if we are renaming post offices at least we are not damaging the economic environment any further. 

Well, let’s stop making the environment hostile for businesses 

with things like cap-and-trade, our energy policy, the health care 

monstrosity, and now this latest TARP II bill that we will have on 

the floor today. It seems like that if we would do things to create 

7 

stability within the business environment and get out of the way 

that that might be a better trajectory to follow for job creation. 

But I am anxious to hear from our witnesses today. 

With that, I yield back the balance of my time. 

Chair Maloney. Thank you. 

Congressman Cummings is recognized. 

OPENING STATEMENT OF THE HONORABLE ELIJAH E. 

CUMMINGS, A U.S. REPRESENTATIVE FROM MARYLAND 

Representative Cummings. Good morning. Thank you, Madam 

Chair. 

Today’s hearing is yet another reminder why we must build upon 

the success of the American Recovery and Reinvestment Act or risk 

a backslide into conditions like those we saw earlier this year when 

we were losing over 700,000 jobs every month. 

I, unfortunately, may have to leave, because I have got two other 

hearings going on. But I want to hear as much of this testimony 

as I possibly can. 

There have been many such hearings held in the House Transportation and Infrastructure Committee, and we have been repeatedly briefed on the projects around the Nation that have produced 

immediate gains through long-term investments, and that is what 

we are doing now over there in the Transportation Committee. 

However, my colleagues on the right continue to argue that the 

money can be better spent by paying down the debt and reducing 

the deficit. 

It is a tough position to argue against. Who doesn’t want fiscal 

responsibility from their government? But abandoning the long-suffering and long-term-unemployed citizens in Baltimore and all over 

this country is a shortsighted world view and one I simply cannot 

endorse. Not only is abandoning these Americans a moral failing, 

but it is bad fiscal policy as well. The result would be higher future 

costs for unemployment insurance, food stamps, public health benefits, as well as lower property values and higher crime rates. 

But I will stand steadfast by my original statement that it is a 

moral failing to continue to let our constituents lose their homes, 

their savings, and their health care in the name of supposed fiscal 

responsibility after 8 years of gross fiscal irresponsibility and blatant catering to the wealthiest among us. 

That is why I wholeheartedly support President Obama’s continued efforts to help the economy recover. In addition to the infrastructure investments, the proposal offers tremendous assistance to 

small businesses, the engine that drives our greater economy. 

Since taking office in January, the President has not lost sight 

of the ultimate goal of helping all Americans recover. Last fall, 

when we were told that the sky was falling, we took action to bail 

out Wall Street and banks all over America. However, record bonuses now flow from those same bailed-out firms, and lobbyists tell 

us the increased consumer protections currently being debated on 

the floor will spell the end of business as we know it. I don’t buy 

it. It only further entrenches me in the mindset that stronger consumer protections are exactly what we need. 

Further, the financial regulatory reform bill being considered on 

the House floor this week will provide $3 billion for short-term 

8 

loans to unemployed homeowners nearing foreclosure. This is the 

kind of relief that can move us from trial modifications to permanent stability. 

While we took the necessary action to stabilize the financial system last fall, the time has come to embrace consumer protection, 

job creation, and real foreclosure prevention in order to meet the 

larger goal of creating a recovery for not just Wall Street but for 

Main Street and for all of Americans. 

I welcome the testimony of our witnesses this morning, and I 

look forward to a frank and productive discussion. 

With that, Madam Chair, I yield back. 

Chair Maloney. Thank you very much. 

I would now like to introduce our distinguished panel. 

Professor Joseph Stiglitz is a university professor at Columbia 

University in New York City and Chair of Columbia University’s 

Committee on Global Thought. He is also the cofounder and executive director of the Initiative for Policy Dialogue at Columbia. 

In 2001, he was awarded the Nobel Prize for Economics. Dr. 

Stiglitz was a member of the President’s Council of Economic Advisers from 1993 to 1995 and served as its chairman from 1995 to 

1997. He then became chief economist and senior vice president of 

the World Bank from ’97 to 2000. He has received numerous 

awards and has been called the People’s Professor. 

Professor Russell Roberts is professor of economics at George 

Mason University, a distinguished scholar, and a research fellow at 

Stanford University’s Hoover Institution. He is the author of a series of novels which discuss economic principles. His first novel, 

‘‘The Choice: A Fable of Free Trade and Protectionism,’’ was named 

one of the top 10 books of the year by Business Week and one of 

the best books of the year by the Financial Times when it was first 

published in 1994. Professor Roberts is the host of the weekly 

podcast series EconTalk and is a frequent commentator on NPR’s 

Morning Edition and All Things Considered. 

We welcome both of you and look forward to your testimony. 

Both of you will have 10 minutes for your testimony. We usually 

have 5 minutes, but this topic is critical to our country. We look 

forward to your thoughts. 

Dr. Stiglitz and then Dr. Roberts. Thank you. 

STATEMENT OF HONORABLE JOSEPH E. STIGLITZ, NOBEL 

LAUREATE, PROFESSOR, COLUMBIA UNIVERSITY, FORMER 

CHAIRMAN, COUNCIL OF ECONOMIC ADVISERS, NEW YORK, 

NY 

Dr. Stiglitz. Thank you very much. It is a pleasure to address 

you concerning the state of the economy and what needs to be 

done. 

Though the economy today is far better than a year ago, it is no 

exaggeration to say the situation remains bleak. We are at a critical stage in our recovery. The banks have been rescued and are 

set to pay out large amounts in bonuses. Yet there remain severe 

problems in our financial markets, with mortgage foreclosures continuing apace and massive problems in commercial real estate on 

the horizon. 

9 

The suffering of homeowners who have lost much of their home 

equity, if not their homes, and workers who have lost their jobs is 

palpable. The divide between Wall Street on the one hand and the 

rest of the country, and even parts of the financial system that 

have received special favors from Washington and those that have 

not, has perhaps never been greater in recent memory. The fact 

that the stock market is up or credit markets are less frozen should 

not distract us from the problems ahead. 

These are especially grave in the labor market. We should not be 

fooled by the fact that the unemployment rate this month dropped 

by .2 percent to 10 percent. More than one out of six workers who 

would like a full-time job still can’t get one. Such an unemployment 

rate should be unacceptable. 

In my written testimony, I describe how bad the situation in the 

labor market is and why I am pessimistic concerning a quick recovery, a view that I think is now shared by the Fed. We will be lucky 

if the unemployment rate returns to a normal level before 2012 or 

2013, unless strong measures are taken soon; and, even then, the 

prognosis is not good. 

I also explain why it would be shortsighted—even more shortsighted than those in the financial markets who got us into the 

mess—if we were to give in to deficit fetishism. We would be myopic in two senses: to focus on one side of the balance sheet rather 

than both sides (the assets that spending can create) is simply bad 

economics. These investments can yield returns far in excess of the 

cost of capital. 

Investments in jobs can even help reduce the deficit in the long 

run. Unemployed workers lose their job skills. We are at risk of 

replicating a phenomenon observed in Europe in the 1980s called 

hysteresis. Those with extended periods of unemployment never return to the labor force or, if they do, it is in jobs with vastly lower 

wages and productivity. 

Unless we manage this crisis well, we could be setting ourselves 

up for an extended period of high unemployment. What economists 

call the natural unemployment rate may be significantly increased. 

And if that happens, GDP and tax revenues for years to come will 

be lower than they otherwise would be, with the result that the national debt would be higher. 

That does not mean that we should ignore the deficit. It does 

mean that we should be very careful in our spending, ensuring that 

we get value for our dollars. 

My earlier book with Linda Bilmes highlighted the high cost of 

the Iraq and Afghanistan wars, including the future cost of providing disability payments and caring for the large number of injured and permanently disabled returning troops. At the time, we 

estimated, for instance, that those costs would be in the order of 

$500 billion or more. Evidence since the publication of our book 

suggests that those numbers were excessively conservative. 

They also suggest that the costs in Afghanistan are markedly 

higher than in Iraq. Using the Administration’s estimates of about 

$1 million per troop, which does not include future costs of disability and health care, the money spent on the 30,000 additional 

troop surge could have created more than 1 million jobs in America 

10 

that pay $30,000; and the jobs created in America would have higher multipliers. That is to say, second- and third-round effects. 

It is also one of the reasons why I have been so critical of the 

manner in which the bank bailouts were conducted. 

A congressional oversight panel has described how at the time 

that money was provided to the banks we got back 66 cents on the 

dollar in preferred shares and warrants. Not to put too fine a point 

on it, we, as taxpayers, were cheated. Had we gotten a fair deal, 

our national debt in the future would have been much lower. 

As we approach the looming jobs problem, we should not repeat 

the mistakes we have repeatedly made responding to the crisis of 

too little, too late. There is in economics something akin to the 

Powell Doctrine in the military. One needs to attack the problem 

with overwhelming force. If things turn out better than the pessimistic prognosis given below, we can always scale back. 

There are clear criteria for the form of stimulus: high multipliers, 

that is to say, large GDP bang for the buck; large job creation bang 

for the buck; creating assets with high returns, especially those directed at national needs like improving technology and public 

transportation systems; flexibility; automatic stabilizers which increase spending commensurate with the economy’s needs; and 

meeting some of the economic and social exigencies created by economic crisis. 

We need to take a portfolio approach. There is no single measure 

that will solve the problems of the magnitude that we face. 

But I do want to emphasize the response to some of the discussion that has been raised that the stimulus has worked. It has not 

been enough. It could have been better designed, but there is absolutely no doubt that, had it not been for the stimulus, the job situation would be far worse than it is today. 

Assessing alternative measures in terms of the criteria I have 

laid out gives some sense of priorities, which should include extending unemployment benefits, aid to States, government jobs programs, research and technology programs, and longer-term investments. 

Here let me just make a couple of comments. In my written testimony, I elaborate on these. 

First, we should take advantage of the fact that this is likely to 

be a long downturn. We should be drawing up plans now for higher-return public infrastructure projects that are not shovel ready 

but could be ready in 1 or 2 years’ time. If it turns out that the 

economy recovers, which is unlikely, these can be undertaken eventually if funds become available. If the economy is still weak a year 

or two from now, we will have a portfolio of high-return projects 

from which we can choose. 

