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FULL COMMITTEE HEARING 

ECONOMIC STIMULUS FOR SMALL BUSINESS: 

A LOOK BACK AND ASSESSING NEED FOR 

ADDITIONAL RELIEF 

COMMITTEE ON SMALL BUSINESS 

UNITED STATES HOUSE OF 

REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

JULY 24, 2008 

Serial Number 110-108 

Printed for the use of the Committee on Small Business 

( 

Available via the World Wide Web: www.access.gpo.gov/congress/house 

HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

HEATH SHULER, North Carolina 

CHARLES GONZALEZ, Texas 

RICK LARSEN, Washington 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

HENRY CUELLAR, Texas 

DAN LIPINSKI, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

BRUCE BRALEY, Iowa 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

BRIAN HIGGINS, New York 

MAZIE HIRONO, Hawaii 

STEVE CHABOT, Ohio, Ranking Member 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

STEVE KING, Iowa 

JEFF FORTENBERRY, Nebraska 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

DAVID DAVIS, Tennessee 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KEVIN FITZPATRICK, Minority Staff Director 

STANDING SUBCOMMITTEES 

Subcommittee on Finance and Tax 

MELISSA BEAN, Illinois, Chairwoman 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

VERN BUCHANAN, Florida, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa 

Subcommittee on Contracting and Technology 

BRUCE BRALEY, IOWA, Chairman 

HENRY CUELLAR, Texas 

GWEN MOORE, Wisconsin 

YVETTE CLARKE, New York 

JOE SESTAK, Pennsylvania 

DAVID DAVIS, Tennessee, Ranking 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

MARY FALLIN, Oklahoma 

(II) 

Subcommittee on Regulations, Health Care and Trade 

CHARLES GONZALEZ, Texas, Chairman 

RICK LARSEN, Washington 

DAN LIPINSKI, Illinois 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

JOE SESTAK, Pennsylvania 

LYNN WESTMORELAND, Georgia, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa 

MARILYN MUSGRAVE, Colorado 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

Subcommittee on Rural and Urban Entrepreneurship 

HEATH SHULER, North Carolina, Chairman 

RICK LARSEN, Washington 

MICHAEL MICHAUD, Maine 

GWEN MOORE, Wisconsin 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JEFF FORTENBERRY, Nebraska, Ranking 

ROSCOE BARTLETT, Maryland 

MARILYN MUSGRAVE, Colorado 

DAVID DAVIS, Tennessee 

Subcommittee on Investigations and Oversight 

JASON ALTMIRE, PENNSYLVANIA, Chairman 

CHARLES GONZALEZ, Texas 

RAUL GRIJALVA, Arizona 

MARY FALLIN, Oklahoma, Ranking 

LYNN WESTMORELAND, Georgia 

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 1 

Chabot, Hon. Steve .................................................................................................. 2 

WITNESSES 

Connelly, Mr. Arthur, Chairman of South shore Bank , on behalf of the 

American Bankers Association ........................................................................... 4 

Oates, Mr. David, President, Oates Association on behalf of the American 

Council of Engineers ............................................................................................ 5 

Bernstein, Ms. Rachelle, V.P. and Tax Counsel, National Federation of Independent Business ................................................................................................. 7 

Zandi, Dr. Mark, Chief Economist, Moody’s Economy.com .................................. 9 

Myles, Mr. William, Myles and Myles Retirement Planners, on behalf of 

the Western Economic Council ........................................................................... 12 

APPENDIX 

PREPARED STATEMENTS: 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 27 

Chabot, Hon. Steve .................................................................................................. 28 

Altmire, Hon. Jason ................................................................................................. 29 

Connelly, Mr. Arthur, Chairman of South shore Bank , on behalf of the 

American Bankers Association ........................................................................... 30 

Oates, Mr. David, President, Oates Association on behalf of the American 

Council of Engineers ............................................................................................ 40 

Bernstein, Ms. Rachelle, V.P. and Tax Counsel, National Federation of Independent Business ................................................................................................. 44 

Zandi, Dr. Mark, Chief Economist, Moody’s Economy.com .................................. 55 

Myles, Mr. William, Myles and Myles Retirement Planners, on behalf of 

the Western Economic Council ........................................................................... 48 

Cochetti, Mr. Roger, Group Director, the Computing Technology Industry 

Association ............................................................................................................ 57 

(V) 

(1) 

HEARING ON ECONOMIC STIMULUS FOR 

SMALL BUSINESS: A LOOK BACK AND ASSESSING A NEED FOR ADDITIONAL RELIEF 

Thursday, July 24, 2008 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Committee met, pursuant to call, at 10:19 a.m., in Room 

1539, Longworth House Office Building, Hon. Nydia M. Vela ́zquez 

[Chair of the Committee] Presiding. 

Present: Representatives Vela ́zquez, Shuler, Cuellar, Altmire, 

Clarke, Chabot, Bartlett, and Davis. 

Chairwoman VELA ́ ZQUEZ. Good morning. I call this hearing of the 

House Small Business Committee to order. 

OPENING STATEMENT OF CHAIRWOMAN VELA ́ ZQUEZ 

Even in a free-market economy, certain conditions call for swift 

and sweeping government action. This February, in the face of rising unemployment and an escalating housing crisis, Congress took 

just that. In an overwhelmingly bipartisan effort, we passed this 

year’s most critical piece of financial legislation. The Economic 

Stimulus Act of 2008 was a landmark bill and has helped to stem 

the effects of what has become a full-blown recession. 

As of today, 130 million American families have collected stimulus checks. Meanwhile, the country’s 26.8 million small businesses 

have enjoyed significant tax write-offs for investments. Altogether, 

these incentives accounted for a $152 billion shot to the lagging 

economy. 

The stimulus package was more than a Band-Aid resolution. It 

succeeded in blunting the effects of what would have otherwise 

been a crippling downturn. The individual rebates, for example, 

drove a spike in consumer spending. By late May, retail sales have 

climbed 1 percent, and the early indicators show that they continue 

to rise in June. In fact, many retailers report gains of 4.3 percent. 

These trends were especially helpful to small businesses, which 

tend to be the largest beneficiary of consumer spending. 

The stimulus package did more than just incentivize consumers. 

It also galvanized small businesses by promising instant write-offs 

and tax breaks on purchases. In doing so, this particular inducement has done more than just encourage small business commerce. 

It has the potential to put cash back in the pockets of our entrepreneurs. These rebates have done a great deal to bolster our 

struggling financial market. 

2 

Yet, despite their many benefits, the economy has a long way to 

go. Rising inflation and climbing unemployment rates have dampened this spring’s financial uptick, and we are now facing a perfect 

storm of financial crisis. But as today’s hearing will show, this is 

not about looking backward, but forward. In addressing our economic woes, we must focus on ways to stimulate our small businesses. After all, they make up 99 percent of American enterprises, 

employ more than half of the country’s workforce, and are the 

backbone of our economy. 

A framework that grows on a combination of tax incentives and 

targeted investment would allow small firms to build off of the first 

stimulus package. Several proposals have been suggested for accomplishing this. These ideas include a second round of stimulus 

checks, increased infrastructure spending, and a payroll tax holiday. 

In this vein, I plan to introduce a bill later today to address certain tax challenges facing small firms. The Small Business Tax 

Modernization and Stimulus Act of 2008 will update outmoded tax 

codes, thereby correcting many of the inequities currently facing 

small firms. 

While looking for ways to stimulate our small businesses, it is 

important to search for solutions that have both long and shortterm effects. Infrastructure spending, for example, will promise a 

little of both. Not only would it give an immediate boost, but it will 

also set up a series of returns down the road. 

We now know that the first stimulus package created a foundation for economic turnaround. Today, we will look at ways to build 

on that framework. As we move forward, we want to make certain 

that we provide maximum opportunity for our small businesses to 

grow. In past recessions, entrepreneurs have succeeded in bringing 

our economy back on track. This time around promises to be no different. 

I am pleased that today’s witnesses could join us for this important discussion, and look forward to their testimony. 

With that, I now yield to Ranking Member Chabot for his opening statement. 

OPENING STATEMENT OF RANKING MEMBER CHABOT 

Mr. CHABOT. Thank you, Madam Chairwoman, and thanks for 

holding this hearing on the role that small businesses play in supporting our economy. I would like to welcome our distinguished 

panel of experts this morning, who have taken time out of their 

busy schedules to provide us with their views, and I want to especially thank Bill Myles from my district in Cincinnati, Ohio, whom 

I will be introducing later. 

