U.S. GOVERNMENT PUBLISHING OFFICE

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THE ECONOMIC AND FISCAL BENEFITS OF 

PRO–GROWTH POLICIES 

HEARING 

BEFORE THE

COMMITTEE ON THE BUDGET 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

HEARING HELD IN WASHINGTON, D.C., JUNE 7, 2017 

Serial No. 115–6 

Printed for the use of the Committee on the Budget 

( 

Available on the Internet: 

www.govinfo.gov 
(II) 

COMMITTEE ON THE BUDGET 

DIANE BLACK, Tennessee, Chairman 

TODD ROKITA, Indiana, Vice Chairman 

MARIO DIAZ-BALART, Florida 

TOM COLE, Oklahoma 

TOM MCCLINTOCK, California 

ROB WOODALL, Georgia 

MARK SANFORD, South Carolina 

STEVE WOMACK, Arkansas 

DAVE BRAT, Virginia 

GLENN GROTHMAN, Wisconsin 

GARY J. PALMER, Alabama 

BRUCE WESTERMAN, Arkansas 

JAMES B. RENACCI, Ohio 

BILL JOHNSON, Ohio 

JASON SMITH, Missouri 

JASON LEWIS, Minnesota 

JACK BERGMAN, Michigan 

JOHN J. FASO, New York 

LLOYD SMUCKER, Pennsylvania 

MATT GAETZ, Florida 

JODEY C. ARRINGTON, Texas 

A. DREW FERGUSON IV, Georgia 

JOHN A. YARMUTH, Kentucky, 

Ranking Minority Member 

BARBARA LEE, California 

MICHELLE LUJAN GRISHAM, New Mexico 

SETH MOULTON, Massachusetts 

HAKEEM S. JEFFRIES, New York 

BRIAN HIGGINS, New York 

SUZAN K. DELBENE, Washington 

DEBBIE WASSERMAN SCHULTZ, Florida 

BRENDAN F. BOYLE, Pennsylvania 

RO KHANNA, California 

PRAMILA JAYAPAL, Washington, 

Vice Ranking Minority Member 

SALUD O. CARBAJAL, California 

SHEILA JACKSON LEE, Texas 

JANICE D. SCHAKOWSKY, Illinois 

PROFESSIONAL STAFF

RICHARD E. MAY, Staff Director 

ELLEN BALIS, Minority Staff Director 
(III) 

CONTENTS 

Page 

Hearing held in Washington, D.C., June 7, 2017 ................................................. 1 

Hon. Diane Black, Chairman, Committee on the Budget ............................. 1 

Prepared statement of ............................................................................... 4 

Hon. John A. Yarmuth, Ranking Member, Committee on the Budget ........ 7 

Prepared statement of ............................................................................... 9 

Douglas J. Holtz-Eakin, Ph.D., President, American Action Forum ............ 11 

Prepared statement of ............................................................................... 13 

Jason Furman, Ph.D., Senior Fellow, Peterson Institute for International 

Economics ...................................................................................................... 28 

Prepared statement of ............................................................................... 30 

John W. Diamond, Ph.D., Edward A. and Hermen Hancock Kelly Fellow 

in Public Finance, Rice University’s Baker Institute for Public Policy .... 43 

Prepared statement of ............................................................................... 45 

Hon. Lujan Grisham, Member, Committee on the Budget, article submitted for the record ..................................................................................... 78 

Hon. Lloyd Smucker, Member, Committee on the Budget, questions submitted for the record ..................................................................................... 87 

Douglas J. Holtz-Eakin responses to questions submitted for the record ... 88 

(1) 

THE ECONOMIC AND FISCAL BENEFITS OF 

PRO–GROWTH POLICIES 

WEDNESDAY, JUNE 7, 2017 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON THE BUDGET, 

Washington, D.C. 

The Committee met, pursuant to call, at 10:00 a.m., in Room 

1334 Longworth House Office Building, Hon. Diane Black [Chairman of the Committee] presiding. 

Present: Representatives Black, Rokita, McClintock, Sanford, 

Renacci, Lewis, Faso, Gaetz, Arrington, Smucker, Brat, Ferguson, 

Woodall, Palmer, Westerman, Grothman, Jeffries, DelBene, 

Khanna, Jayapal, Carbajal, Wasserman Schultz, Schakowsky, 

Jackson Lee, and Lujan Grisham. 