Secondly, as we went about the rescue we had no vision of what 

kind of a financial sector, or what kind of economy we wanted to 

emerge after the crisis. We cannot and we should not go back to 

the world of 2007. Our financial sector was bloated and distorted. 

It will have to be downsized. But the question is, what parts should 

be downsized? We should be strengthening the venture capital 

firms and the banks that lend to small- and medium-sized firms. 

A vision of the economy that we want after the crisis should also 

guide our spending. The economy of the future will require more 

11 

educated workers and will be based on high technology. That is 

why it is particularly disturbing for me to see universities furloughing teachers and other cutbacks in our education system. 

In my written testimony, I discuss the special problems facing 

small- and medium-sized enterprises which are the source of job 

creation. They are facing increasing difficulties in getting access to 

credit, even as the banks seem to be recovering. More than a year 

ago, we were told that we needed to bail out the banks to maintain 

lending. But in giving huge sums to the banks, we put no conditions on how they used the money. 

I also outline some bold actions that could be undertaken that 

would enhance the flow of funds to SMEs. Whatever benefits we 

give should be linked to job creation. A capital gains tax benefit for 

a small business engaged in real estate speculation is not exactly 

what the economy needs at this juncture. Many owners of SMEs 

rely on the use of their home or other real estate as collateral for 

lending; and with these prices plummeting, access to credit is being 

impaired. 

This is only one of several complex linkages between the real estate sector and rest of the economy, explaining why it was such a 

mistake not to do more earlier about that sector; and this is only 

one of several channels through which problems in the real estate 

market are transmitted to the rest of the economy. 

For instance, the weak housing market will contribute to high 

unemployment and lower productivity in another way. A distinguishing feature of America’s labor market is its high mobility. But 

if individuals’ mortgages are underwater or if home equity is significantly eroded, they will be unable to move, to reinvest in a new 

home, and this will really undermine what has been one of our 

great strengths. 

Let me say a word about global imbalances. This is a global economic downturn. Well before the crisis there was a worry that 

there would be a disorderly unwinding of the global imbalances. 

This disorderly unwinding was not the cause of the current crisis, 

but it could be of the next. 

It is important that something be done about these imbalances, 

which include America living beyond its means. But one of the 

things I emphasize is that we cannot rely on some international fix, 

a magic bullet that might result from correcting these imbalances 

for solving our problems. 

While I have emphasized that it is premature to begin exiting 

from the extraordinary monetary and fiscal interventions, I 

thought it important to stress the special difficulties resulting from 

particular measures undertaken by the Fed as it puts on its balance sheet around $1 trillion of mortgages. We should recognize 

that, as it exits this program, mortgage interest rates will rise, and 

this will have an adverse effect on real estate prices and investment. At the same time, the Fed will experience a large capital loss 

on its holdings. Whether it recognizes that loss or not does not hide 

what has really happened. This is just another of the many costs 

that the failure of our financial system and the Fed’s failure have 

imposed on our society. 

These costs are one of the reasons that we have to have effective 

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12 

tial functions of managing risk, and allocating capital at low transaction costs. Private rewards were misaligned with social returns. 

We are emerging from this crisis with a banking system that is 

more concentrated and less competitive, more able to extract rents 

from the rest of the economy, evidenced by usurious interest rates 

on credit cards. While the money will help recapitalize the banks, 

the higher interest rates will slow the recovery and a less competitive banking system will serve neither our citizens nor our economy 

well. 

There is a simple test of the adequacy of reform of our financial 

system. If these reforms had been put in place say in 2003, would 

a crisis have occurred? And if it had occurred, would it have been 

less costly? My assessment of the reforms currently on the table is 

that they failed to meet this test. 

Unless we pass an adequate regulatory reform, we can look forward to another crisis down the road. This is not good news either 

for our citizens or for our economy. 

I am particularly concerned about our failure to deal effectively 

both with the too-big-to-fail institutions and with derivatives and 

credit default swaps. In my written testimony, I explain what we 

should be doing and why what is currently under discussion falls 

far short. Our regulations failed, but so did our regulatory institutions. Again, I explain why I think it would be a serious mistake 

to make the Federal Reserve system a system regulator. 

Let me conclude with three general comments. 

The first is that the agenda of our economic reform needs to be 

far broader. Our tax laws encouraged excessive leverage and risk 

taking. What kind of society says that speculation should be encouraged at the expense of hard work? But that is what we are 

saying when we tax earned income far higher than capital gains. 

Flawed bankruptcy laws and corporate governance, too, contributed 

to the crisis. 

Secondly, we need to keep in mind that the real costs of an economic downturn caused by a bubble occur after the bubble breaks. 

Crises don’t destroy the assets of an economy. The banks may be 

bankrupt, many firms and households may be bankrupt, but the 

real assets are as much as they were before, the same buildings, 

factories, and people, the same human, fiscal, and natural capital. 

In the run-up to the crisis, resources were wasted by the private 

sector. This is water over the dam. The key question is, how will 

resources be used after the bubble is broken? This is typically when 

most of the losses occur as resources fail to be used efficiently and 

fully and as unemployment soars. This is the real market failure 

and one that is avoidable if the right policies are put into place. 

What is striking is how often the right policies are not put into 

place, and the losses in the bubble are compounded by the losses 

after it bursts. Something is wrong when we simultaneously have 

homeless people and empty houses, unmet needs and yet firms and 

workers willing to produce more. 

We are a rich country. We can afford to squander hundreds of 

billions of dollars, but there are limits for even a rich country. The 

combined effects of unbridled spending on unproductive wars, corporate welfare, and poorly designed bank bailouts inevitably will 

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13 

economic mismanagement, leading to an economy operating for 

years below its potential, the consequences are even more worrisome. 

I know my time is up. Let me just conclude there and ask that 

you put into the record my full testimony. 

[The prepared statement of Joseph E. Stiglitz appears in the 

Submissions for the Record on page 39.] 

Chair Maloney. Without objection. 

Dr. Roberts, you are recognized for 10 minutes. Thank you. 

STATEMENT OF RUSSELL ROBERTS, PROFESSOR OF ECONOMICS, GEORGE MASON UNIVERSITY, AND THE J. FISH AND 

LILLIAN F. SMITH DISTINGUISHED SCHOLAR AT THE 

MERCATUS CENTER, AND A RESEARCH FELLOW AT STANFORD UNIVERSITY’S HOOVER INSTITUTION, FAIRFAX, VA 

Dr. Roberts. Chairwoman Maloney and distinguished members 

of the committee, a man once asked his doctor how much weight 

he would lose if he skipped his daily breakfast of a bagel and butter, about 350 calories. The doctor said, if you do that every day 

for a month, you will lose 3 pounds. After 10 days of skipping 

breakfast, the man came in to see how he was doing. To the doctor’s surprise, the man’s weight was unchanged. The doctor said, 

Well, good thing you stopped eating breakfast. Otherwise, you 

would have gained a pound. When I made my prediction, I didn’t 

realize how bad your weight situation was. 

Unfortunately, the doctor’s analysis was flawed. He didn’t realize 

that because the man was skipping breakfast he was eating a bigger lunch. 

Now I think about that doctor when I think about the CBO estimates of the impact of the American Recovery and Reinvestment 

Act of 2009, the stimulus package. The CBO estimates, as we have 

discussed, that there are about 600,000 to 1.6 million jobs in the 

economy extra compared to what would have happened in the absence of the stimulus. It is an embarrassingly imprecise estimate, 

but it is not really an estimate at all. It is just a repeat of the forecast that CBO made at the beginning of the process, like the doctor 

who predicts that skipping breakfast will reduce your weight. 

It doesn’t use the facts in the economy, as the CEO concedes, 

since the stimulus was passed. It is a fake estimate. We have no 

idea how many jobs have been created or lost because of the stimulus since the CBO admits to know the real impact we would have 

to know the path of the economy in the absence of the package and 

that is unknown, just as the lunch habits and metabolism of the 

patient might be unknown to a doctor making a forecast in advance. 

What we do know is that we have lost millions of jobs since 

March when the stimulus was passed. We were told that, without 

it, unemployment would reach 8.8 percent. Well, with it, it is back 

at 10 now; and it was, of course, higher. 

There is no way of knowing whether the stimulus averted a 

worse situation or whether it is part of the problem. And I am 

ashamed to say and embarrassed to say there is no consensus in 

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14 

dence available to settle that. But it wouldn’t be surprising to discover the stimulus has had little or no effect or made things worse. 

Of the $235 billion spent to date, more than a third of that has 

been spent on temporary tax rebates, just as the Bush Administration temporary rebates of February 2008, had little or no impact 

and were mostly saved. That has been true of these tax rebates. 

The direct spending component is about $145 billion of that. 

Eighty percent has been spent by the Departments of Health and 

Human Services, the Department of Labor, Education, and the Social Security Administration. Those agencies don’t have very many 

shovels. Roughly one-half of the job losses since December of 2007 

are in construction and manufacturing, and HHS spending doesn’t 

do much for those folks. 

Some argue it doesn’t matter what the money is spent on. People 

will spend the money they receive. That creates jobs, puts more 

money in people’s hands, and so on. Ironically, this Keynesian story 

works best when the economy is healthy. Consumer spending is 

down because people are rightfully worried about the future. When 

people are nervous or scared, they are going to save more and 

spend less compared to when they are confident and optimistic. So 

fiscal policy that counts on the multiplier doesn’t work any better 

than monetary policy stuck in that liquidity trap. 

This is particularly true of temporary increases in income. Both 

fiscal and monetary policy are constrained by the anxiety that people have about the future. 

Unfortunately, policymakers have been doing a lot to create anxiety, rather than to dispel it. The deficit last year was $1.4 trillion. 

People know that tax increases are coming, but they don’t know 

how big their share will be. The prospect of tax increases discourages spending and offsets some or all of the stimulus. 

The size of the debt is creating worries about default or inflation. 

The government continues to intervene in ad hoc ways in the auto 

industry, the financial sector, and major changes are on the table 

for how the government regulates health and energy. 

We need new businesses to start. We need old businesses to expand. Yet their owners can’t be sure of what the rules of the game 

are, the tax rates they might face, the interest rates they might 

face, the inflation rate they might face, the health care mandates 

they might face, the emissions regulations they might face. And it 

is not surprising that businesses are likely to sit on their hands sitting on the sidelines to see how things will turn out. 