Madam Chairwoman, small businesses, like all Americans, are 

concerned about the slowing growth of the economy. Energy prices 

are high. Too high. The stock market is lagging, people are losing 

their homes, and the U.S. dollar has weakened. Small businesses 

have been particularly hard hit by this confluence of factors. 

The economic stimulus package that was passed in a bipartisan 

manner early this year I think was the right thing to do. It was 

a temporary solution or fix to a problem as we saw it. It was one 

of those things that oftentimes has happened too rarely, both under 

3 

Republican control and Democratic control, and that is something 

that happens in a bipartisan matter, and quickly. I supported it, 

as did you and most other Members of Congress. As I say, I think 

it was the right thing to do. But there are a lot of other more permanent things which need to be done, and I will get into those 

now. 

We need a comprehensive approach to stem rising energy prices, 

for example, to create more job and strengthen our economy. First, 

we should increase domestic oil production, invest in renewable 

fuels, and increase incentives for energy efficiency and new technologies. I strongly believe the most critical step toward reducing 

the price at the pump is boosting domestic oil production by opening Alaska’s Arctic National Wildlife Refuge, or ANWR, and the 

Outer Continental Shelf, to environmentally responsible energy exploration. Until we can further develop cost-effective alternative 

energy solutions, we need more domestic oil production to help 

lower gas prices and move towards energy independence. 

Again, I want to emphasize that I also firmly believe that the alternative and renewable energy sources, whether it is wind, solar, 

biomass, are also an important part of this, and we need to emphasize that as well as ANWR and the Outer Continental Shelf and 

building new oil refineries, and the rest. 

Second, we need to make the 2001 and 2003 tax cuts permanent. 

These cuts included an across-the-board tax cuts for all working 

Americans, which is especially helpful to small businesses, since 

most of those folks file as individuals. In addition, this relief increased the child deduction, raised the student loan interest deduction, and eliminated the death tax. Of course, that was over time 

because we didn’t have the votes in the Senate to make elimination 

of the death tax permanent. And as we all know, because we didn’t 

have the votes in the Senate, that, what I believe is an egregious 

tax, will come back again very soon if we don’t do something about 

it. Taxpayers will face the biggest tax increase in history if these 

that I have mentioned and others are allowed to expire. 

The chairwoman has called a number of hearings on health care, 

and I think we share a concern about the high cost of and access 

to health care. I believe we should continue to try to find innovative ways to make health care more affordable and accessible to 

small businesses. 

Finally, we must eliminate wasteful Federal spending. Our Nation’s long-term fiscal health depends on cutting spending and 

working towards a balanced budget. The Congressional Budget Office estimates that for the first three quarters of 2008, the Federal 

Government incurred a budget deficit of $268 billion, more than 

twice the deficit recorded for the same period last year. 

These steps would help all Americans and especially our Nation’s 

small businesses through our challenging economic environment. 

I again want to thank the chairwoman for holding this hearing, 

and I look forward to the testimony of all the witnesses here this 

morning, especially the witness from Cincinnati. 

I yield back. 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Chabot. I am pleased 

to welcome Mr. Arthur Connelly. He is the Chairman elect to the 

American Bankers Association. Mr. Connelly is also Chairman of 

4 

South Shore Savings Bank. The American Bankers Association represents banks of all sizes on issues of national importance for financial institutions and their customers. 

Mr. Connelly, welcome. You have 5 minutes to make your presentation. 

STATEMENT OF ARTHUR CONNELLY, CHAIRMAN, SOUTH 

SHORE BANK, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION 

Mr. CONNELLY. Thanks very much, Madam Chairwoman, Ranking Member Chabot, and members of the Committee. My name is 

Arthur Connelly. My bank is a 175-year old mutual institution just 

south of Boston, with $950 million in assets. 

Our nation is certainly facing difficult economic conditions. However, I want to say at the outset that I am, and my banking colleagues across this country are very positive about our nation’s economic future. Our nation has faced these challenges before and has 

emerged much stronger as a result. 

This is not to minimize the problems that are occurring today, 

whether they are from job losses, struggles to avoid foreclosure, or 

just trying to meet the daily needs in the face of high gas and food 

prices. These economic weaknesses will take many months to resolve, perhaps even several years. We need to collectively look for 

solutions that will ensure a fast recovery. 

The focus on small businesses is important now, as they are drivers of new ideas, new employment, and new economic growth. The 

vast majority of banks in our country are community banks, small 

businesses in their own right. In fact, 3,500 banks, 41 percent of 

the industry, have fewer than 30 employees. Small banks like mine 

have been an integral part of our communities for decades, and we 

intend to be there for many, many more years to come. 

We continue to work to help resolve financial problems as quickly 

and judiciously as possible. Indeed, the process of economic adjustment is well underway, helped by Federal Reserve action and the 

economic stimulus package, Congressional actions, including improvements to the FHA program, the reform of the GSEs, and the 

temporary FHA program to assist distressed borrowers should all 

provide helpful tools, and we applaud those efforts. 

Before turning to a few suggestions for changes, however, I know 

that many of you may be wondering about the health of the banking industry in light of the recent failure of IndyMac. Let me assure you that the industry as a whole remains fundamentally 

strong. Ninety-nine percent of banks are currently classified by regulators as ′′well capitalized,′′ the highest possible designation. We 

have the capital and the reserves to continue to make loans that 

are so vital to each and every one of our communities. 

Changes are needed, however, particularly to avoid a severe 

credit crunch. The secondary markets have already reduced the 

amount of credit available for residential and commercial real estate. ABA recommends a thorough discussion of securitization accounting rules to ensure credit can flow from this source. 

Moreover, FASB’s so-called fair value rules often fail to reflect intrinsic values or provide accurate and useful information to investors. ABA recommends that these rules be revised immediately. 

5 

The credit crunch can also stem from an over-reaction on the 

part of bank regulators. They are combing through banks’ books, 

looking for anything to criticize. This clearly has a chilling effect 

on the willingness of a banker to make new loans to deserving individuals and small businesses that need help today. While banks 

will naturally be more conservative as the economy weakens, pressure to write down the value of loans where payments are current 

will have a devastating effect on the availability of credit. 

Finally, I want to mention an issue that has arisen very recently, 

the problem of naked short-selling, as well as the repeal of the uptick rule, which has had a dramatic impact on many publicly traded banks, large and small. In spite of the strength of the industry 

and the backstop of the FDIC, our members are reporting that 

bank customers are equating stock drops with the safety of their 

deposits. 

While the SEC’s Emergency Order helped stop a speculative 

practice for a few large institutions, it really did nothing to help 

small banks. The ABA recommends that the SEC take immediate 

action to stop inappropriate short selling for all publicly traded 

banking institutions. 

Madam Chairwoman, we understand that you are about to drop 

a tax bill for small businesses. We want you to know that the ABA 

strongly supports initiatives like this one to address the concerns 

of small business. 

I appreciate the opportunity to be here today, and would be 

pleased to answer any questions. 

Thank you. 

[The statement of Mr. Connelly can be found in the appendix at 

page 30.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Connelly. 

Our next witness is Mr. David Oates. He is the President of 

Oates Associates, Incorporated, a civil and structural engineering 

firm operating in the St. Louis area for over 40 years. Mr. Oates 

is here to testify on behalf of the American Council of Engineering 

Companies. ACEC and its member firms employs thousands of engineers, architects, land surveyors, scientists, and other specialists. 

Its members are responsible for more than $200 billion of private 

and public works. 

We welcome you. 

STATEMENT OF DAVID OATES, PRESIDENT, OATES ASSOCIATES, INC., ON BEHALF OF AMERICAN COUNCIL OF ENGINEERING COMPANIES 

Mr. OATES. Thank you, Madam Chairwoman, and members of 

the Committee. I appreciate the opportunity to testify before you 

today about the importance of a safe and efficient transportation 

system to our economy and the role that transportation and infrastructure investments play in promoting economic growth. 

As mentioned, my name is David Oates, and I am President of 

a civil and structural engineering firm in the St. Louis area. My 

firm currently employs 40 civil and structural engineers. I am also 

an active member of the American Council of Engineering Companies, or ACEC, the trade association of America’s engineering industry. I currently serve as ACEC’s Transportation Chair. 