Chairman BLACK. The hearing will come to order. Welcome to 

the Committee on the Budget hearing, which will focus on the economic and fiscal benefits of pro-growth policies. 

Good morning, and thank you everyone for being here, and I especially want to thank our great panel that is here with us today, 

our witnesses, for being willing to come in this morning and provide their thoughts on this important topic. We are having this 

hearing today in preparation for the upcoming release of our 2018 

budget resolution. An important component of that resolution is an 

analysis of our economic conditions and our projects of future economic growth. 

Over the last 8 years, we have seen stagnant economic growth, 

leading economists and the CBO to consistently downgrade their 

growth projections. As recently as 2012, the CBO projected our 

economy would average a 3 percent growth over a 10-year window. 

This year, the CBO is only projecting an average of 1.9 percent 

growth over the next 10 years. However, it is important to point 

out that the CBO’s projects are based on the assumption of continuing existing law with no changes in the economic policy. There 

is no question that the policies of the Obama years greatly contributed to the anemic economic growth and the downgraded growth 

projections. Higher taxes, the disaster that is ObamaCare, an expanded regulatory regime, and more federal spending and debt 

have held back the American entrepreneurs and small businesses. 

The Obama economy left millions of Americans behind. Over 14 

million Americans left the labor workforce during the Obama administration’s 8 years in office. That is 14 million Americans. And 

in total, 95 million Americans are now out of the labor force: 95 

million. 
2 

That is more than one-third of the total working age population, 

and I think that it is important to emphasize that there are 95 million Americans that are now out of the labor workforce, more than 

one-third of the total working age population. It has been the working-class Americans in the coal mines of West Virginia or the factories of central Tennessee or the farming communities in Nebraska that have borne the brunt of the liberal agenda over the 

last 8 years. 

The ability and the opportunity to work is a fundamental pillar 

of the American Dream. Without the stability and self-worth that 

comes from having a job and providing a better future for one’s 

children, our culture, and our economy, and truly our national morale suffers. Plenty of our friends across the aisle and many in the 

media have said that a 1.9 percent growth is the new normal. They 

have a pessimistic view of our Nation’s ability to create jobs and 

build a foundation of greater opportunity for all citizens, especially 

if the new President and the Congress are successful in enacting 

a series of pro-growth policies. While I am never surprised by the 

media’s pessimism, I am surprised that our friends across the aisle 

have such a negative view of Congress’ ability to affect real change 

and to set a new economic standard. 

So, I have got a message for everyone here today who thinks 

America is doomed to a future of less opportunity and potential: 

take your losing attitude elsewhere. We are the greatest country on 

Earth. We have got the best workers, the best innovators, and the 

best companies, and they are not the problem. Washington, D.C. is 

the problem. Government is getting in their way, and it is about 

time that we fix that problem. 

And that is why the Republicans are committed to reforming the 

Tax Code, reforming our healthcare system by repealing and replacing ObamaCare, by reducing the regulatory burden on American small businesses, and getting our fiscal house in order, which 

is our responsibility in this Committee. These policies will spur economic growth and unleash the potential of the American free-market economy. 

We would welcome our Democratic colleagues to join us in this 

effort, but it requires them to no longer be content with the status 

quo of the Obama years. We have got to put those years behind us, 

because there is no law that we have to forever accept President 

Obama’s slow-growth policies. We can make changes to improve 

our economy, and we can start with adopting a budget resolution 

that puts our country on a sound fiscal path. 

Growing our economy is also a vital step to getting our fiscal 

house in order. Since World War II, 3 percent growth has been the 

historical average. In the late 1990s, our economy grew by a rate 

of 4.5 percent, more than twice the rate of our growth today. It is 

no coincidence that we also balanced the Federal budget during 

this time period. Strong economic growth combined with spending 

restraint is how we get our country on a path to balance and how 

we begin to pay down the national debt without raising taxes. 