In a recent survey of employers by Manpower Inc., 73 percent 

said they plan no change in staffing for the first quarter of 2010. 

That is the highest level of no change since 1962. Employers are 

waiting to see what the rules of the game are going to be. 

So what is to be done? Well, everybody assumes there is something that has to be done. There has to be a solution, something 

to get people back to work faster. 

That may not be the case. Government policy induced an unnatural expansion of the housing sector over the last decade. We built 

way too many houses. That naturally drew a lot of people into construction. Fully 25 percent of the losses in the job market have 

been in construction. The workers who no longer hold those jobs 

15 

have to find other things to do, and they are taking their time deciding on what that should be. 

Unfortunately, it is natural that unemployment lingers. If you 

have to do something, please look for effective ways to spend 

money and reduce policy uncertainty. Stop giving away money to 

states with no strings attached. 

Why has a major goal of policy so far been to preserve state employment while the private sector takes a beating? Let’s let the 

states deal with their past recklessness rather than giving them an 

incentive to be reckless in the future. They are obligated to balance 

their budget. They can cut spending. They can even cut spending, 

if they would like, without laying workers off. I think that is a good 

incentive. 

Don’t treat unspent TARP funds as free money. They aren’t free. 

Don’t waste it the way the stimulus money has mostly been wasted. 

Instead of spending randomly, let’s cut the payroll tax. Cutting 

the payroll tax makes workers less expensive to employers. Cut it 

by 25 percent for the next 5 years, you will see an impact on job 

creation. It will reduce revenue by about $250 billion a year, but 

it will at least have a chance of creating jobs. 

To reduce uncertainty and fears, stop fiddling with every aspect 

of the economy. Maybe it is not the best time to try to radically 

change the health care system and the energy market while propping up banks, the auto industry, and borrowing trillions of dollars. 

Stop issuing such short-term debt. It is what got Wall Street in 

trouble. The government rescued Wall Street—mistakenly in my 

opinion. There is no one to rescue us. Reduce some aspect of government spending to show that grownups are in charge and that 

the government can act responsibly. Get rid of corporate welfare. 

Cut tariffs and quota which are a silent tax on the consumer. 

Stop propping up losers. Let people who are reckless go out of 

business. Otherwise, we are throwing good money after bad and 

setting the stage for future recklessness. 

F.A. Hayek said that, ‘‘the curious task of economics is to demonstrate to men how little they know about what they imagine they 

can design.’’ It would be good to recognize our limits about what 

we imagine we can design. We cannot steer the economy, we cannot steer the labor market, and recognizing those limitations is a 

step in the right direction. 

Thank you very much. 

[The prepared statement of Russell Roberts appears in the Submissions for the Record on page 64.] 

Chair Maloney. I thank both of you for your very thoughtful 

presentation. 

Both of you mentioned the challenge that we have in creating 

private-sector jobs. This is a chart that we did on private-sector job 

loss; and it shows, since 1992—this top level is the jobs created and 

the bottom level is the jobs lost, and you see that in the recession 

of 2000 the jobs created never, never went back to the level under 

the Clinton years. In fact, the number of private-sector jobs created 

has fallen dramatically. The jobs lost have risen, which is not unexpected in a recession. But what is happening when the number of 

16 

private-sector jobs created has fallen so dramatically, particularly 

during the Bush administration? 

And my question, Dr. Roberts and Dr. Stiglitz, is did the labor 

market fundamentals change or weaken in some way—the labor 

market fundamentals during the Bush administration? Has there 

been some fundamental change in our structure? Why are the 

number of private-sector jobs falling so dramatically? 

[The chart titled ‘‘Current Recession Characterized by Precipitous Fall in Private Sector Job Creation’’ appears in the Submissions for the Record on page 69.] 

Dr. Stiglitz. Actually, I would say things were even worse than 

those pictures depict, because much of the job creation in the private sector was artificial. That is to say there was a bubble, and 

a lot of the jobs created in the private sector were in real estate 

or based on consumption that was fueled by this artificially created 

bubble. 

For instance, in one year alone, there were $950 billion of mortgage equity withdrawals that fueled consumption in the private 

sector. That was all artificial, so the true picture is worse than 

what you have depicted. 

There is a change in the structure of our economy that has been 

going on for some time, partly having to do with globalization. That 

is to say that there is a shift of comparative advantage, in manufacturing in particular, to other parts of the world. Some countries, 

like Germany, have responded to that challenge by trying to create 

education systems that enable the sustenance of a competitive 

manufacturing sector based on high technology. 

We decided not to take that course. We did not make the investments in people and technology that we should have, and that has 

put us at a competitive disadvantage. 

I think, in some sense, it was a very difficult time. It would have 

been difficult for any administration. But the failure to take a 

proactive response has made things far worse. There are other 

countries like Sweden that did have a proactive policy and have 

succeeded much more impressively. 

Chair Maloney. Thank you. 

Dr. Roberts. 

Dr. Roberts. Well, I think the other fact that is going on in that 

picture, that is, of course, a million factors, that people made all 

kinds of choices about education and training, whether it be in the 

job market or not. 

Of course, the other factor going on in the background of that 

story is monetary policy. It is kind of ironic. Alan Greenspan was 

a genius; and then, all of a sudden, he wasn’t a genius anymore. 

Around the 2001 period, he put interest rates at their lowest level 

of the past 40 years; and then he very precipitously increased them 

around 2004. I think that did a lot of damage to our economy, as 

Professor Stiglitz points out. 

There was a lot of artificial investment in housing. That was 

partly due to bad monetary policy. It was also due I think in part 

probably to bad regulation and pressure put on various institutions 

to give low interest loans and low down payment loans. Caused an 

artificial expansion of the housing sector. We both agree on that. 

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ties for better investment. So I think the monetary story is partly 

what is going on in those data. 

I disagree a little bit with Professor Stiglitz on globalization. It 

is true we haven’t made top-down investments in technology. We 

have a lot of bottom-up investments for individuals who have done 

training on their own through their own choices. 

We have the most vibrant technology sector in the world, we 

have the most vibrant venture capital sector in the world, and 

those sectors are relatively unregulated, particularly venture capital, which is why I have hopes and optimism for the future, even 

though our financial system is a horrible mess as government has 

tried to steer it in I think very destructive ways. 

I think the bright side of the story is productivity. Our competitiveness is helped tremendously by our incredible productivity, not 

so much in the recent recession, where productivity jumps artificially as workers are laid off, but rather through the fact that our 

skills and technology are rather spectacular. 

A lot of our job losses since the recession are in manufacturing. 

Some of that is due to a reduction in the economy’s strength, but 

some of it is due to productivity in manufacturing, a process that 

has been going on for 50 years as we have been able to substitute 

technology, which is really human knowledge embodied in machines, and made our workers more productive. So I am optimistic 

about our future and competing in the global marketplace. 

Dr. Stiglitz. Can I just make one more comment? I agree very 

strongly that we have very vibrant technology, but it is a high-technology sector that has not created as many jobs and hasn’t been 

as integrated into manufacturing as in some other countries. 

But I wanted to really focus on one other point, which is that, 

normally, we think of a low price of factor inputs as a good thing, 

as stimulating the economy. The cost of capital that was made artificially low by the Fed should have been the basis of a large job 

creation, if our financial sector had been doing its job. The fact is, 

it could have directed that capital to productive uses. We could 

have had a real boom if things had gone the right way. 

But, unfortunately, our private financial sector didn’t do what it 

should have been doing. Combined with these other problems that 

I have described, the result was that what would have been an opportunity from low cost of capital to have a massive expansion of 

the productive powers of our economy wasn’t taken advantage of. 

Dr. Roberts. May I comment on that? 

Chair Maloney. Certainly. Then we have to move to the next 

speaker, but, in fairness, you should have an opportunity to comment, too. 

Dr. Roberts. Briefly, it is an excellent point that those low rates 

of interest normally would have stimulated all kinds of potentially 

productive activities. Unfortunately, in 1997, we made capital gains 

on housing tax free. That encouraged a lot of people to accumulate 

second homes and third homes as a way of investing, which is not 

particularly productive. So that was a terrible mistake. 

But I think we also have to recognize that the government mandates pushed money explicitly into low interest, low down payment 

mortgages. Fannie and Freddie were pushed tremendously in this 

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come housing. It is a lovely goal. But, as a result, a lot of those 

mortgages went underwater. 

The private sector, the financial Wall Street side that Professor 

Stiglitz is referring to, also got into that, but that wasn’t until 

about 2004 to 2006 when they did make a lot of bad bets. The 

question is, why did they do that? And I worry a lot that they were 

expecting to be bailed out by the government, which, of course, 

they were. They were gambling with my money and yours, not 

their own money. Until we fix that, we are not going to have a 

healthy financial sector. The too-big-to-fail problem which you mentioned earlier I think is the central problem that has to be solved. 

Chair Maloney. Thank you very much. 

Mr. Campbell. 

Representative Campbell. Thank you, Madam Chair. 

John Maynard Keynes said that the government could stimulate 

the economy by digging a hole, by paying someone to dig a hole and 

fill it back up again. Dr. Stiglitz, do you agree with that? 

Dr. Stiglitz. Yes, but we have better ways of spending money 

than either going to war or filling holes. 

Dr. Roberts. I don’t agree with it. In fact, I want to emphasize 

one thing we do agree on is that money spent on war is wasted. 

It is not a stimulus package. 

I think one of the most destructive and immoral economic doctrines of the last 75 years was the belief that World War II was 

good for our economy because it created a Keynesian multiplier. 

Even more effective than just digging ditches, it got people to buy 

tanks and airplanes. But tank and airplane purchases are good for 

tank and airplane manufacturers. They are not good for the rest 

of us. Private consumption in those times fell. It was very bad. 

Representative Campbell. I got a letter—we all got a letter 

from Vice President Biden earlier this year saying, here is a list 

of the stimulus, that stimulus money that was put in your district. 