6 

On behalf of myself and ACEC, I urge you to include spending 

on our Nation’s transportation and environmental infrastructure as 

you consider legislation to stimulate the faltering economy. I was 

very pleased yesterday to see the House pass H.R. 6532, a bill that 

addresses the impending shortfall of revenues in the Highway 

Trust Fund, which could lead to a 34 percent cut in your State 

highway program. I hope the Senate will act quickly on that legislation. 

But much more can and should be done beyond a short-term fix 

to the Highway Trust Fund. Additional spending on infrastructure, 

from roads and bridges, to sewer and drinking water systems, will 

provide a near-term boost to our economy through job creation, at 

the same time provide long-term benefits to our economy. 

My firm is involved in all manner of public work projects, but my 

passion and experience lie in the transportation field. So I will direct the majority of my comments to those matters. My written testimony contains much more information on water and environmental infrastructure. 

Transportation and transportation-related industries account for 

10 percent of the U.S. Gross Domestic Product, and there is welldocumented evidence of the direct correlation between transportation spending and job creation. One commonly cited study from 

the Department of Transportation found that 47,500 jobs were associated with $1 billion in infrastructure spending. 

My firm and others in the transportation and engineering construction industry support well-paying engineering and construction jobs. Additional spending on transportation projects and programs will foster immediate job creation, but it is also important 

to appreciate the long-term benefits to our national economic competitiveness. 

The primary purpose of the Federal Surface Transportation Program is the safe and efficient movement of people and goods, which 

contributes to economic growth by facilitating on-time manufacturing and delivery, making personal business travel easier and reducing congestion and maintenance costs. 

Transportation investments also strengthen local and regional 

and State economies, and in turn generate additional tax revenue 

by allowing businesses to expand operations and hire more workers. Inadequate funding for transportation has led to deterioration, 

congestion, and delays, all of which raise the price of doing business through maintenance and repair needs, wasted fuel, and delayed cargo shipments. 

Last year, our national economy was crippled by nearly $80 billion in congestion costs. On the safety side, traffic accidents and fatalities, beyond their personal impact, exact a $230 billion dollar 

annual toll in economic costs. 

The National Surface Transportation Policy and Revenue Study 

Commission concluded that we need $225 billion minimum annual 

investment to upgrade our system to a state of good repair and create more advanced sustainable system. 

The massive quantity of transportation and infrastructure needs 

are certainly not going to be met in one piece of legislation, but the 

American Association of Highway Transportation officials has identified over 3,000ready-to-go projects that would be sped up through 

7 

additional near-term spending. An influx of additional funding 

would allow State DOTs to move forward with projects that are 

currently on hold. 

In my State, the Department of Transportation has identified 200 ready-to-go projects in need of $2 billion in funding, and these 

projects won’t just go to huge multi-state firms. Small businesses 

like mine will benefit greatly from contracting and opportunities 

from this additional funding. 

By boosting infrastructure spending you can take an important 

step toward fixing structurally deficient bridges, rebuilding crumbling roads and highways, and the best part is that these are truly 

investments. We are building structures this will last and will provide added value for years and years. There is both a short-term 

stimulus and a long-term gain. 

On behalf of ACEC and the Nation’s engineering industry, I 

want to thank this Committee once again for focusing attention on 

this important issue. 

I would be happy to answer any questions. 

[The statement of Mr. Oates can be found in the appendix at 

page 40.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Oates. 

Our next witness is Ms. Rachelle Bernstein. She is the Vice 

President and Tax Counsel for the National Retail Federation. Ms. 

Bernstein joined NRF in 2004, following 13 years as outside tax 

counsel to the NRF Government Relations Department. The National Retail Federation represents an industry with more than 1.6 

million U.S. retail companies and more than 25 million employees. 

Welcome. 

STATEMENT OF RACHELLE BERNSTEIN, VICE PRESIDENT/TAX 

COUNSEL, NATIONAL RETAIL FEDERATION 

Ms. BERNSTEIN. Thank you very much, Madam Chairwoman, 

Ranking Member Chabot. I am Rachelle Bernstein, Vice President 

and Tax Counsel for the National Retail Federation, which is the 

world’s largest retail trade association. NRF represents an industry 

with more than 1.6 million U.S. retail establishments, more than 

24 million employees, about one in five American workers, and 

2007 sales of $4.5 trillion. Most retailers are small businesses. 

Ninety-six percent of retail companies have only one location. 

Chairwoman Vela ́zquez, Ranking Member Chabot, members of 

the Committee, NRF commends you for holding this important 

hearing to evaluate the impact on small business of the economic 

stimulus package enacted earlier this year and assess the need for 

additional relief. 

Early this year, Congress and the administration worked together in a bipartisan fashion to enact economic stimulus legislation to aid a slowing economy. The NRF commends the Congress 

for its quick action to address the Nation’s economic needs. Because consumer spending represents 70 percent of the GDP, we believe that the tax rebate payments were particularly important. 

Today, we would like to share with the Committee what we have 

learned to date about the impact of these tax rebates. 

In the current economy, most categories of merchandise and most 

types of retail outlets are struggling to achieve even modest sales 

8 

increases. Tax rebate payments are providing some stimulus, but 

consumer spending remains subdued because of the stresses of declining home values, escalating food and fuel costs, increasing unemployment, and weak financial markets. Consumers are concentrating their spending on essentials. They are also more concerned 

than ever with the pricing of merchandise. Consumers are shopping more online so that they can more easily make price comparisons and also save money on gas. 

For small retailers, this economic climate is even more difficult 

than for larger retailers. Small retailers tend to compete more on 

service than on price. Because small retailers cannot benefit from 

economies of scale, they are hit harder than other merchants by 

rising costs, particularly the rising cost of fuel. Small retailers who 

do not sell their goods online are not able to take advantage of the 

shift to online sales. 

Direct deposit of tax rebate payments began the last few days of 

April, followed by the mailing of the rebate checks through July 11 

for eligible taxpayers who filed a tax return. After a decline in retail sales in March, there has been a bump in retail sales of general merchandise for April, May, and June, which we attribute to 

the distribution of the tax rebate checks. 

The April bump in retail sales was .6 percent seasonally adjusted 

month to month, which was the largest month-to-month increase 

since November of 2007. With substantially more checks distributed in the month of May, amounting to more than $40 billion in 

rebates, retail industry sales increased by .9 percent. Most of the 

May sales went to discounters and grocers, although some shoppers 

splurged on electronics and appliances. 

The Treasury Department distributed almost 30 billion in the 

month of June, but consumer spending remains soft, with an increase of .2 percent. Most of this increase seemed to be focused on 

necessities. 

A survey of consumers’ use of tax rebate checks was performed 

by Big Research the week of June 3 through 10. As of that date, 

45.3 percent of survey respondents had received their tax rebates, 

and 42.9 percent said they used the money to purchase something. 

However, nearly half of that money was spent on gas or necessities 

such as groceries rather than general merchandise, as envisioned 

when the rebate check program was passed by Congress. And 17.1 

percent of the respondents initially saved their rebate money, but 

it appears that they may have set it aside for purchases in upcoming months. 

In survey findings released just this week, NRF found that onefifth of parents nationwide have set aside a portion of their stimulus check for back-to-school purchases. Specifically, parents say 

they will use some of their tax rebate check to fund electronics, 

such as computers and cell phones. 

Despite a more modest increase in retail sales over the last few 

months than was expected from the rebate checks, we believe the 

results are better than they would have been if Congress had not 

enacted these rebates. Based on the economic information that is 

currently available, we believe that a compelling case can be made 

for providing additional economic stimulus legislation. 

9 

If Congress does act on a second stimulus package, we believe it 

should once again include relief for the consumer. Since consumer 

spending is the largest contributor to GDP, it is difficult to foresee 

an improvement in overall economic growth until consumer spending improves. 

Chairwoman Vela ́zquez and members of the Committee, thank 

you again for the opportunity to speak to you this morning. I would 

be happy to answer any questions. 

[The statement of Ms. Bernstein can be found in the appendix at 

page 44.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Ms. Bernstein. 

Our next witness is Dr. Mark Zandi. Mr. Zandi is the Chief 

Economist and Cofounder of Moody’s Economy.com in West Chester, Pennsylvania. He received his Ph.D. At the University of Pennsylvania. At Moody’s he directs the company’s research and consulting activities. Moody’s Economy.com is an independent subsidiary of the Moody’s Corporation, and a leading provider of economic research and consulting services. 