I believe our economy is on the cusp of a great resurgence. The 

pro-growth policies of healthcare reform, tax reform, regulatory reform, and deficit reduction will provide the economic freedom and 

the certainty that our economy needs to grow to create jobs and 
3 

create the type of opportunity that is the birthright of all Americans. I look forward to hearing from our witnesses today on how 

we can develop better policies to boost our economy, and it is time 

for optimism and new ideas, not pessimism and willingness to accept the status quo. And with that, I yield to my Ranking Member, 

Mr. Yarmuth. 

[The prepared statement of Diane Black follows:] 
4 

BlACK OPENING STATEMENT: 

THE ECONOMIC AND FISCAL BENEFITS OF PRO-GROWTH POLICIES HEARING 

Washington, D.C., Wednesday, June 7, 2017 

As prepared far delivery- Hause Budget Committee Chairman Diane Black 

Good morning, and thank you everyone for being here. I especially want to thank our great panel of 

witnesses for being willing to come in this morning and provide their thoughts on this important topic. 

We're having this hearing today in preparation for the upcoming release of our 2018 budget resolution. 

An important component of that resolution is the analysis of our economic conditions and our 

projections of future economic growth. 

Over the last eight years, we've seen stagnant economic growth, leading economists and the CBO to 

consistently downgrade their growth projections. 

As recently as 2012, the CBO projected our economy would average 3 percent growth over the ten-year 

window. This year, the CBO is only projecting an average of 1.9 percent growth over the next ten years. 

However, it's important to point out that CBO's projections are based on the assumption of continuing 

existing law with no changes in economic policy. 

There is no question the policies of the Obama years greatly contributed to anemic economic growth 

and the downgraded growth projections. 

Higher taxes, the disaster that is Obamacare, an expanded regulatory regime and more federal spending 

and debt have held back American entrepreneurs and small businesses. 

The Obama economy left millions of Americans behind. Over 14 million Americans left the labor force 

during President Obama's eight years in office. 

In total, 95 million Americans are now out of the labor force- that's more than one-third the total 

working-age population. 

It's been the working-class Americans in the coal mines of West Virginia or the factories of Central 

Tennessee or the farming communities in Nebraska that have borne the brunt of the liberal agenda of 

the past eight years. 

The ability and the opportunity to work is a fundamental pillar of the American Dream. 

Without the stability and self-worth that comes from having a job and providing a better future for ones' 

children, our culture, our economy, and- truly- our national morale suffers. 
5 

Plenty of our friends across the aisle and many in the media have said that 1.9 percent growth is the 

new normal. 

They have a pessimistic view of our nation's ability to create jobs and build a foundation of greater 

opportunity for all citizens, especially if the new President and Congress are successful in enacting a 

series of pro-growth policies. 

While I'm never surprised by the media's pessimism, I am surprised that our friends across the aisle have 

such a negative view of Congress's ability to affect real change and set a new economic standard. 

So I've got a message for everyone here today who thinks America is doomed to a future of less 

opportunity and potential: take your losing attitude elsewhere. 

We are the greatest country on earth. We've got the best workers, best innovators, and the best 

companies. They are not the problem. 

Washington, D.C. is the problem. Government is getting in their way, and it's about time we fixed this 

problem. 

That's why Republicans are committed to reforming the tax code, reforming our health care system by 

repealing and replacing Obamacare, reducing the regulatory burden on American small businesses, and 

getting our fiscal house in order. 

These policies will spur economic growth and unleash the potential of the American free-market 

economy. 

We'd welcome our Democratic colleagues to join us in this effort, but it requires them to no longer be 

content with the status quo of the Obama years. 

We've got to put those years behind us because there is no law that we have to forever accept President 

Obama's slow-growth policies. 

We can make changes to improve our economy and we can start with adopting a budget resolution that 

puts our country on a sound fiscal path. 

Growing our economy is also a vital step to getting our fiscal house in order. Since World War II, 3 

percent growth has been the historical average. 

In the late 1990s, our economy grew at a rate of 4.5 percent- more than twice the rate of growth 

today. It's no coincidence that we also balanced the federal budget during this period. 

Strong economic growth combined with spending restraint is how we get our country on a path to 

balance and how we begin to pay down the national debt without raising taxes. 