Interestingly, the very first thing on the list in my district was $2.3 

million to put a green roof on a Federal building. What they didn’t 

point out was that that Federal building is scheduled to be torn 

down. So we are spending $2.3 million to green roof a building in 

my district which will subsequently be torn down. Now that is 

clearly digging a hole and filling it back up again. 

Now to your point, Dr. Stiglitz, yes, somebody got hired to put 

on that roof. But there is no multiplier. There is no downstream, 

no additional jobs. 

I would think it sounds like you would both agree that if we were 

going to spend—through tax credits or any other way—Federal 

money that it would be much better spent, rather than digging a 

hole and filling it back up again, in something that creates a number of downstream jobs. 

Let me just throw two ideas at you both and get your comments 

on them. 

One, on infrastructure things, suppose the government put free 

broadband Internet, wireless Internet in the 250 largest markets in 

the country and then let the high-technology community do what 

they could with that capability. It actually wouldn’t be that expensive to do that. 

19 

Or let me give you a second idea. What if we had a capital gains 

tax holiday but different than what has been talked about. You 

said that for 12 months or 9 months or 6 months—pick a period 

of time—that any investment made by someone would be free from 

capital gains tax whenever they sold it. If they sold it 5 years from 

now, 10 years from now, it didn’t matter. It seems to me that one 

of the problems right now is the perception of risk out there and 

that people are not making investment, not hiring, not doing anything. 

Dr. Stiglitz talked about the financial sector. I am on the Financial Services Committee. I agree with you on the war in Afghanistan, with both of you on all of that stuff. But I only have got 5 

minutes. So we will stick with this particular topic right now. 

But if we did something like that, we reduce the risk or increase 

the potential return in exchange for that increased risk that is out 

there and perhaps get some money off the fence and say, well, 

maybe I will invest in that business, maybe I will grow this particular business, maybe I will buy that piece of commercial real estate which is troubled. 

So your views on those two thoughts, Dr. Stiglitz and then Dr. 

Roberts. 

Dr. Stiglitz. I think both of them are good ideas as a broad concept. Let me speak to the first one. 

The fact is that the margin of cost of using broadband is very 

close to zero, and that is the kind of facility where there is a particular role for government in the provision. The private sector 

could provide it, but it would charge. This would create a distortion, because the price exceeds the marginal cost of usage, so this 

is a particularly good example of something that the government 

could provide. It increases efficiency and then creates an environment. It is part of the infrastructure, which is particularly relevant 

for modern technology. So I think that is the kind of thing that one 

ought to very seriously consider. 

The second point you raised has to do with how do we reduce the 

risk of investment? There is another problem that I want to also 

emphasize, and that is access to capital, which small- and mediumsized enterprises are particularly facing. So the problem is both the 

demand for investment but also the capability of making that investment. 

One way of trying to attack both problems simultaneously, for instance, is to allow firms, and especially small firms, to write down 

immediately the cost of their investment. That is like the government paying a part of the cost up front, but it is effectively a loan. 

Now is a particularly good time for doing that because, while it reduces government revenue today, it will increase government revenue in the future, because the depreciation isn’t there and the cost 

of capital to the government right now is close to zero. It is effectively a loan from the government to the firm at a time when the 

firm really values it, both reducing the uncertainty and giving 

them access to capital. 

One should try to think about two general principles: First, when 

can you do that? And, second, what tax benefits ought to be linked 

to investment? It is not just lowering tax rates, giving tax benefits, 

but they have to be linked to job creation or to investment. 

20 

Representative Campbell. Dr. Roberts. 

Dr. Roberts. I would love to have free broadband. There are a 

lot of free things I would like. One of the lessons we learn from economics is nothing is free; and one of the challenges you face in your 

jobs is trying to recognize what the costs are, especially in today’s 

world where it appears that everything is a free lunch, that there 

is no cost to spending—in fact, ‘‘there is a benefit, because it is 

going to reduce unemployment!’’ I think that is sometimes an illusion that can actually make the situation worse. 

I particularly worry about the precedent of using the government 

to decide where technology goes. It is going to lead to lots of lobbying and decisions made not necessarily on the basis of what is 

most productive but what is politically expedient. 

Right now, for example, we are guaranteeing a loan to the Tesla 

Corporation which makes a very nice sports car. It is an electric 

sports car out of California. It is beautiful. It is very fast, and it 

is an electric car that is lovely. 

They want to develop a sedan for families. Are they going to be 

able to do that? I would like to see them do that on their own two 

feet, convincing investors of the very risky proposition they are involved in, rather than being guaranteed that I am going to step in 

and make them whole if it doesn’t work out. I think that is a terrible precedent not simply because the government has no incentive to make those investments wisely but, even worse, people start 

lobbying you for favors and goodies as, of course, they already do. 

Again, the same thing is true with the tax holiday. It is always 

tempting. I just think it is important to remember it is not free. 

There is foregone income and opportunities that could be done with 

that money, and I would worry about tweaking the system here 

and there. 

The reason I advocate—I have mentioned a 25 percent cut in the 

payroll tax. I would actually like to eliminate the payroll tax. Payroll tax is a regressive tax. It deceives people into what its real effects are. The people actually think that it goes to be set aside for 

their Social Security money instead of out the door to go fight the 

war in Afghanistan, pay for food stamps, and everything else the 

government does. So, right now, people have a very weird idea 

about what a dollar of government spending costs them. 

So I would like to get rid of that and add a little bit to income 

taxes so that everybody can see with transparency what the effects 

of government spending are on their pocketbook. So that is politically difficult to do, and it is probably not the best thing to do right 

now because it is complicated. People are going to say, what is 

going to pass? What is going to happen? So every time a nice idea 

gets put on the table, people say, you know, maybe I will wait until 

that tax break comes through. So it is a dangerous game. 

Again, I would argue for simplicity, transparency, and, ideally, 

efficiency, if you can find it. 

Chair Maloney. Thank you very much. 

And recognized in order of appearance Congressman Snyder. 

Representative Snyder. Thank you, Madam Chair. 

I thank y’all for being here and your different perspectives. 

Dr. Roberts, I wanted to direct my question, if I might, to you. 

In your written statement you have this one—at the end you say, 

21 

reduce some aspect of government spending to show that the 

grownups are in charge and that someone can practice tough love 

with the American people. Say ‘‘no’’ to some special interests. Get 

rid of corporate welfare. 

We have a situation regardless of what you think about the 

health care reform bill and the different variations. But we have 

this issue of Medicare Advantage. I don’t know if you are familiar 

with it or not. But it was—well, I will go ahead and describe the 

situation. 

We have a situation now where one out of five Medicare recipients gets 12 percent more money on average than the other four 

out of five and 80 percent. And it originally came about because 

some private insurance company said they can deliver Medicare 

more efficiently. The program was set up. But then at some point 

they said, actually, we want a little more money. So now they are 

getting 12 percent more on recipient. 

Part of the—at least in the House bill—is to gradually eliminate 

that additional money, which I have heard somebody today say 

that is corporate welfare. They are getting more money to do what 

they said they could do more efficiently. 

So what happened? I voted for the bill, as a lot of Members did. 

And we now have the U.S. Chamber running ads all over the country talking about these massive cuts to Medicare. Yet you go on the 

U.S. Chamber of Commerce’s Web site and they’re saying something like, where are the legislators with courage to stand up for 

entitlement reform? 

So regardless of what you think about all aspects of this thing— 

but isn’t that a good example? You have one program that most of 

us—regardless of the financing—would say it is very well-received 

by the American people. But you have taken one out of five Medicare recipients and are paying corporations 12 percent more money 

on the average than the other 80 percent. Is that a good example, 

as I have described to you, of what we should be doing away with? 

Dr. Roberts. Well, I don’t know the details of Medicare Advantage, and I have no interest in defending the U.S. Chamber of 

Commerce’s strategies for provoking you to do what they think is 

in their interest. 

I would say, quoting Friedman, that pro business is not the same 

as pro capitalist. I am pro capitalist. I am not pro business. Businesses don’t like capitalism. It makes them compete. They would 

prefer to get special treatment. I want to get rid of all that. 

That is why I want to get rid of those quotas on sugar which enrich about 10 families in the United States and make every American pay a higher price. It is outrageous. Especially now. It is a 

great time to do something for the American people at the expense 

of rich fat cats. Get rid of those quotas. They are unfair, and they 

are destructive. 

Representative Snyder. In fact, I brought it up several times 

that there has been bipartisan interest, as you know, in doing 

something about our trade policy with Cuba. It seems like, if we 

are going to do something, this would be a wonderful time to help 

sell more stuff to Cuba. 

I wanted to ask you another question, if I might. I forget how you 

phrased it, but, basically, you are saying, is this the right time to 

22 

create more uncertainty by—I think your word is—‘‘fiddling’’ with 

different aspects of the American economy. Probably two biggest 

aspects of fiddling—I think maybe Dr. Burgess mentioned it—are 

health care and energy policy or climate change. 

The question I have for you, though, is, even if we come up with 

some bill that Dr. Burgess and I would both support or you and 

I would support, given the nature of energy policy and energy and 

given the nature of health care, we will acknowledge I think that 

whatever we would do it would take several years to implement. 

I mean, how can we sit back and say, we will do nothing until we 

can look ahead and see several years of blissful peace and paradise 

economically and socially in the worldwide community and then we 

will act in these areas? 

That is not going to happen when in fact—I mean, I have people 

coming to my office all the time from the business community, and 

they have been doing this for a couple of decades, saying we have 

to do something about health care costs. It hurts my ability to compete internationally, whether it is small- and medium-sized companies or from international corporations based in Arkansas coming 

and saying we have got to do something about this. It will add to 

our ability to compete. 

So my question is, I can understand what you are saying about 

this uncertainty, but there is uncertainty, is there not, in doing 

nothing? 

Dr. Roberts. Oh, absolutely. 

Representative Snyder. Please respond to that. 

Dr. Roberts. It is an interesting challenge. If you want to do 

something in health care—let’s take a very narrow problem that 

everybody is worried about, which is that some Americans don’t 

have health care coverage, right? Or, worse—it is often confused— 

have limited access to health care, which is what we really fundamentally care about. 

We could create a program that would help those folks. It would 

cost a lot of tax dollars, right, but we could subsidize their insurance. We could create a larger entitlement program for Medicaid 

than we have now. We could fix ways to make sure that people are 

covered. 