Welcome. 

STATEMENT OF DR. MARK ZANDI, CHIEF ECONOMIST, 

MOODY’S ECONOMY.COM 

Mr. ZANDI. Thank you. Thank you, Chairwoman. Thank you, 

Committee, for the opportunity to be here today. Let me say these 

are my personal remarks and not representative of the Moody’s 

Corporation. 

I have strong support for the idea that we need a second fiscal 

stimulus plan. I think that is a very laudable idea and is much 

needed in today’s economy. I think the plan should be timely so 

that the stimulus gets to the economy by early 2009. I think it 

needs to be targeted to lower income, middle income households 

that will spend the money quickly, and to small businesses that 

will use the money quickly to support hiring and investment of 

their further activity, and that it should be temporary. It should 

not lift the long-term Federal budget deficit. That is a very significant problem that we are going to face in coming years, and we 

don’t need to add to that problem. 

So timely, targeted, and temporary. I think those are the key criteria. 

I support the idea for a second stimulus plan for three reasons. 

Reason number one, the economy is still very weak. We have lost 

over 400,000 jobs since the beginning of the year. They are very 

broad-based. It is not just housing, vehicle manufacturing; it is retail, it is financial services, it is information services, it is professional services. In fact, there are only two industries that are adding to payrolls in a consistent way, and that is health care and 

educational services. That is it. 

The job losses are broad-based across the country. In my view, 

19 States are in recession. Ohio is one of those States. California, 

Arizona, Nevada, Michigan, Rhode Island. They are all over the 

country. There are many other States that are very close to recession, and probably will be in recession before this is all said and 

done. 

10 

The problems the economy faces are persistent. They are not 

going away quickly. The housing downturn is in full swing. Price 

declines will continue through this time next year, even under the 

best case scenario. 

The problems in the financial system are well-entrenched. The 

banking system is writing down problem loans, and that will continue for the foreseeable future. High energy and food costs are a 

significant drain on the economy that aren’t going to go away. So 

I think the economy’s problems are persistent. 

The second reason for my support is that the benefits from the 

first stimulus package are fading. The tax rebate, which was the 

principal element of the first stimulus package, about $100 billion, 

that has lifted retailing activity in April, March, and June. Talking 

to retailing clients that I have, they already are seeing retail sales 

are falling off quite dramatically in the month of July, so we are 

seeing it fall off very rapidly. 

The investment tax benefits, they of course expire at the end of 

the year, and what they have done is in a modest way pushed investment forward into this year, stealing away from investment for 

next year, so if those investment tax benefits are not extended, 

then there will be a payback in early 2009 with less investment by 

businesses. So the stimulus is going from a plus, and it will be a 

negative later this year into 2009. So a second reason for support. 

The third reason for support is monetary policy can’t help. The 

Federal fund rates target is 2 percent. It is not going to go any 

lower. There are concerns about inflation. I don’t think that means 

the Reserve will tighten monetary policy soon, but what it surely 

means is that this is not going to be any further easing of policy. 

Interest rates are not going any lower. So we can’t count on that. 

So if policymakers are going to stimulate the economy, it has to be 

Congress and the economy. It has to be fiscal stimulus. 

So those are the three reasons for support. What should the plan 

look like? I think it probably should be $50 to $100 billion. That 

would be equal to the difference between what economists think is 

going to happen next year and what the economy should grow in 

a normal, well-functioning environment, the difference between 

what we think growth will be and what economists call the potential growth, that growth necessary to maintain a stable rate of unemployment. 

Most economists, including myself, believe that unemployment 

will rise into 2009 if the economy doesn’t experience stronger 

growth. In fact, the unemployment rate today is 5-1/2. Most economists think it will be between 6 and 6-1/2 percent by the spring, 

summer 2009. Of course, that understates the stress in the job 

market. Many people are being pushed from full-time to part-time 

employment. They are still working but losing overtime hours. So 

there is a lot of other stress. So that $50 to $100 billion would go 

a long way to filling that gap. 

And if economists are wrong and the economy turns out to be 

better, that is not a real problem. We have a 5.5 percent unemployment rate. We could use a little bit of extra growth anyway to 

bring that rate down, back to where most economists would think 

is full employment, which is below 5 percent. So I don’t think there 

11 

is much downside to being wrong. It would be nice if we were 

wrong. 

In terms of what should be in the plan, I am going to throw out 

some ideas, all of which are more or less good, some better than 

others, but it depends on circumstances. 

I think extending the Food Stamp Program would be a great 

idea. You can implement that quickly. You can have it out there 

in 60 days. All research shows people spend that within 30 days 

after that. These are going to help low-income households struggling with the high food costs. It is killing them. I think that would 

be helpful, a very efficacious kind of policy. 

I think a gas tax holiday is a good idea. I think that would help 

people who are struggling, low-income households that are struggling to get to work, driving long distances, and any help they can 

get in terms of tax relief there, I think would be helpful. 

Those are for consumers. For businesses, I would extend the investment tax benefits for another year. I don’t think the cost to 

Treasury is very significant, and I think that would at least take 

away that drag that will be on the economy in 2009, particularly 

for small businesses that will face higher costs because of that. 

Here is a little bit of a stretch, but I think a payroll tax holiday 

would be a very good idea. It would go to low-income households, 

people who don’t pay income tax but work and pay payroll tax, and 

to small businesses, because that will be a cash infusion to them 

that they can use to hold on to their workers and to investment. 

So those are for businesses. 

For government, aid to State and local governments would be 

very good. There was a very good piece in the Journal today about 

the size of the fiscal problem States are facing. They are going to 

cut back on Medicaid and other infrastructure. That would be very 

beneficial, to get them some help to forestall some of those cuts. 

Finally, infrastructure spending. The only caveat there is you 

have got to figure out how to cut the checks quickly. If you can’t, 

then it is not worth it. Criteria number one is timeliness. If it is 

not timely, it is not stimulus. It is not counterproductive. So if you 

can marry stimulus with infrastructure, that is great. But you have 

got to figure out how to execute. That is very important. 

With that, I will stop. Thank you for the opportunity. 

[The statement of Mr. Zandi can be found in the appendix at 

page 48.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Dr. Zandi. 

And now I will recognize Ranking Member Mr. Chabot for the 

purpose of introducing our next witness. 

Mr. CHABOT. Thank you, Madam Chairwoman. I am pleased to 

introduce William Myles from Cincinnati, Ohio. Bill serves as Vice 

President and member of the Board of Directors at the Western 

Economic Council, an organization created 20 years ago to promote 

economic development and community pride in western Hamilton 

County, Ohio. He is a retirement planner with the firm of Myles 

and Myles located in Covington, Kentucky. 

Bill has been working with clients for over 30 years in the firm 

that his father founded back in 1965. He is also a member of the 

leadership team of Agenda 360, an economic development strategic 

plan for Cincinnati and it’s surrounding counties. 

12 

A graduate of the Citadel, Bill lives with his wife Barb in the 

Cincinnati neighborhood of Bridgetown. We are pleased to have 

him here this morning, and look forward to your testimony. Thank 

you. 

STATEMENT OF WILLIAM MYLES, MYLES & MYLES, RETIREMENT PLANNERS, ON BEHALF OF THE WESTERN ECONOMIC 

COUNCIL 

Mr. MYLES. Thank you, Chairwoman Vela ́zquez, Ranking Member Chabot, and all the members of the Committee for the opportunity to speak today. The Western Economic Council was founded 

20 years ago as a nonprofit economic development group. Today, 

our members represent nearly every aspect of life in the western 

suburbs of Cincinnati, Ohio. As members, we voluntarily work to 

foster a greater economic and built environment for our region. 

In an effort to prepare for this hearing, I asked our members a 

number of questions on the subject. Much was revealed after several dozen conversations. 

Consumer rebates are being used in every imaginable way. Recipients I spoke with are respectively paying bills, buying gasoline, 

buying a high definition television, going on a trip, investing in 

long-term savings, putting the money on the side for a time when 

they may need it, and everything in between. 

Who would argue any payments to consumers is not in itself positive for the economy? An $1,800 check to a family of four with 

adjusted gross income of $70,000 is, by any measure, something of 

a windfall. 

One of our members shared a report of the International Shopping Centers Trade Group from earlier this year. It reported their 

tenants were crediting increased sales to the rebates. Last week, 

the same group reported those sales had leveled off and it expects 

a record number of their tenants will go out of business in 2008. 