I believe our economy is on the cusp of a great resurgence. 
6 

The pro-growth policies of health care reform, tax reform, regulatory reform and deficit reduction will 

provide the economic freedom and the certainty that our economy needs to grow, create jobs, and 

create the type of opportunity that is the birthright of all Americans. 

I look forward to hearing from our witnesses today on how we can develop better policies to boost our 

economy. 

It's time for optimism and new ideas, not pessimism and willingness to accept the status quo. 

With that, I yield to the Ranking Member, Mr. Yarmuth. 
7 

Mr. YARMUTH. Thank you very much, Chairman Black, and I 

thank the witnesses for being here. We look forward to hearing 

from you. 

Obviously, economic growth is a critically important issue. Increased economic growth can benefit American families and the 

Federal budget outlook. But we cannot have a meaningful hearing 

about economic growth without acknowledging the fact that the 

level of economic growth projected in the President’s budget is totally unrealistic, if not absurd. Any budget that includes that level 

of growth should not be taken seriously. Americans deserve more 

than faith-based economics. 

We need to be honest with them. Despite all the wishful thinking 

of the administration and some of my colleagues on the other side 

of the aisle, long-term economic growth of 3 percent is just not 

going to happen, particularly given the current economic and labor 

trends we face. 

There are good reasons why CBO is projecting the economy’s 

long-term growth rate as 1.9 percent and why the Blue Chip consensus private sector forecast is only slightly better at 2.0 percent. 

The entry of the baby boom generation and increasing numbers of 

women into the workforce helped support economic growth in the 

1970s and 1980s. Those demographic trends have ended, and they 

are not going to return. 

But we can take steps to help strengthen our economy, and they 

are steps that the American people overwhelmingly support. We 

can raise the minimum wage. We can invest in state-of-the-art infrastructure and innovation to create the next industries: research 

and science to make the next big discovery, and education and job 

training to develop a more skilled and productive workforce. 

We can end loopholes that allow companies to ship jobs and profits overseas. And we can enact comprehensive immigration reform 

to increase the size of our workforce and the size of our economy. 

Those are all things we can do now and should do now. 

Massive tax cuts are not the answer, even though we are likely 

to hear that claim a lot today. We have done that before, actually 

twice. Instead of sustained economic growth, our deficits exploded. 

Both of those tax cuts were accompanied by lax regulation that 

contributed to financial crises and recessions just a few years later. 

Regulatory reform is not a silver bullet either, but we will likely 

hear that today as well. Most regulations already must meet a costbenefit test. 

Rescinding regulations without a very thorough understanding of 

the threat that rescission would cause to both direct economic benefits and non-economic benefits such as improved health, safety, 

and environmental conditions, would be irresponsible. 

Presumably, this is our last hearing before the release of my Republican colleagues’ budget. Economic growth will obviously be a 

big part of their proposal, and it is my hope that it will be far different than the President’s budget, that it will use responsible economic growth projections, that it will not rely on debunked claims 

that massive tax cuts pay for themselves, that it will increase funding for national priorities that will grow our economy, and that it 

will make investments in our Nation’s greatest asset, the American 

people. We plan to talk about that and more today, and I hope to 
8 

hear some helpful insights from our witnesses. I look forward to 

your testimony, and I yield back. 

[The prepared statement of John Yarmuth follows:] 
9 

YARMUTH OPENING STATEMENT: 

ECONOMIC AND FISCAL BENEFITS OF PRO-GROWTH POLICIES HEARING 

Washington, D.C., Wednesday, June 7, 2017 

As prepared for delivery- House Budget Committee Ranking Member John Yarmuth 

Thank you Chairman Black. And thank you all for coming to testify before us today. I look forward to 

hearing from you. 

Obviously, economic growth is a critically important issue. Increased economic growth can benefit 

American families and the federal budget outlook. But we can't have a meaningful hearing about 

economic growth without acknowledging the fact that the level of economic growth projected in the 

President's budget is simply absurd. Any budget that includes that level of growth should not be taken 

seriously. 