Well, why would we pass a 2,000-page piece of legislation that 

no one understands? I don’t get it. Well, I do get it, actually. And 

people say, I don’t mind that it takes a while, but people say, well, 

we will figure out how it works later. That is the mistake. Not that 

it takes a while but that we are passing legislation when we don’t 

understand the consequences. 

Representative Snyder. So you don’t have a problem with 

tackling a problem today at the time of this economic downturn, 

like health care or like energy and climate change legislation. Your 

concern is your ability to understand the legislation or the ability 

of the American people. I need to be sure. Because I think that is 

an important point. 

Dr. Roberts. I am saying two things. Transparency is extremely 

important in today’s climate, right? So a 2,000-plus page bill that— 

I don’t know—creates 80 new, 100 new—whatever it is—pieces of 

the health care puzzle, no one understands how they interact. Most 

23 

of us haven’t read the whole bill. I think that is the wrong way to 

fix the problem. 

The second thing I would say is that whatever you do to fix the 

problem you want to be pretty confident that it will make the problem better and not worse. I would say a lot of the stuff we are 

doing right now, we are really not quite sure, and that is the biggest problem we have. But if our goal as a Nation is to help coverage, let’s pay for it. Just like, if our goal is to get more people 

in houses, let’s subsidize housing. Let’s not create a labyrinthine 

regulatory environment with Fannie and Freddie that no one understood, no one was on top of and is going to cost the American 

people hundreds of billions of dollars that at the time was said was 

going to be a free lunch. That is what we want to avoid. 

Representative Snyder. I know my time is up. But what you 

are saying, though, is you do not have a problem with us acting 

today. It is the programs with regard to health care that you have 

a problem with, which is different I think than what I took from 

your testimony. 

Dr. Roberts. Absolutely. 

Chair Maloney. Thank you. 

Dr. Burgess. 

Representative Burgess. Dr. Snyder, it will be a cold day when 

you and I begin to agree on a lot of things. But I think you know, 

just like Dr. Snyder, through the summer, Dr. Roberts, I heard 

from angry people at home about what we were doing with this— 

at that time, it was a 1,000 page bill. They got madder when it 

went to 2,000 pages. Yet we weren’t fixing the fundamental problem that most people were concerned about, and that is someone 

who, because of a tough medical diagnosis, because they find themselves between jobs and their COBRA benefits are something they 

can’t keep up with because of the way COBRA is structured, they 

now end up with a tough medical diagnosis without health insurance. 

It is very, very difficult then to claw your way back into the system. That is what has been so pernicious. 

Interestingly enough, we had a Congressional Budget Office 

study that told us how much it would cost to fix that problem 

based loosely on what Senator McCain advocated in the fall of 2008 

based on the stated high-risk pools and reinsurance programs, giving states some flexibility. It was about $25 billion over the 10-year 

budget window, which is, as you point out, a significant amount of 

money but nowhere near the $1 trillion price tag that we ended up 

with with this large bill. 

Because of the things we are doing—and it is not just health 

care, because we have got a 1,400-page bill today on financial services, and we had 1,000-page bill on energy earlier in the year—the 

lack of job creation is something that has not been seen since—did 

you say since 1962? Did I understand that correctly? 

Dr. Roberts. That was the expectation of employers that they 

are going to do nothing. That number is at its highest level since 

1962 for the first quarter of 2010. Seventy-three percent say they 

don’t expect to hire or reduce in the first quarter, which evidently 

is the largest since 1962. People are just waiting. 

24 

Representative Burgess. And what broke that? What caused 

that to change in 1962? I mean, I was alive, but I don’t know that 

I was economically aware of my surroundings. What changed in 

1962? 

Dr. Roberts. I turned 8. I think that was the crucial event. 

I don’t know. There were a lot of things going on. I don’t know. 

There were some tax cuts I am aware of, but I don’t know if they 

were decisive or unimportant. 

Representative Burgess. But the tax rate did come down significantly somewhere around that time, is that not correct? 

Dr. Stiglitz. The big thing was the investment tax credit that 

stimulated the economy. 

Representative Burgess. And it got people off the sidelines and 

created jobs? 

Dr. Stiglitz. At least one of them. 

Representative Burgess. Well, Dr. Roberts, you mentioned I 

think in your testimony the problem of the true unemployment 

rate. The people who have just given up and may not be looking 

for a job. I think we heard in this committee last Friday that that 

number is 17.2 percent of people who are—the actual number of 

unemployed are those people that have just stayed away from even 

seeking employment. 

What is the right thing to do here? Do we continue to extend unemployment benefits to that group of people? Or are we creating 

more problems than we are helping at some point by indefinitely 

extending those benefits? 

Dr. Roberts. Extending unemployment benefits are good for the 

people who get them. And we understandably feel bad for those 

who don’t have a job. It will discourage them from looking more. 

The measured unemployment rate will be higher than it otherwise 

would be. Politically, that is tough for you guys, isn’t it? That is 

a real tension that you have got to deal with. 

Representative Burgess. Has anyone measured the job-searching activity that goes on toward the conclusion of those benefits? 

Do we have any data? Has any economist looked at that and said, 

okay, we have got 26 weeks of unemployment. People know what 

that 26 weeks is, and the last 6 weeks is there a change in behavior that might lead to finding a job or is the market just so bad 

that it doesn’t matter what you do? 

Dr. Roberts. Well, there have been a lot of studies of it. I think 

the crucial question here is how different, potentially, this particular leaving of unemployment is going to be for the Americans 

who are struggling right now. 

We have a couple of sectors that are going to have to get smaller. 

We can artificially prop them up. I think that would be a terrible 

mistake. But, as I mentioned, a quarter of the people who have lost 

their jobs since 2007 were in the construction industry. You have 

specialized skills. 

What would you do in that situation? You could say, well, maybe 

my sector will come back. And, of course, maybe it will. But maybe 

it won’t, in which case maybe it is time for you, unfortunately, to 

leave those skills behind and retool. Those are very difficult decisions. People want to postpone them, and I don’t blame them. 

25 

Representative Burgess. What about the demographic of the 

young individuals, 17 to 21, say that—— 

Dr. Roberts. Teenage unemployment rate is about 26 percent 

right now. It wasn’t helped by the increase in the minimum wage. 

I think that was a mistake. Again, especially in a time of high unemployment, to make it more costly to hire low-income, low-skilled 

workers I think is a mistake. 

Representative Burgess [continuing]. Should we look at revisiting what—we don’t call it reduction of minimum wage but call it 

an entry-level wage for certain sections of that demographic? 

Dr. Roberts. I would get rid of the minimum wage. I think it 

puts low-skilled workers at a terrible disadvantage. It creates an 

artificial pool of people who want to work and reduces the number 

of employers who want to hire them. We only look at the wage. We 

should look at the other aspects of the job, on-the-job training, how 

hard you have to work while you are on the job. 

You raise that minimum wage, you make the life of a person— 

it is true—a bunch of people get a higher wage, which is great for 

them. But the other folks who have fewer opportunities than the 

people who do have a job are going to find the workplace a less 

friendly place because there is more competition with other folks. 

Chair Maloney. Would you like to respond? 

Dr. Stiglitz. Just a couple of points, very briefly. 

First, although there have been studies about the effect of unemployment insurance on job search, most of those studies are not in 

the context of high unemployment in the particular situation we 

are today. The problem is there are no jobs, so having many more 

people looking for the same jobs isn’t going to lead to more employment. It is not lack of search but lack of jobs. We ought to remember that this particular situation is not always the case. When the 

economy recovers, the search becomes a more relevant concern. 

Secondly, the situation is much worse than what you have just 

described, because, in fact, large numbers of people are moving 

over to disability, and those do not appear in the unemployment 

numbers, even in the broader measure of discouraged workers. Discouraged workers do not include people who have applied for disability. 

The estimates are that the increased number of people applying 

for disability—not all of them will get it—is about a million. About 

half of them will get it, and they will likely remain out of the labor 

market perhaps for the rest of their lives or at least for an extended period of time. 

There is not any epidemic of a disease that is causing this. It is 

a lack of jobs. It is another part of what you might call our safety 

net. But what I am emphasizing is that the labor market situation 

right now is worse than even the one out of six number that I mentioned. 

The third point, to reiterate what Dr. Roberts said, is that there 

is going to have to be a lot of structural change, with people moving from one industry to another. That is why what I think active 

labor market policies are required, and that requires education and 

training. 

Chair Maloney. Thank you very much. 

Mr. Cummings. 

26 

Representative Cummings. I want to just pick up exactly 

where we left off here. 

So what are we training them for? In other words, if the jobs are 

not there—and we had testimony in this committee just a week or 

so ago, less than a week ago, where we were told that one of the 

areas that seemed to be increasing is health care or at least is staying pretty steady. It is not losing. 

But, you know, when you think about people who are in a position right now where, if they lost their job, their job is pretty much 

going away—I think you talked about this, Dr. Stiglitz. 

I guess the better question is, if the President called you today 

as soon as you walked out this door and said, you know, I just saw 

you on C–SPAN. I want you to tell me what you would do if you 

were me to deal with this jobs situation. What would you tell him? 

Both of you. 

You know why I am asking this question is because, you know, 

we can go back and forth. This reminds me of a ping-pong game. 

We could go back and forth, back and forth. We could have our 

theories about all kinds of stuff. 

But the fact is, is that when I go back to Baltimore, I have still 

got people who don’t have a job. I have still got people who—it is 

about Christmastime. They are not able to buy presents. They are 

not trying to get to Disney World. They are just trying to get to 

the park. They are not trying to have filet mignon. They are trying 

to have hamburger. And they can’t get there. 

You all have said it, I think—I know you said it, Dr. Stiglitz. Not 

only are they losing their homes, they are losing the equity in their 

homes. They are looking at their stock portfolio and realizing that, 

almost overnight, they have been wiped out. 

So I am trying to figure out, when we go to jobs, what is it that 

we can do? We have all this nay saying, oh, we can’t do this. What 

can we do and how soon can we do it? Because the people that I 

am talking about are holding on by a thread; and the thread is getting very, very, very, very thin. So they don’t want to hear a lot 

of, you know, theory. They want to know how they can get to work. 