The anecdotal conclusion of the great majority I canvassed is 

that consumer rebates are helpful, yet not enough to lift the economy out of a low spot in the business cycle. Rebates may never be 

reliable at stimulating the economy because they don’t guarantee 

the desired change in behavior. 

Conversely, tax deductions are inherently reliable. Generally, our 

members feel a better short and long-term approach is to target 

benefits to those who have directly invested in the means of production of goods and services. 

The owner of a home improvement company hesitated last year 

to buy additional equipment. This year it is a different story. He 

will hire more people to use this new equipment because of the tax 

benefits to small business. He, and others like him, will be creating 

a recurring $1,800 payment to newly hired workers. 

If the goal is to assist those suffering through a particular hardship, such as avoiding home mortgage foreclosure, perhaps specific 

legislation will be more efficient than broad, one-time consumer rebates as a solution. This was, along with transportation infrastructure improvements, a common alternative to consumer rebates suggested by our members. 

Perhaps in the fullness of time empirical data will reveal the 

true impact of the Economic Stimulus Act of 2008. In the meanVerDate Aug 31 2005 17:53 Aug 27, 2008 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 G:\CLERK SB-LD\HEARINGS\TRANSCRIPTS\40870.TXT RUSS
13 

time, however, our members value the tax incentives as having a 

greater effect on their businesses than consumer rebates. They very 

much want you to know that continuing the tax incentives to small 

businesses is critical fuel for what has become the engine of the 

American economy. 

Thank you again on behalf of all our members. 

[The statement of Mr. Myles can be found in the appendix at 

page 55.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Myles. 

Mr. Connelly, if I may, I would like to address my first question 

to you. 

Due to the problems at Fannie Mae and Freddie Mac, the rise 

in foreclosures, and most recently the failure of IndyMac, many are 

calling for increased intervention. Secretary Paulson is among 

those who believe that this is necessary. 

What solutions do you favor to return stability and liquidity to 

financial markets, without being overly burdensome? 

Mr. CONNELLY. Thank you, Madam Chairwoman. We think that 

the housing bill is a great start. Establishing a level playing field 

regulating nonregulated mortgage lenders is essential. More importantly, it is essential to find a balance. Extreme caution is necessary. Consistent prudence and moderation on the part of the regulator is critically important. Prudent and responsible reporting on 

the part of the media is important. 

We have heard a lot in the last week or so about the list of troubled banks in this country. It is critically important to understand 

that 99 percent of the banks in this country are well capitalized, 

number one. 

Number two, that 87 percent, historically, 87 percent of the 

banks that have been on FDIC’s problem bank list have successfully worked their way off. 

So FDIC’s list is a meaningless to the public unless they have 

the backup data that should be confidential and the public 

shouldn’t have while forbearance and due diligence is being exercised. 

So I think caution and balance is the most important thing and 

doing everything we can to control inflation. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Dr. Zandi, as you know, any stimulus enacted could put a further 

strain on our national debt. Is there potential concern that the 

short-term benefits created by the stimulus package could be outweighed by the long-term effect of increases to our national debt? 

Mr. ZANDI. Not if well designed. A key criteria for a fiscal stimulus plan should be that every element of it is temporary, that it 

is not something that is put into law for except a very brief period 

of time. Therefore, it would add to the deficit in that window. That 

is the idea. That is how you get stimulus. You are borrowing money 

and you are using that to put into the pocket of business people 

and consumers so that they put it into the economy right away. 

Now that would be a problem if you kept borrowing money because investors would say, Oh, you’re going to borrow a lot of 

money. You’re going to have to pay a high interest rate. But if you 

go to them and say you are borrowing once for these things, then 

14 

they won’t charge you a higher interest rate for it so you get the 

benefit with no cost. 

Anything you do that has long-lasting consequences would be 

counterproductive and detrimental. 

Chairwoman VELA ́ ZQUEZ. Ms. Bernstein, you spoke about the effect of the first stimulus package in terms of the rebate checks that 

were issued, how it boosted consumer spending, and you talk about 

the surveys that you conducted right after May, June and July, 

and in all those first months after the rebates were issued you saw 

consumer spending going up, then in July it is dropping. 

Ms. BERNSTEIN. It is still unclear to me what is happening in 

July. Obviously, we don’t have the results of the month yet. I can 

tell you anecdotally I have heard from some retailers who, based 

on the first week of July, think that the results may be better than 

they were in June. So I think it is just a little too early to be able 

to make an analysis of that situation. Remember, the checks kept 

coming out through July 11. 

Chairwoman VELA ́ ZQUEZ. But it is your opinion that it really provided some short-term boost to the economy? 

Ms. BERNSTEIN. Absolutely. Absolutely. 

Chairwoman VELA ́ ZQUEZ. Mr. Oates, you touched on the benefits 

derived from increased infrastructure spending, but I did not hear 

how it will affect overall GDP. I ask this question because Chairman Bernanke indicated last week that our economy will grow appreciably lower below its rate, and likely be around 1.6 percent for 

the remainder of the year. Are you aware of any correlation between infrastructure spending and increases in our GDP? 

Mr. OATES. Yes. Standard & Poor’s reports that every dollar invested in highway infrastructure or highway construction generates about $1.80 in Gross Domestic Product in the short term. As 

I said in my testimony, transportation and transportation-related 

industries account for 10 percent of the U.S. Gross Domestic Product. 

So when you look at those two factors, the influence of additional 

investments in transportation and infrastructure on the overall 

economy could be substantial. Also, the efficiency of highway improvements affects the economy. Researchers from New York University show that every dollar invested in the Nation’s highways 

generates about 30 cents of production cost savings to businesses 

every year. So over 4 years you would get a return on that investment. That same study estimated that highway investments contributed an average of 25 percent of total productivity gross nationwide over the last 40 years. 

Chairwoman VELA ́ ZQUEZ. Mr. Oates, you mentioned the 3,000 

highway projects that are ready to go and the money is there. The 

problem that I see is that many small businesses rely on contracts 

from agencies other than DOT. Do you know of any other government agencies that have similar contracts in that ready-to-go 

phase? 

Mr. OATES. I can speak for the clients that we have in our local 

area, the counties and cities that we do work for. If they had, and 

as Dr. Zandi said, if they had a check or had assurance of funding 

quickly, most of them have projects that they can move ahead and 

get started on if something happens quickly. So, yes, there are a 

15 

number of our clients are waiting for funding for projects that they 

have ready to go or they can advance from next year and do some 

other things the following year. 

Chairwoman VELA ́ ZQUEZ. Ms. Bernstein, the second part of the 

stimulus involved increasing the section 179, along with allowing 

businesses accelerated depreciation. Are you aware of any evidence 

empirically or anecdotally that those in your industry have been 

using the tax breaks to buy new equipment or make investment? 

Ms. BERNSTEIN. I can only give you anecdotal information. What 

I have learned from retailers is that as this year began and the 

economy was so soft, they continued with projects that had to be 

done or where they were committed to a contract that they couldn’t 

get out of. In terms of new spending on improvements that might 

be needed or other types of equipment that they might need but 

might not necessarily buy, people were just not spending the 

money because the industry was doing so badly and there was so 

much cutting back on expenditures. 

Chairwoman VELA ́ ZQUEZ. Dr. Zandi, you mentioned that the benefits of the first stimulus package are fading. You support a second 

stimulus package, but you say that it should be timely, targeted 

and temporary. If you are asked to say today—we are limited here 

in terms of how much money there is—what will be the most targeted and most productive stimulus provision that could be included in any package? 

Mr. ZANDI. Well, the thing that provides the most economic bang 

for the buck so that every dollar you spend, you get more GDP, is 

the food stamp extension. That is the most obvious thing to do. Infrastructure spending is also very important, but goes to the timeliness issue. You just need to get those checks out there and have 

projects that work well. 

Of the various kind of tax breaks, the most efficacious, the most 

bang for the buck, could be a payroll tax holiday. More than the 

income tax rebate, for various reasons. 

Chairwoman VELA ́ ZQUEZ. Why do you think that? 

Mr. ZANDI. For one reason, it would benefit very low-income 

households. Some 40 million people are working, pay payroll tax, 

and don’t pay much in the way of income tax. This would be a significant benefit to them. It goes right into, many cases, into their 

bank, checking account, and as such people spend that much more 

readily, much more quickly than getting a rebate check. 