We need to be honest with the American people. And despite all the wishful thinking of the 

Administration and some of my colleagues on the other side of the aisle, long-term economic growth of 

three percent is not going to happen, particularly given the current economic and labor trends we face. 

There are good reasons why CBO is projecting that the economy's long-term growth rate is 1.9 percent. 

And why the Blue Chip consensus private sector forecast is only slightly higher, at 2.0 percent. 

The entry of the baby boom generation and increasing numbers of women into the workforce helped 

support economic growth in the 1970s and 1980s. Those demographic trends have ended and they are 

not going to return. 

But we can take steps to help strengthen our economy- and they are steps that the American people 

support. 

Raising the minimum wage. 

Investing in a state of the art infrastructure, innovation to create the next industry, research and science 

to make the next big discovery, and education and job training to develop a more skilled and productive 

workforce. 

We can end loopholes that allow companies to ship jobs and profits overseas. 

And enact comprehensive immigration to increase the size of our workforce and the size of our 

economy. 

Those are all things we can do now and should do now. 

Massive tax cuts are not the answer- even though we are likely to hear that claim a lot today. We've 

done that before .... actually twice. Instead of sustained economic growth, our deficits exploded. Both of 

those tax cuts were accompanied by lax regulation that contributed to financial crises and recessions a 

few years later. 

Regulatory reform is clearly not a silver bullet either- but we will likely hear that today as well. Most 

regulations already must meet a cost/benefit test. Rescinding them eliminates their benefits, both 
10 

direct economic benefits and non-economic ones such as improved health, safety, and environmental 

conditions. 

Presumably, this is our last hearing before the release of my Republican colleague's budget. Economic 

growth will obviously be a big part of their proposal. And it is my hope that it will be far different than 

the President's budget. That it will use responsible economic growth projections. That it won't rely on 

debunked claims that massive tax cuts pay for themselves. That it will increase funding for national 

priorities that will grow our economy. And that it will make investments in our nation's greatest assetthe American people. 

We plan to talk about that more today and I hope to hear some helpful insights from our witnesses. I 

look forward to your testimony 
11 

Chairman BLACK. Thank you, Mr. Yarmuth. And Dr. HoltzEakin, Dr. Furman, and Dr. Diamond, thank you for being here 

today and taking time out of your schedule to join us. The Committee has received your written statements, and they will be part 

of the formal record. You will each have 5 minutes to deliver your 

oral remarks, and Dr. Holtz-Eakin, we will begin with you today 

for your 5 minutes. 

STATEMENTS OF DOUGLAS J. HOLTZ–EAKIN, Ph.D., PRESIDENT, AMERICAN ACTION FORUM; JOHN W. DIAMOND, Ph.D., 

EDWARD A. AND HERMENA HANCOCK KELLY FELLOW IN 

PUBLIC FINANCE, RICE UNIVERSITY’S BAKER INSTITUTE 

FOR PUBLIC POLICY; AND JASON FURMAN, Ph.D., SENIOR 

FELLOW, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS 

STATEMENT OF DOUGLAS J. HOLTZ–EAKIN, Ph.D. 

Mr. HOLTZ-EAKIN. Well, thank you, Chairman Blank, Ranking 

Member Yarmuth, and members of the Committee. It is a privilege 

to be here today. Is that better? Apologies. Let me make three 

points briefly, and then I look forward to answering your questions. 

Point number one is that this hearing is on exactly the right 

topic. Better long-term economic growth is the preeminent policy 

challenge of this era, and it can be seen by the sharp difference between the performance from the end of World War II to 2007, when 

GDP rose fast enough that even with the arrival of the baby boom 

generation GDP per capita rough measured the standard of living 

doubled roughly every 35 years. 

So, in 35 years, you could see the standard of living double, and 

that was the route to many people’s version of the American 

Dream. Current projections would have GDP per capita doubling 

every 75 years, and so the capacity to reach dreams is fading over 

the horizon. 

Raising the rate of economic growth would be the single most 

beneficial policy for all Americans, and so I applaud the Committee 

for focusing on this. It would also benefit the Federal budget. The 

CBO estimates that every tenth of a percentage point of sustained 

increase in economic growth reduces budget deficits by about $270 

billion. And so, while not a panacea, you cannot grow your way out 

of the problems; it is important to have faster economic growth, 

and it will benefit the fiscal outlook. 