Dr. Stiglitz. 

Dr. Stiglitz. Let me first say that there is no magic bullet. In 

my written testimony I gave a list of several things. 

Representative Cummings. You are talking to the President. 

Tell him what you would do. Go ahead. 

Mr. President—— 

Chair Maloney. We will send it to him. 

Dr. Stiglitz. I would begin with aid to the states. They have balanced budget frameworks. Their revenues are plummeting, and 

their shortfall is over $200 billion a year. They have to either raise 

taxes or cut back expenditures, which means cutting back on jobs. 

For instance, over the past year alone, state and local governments have reduced their employment by 96,000. Government is 

compounding the problem because of lack of revenue. It is not because they have mismanaged anything; it is a macroproblem that 

was imposed on them. 

I would recommend what I call revenue sharing. If the economy 

turns up, you don’t have to help them. If it turns down, you need 

to give them more money so they don’t have to cut back. This is 

27 

really important, because the needs that you describe are getting 

worse and the ability of the States to respond is weakening. 

Representative Cummings [continuing]. Anything else you 

would tell him? 

Dr. Stiglitz. I would actually use investment tax credits, particularly marginal investment tax credits, to encourage the private 

sector and other kinds of things I mentioned before like accelerate 

depreciation for small businesses. That directly links to encouraging investment. 

I also think that you need to have a government jobs program. 

You can create jobs. We have big public needs: creating parks, 

weatherizing public schools, lots of things like that that we might 

be doing in the future but accelerating them today. 

I also think research and technology programs are important. 

The big advancements in our technology that have transformed our 

economy for the most part come from the government. They have 

been implemented by the private sector, but they come from the 

government. The Internet was financed by the U.S. Government. 

You can go down a whole list of things where governments have 

played a transformative role, and yet now support for these activities is being undermined. This is particularly critical at this time 

because some of our big, major universities are suffering greatly, 

the private ones because of the reduction of their endowments, and 

the public ones because of cutbacks at the state level. 

Finally, as I have described in my testimony, we focused in the 

first round of the stimulus on shovel ready projects. That created 

the problem of things that perhaps should not have been done. But 

this is a long-term downturn, and we should begin thinking about 

what we can do over the longer term. If it turns out that we are 

wrong and the downturn is shorter term, we can always cut back. 

But if we don’t do the planning now, we won’t have plans that we 

can put in place a year from now or 18 months from now. 

On the credit side, credit is not flowing to small- and mediumsized enterprises. As Congresswoman Maloney pointed out, that is 

where the job creation is. There are a whole set of things we should 

do to fix this. 

We ought to require all banks to allocate a certain fraction of 

their portfolio to small- and medium-sized enterprises, effectively 

extending CRA temporarily for small- and medium-sized enterprise. 

I mentioned that with much of the TARP money, there was no 

thought to what kind of financial system we ought to have. It 

didn’t go to the banks that were involved in lending to small- and 

medium-sized enterprises, which is where it should have gone. 

The Fed is providing money at low interest rates, close to zero 

interest rates, to the banks without asking what they are using the 

money for. If the Fed is lending money to the banks at zero interest 

rates, there ought to be a link to job and investment creation in 

the United States. 

The real problem right now is we are actually having a foreign 

policy problem, because our Fed is lending money to banks at close 

to zero interest rate, and they are worried abroad that we are creating bubbles in their country, which is actually undermining 

globalization. Brazil has put up barriers to the inflow of capital, 

28 

and other countries are discussing putting up inflow barriers of 

capital as well. 

The conduct of our monetary policy is leading to a weakening of 

capital market globalization. It is counterproductive. 

One other idea is using some of the TARP money, for instance, 

to help reduce some of the cyclical risks associated with SME lending. Much of the risk that they face today is they don’t know the 

business cycle. We have talked about the risks associated with 

health care reform. We know about that. But the big risk facing 

most businesses is, where is the economy going? Small businesses 

can’t control that. The downturn is a result of macroeconomic mismanagement, and we ought to help small- and medium-sized enterprises manage that risk. Big businesses can do it on their own. 

Another provision is extending loss carry-back provisions for 

SMEs that engage in incremental investment or job creation. This 

is an example similar to immediate tax write-offs for investment. 

It has a cost to the Treasury in the short term but will make up 

for that in the long term. The year is not a natural unit. 

There are a number of other suggestions in my written testimony. But I think there is actually a portfolio here. None of them 

by themselves is going to transform the economy, but, taken together as a package, I think it will make a dent in the unemployment rate. 

Representative Cummings. Thank you very much. I see my 

time is long over. 

Chair Maloney. Mr. Roberts, would you like to respond to what 

would you tell the President today? 

Dr. Roberts. My phone call is briefer. I will make it short. 

I would say, Mr. President, I really appreciate—I am deeply flattered that you think economists have something useful to tell you, 

particularly this economist. But I, as an economist, have become 

more humble in recent years. I will give you an example. 

The economy is a complex system that we do not understand well 

as economists, and I mentioned earlier that we have Nobel laureates who want to see the stimulus be double what it was initially. 

We have equally illustrious economists who think it ought to be 

zero. That is embarrassing. That tells you that our field is in a little bit of turmoil. We don’t understand the complex system called 

the economy. So maybe you are looking up the wrong tree when 

you are asking for me to make jobs for people on the streets of Baltimore. 

Because that is not what presidents are good at. What presidents 

are good at is trying to make a policy environment that might 

make a difference. But, ultimately, those decisions are not going to 

be made by the President. 

You know, airline crashes have fallen steadily over the last decades. We are much, much better at reducing the risk of crashing 

an airplane. Why aren’t we better at reducing the risk of financial 

crashes? We have lots of data. We have lots of smart people thinking they can steer the financial system the way we steer the aircraft safety system. 

But they are fundamentally different. We are not good at steering the financial system. I don’t care how many pages are in the 

bill. 

29 

So I would—again, I would push for transparency. I would ask 

the President, let’s try to learn from our mistakes and not repeat 

them. 

And I would be skeptical about the ability of government to create technology, despite Dr. Stiglitz’ encouragement. The government created DARPANet. The private sector created the Worldwide 

Web and the Internet as we know it today. They can work together, 

and it can be useful. Sometimes they are synergistic. But the ability of the government to pick winners I think is an extremely dangerous road to go down. 

Chair Maloney. Thank you very much. 

Mr. Brady. 

Representative Brady. Thank you, Madam Chairman. 

I did get a chance to read both of your testimonies last night 

while I kept an eye on that highbrow, intellectual economic news 

program I like to call SportsCenter. So I did get to read the testimonies and appreciate them. Both of them are very enlightening. 

Right now, when it comes to jobs, the U.S. is recovering at a 

slower pace than any other major developed nation. When you look 

back, the Great Depression, while countries entered it about the 

same time, the speed of their recoveries also varied greatly. On one 

extreme, Sweden, 1934. On the other extreme, the U.S., 8 years 

later. 

Dr. Al Felzenberg in his book, ‘‘The Leaders We Deserved (and 

a Few We Didn’t): Rethinking the Presidential Rating Game,’’ he 

identified in the sense that President Franklin Roosevelt had unintentionally retarded the U.S. recovery by vacillating between mutually contradictory economic policies, starting from reflation, breaking the gold standard and devaluing the dollar, and moving to price 

controls. Then there was a focus on balancing the budget, especially with higher taxes and tax experiments, increases in taxes on 

retained earnings. That led to a recession on top of the Depression. 

Then there was the trust busting where they broke up the price 

fixing that had been put in place before. And then, of course, the 

big spending, the WPA, the make work project. 

While there has been a lot of effort to not repeat monetary mistakes from the Great Depression, it seems like we may well be repeating some of the fiscal and regulatory mistakes from the Great 

Depression. FDR’s policy fluidity increased uncertainty and slowed 

private business investment and job creation in the 1930s, just as 

I hear from our local businesses back home who tell me their customers and clients are not making those key investment decisions 

because it is hard enough for them to predict the market. It is impossible for them to predict the market and Congress at the same 

time. 

Dr. Roberts, in your testimony, you state that policy fluidity is 

once again exacerbating uncertainty and therefore retarding business investment and job creation. So the question is, in contrast to 

one of our former colleagues, now Chief of Staff Rahm Emanuel, 

who said, never let a crisis go to waste, should Congress put large, 

contentious issues such as health care, climate change, imposed tax 

increases aside to reduce uncertainty and encourage quicker business investment and job creation? 

Dr. Roberts. You want a yes, don’t you? 

30 

Well, I do think that is a good idea. I do think that is a good 

idea. I think it is the wrong time to be experimenting. 

Again, if we had to fix something that we thought was desperately wrong that would be simple, transparent, and quick, I 

think it would be a good idea. But I think overhauling complex systems at this time is very difficult. 

Just one comment on the Great Depression. It is 75 years later, 

and economists still can’t agree on what caused it or how we got 

out of it. I think that is a warning sign, Mr. Cummings, to asking 

economists to solve, steer the economy. It is embarrassing, but it 

must be admitted. It is true. 

Representative Brady. Thanks. 

In all fairness, Dr. Stiglitz, please. 

Dr. Stiglitz. Uncertainty is inherent, and there is uncertainty if 

we do something and uncertainty if we don’t do something. I have 

talked to a lot of businessmen in the energy sector who say the real 

problem right now is they know that, at some time in the future, 

they are going to pay for the price of carbon. The equilibrium price 

of carbon is much higher than zero. If we don’t do something, Europe is going to implement border taxes. We are going to have to 

do something. 

And they want a response. They know something is going to have 

to be done, and they want something to be done sooner rather than 

later. So there is no way of getting out of this inherent uncertainty 

of the world that we live in. 

The same thing is true about health care. That was one of the 

discussions that we had earlier. In my mind, I agree it would be 

a lot better if we could do something that was transparent and 

clear. But again there is no getting out of this inherent uncertainty. 

Representative Brady. Doctor, I was just going to ask, there 

are real-life consequences to all this uncertainty. Yesterday, we had 

a company, Eastman, that had—that canceled a major chemical 

construction project in Beaumont. It cost us about 2,500 jobs. It 

was on the board because not just of global uncertainties, but there 

are uncertainties about climate change, global warming legislation 

and how it might affect their projects. So that uncertainty came 

home to roost for a community in our district with real negative 

consequences. 