Also, I think it is designed to help employers. For small businesses I think that would be important. And this might help them 

survive. I think that would be also very effective. 

The thing that is least effective would be the benefits investment. Kind of the accelerated depreciation. I am not saying that 

doesn’t help, it is just it doesn’t help as much as other things. 

Chairwoman VELA ́ ZQUEZ. Thank you very much. 

Now I recognize the ranking member. 

Mr. CHABOT. Thank you. 

Dr. Zandi, when you said it doesn’t help as much, you might be 

thinking, and I assume in the short term, but it has also been indicated here we get a bump-up for a couple of months, then it falls 

back off. If you want to do something structural, something that is 

actually going to benefit the economy over the long term where 

16 

small businesses may be able to grow and hire more people, which 

is actually perhaps better for the country and maybe employs more 

people and maybe means that recessions aren’t as deep or that everybody does a little better over the long term, that those investment type tax cuts are important as well, aren’t they? 

Mr. ZANDI. I wouldn’t disagree with that. Anything that raises 

investment obviously helps our economy in the long run. Focusing 

on the idea of trying to stimulate economic activity in the near 

term and trying to get the most out of the limited budget that you 

have, you are going to get less of a boost, near-term boost. I am 

not saying that you shouldn’t have these other objectives in mind. 

Mr. CHABOT. I supported the economic stimulus package, as most 

Republicans and Democrats did, but I think the argument that I 

would make is that if we can improve the overall economy over the 

longer term by having businesses be healthy, especially small businesses, because that is the emphasis of this Committee, that you 

are hiring more people and people have jobs for a longer period of 

time and we have a more resilient economy. So the recession, 

which are inevitable to some degree, will be less deep and perhaps 

less frequent if the country—if we grow the pie, so to speak, rather 

than just redistribute money, which is the alternative, even though 

that may help for a month or two? 

Mr. ZANDI. Excellent point. Let me make one more point. Most 

of the benefits to the investment tax that we put in place for the 

stimulus package generally benefit businesses that make large investments. If you make a small investment, the actual benefit to 

the business is very, very small. They are much more worried 

about sales, much more worried about—the last thing on their list 

is the so-called cost of capital, particularly for small equipment. It 

is not going to much a big difference. They know that ultimately 

down the road their tax bill is going to be higher. All you are doing 

is shifting the tax liability from today to tomorrow. And they know 

that. That tax benefit that you have probably benefits bigger companies that make big equipment purchases. That benefits them 

more than the small businesses. 

Mr. CHABOT. I have quite a few small business folks in my community that have told me they have directly taken advantage of 

those, and that enabled them to do better than they otherwise 

would and keep employees on longer and sometimes hire more, 

which is what we want to do. 

Mr. Myles, let me go to you if I can. In your retirement planning 

and that sort of thing, how important would it be in long-term 

planning if, for example, we made the tax cuts that we passed in 

2001 and 2003 permanent and if we did some structural things like 

simplify the Tax Code and people could rely on it for longer periods 

of time so they didn’t worry about us changing things around. How 

much would that have to do with improving the overall economy 

and peoples’ lives? 

Mr. MYLES. There is nothing you could do that would be more 

important than that. That is simply the number one planning challenge. I can’t say it any better than you just did. 

Mr. CHABOT. Right now you don’t know what we are going to do 

and you don’t know that the tax cuts are going to continue or not 

because at this point next year they are going to—a lot of them are 

17 

going to go out of existence and the taxes will go back up to the 

levels that they were some years ago, and a lot of Americans aren’t 

aware of that, quite frankly. Is that your understanding? 

Mr. MYLES. It is very much so, from the estate tax on the top 

end, to the savers’ tax credit for those most modest earners among 

us. Very true. 

Mr. CHABOT. Thank you. 

Ms. Bernstein, if I could go to you next. You had mentioned with 

reference to the economic stimulus package and how people utilized 

it and what they spent it on, I think you said half of those actually 

spent it, ended up spending it on gas or fuel of some sort and food. 

Ms. BERNSTEIN. Right. 

Mr. CHABOT. So how important is it that we get a handle on this 

energy crisis that we find ourselves in in this country? 

Ms. BERNSTEIN. I think it is important to get a handle on it for 

many different reasons. Not being an economist, I don’t know how 

quickly that can be put into place and whether that will—how well 

that can affect the immediate situation. But from the retail perspective, we are hit by it in many ways. Obviously, to the extent 

that consumers are using their wages or rebate checks or whatever 

money they have to spend on gas instead of spending it on other 

things and get the same amount of gas, that is a real problem for 

the retail industry, which is really suffering. 

In addition, obviously the fuel costs are very high for retailers 

that must get their inventories to their stores. For small retailers 

that don’t have the benefits of economies of scale, those delivery 

costs to get things to their stores end up being that much higher 

and end up being something that is much more of a burden to 

them. So all around fuel costs are important in the retail industry. 

Mr. CHABOT. Thank you. If gas was as a year and a half ago or 

so, $2 something a gallon, now $4 a gallon, and the consumer is 

paying that, and maybe some of that out of the economic stimulus 

package, if a significant portion is going to say Saudi Arabia or Nigeria, Venezuela, or wherever it is going, that portion isn’t doing 

a heck of a lot for the retailers here locally or the overall economy. 

Would you agree with that? 

Ms. BERNSTEIN. That would appear to be so, but I have to I say 

I have no particular background. 

Mr. CHABOT. Thank you. 

Mr. Oates, if I could go to you next. You had mentioned the importance of the highway funding and the infrastructure and all 

those things, which I certainly agree with you. Let me ask, how 

much confidence do you have in Congress, and again, I would stipulate that I mean under Republican control in the past or Democratic control now, how much confidence do you have that the decisions relative to where the highway funding ought to be spent is 

going to be based upon the merits as opposed to pork barrel earmark-type spending, which may end up in say a bridge in Alaska 

that doesn’t go any place, and perhaps in a smaller State like, say, 

West Virginia, which traditionally has had a fairly powerful representation in the Senate and been able to direct a fair amount of 

money in that direction—this is a pretty long question—but would 

you feel more confidence; do you think we ought to adjust our 

thinking up here on the Hill in how we go about funding things 

18 

and should they be funded more upon the merits as opposed to 

some political decision making process? 

Mr. OATES. They said there would be no trick questions. Talking 

about the stimulus package, I think both in the timeliness and how 

this is done, for it to be effective for infrastructure, it does need to 

be distributed in some way that is just straightforward grants to 

States and/or local communities to take care of certain infrastructure things with as few strings as possible and probably distributed 

by State size or community size or something like that so that the 

State and the local folks can decide where they need to spend that 

money within a certain range of parameters. If a local community 

has another $500,000 that they can go spend on a sewer project or 

a road project yet this year, if they have that money, they will be 

able to do something with it and they will be able to hire people, 

buy supplies, it will help all different sizes of businesses. 

Mr. CHABOT. Finally, Mr. Connelly, with the economy as it is 

today, and tighter markets, is it getting tougher or is it relatively 

tough for small businesses at this time to get access to credit, and 

did you have any suggestions as to what we can do about that. 

Mr. CONNELLY. First of all, Mr. Chabot, thank you for not asking 

me the last question. 

Coming from the home of the Big Dig, I might have a uniquely 

different opinion. It’s business as usual in my town. Our small 

business lending and residential lending are up substantially over 

this time last year. I just spent the weekend with 300 of my closest 

friends, bankers from across the country, who tell me that lending 

is going on. 

Now, admittedly, there are pockets where there are problems. 

We are not making loans like the old Ninja loans; you know, no income, no jobs, no assets. But we are making loans with prudence. 

We are looking at income and likelihood and ability to repay. It 

wasn’t our institutions that caused the problem. So there is lending 

going on out there, and in some pockets there is a lot of lending 

going on. 

Mr. CHABOT. Thank you very much. I yield back, Madam Chair. 

Chairwoman VELA ́ ZQUEZ. Mr. Shuler. 

Let me just remind Mr. Chabot that bridge to nowhere is important because that is the only way to transport that oil. 

Mr. SHULER. Thank you, Madam Chair. Dr. Zandi, I want to ask 

kind of the chicken or the egg kind of thing. What impact has the 

weak dollar had on both petroleum prices, other imports, food 

prices? Because if you look at it, the gas prices haven’t gone up in 

Europe because of the strong Euro, but they are buying almost 

what, 1-1/2 to almost 2 barrels for our 1 barrel that we purchase. 