The second point I would make is that the kind of economic 

growth that is needed is the hard kind to get. This is not stimulus, 

short-run recovery from a recession where there are workers and 

factories sitting idle that are easily put back into use. This is improving the genuine supply side of the economy, the capacity of 

workers to produce more. In the end, long-term growth is just 

growth in workers and growth in output per worker: productivity. 

And increasing productivity is going to require deep structural 

changes. 

The kinds of policies that are required are, in fact, permanent 

changes, structural reforms that improve incentive over the longterm, cause American businesses to invest in the United States, innovate in the United States, hire and pay people here, and those 
12 

are the kinds of policies that are essential. In my written testimony, I highlight essentially a laundry list of the kinds of things 

that the Congress should be looking at. 

I would put at the top of that list something that this Committee 

should care deeply about, which is the fiscal outlook for the United 

States. The CBO’s baseline, released in January, shows that left on 

autopilot, the Federal budget will grow to trillion-dollar deficits 

over the next 8 years. Those will be 5 percent of GDP or greater, 

far above any safe line. 

Of those trillion-dollar deficits, over $600 billion will be interest 

on previous borrowing, and so the Federal Government is headed 

to a position where it is borrowing to pay off the interest on previous borrowing. Interest will be the second-largest program in the 

Federal budget, second only to Social Security. Larger than defense, Medicare, Medicaid, all of the things that we normally think 

of as what the government would do. 

So, if you are an investor on the global stage looking at a country 

that is running into what is a surefire sovereign debt crisis at some 

point, why would you want to invest there? Why would you want 

to hire there? Why would you want to grow there? It is an impediment to our outlook, and it ought to be fixed. That means fixing 

the entitlement programs. They are the heart of that growing deficit. Those programs deserve to be better on their merits. They 

should be a social safety net that is financially secure, provides 

good work incentives for both younger and older Americans, and 

are pro-growth in their design. 

The second thing I would put on your radar screen is tax reform. 

There is probably no single thing that can happen more quickly 

and have more durable impacts than fundamental changes to the 

U.S. corporation and individual income tax. Tax reform, as everyone on the screen knows, is hard. It has not happened for 31 years 

for a reason. But I would encourage everyone to take a very close 

look at getting over the finish line and having the kinds of structural changes to tax reform that will give permanently better incentives to firms and workers in the U.S. 

And then, I would also highlight the importance of long-term 

education reforms. There is no substitute for having workers with 

greater skills, education, and capacity to adapt to future economic 

conditions. And that is going to be one of the things that can, over 

the long-term, raise productivity the greatest. There are others on 

my list: regulatory reform, immigration reforms, infrastructure programs. I would be happy to discuss them, and I thank you again 

for the chance to be here today. 

[The prepared statement of Douglas J. Holtz-Eakin follows:] 
13 

Economic and Fiscal Benefits of Pro-Growth Policies 

Testimony to the U.S. House 

Committee on the Budget 

Douglas Holtz-Eakin, President 

American Action Forum* 

June 7, 2017 

*The opinions expressed herein are mine alone and do not represent the position of 

the American Action Forum. I thank Gordon Gray for his assistance. 
14 

Introduction 

Chairman Black, Ranking Member Yarmuth and members of the Committee I am 

honored to have the opportunity to testify on the necessity of a pro-growth policy 

agenda, and its implications for the economy and the budget. Pro-growth policies 

are essential to ensuring that current and future American families enjoy the 

improvements in their living standards that at least match the gains made by 

previous generations. The strength of the economy and the sustainability of the 

federal budget are also closely interlinked; going forward better budgetary 

outcomes will require stronger economic growth and more rapid trend economic 

growth will depend, in part, on improved budget policies. 

In my testimony, I wish to make three simple points: 

• More rapid trend economic growth is the most pressing policy issue facing 

the Congress, 

• Improved economic performance will require moving away from a policy 

regime characterized by high taxes, extensive regulation and temporary, 

targeted "stimulus" toward permanent structural reforms, and 

• Structural reforms to entitlements, taxes, regulations, education, 

immigration, and trade agreements are the most promising policy mix to 

restore economic growth, generate rises in the standard of living, and lead to 

a sustainable budget outlook 

Let me discuss these in turn. 