I agree, uncertainty exists in all climates, but I really think back 

home in all of our states it has changed the behavior and it is altering behavior and the ability for us to recover from this economy. 

Dr. Stiglitz. As I said before, I know that a lot of, say, large 

electric power plants do not want to invest, knowing that sometime 

in the next 5 years or 10 years we will have to deal with this problem of climate change. They would rather have it dealt with sooner 

than later. 

This is not going to go away. If we resolved it, hopefully in a 

good way, that would allow them to go ahead. In the meanwhile, 

they know there is a high likelihood that there will be some form 

of carbon charge. There will be taxes put on our exports if we don’t, 

and we should recognize that we can’t be the free rider on the global system. Our firms know that they will face these border taxes 

if we don’t do something. 

31 

Chair Maloney. The gentleman’s time has expired. 

Representative Brady. Thank you both. 

Chair Maloney. Mr. Hinchey. 

Representative Hinchey. Thank you very much, Madam 

Chairman. 

Thank you both, gentlemen. I am sorry I wasn’t here to hear 

what you had to say, but, unfortunately, I had to be someplace 

else. But I am happy to be here at least for a few minutes to have 

an opportunity to see you and maybe ask you a question that I’m 

sure you have addressed before. 

But the situation that is confronting us is this deep recession, 

and the deep recession has its primary results in the loss of employment. We have more people who have been unemployed than 

we have in a long, long time. The economic circumstances we are 

dealing with hearken back to the 1929 Depression. The economic stimulus package that we have introduced, $787 

billion, was, in the opinion of many of us, about half of what we 

should have put out. Unfortunately, only about 30 percent of that 

$787 billion has been put out so far. It has been awfully slow. A 

lot more needs to be done. 

Could you give us some insight into what you think about the 

initiation of the stimulus bill and what needs to be done to get it 

out there more effectively? What is the focus of attention that it 

needs to have and what else we need to do to create and stimulate 

the much-needed jobs that are going to be essential to addressing 

this economic condition? 

Dr. Stiglitz. I agree that the stimulus package that was passed 

was both too small and not as well designed as it could have been. 

We knew that the large part that went into household tax cuts was 

not going to lead to that much spending. Because with the overhang of debt, the uncertainties, households would tend to save a 

lot of that. The nature of a stimulus is that you have to stimulate. 

You have to have people spend. So that part was not very effective. 

The tax cut should have been aimed at investment. An incremental investment tax credit, as I mentioned earlier, or other provisions encouraging investment would have been better. Some of 

the money went to help states and localities but not enough. The 

result of that is, while the Federal Government is expanding, 

states and localities are contracting, and that is undoing the stimulus. It is like a negative stimulus coming from the state and local 

level. 

It is one of the lessons we should have learned from the Great 

Depression but didn’t. Exactly the same thing happened during the 

Great Depression. The magnitude of the net stimulus is much 

smaller because it is being offset, and that is another thing I would 

have changed. 

One of the discussions that we have been having this morning 

is that different economists disagree. That is always going to be the 

case. But I think that the overwhelming number of economists— 

and we will have a disagreement about this—know that we have 

had lots of experience of situations where there is an economic 

downturn, and the problem is a lack of aggregate demand. In those 

contexts, increasing aggregate demand, by and large, does lead to 

more output and more jobs. The situation is, as you said, serious. 

32 

The fact is, it is not just a lag. People say the problem is that employment always lags, but that is not the problem. We haven’t had 

enough growth to create jobs, with or without lags. 

Representative Hinchey. So, with regard to growth, one of the 

things we ought to be doing is stimulating the existing industry 

and maybe also coming up with new technology that is going to 

create new industries. 

In connection with what you were saying just a few minutes ago, 

the energy situation, don’t you think we should be putting more attention and more investments into the generation of alternative energy, solar energy to stimulate new technologies and new industry? 

Dr. Stiglitz. Yes. Let me be clear regarding the discussion we 

have had earlier this morning about the issue of the role of government in stimulating technology. It is not just a question of picking 

winners. The real question is that there are huge spillovers, what 

we economists call externalities, benefits to all of society when you 

create new technologies. 

We have all benefited enormously from inventions like the Internet or the laser. We could all list a whole set of things where the 

inventor got only a small percentage of the social benefit arising 

from his innovation. That kind of basic R&D that always necessarily needs to be supported by the government. That is even 

more true when we are talking about benefits that are societal in 

nature, like global warming. The answer is very much that those 

are exactly the kinds of things that we ought to be doing now, 

which would create the preconditions for more private-sector activity. 

Chair Maloney. The gentleman’s time has expired. 

We have been called to a vote, but I want to briefly ask—maybe 

we have time for two brief questions. 

In your testimony, Dr. Stiglitz, you pointed out that there were 

going to be severe shocks and problems with our financial markets 

due to the mortgage industry’s foreclosures continuing and the 

looming problem of commercial real estate. Do you have any solutions or ideas of what we should do with these challenges that are 

before us? 

Dr. Stiglitz. In the area of home foreclosure, the real problem 

is that the policies of the Administration so far have not been sufficient. The main deficiency is that we have not written down principal. A quarter of all homes are underwater. We know that once 

homes are underwater, the probability of a default and a foreclosure goes way up. Eventually, that leads to problems in our financial sector, in the ability of banks to lend. It leads to all kinds 

of consequences. So we need to restructure the value of those mortgages. 

Unfortunately, we have made some mistakes in what we have 

done so far, two mistakes in particular. We allowed the banks to 

keep on their balance sheet these mortgages at face value, rather 

than writing them down to the reality. I call that marking to hope, 

not marking to market. That discourages them from dealing with 

these problems. 

Secondly, it was a mistake in some of the bailouts when we decided to underwrite the banks’ losses because that encourages them 

to, again, hope for a gain so that they get the upside and the govVerDate Nov 24 2008 13:19 Jun 24, 2010 Jkt 054937 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 C:\DOCS\55916.TXT SHAUN PsN: DPROCT
33 

ernment takes the downside. That in turn encourages them not to 

do anything. 

I think we need a homeowners Chapter 11 that would provide a 

legal backdrop to encourage restructuring. We have Chapter 11 

that allows for a rapid restructuring of corporate debts because we 

think it is important to keep jobs; keeping people in their homes 

is equally or more important. We need a homeowners Chapter 11 

that treats homeowners at least as well as we treat corporations 

and homes at least as well as we treat debts associated with yachts 

and other things of indebtedness. 

Chair Maloney. And commercial real estate which is a looming 

time bomb, what should we do about that? 

Dr. Stiglitz. That is a problem with no easy solution, other than 

to recognize that it is a problem and that we ought to be demanding capital adequacy on the part of banks. If we don’t, we are going 

to have a problem with our financial system in 1, 2, 3 years time 

all over again. 

Dr. Roberts. But if we continue to give people a do-over for 

their mistakes, as compassionate as that sounds and its impact on 

the economy as a whole might be beneficial today, we are continuing to destroy the incentives that make our country productive 

and prosperous. So I think it is a terrible mistake to say to people, 

if you are in trouble, turn to us and we will extend your hand, 

where the ‘‘us’’ is the government. I think it is a bad precedent. It 

is a problem. 

I think we will have a serious foreclosure problem next year. It 

is going to be very destructive. Unfortunately, we aren’t going to 

have the budgetary leeway, I suspect, to do much about it. 

But to say to people, whether it is on Wall Street or on Main 

Street, you don’t have to take responsibilities for your actions; if 

you made a mistake, we will bail you out; that is going to be the 

end of our country as we know it. Down the road, we will pay a 

fierce price. It will destroy the mortgage market, and that is how 

we got into this mess, by assuming that we could tweak and control and steer the mortgage market the way we thought was socially desirable. It is an illusion to think that comes at no price. 

So it does have a good short-run effect. I agree with Professor 

Stiglitz. But the long-run consequences are easy to ignore, and I 

think they have to be faced. 

Chair Maloney. Thank you very much. 

Mr. Brady. 

Representative Brady. Dr. Stiglitz, in your testimony—and I 

am curious—you made a recommendation that to spur employment 

that we encourage people to retire early, lowering penalties to get 

on Social Security and lowering the eligibility for Medicare. Many 

European countries tried these in the 1980s and 1990s, and it ultimately reversed course because it actually took away Federal outlays and increased their entitlement costs. 

Right now, as you know, everyone knows Social Security and 

Medicare are sinking ships. So the dual thought of adding more 

people onto those ships at the same time removing them as productive citizens at a time life expectancy is increasing, wouldn’t that 

proposal actually reduce real GDP over time? 

34 

Dr. Stiglitz. I thought of that as mostly a short-term measure. 

I will agree with you that, over time, we ought to be increasing Social Security and Medicare. This is one of the older ideas in the 

Greenspan Commission, and I support that idea. 

Representative Brady. Dr. Roberts, any thought? 

Dr. Roberts. No, no comment. 

Representative Brady. Thank you both. I appreciate it. 

Chair Maloney. First of all, I would like to thank our distinguished panelists today. While putting Americans back to work 

today may require deficit spending, the dangers of inaction are 

even more costly. If we don’t invest in job creation, we will pay 

later in the form of higher payments to unemployment insurance, 

food stamps, welfare, and other entitlements. 

Thank you for your ideas to help us work in government to help 

the private sector create more jobs and to move our economy forward. 

We have been called for a vote. I could listen to both of you all 

day. Thank you very much for being here. Thank you. 

Dr. Roberts. Thank you. 

[Whereupon, at 11:54 a.m., the committee was adjourned.] 

(35) 

SUBMISSIONS FOR THE RECORD 

36 

PREPARED STATEMENT OF CAROLYN MALONEY, CHAIR, JOINT ECONOMIC COMMITTEE

For the first time since the recession began two years ago, the labor market appears to have stabilized. After month after month of punishing losses, November’s 

employment picture was relatively stable. Less than a year ago, job losses were 

growing more and more severe. Last November, the economy shed 600,000 jobs. 

Losses increased until January, when they hit a post-Great Depression record of 

741,000 jobs lost, the last month that President Bush was in office. 