So what impact has the weak dollar had on the economy, or has 

it been the economy obviously impacted the weak dollar? 

Mr. ZANDI. It is both. On net so far, the weak dollar has been 

a benefit to the economy in that the plus from increased trade has 

offset the negatives resulting from higher import prices, including 

the higher cost of oil and other commodities. Now oil prices are 

higher, commodity prices are higher because of the lower dollar because these products are traded globally in dollars, and so when 

the dollar falls in value, to ensure that demand and supply globally 

remains the same the dollar price has to rise. So there is debate 

19 

as to what degree the lower dollar has contributed to the run-up 

in oil prices. But, in my guesstimate, roughly $25 of the increase 

in oil prices since 2002 is the dollar. So you go back to 2002, WTI was trading for $25. Now it is trad- ing for $125, and $25 of that is the weaker dollar. That has been 

very negative. So taken by itself, that is a problem. But in the context of the pluses on net so far, it has been a net plus. 

Mr. SHULER. So if we continue to increase the debt over the long 

period of time, and I know we have talked about the taxes expire. 

I have children, a three-year-old little girl and a seven-year-old little boy. What is the impact to our children if we don’t have the revenues in hand and we continue to increase our national debt? I 

mean we are ultimately going to get to the point where we are upside down, and what impact is that going to have? I know the short 

term—we can talk about short term. We can stimulate it all we 

want, and instead of $100 billion, let’s put $400 billion in. But 

what impact is that going to have on my children’s future both 10, 

and 15, and 20 years down the road? If there is a shortfall in Congress that I see as everybody looks 2 years ahead because that is 

their next election, so what is the impact that we are going to have 

10 years, 15, 20 years, and that is what we should be talking 

about, is what the long-term impact is going to be. Yes, we are 

going to increase and stimulate the economy today, but what impact will that also have in 5 years, in 10 years, and in 20 years? 

Mr. ZANDI. You make an excellent point, and I think our most 

significant economic problem is the daunting fiscal future that we 

face. The arithmetic doesn’t work. Something is going to break if 

something doesn’t change. It doesn’t have to happen this year, and 

it won’t, doesn’t have to happen next year, and it won’t, but at 

some point over the next 5 to 10 years it is going to become very 

clear that the fiscal situation is untenable. 

You have three choices, really. One is doing nothing and let the 

deficits increase, and that will be catastrophic because rates will 

rise and undermine investment, and the economy will struggle. We 

will have many more problems. The other option is to raise taxes. 

The third option is to cut spending. That is it. Those are the three 

choices. Obviously, they are very difficult choices that you are going 

to have to make, but you are going to have to make them and figure out a way to do it. But that is clearly our most significant economic problem. 

Let me just say though the long run is made up of a lot of short 

runs, and we are now in a short run that is very debilitating and 

painful and people are obviously under a lot of stress, and I think 

we can do some things in the near term to alleviate that stress 

without jeopardizing our long-term economic health. That is a reasonable discussion to have, but that is not to say we shouldn’t have 

this discussion about what we are going to do about our fiscal problems in the long run. 

Mr. SHULER. I have 10 seconds. I kind of want a yes or no, or 

just an answer. We have to stimulate the economy, put between 

$50 or $100 billion into the economy, or more. How do you recommend we do that? Do we print more money or do we borrow it 

from foreign investors, like we have been? One of the two. 

Mr. ZANDI. I thought you said yes or no. 

20 

Mr. SHULER. I know what the answer is. We have got two options. 

Mr. ZANDI. You are going to have to borrow money. 

Mr. SHULER. So we borrow money from the Chinese to ultimately 

buy more Chinese products. I wish I was in that business, to lend 

somebody money that is going to ultimately buy my products. 

Mr. ZANDI. That is not quite fair. Put it into a bridge or a road. 

Mr. SHULER. That would be wonderful. I yield back. 

Chairwoman VELA ́ ZQUEZ. The time has expired. 

Ms. Clarke. 

Ms. CLARKE. Thank you, Madam Chair. This is a great hearing, 

but I have to tell you I am sitting here and it is kind of scary. I 

want to just ask the question about infrastructure development to 

Mr. Oates in particular because one of the equations that I see that 

is sort of missing in terms of the stimulus of infrastructure is sort 

of the companion infrastructure, which has to do with energy that 

goes along with it. Because if indeed we are going to talk about rebuilding roads, we have to talk about what it costs across the 

board. 

In terms of energy right now, we are really struggling. How are 

we going to pay for the oil that goes into the bulldozer or the other 

equipment? How are we going to move products or materials from 

one place to another? 

One of the challenges that I think we face is how we are identifying an emerging industry, which is the redevelopment of energy 

and the infrastructure that we need to distribute it. 

So has your organization taken a position with respect to energy 

and how it is distributed and what we need to put in the pipeline 

now? Because a lot of what we are talking about here are dealing 

with variables that currently exist. What has made American great 

is the imagination of what can exist. I think we have to move into 

that mode if we are going to talk about prosperity again and not 

this do we print money or do we borrow money scenario. 

How do we create wealth again I think is the major issue that 

we need to be focusing on. We are trying to survive. Our kids will 

be struggling to survive if we don’t talk about the innovation that 

has made America great. 

So I want to know whether there have been any conversations. 

For instance, we are having blackouts in Brooklyn, New York, and 

ConEd can patch and patch and patch for as long as they want to. 

It is an old city. This place, as long as we continue to use the types 

of appliances and lifestyle that we have, we are going to constantly 

be going through these blackouts. No one is talking about that new 

infrastructure that goes along with engineering and transportation 

in order to get us where we need to be. 

Have you had any conversations or has that risen as an issue for 

your organization? 

Mr. OATES. Energy questions have come up in our organization. 

We are mostly a public infrastructure organization and deal with 

investments there. I am a transportation engineer, so I don’t know 

a lot about a whole lot of the other infrastructure issues. 

One of the issues could be that it is more difficult for Congress 

to get spending in those areas because a lot of that is controlled 

21 

by private companies that deal with the infrastructure for energy. 

So I can’t answer a whole lot. 

Ms. CLARKE. I am just thinking, construction costs right now 

skyrocketing. A lot of that has to do with labor, but it also has to 

do with energy. Right? 

So maybe, Dr. Zandi, do you have any ideas about the fact that 

our energy costs are sort of the companion? It is like the shadow, 

like that extra piece that is hanging off in everything that we are 

talking about here, whether it is the cost of food, whether it is the 

cost of products. It is just sort of hanging off and we are kind of 

ignoring it. We are talking about it but we are kind of playing 

footsie with it, but it is costing us. 

Do you have any ideas about how the public can partner to jettison us to deal with this? Because I think that that is probably 

one of the pieces that helps us in the long run. It is the new industry that creates wealth. 

Mr. ZANDI. We are talking about energy specifically? 

Ms. CLARKE. Energy specifically. 

Mr. ZANDI. I think here the solution to our energy problems are 

long term. 

Ms. CLARKE. They are. 

Mr. ZANDI. There is very little you can do in the very short run. 

I mentioned the gas tax holiday. I think that takes some of the 

edge off for some of the folks, but that is very modest and doesn’t 

solve our long-term problems. With respect to long-term energy, 

really what policy should be focused on is supply, and that is I do 

support expandingoffshore drilling. I think that makes perfect 

sense. 

By the way, you don’t need to see oil wells dug to affect the current price because as soon as the markets sense this is going to 

happen, prices will come down to reflect that. 

Ms. CLARKE. Mr. Zandi, I don’t want to take you into one particular industry; what I am talking about is innovation. There are 

going to be a whole host of different types of production of energy 

for us. If we don’t do that then we are doing a disservice to his 10- 

year-old son and3-year-old daughter because we are talking about 

thelong term, and everything that we are talking about today has 

that as part of the equation. And while people keep saying it is 

long term, it is now and it is long term. If we don’t start, because 

we are doing little pieces, the snippets that you are talking about, 

right, it still remains a part of the equation that we have yet to 

address? 

So I think that part of the equation, and I am winding down, 

Madam Chair, is that we have to make incremental steps as we try 

to solve the immediate, to come to that point where we have 

reached the tipping point for the development of new industry in 

energy. If we don’t, we will wake up 10 years from now and the 

same challenge that we are facing in terms of how we make things 

happen will continue to exist. 