The Growth Challenge 

More rapid trend economic growth is the preeminent policy challenge. The nation 

has experienced a disappointing recovery from the most recent recession and 

confronts a projected future defined by weak economic growth. Left unaddressed, 

this trajectory will result in failing to bequeath to the next generation a more secure 

and more prosperous nation. 

Figure 1: Disappointing Economic Growth 
15 

4.0 

3,0 

2.0 

~ 1.0 

f1 

, 

Post Recovery GOP Growth (2009-2017) 

& ().0 h-.Jl'-r--,.-,.-,........,-....-,.--,.-...,.--,--,-...,.--,--,...-..,--,---,.._,.__,---r--.,--,--,--,--,--,--,--,~~ 

~ g -ro N 

~ -1.0 g. 

-2,0 

-3.0 

-4.0 

OOOO~~~MNNNNMMMM~~~~~~~~~~~~~ 

rlrlrlrlrlrlrlrlrlrlrlrlrirlrlrlrlrlrlrlrlrlrlrlrlrlrlrlrl 

00000000000000000000000000000 

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ rlNM~rlNM~rlNM~rlNM~rlNM~rlNM~rlNM~rl 

00000000000000000000000000000 

Figure 1 shows quarterly, year-over-year growth rates for real Gross Domestic 

Product (GDP) since the "official" end of the Great Recession in June of2009. As 

displayed, real GDP growth has been stubbornly weak, averaging 1.8 percent (the 

dotted line). While it is generally understood that recoveries from recessions 

precipitated by financial crises tend to be weaker, the persistence of the nation's 

weak economic recovery should not be written off as inevitable, but rather as a 

failure of economic policy. 

Figure 2: CBO January Baseline 
16 

2.5 

2.0 

2]2. 

::;;;' 1.5 

'§; 

:: 

Cl 

0. 

0 

Cl 

<ii 1.0 

~ 

0.5 

Projected Growth (2018-2027) 

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 

Even more troubling than the recent past is the outlook. The Congressional Budget 

Office (CBO) projects that the U.S. economic growth will average 1.8 percent over 

the next 10 years. This rate of growth is below that needed to improve the standard 

of living at the pace typically enjoyed in post-war America. During the early postwar 

period, from 194 7 to 1969, trend economic growth rates were quite rapid. GOP and 

GOP per capita grew at rates of 4.0 percent and 2.4 percent, respectively. Over the 

subsequent two and one-half decades, however, these fell to 2.9 percent and 1.9 

percent, respectively. During the years 1986 to 2007, trend growth in GOP 

recovered to 3.2 percent, while trend GDP per capita growth rose to 2.0 percent. 

These were rates quite close to the overall historic performance for the period. 

These distinct periods and trends should convey that the trend growth rate is far 

from a fixed, immutable economic law that dictates the pace of expansion, but rather 

subject to outside influences including public policy. 

More rapid growth is not an abstract goal; faster growth is essential to the wellbeing of American families. 

Table 1 

The Importance of Trend Growth to Advancing the Standard of Living 
17 

0.50 139 

0.75 93 

1.00 70 

1.25 56 

1.50 47 

1.75 40 

2.00 35 

2.25 31 

2.50 28 

2.75 26 

3.00 23 

The trend growth rate of postwar GDP per capita (a rough measure of the standard 

ofliving) has been about 2.1 percent. As Table 1 indicates, at this pace of expansion 

an individual could expect the standard of living to double in 30 to 35 years. Put 

differently, during the course of one's working career, the overall ability to support 

a family and pursue retirement would become twice as large. 

In contrast, the long-term growth rate of GDP in the most recent CBO projection is 

2.0 percent. When combined with population growth of 1.0 percent, this implies the 

trend growth in GDP per capita will average 1.0 percent. At that pace of expansion, it 

will take 70 years to double income per person. The American Dream is 

disappearing over the horizon. 