But we turned a corner. Job losses have steadily fallen for the last six months. 

Yet there is no escaping the cruel math of recoveries. The recovery of the job market 

lags behind the recovery of the broader economy. Businesses must have more customers before they add employees. 

Although the labor market appears to be stabilizing, too many Americans remain 

out of work. More than 15 million workers are unemployed. While we have brought 

the economy back from the brink, we are not yet where we need to be in terms of 

job creation. 

The mission is to create high-quality private-sector jobs. Congress has already done a great deal of work on this front. The $700 billion Recovery Act included a 

tax cut for 95 percent of American families and created jobs while investing in clean 

energy technologies, infrastructure, and education—and we see those investments 

paying off in the steadily improving labor market figures. The effect of the stimulus 

on job creation has been verified by the non-partisan Congressional Budget Office. Just last month, we extended the $8,000 first-time homebuyers credit that will 

spur construction jobs. 

We extended tax relief to small businesses. We are boosting funding for small 

business loans via the Small Business Administration. These two initiatives should 

spur hiring. 

Earlier this week, President Obama announced a new job creation agenda with 

three key initiatives to accelerate job growth. First, we need to focus on small businesses. Small businesses are the engine of the American economy. By helping small 

businesses expand investment and access credit, they can fuel job growth. Second, 

we need to invest in our future by rebuilding America’s crumbling infrastructure. 

Finally, we need to focus on ‘‘green’’ jobs. Smart, targeted investments in energy efficiency can help create jobs while improving energy security and saving consumers 

money. 

Congress and the President will work together to aggressively pursue a job creation agenda that speeds the labor market recovery. Of course, some of those initiatives will require new spending. We are committed to transparency regarding the 

cost of our initiatives. 

But let me be clear: While putting Americans back to work today may require deficit spending, the dangers of inaction are even more costly. If we don’t invest in job 

creation, we will pay later in the form of higher payments to unemployment insurance, food stamps, welfare, and other entitlements for a ballooning number of outof-work Americans and their hard-hit families. 

Nearly 6 million Americans have been unemployed for 6 or more months. Over 

3 million Americans have been unemployed for over a year. Research shows that 

the longer a worker is out of work, the harder it is for him to find a new job. We 

must invest in these workers with aggressive job creation policies coupled with targeted job training initiatives. Otherwise, we face a long-term cost burden far more 

expensive than smart spending on job creation investments today. 

Our challenge today is immense. While the economy may be on the road to recovery, the labor market remains on shaky footing. We Americans are a hard-working, 

resilient people. But the millions who have been battered by the economic storm 

need our help today in getting back to work. I am confident that we are up to the 

task. 

And I am thrilled that we have with us today Dr. Joseph Stiglitz, one of America’s 

brightest economic minds, to help us learn about the best ways to accomplish our 

goal of a rapid and complete labor market recovery. 

PREPARED STATEMENT OF SENATOR SAM BROWNBACK, RANKING MINORITY

I want to thank the chair for scheduling today’s hearing. The question of how to 

restore growth to the labor market is the single most important challenge facing the 

Administration and the Congress. In answering the question of ‘‘what should government do?,’’ we need to be mindful of the equally important consideration of ‘‘what 

government should not do.’’ 

The only way that we are going to restore meaningful, long-term growth in employment and output is through the private sector. We need to once again unleash 

37 

the engine that powers our economy to create jobs and opportunity for our citizens. 

We need to make sure that our citizens are able to enjoy the fruits of THEIR labor 

instead of being asked to give more and more of those fruits to the government to 

distribute according to its wishes and desires. 

Point is that instead of paving the way to economic recovery, the government is 

standing in the way. The massive stimulus bill—$787 billion—that passed in February. The American 

people were told that this was necessary to prevent unemployment from rising 

above 8 percent. The last time I checked, 10 is greater than 8. The February stimulus has turned out to be no stimulus, so now the President and Democratic leadership are calling for more stimulus—even though the majority of the first stimulus 

hasn’t been spent. This time they are talking about using unspent money from 

TARP. I opposed passage of TARP and I am even more opposed to the Administration and Congressional majority transforming this money into a perpetual slush 

fund. The legislation was specific. As money was paid back to the government, it 

was to be used to pay down the national debt, not to fund new programs or new 

spending. 

What are the biggest threats to the future long-term prosperity of our nation? 

Plain and simple: it is our skyrocketing national debt, our unfunded entitlement 

promises and a government intent on getting bigger and bigger and controlling more 

and more of our nation’s economy. Does the marketplace have imperfections? Yes 

it does. But those imperfections pale in comparison to the threat posed by a runaway government that believes it has better and more complete knowledge of how 

to allocate resources and determine the value of labor and capital. 

The failure of ‘‘really smart people’’ on Wall Street to recognize and account for 

risk couple with excess leverage brought our entire economic system to the brink 

of collapse. The government is in the process of doing the same thing. For instance, 

instead of creating stability and reducing uncertainty, our government is introducing greater uncertainty and great risk into the private sector. 

Let’s take the current debate over the proposed takeover of the health care system 

by the federal government. If you are a small business the current debate and the 

ideologically driven path of current legislation offer little comfort and introduce even 

greater uncertainty into an already uncertain economic environment. What will it 

cost? What new mandates and penalties will I face? These are questions business 

owners and managers are concerned with. These uncertainties loom as a major obstacle to a decision to hire new workers or to postpone decisions to reduce compensation costs by reducing the number of employees. 

Entrepreneurs see it for what it is—a giant government scheme to embark upon 

the greatest redistribution of economic resources in this history of this nation. The 

difference is that when an entrepreneur embarks on a new venture, the money at 

risk is usually his own. When the government embarks on a new scheme, it’s other 

people’s money. 

We will hear that legislation passed in the House and in pending in the Senate 

will reduce the deficit. It’s a mirage that relies on timing and inflation. The real 

point is that the legislation will permanently and significantly increase the size of 

government both in terms of what the government spends and what it takes from 

hard working citizens. At the end of the day, it will leave us less free, more deeply 

in debt, and less prosperous in the future. 

I look forward to the testimony from our witnesses. Both are distinguished scholars. I will be interested to hear their thoughts on how to move the economy forward. 

For my part, I am convinced that government needs to cease being the obstacle to 

recovery. We need to stop increasing uncertainty and as I said earlier stop blocking 

the road to recovery. 

PREPARED STATEMENT OF REPRESENTATIVE KEVIN BRADY

I join in welcoming Dr. Stiglitz and Dr. Roberts, and look forward to hearing the 

views of these two distinguished economists. 

The economy remains the number one issue for Americans and my constituents 

in Texas. They are apprehensive—in some cases frightened—about the direction 

that economic policy has taken in Washington. 

A new Bloomberg survey of the American public reveals that the vast majority 

of the Nation, 60 percent, believe the stimulus had no effect or is hurting the economy. More troubling, nearly half (48%) say they feel less financially secure today 

than they did when President Obama first took office. And their pessimism grows 

about the willingness and the ability of the government to reduce the staggering 

deficit. 

38 

The recent hastily-arranged jobs summit and calls by the President for Stimulus 

II are further signs this Administration’s economic policies are failing the American 

public. 

Consumers are frightened by the debt and their job future and understandably 

reluctant to spend. Businesses of all sizes are worried—reluctant to add new workers while Washington promotes higher health care costs, energy costs, more regulation and new taxes. 

The White House and this Congress have taken their eyes off the economic ball, 

opting instead to pursue ideological agendas that contribute nothing to our economic 

recovery and, in fact, fuel fear among job creators along our Main Streets. We need 

to stop ‘‘frightening the horses’’ if we hope for a stable and reliable economic recovery led by our local businesses, rather than the government. 

The United States is at an economic crossroads. The road to the right is a free 

market economy in which the decisions of Americans acting as entrepreneurs, consumers, workers, investors, and savers are determinative, while the road to left is 

a social market economy, in which the federal government plays a controlling role. 

To the right, Congress would gradually reduce federal budget deficits by restraining the growth of federal spending and pruning unnecessary or ineffective programs. 

Reforming health care on this path would focus on empowering patients and lowering costs. 

To the left, Congress would continue its reckless spending. Reforming health care 

on this path would focus on empowering the federal bureaucracy and expanding 

health-care entitlement benefits with little consideration about long-term costs. 

To the right, Congress would direct the Treasury to sell its shares in Chrysler, 

Citigroup, GMAC, and General Motors and to truly privatize Fannie Mae and 

Freddie Mac as quickly as possible. Once again, the market would determine which 

companies prosper or fail. 

To the left, Congress would establish an industrial policy for the United States, 

determining winners such as green technologies, and losers such as oil and natural 

gas production, based on political criteria. Housing is one of the few sectors of the 

U.S. economy in which the federal government has pursued an industrial policy. 

The collapse of the housing bubble and the insolvencies of Fannie Mae and Freddie 

Mac should warn us about the dangers of mixing public purpose and private profits. 

To the right, necessary regulations would be as simple as possible and fairly enforced. Old regulations would be regularly reviewed, and regulations that proved 

costly, ineffective, or unnecessary would be eliminated. 

To the left, new regulations would multiply. The cost or effectiveness of regulations would matter little so long as their intent is good. 

To the right, Congress would stabilize the federal tax burden as a percent of GDP 

at its post-World War II average. Congress would reform the federal income tax system to encourage both domestic and foreign investors to make job-creating investments in the United States rather than forcing them abroad. 

To the left, Congress would allow the federal tax burden to rise as a percent of 

GDP. Congress would inevitably be forced to increase the income and payroll tax 

rates paid by nearly all Americans, not just the wealthy. 

To the right, Congress would aggressively pursue new customers around the 

globe, tearing down barriers and creating U.S. jobs by approving the pending free 

trade agreements with Colombia, Panama, and South Korea and engaging in dynamic growing markets—such as the Asia Pacific region. 

To the left, Congress would block these agreements, withdraw from the global 

marketplace, and impose protectionist measures that block access to the U.S. market at the behest of a few labor leaders and other activists. 

History both here and abroad proves that the right road leads to sustained economic growth, rising personal income, and expanding job opportunities while the left 

road leads to stagnation. 

The question before Dr. Stiglitz and Dr. Roberts today, is which road would you 

choose? 

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