So in terms of the economics of that equation, I think we have 

to have a wider view of each step that we are taking for our economy and what the shadow that is cast by the energy costs involved 

has done in every sector of our lives. 

Thank you very much, Madam Chair. 

22 

Chairwoman VELA ́ ZQUEZ. Mr. Chabot. 

Mr. CHABOT. Thank you. I will be brief, Madam Chair. This has 

been a very interesting discussion. Dr. Zandi just said something 

that I just wanted to point out and just emphasize a little bit. I 

would agree with the gentlelady that this is a long-term problem 

that we have here, and it would be good if we could work this out 

together in a bipartisan manner. We do too little of that in Congress, but this is one we really ought to work on together, and perhaps the rest of the Congress should look to this Committee because the chairwoman has worked over the last year and a half in 

a very bipartisan manner, and I commend her for that. 

Doctor, you just mentioned that if, for example, we announced 

that we are going to drill offshore or in ANWR, or wherever, where 

we know that there are significant quantities of energy available 

to us that we have essentially put off limits, that you would see 

that essentially directly affect the price because the markets would 

know that we are serious about this. We are actually going there 

to get this, even though we may not see that oil for some years. 

That is why some have argued we are not going to see it for 3 

years, 5, 10, so why do we have to do this now. That is why I think 

we should have done it 3 years, 45 years, 10 years ago, and voted 

consistently to do that. But that is the past. 

As this point, as you indicated, it would be reflected immediately 

in the markets because of speculation. This is something the Republican leadership pooh-poohed. They said speculation. I agree 

with the Democrats. I think that is part of it, not the whole thing, 

but part of it. And so that is why it is so important that we act 

sooner rather than later to actually announce we are doing this. 

Even if we don’t see that oil, we will see it reflected in the prices 

very quickly in the downside because of the speculative part of 

that. Is that correct? 

Mr. ZANDI. Let me just point out the conduit through which this 

would reflect current price maybe as another conduit. You have 

global energy prices that feel like prices are going to be higher in 

the future, therefore you are going to keep more oil in the ground 

today because you are going to get a much higher price down the 

road. So if they sense there is going to be new supplies coming on 

and the price may not be higher, they will be much more forthcoming with supplies today and it will bring current prices down. 

Mr. CHABOT. Again, I just want to reiterate what I said before. 

Even though I and many talk about increasing supply now, drilling 

in ANWR, Outer Continental Shelf, that is only part. We clearly 

have to emphasize increased technologies of the future, whether it 

is wind, solar, biomass, geothermal. All those things are part of 

this picture as well, as well as making it possible to build new oil 

refineries in this country, which we haven’t done in over 30 years. 

It needs to be a comprehensive energy policy, and again, I wish 

this Committee was in charge of it because I bet we could solve it 

in about a week through the great work of Chairwoman Vela ́zquez. 

Chairwoman VELA ́ ZQUEZ. On this issue I am not that sure. But 

let me just say, Dr. Zandi, that look, we all support drilling, and 

what we are saying is that there are a bunch of oil companies 

today that are holding leases in about 68 million acres of land and 

23 

they are not drilling it. And we are saying use it or leave it. We 

are going to take it away. 

So you mentioned that probably those companies are speculating 

about oil prices going up and that might be the reason why where 

they can drill today they are not doing it. So without a single new 

lease or single new drilling authorization, we can get 4.8 million 

barrels of oil a day in this country without going into ANWR. 

But that is not the question today. That was the statement of the 

day. 

Mr. ZANDI. I think this is an energy policy debate. 

Chairwoman VELA ́ ZQUEZ. Yes. Sometimes it doesn’t matter the 

topic, we end up talking about ANWR. So we have got to have 

ready our talking points. 

About the holiday, the pay tax holiday that you mention as being 

part of the second stimulus package, there are some critics that 

maintain that while employees could see immediate relief, employers could be burdened by administrative challenges. It is their concern that small firms will face compliance issues and that this 

could potentially minimize the benefits. 

Mr. ZANDI. Excellent point. That is the single most significant 

negative of that particular proposal. You have to turn the switch 

on and off. For many, particularly small businesses, they don’t 

have a payroll company that is managing their affairs. If they don’t 

do it right, they will get penalized, although you might construct 

a legislation so they don’t over a period of time. 

The other downside is companies more than likely will try to figure out ways to include compensation that they would pay out at 

some other point in that period so that they wouldn’t have to withhold payroll tax. So I am not saying there is no downside. There 

are. That clearly is, in my view, the most significant downside, the 

administrative costs, particularly to small businesses. But if you 

ask them would you want the cash in exchange for a little bit of 

administrative difficulty, I bet they would take the cash. 

Chairwoman VELA ́ ZQUEZ. Ms. Bernstein, I would like to hear 

your comments. 

Ms. BERNSTEIN. I agree with what Dr. Zandi has just said. The 

larger employers use outside service providers, and I know there 

are certain payroll companies that can handle this. This is an issue 

that we looked at a little bit when we were looking at what type 

of consumer rebate would work, whether it could be a check or 

whether it would be faster to get the rebate payment to consumers 

by actually doing it through employer withholding. So it is a similar issue. 

I am a little more concerned, as Dr. Zandi said, about the small 

businesses that don’t necessarily use those same outside payroll 

providers and that there might be more of a burden. But, remember, on the small business side, the self-employed person pays payroll tax twice, so it probably is a significant benefit for a small 

business person who pays as the employer and as the employee. 

And so it is possible that they might be able to get more access to 

more of the software that is out there, and perhaps if it was widespread enough the costs could be minimized. 

24 

The question is how long would that take; what would be the 

start-up time? If you wanted to turn this on more quickly, it might 

be more of a burden. 

Chairwoman VELA ́ ZQUEZ. Dr. Zandi, in your testimony on page 5 

you provided ′′fiscal economic bang for the buck.′′ You have the payroll tax holiday at 1.29; across-the-board tax cut, 1.03; accelerated 

depreciation .27. 

So as we discussed before, our budget is limited, and when we 

are considering a second stimulus package, we have got to be targeted, we have got to be specific. We need to know. One of the 

many things that we are going to be considering is going to have 

the most positive impact in terms of our economy. 

How do you come up with these numbers? 

Mr. ZANDI. It is based on a simulation of a macro econometric 

model that I constructed for the purposes of doing this kind of an 

evaluation. I did it a number of times. I did it in preparation for 

the 2001 stimulus plan and updated it for the January-February 

period for the most recent stimulus plan. I have a much more detailed document. I would be happy to describe it. 

Chairwoman VELA ́ ZQUEZ. It really caught my attention. 

Mr. Connelly, this is my last question. In the housing bill that 

we passed yesterday, you saw what we did, the Federal Government, regarding Bear Stearns, now Freddie Mac, Fannie Mae. You 

represent small banks. What will you say will be an action taken 

by Congress that could prove beneficial for small banks to continue 

the great work that you are doing? 

Mr. CONNELLY. Well, I think the improvement to the FHA programs, GSE reform, temporary FHA program, are all great things. 

There is a critical thing I want to mention though, and that is we 

need to recall the lessons that we have learned from the previous 

rounds of economic weakness. Coming from New England, I recall 

the real estate debacle of the early nineties and a lot of problems 

that caused small businesses to be squeezed out of business as a 

result of performing/nonperforming loans. Just this weekend I 

heard from some of my colleagues around the country that regulators are beginning to ask for appraisals on performing loans, and 

it is important that we not force currently performing loans into a 

distressed condition by making such requests. 

So I think we really want to be careful on the regulatory side 

that we not add fuel to the fire. Those lessons that we learned 5, 

10, 20 years ago are so critically important to bear in mind. 

Chairwoman VELA ́ ZQUEZ. Again, let me take this opportunity to 

thank you all. This has been an insightful discussion. As we move 

forward in terms of having discussions along the leadership regarding a second stimulus package, I promise you that the discussion 

that we had today will prove beneficial in my input in those meetings where I meet to discuss with the Democratic leadership what 

we are going to do next. Hopefully, I will be there at the table representing the voice of small businesses in this country. Thank you 

very much. 

Mr. CHABOT. I am sure Nancy Pelosi will care a lot what I 

thought about the issue, too. 

[The statement of Mr. Cochetti can be found in the appendix at 

page 57.] 

25 

[Whereupon, at 11:43 a.m., the Committee was adjourned.] 

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