Economic Growth and the Federal Budget 

A second benefit of improved economic growth is budgetary. The federal 

government faces a problematic budgetary future, largely due to long-term pension, 

health, and other spending promises coupled with recent programmatic expansions. 

The core, long-term issue has been outlined in successive versions of the CBO's 

Long-Term Budget Outlook. In broad terms, the inexorable dynamics of current law 

will raise federal outlays from an historic norm of about 20 percent of GDP to 

upwards of 30 of GDP. Any attempt to keep taxes at their historical norm of about 

18 percent ofGDP will generate an unmanageable federal debt spiral. 

This depiction of the federal budgetary future and its diagnosis and prescription has 

all remained unchanged for at least a decade. Despite this, lasting action (in the right 

direction) has yet to achieve the force of law. 

In the past several years, the outlook has worsened significantly. Over the next ten 

years, according to the CBO's latest baseline projections, the det1cit will average over 

$940 billion. Ten years from now, in 2026, the deficit will be $1.4 trillion. As a 

result of the nation's irresponsible spending binge, in 2027 debt held by the public 
18 

will have more than doubled from its pre-financial crisis level in 2007 to nearly 90 

percent of GOP and will continue its upward trajectory. 

High levels of indebtedness, coupled with weak projected growth, crowd out 

productive investment and further suppress economic growth. This combination 

eventually leads to a spiral of higher interest rates, debt service payments, and 

damaging fiscal policy. Within the current budget window, interest payments make 

up more than half of projected deficits, meaning the existing debt portfolio is 

already constraining policymakers and jeopardizes the budget's capacity to absorb 

another recession or geopolitical crisis. 

Despite the nation's significant budgetary challenges, even incrementally higher 

economic growth can ameliorate the fiscal outlook by increasing taxable income and 

suppressing reliance on the social safety net. According to the CBO, a persistent 0.1 

percentage point increase in productivity growth translates into $273 billion in 

budget savings.l A robust pro-growth agenda could realize multiples of this "rule of 

thumb" in deficit reduction. 

A Policy Regime for Faster Trend Growth 

It is desirable to change the style of policy to produce better growth. Economic 

growth policy is more a philosophy than a piece of legislation. It is a commitment at 

every juncture in the policy process to evaluate tradeoffs between social goals, 

environmental goals, special interest goals and economic growth- and err on the 

side of growth. Looking back, the Obama Administration contemplated a health care 

law that raised $700 billion in new taxes and created two new entitlements at a time 

when the spending-swollen federal debt was already exploding. The White House 

also chose social objectives over growth. It unleashed the Environmental Protection 

Agency, choosing a green agenda over growth. It launched the National Labor 

Relations Board on a union agenda at odds with growth. 

The second flaw in recent policy approaches has been its misguided reliance on 

temporary, targeted piecemeal policymaking. Even if one believed that 

countercyclical fiscal policy ("stimulus") could be executed precisely and had 

multiplier effects, it is time to learn by experience that this strategy is not working. 

Checks to households (the Economic Stimulus Act of 2008), the gargantuan stimulus 

bill in 2009 (American Recovery and Reinvestment Act), "cash for clunkers" (the Car 

Allowance Rebate System), tax credits for homebuyers (the Federal Housing Tax 

Credit, the HIRE Act (consisting of a $13 billion payroll hiring credit, expensing of 

certain investments, $4.6 billion for schools and energy), the Small Business Jobs Act 

of 2010, and the state-local bailout Public Law 111-226 ($10 billion in education; 

$16 billion in Medicaid) have all failed to generate adequate growth. 

As the policy regime of macroeconomic fiscal (and monetary) fine-tuning backfired 

in the 1960s and 1970s, leaving behind high inflation and chronically elevated 

unemployment, it is working no better in the 21st century. Instead, there should be 
19 

a commitment to raising the long-term growth rate of the economy through 

permanent reforms. 

This Committee can contribute greatly to moving toward a better, long-term 

oriented set of policies. The founders recognized that the government had 

important roles in national security, basic research, education, and infrastructure. 

Congress should reflect these principles in their budgets. As it turns out, however, 

these areas are funded in the annual appropriations bills -precisely the area of the 

budget that was the focus of caps in the Budget Control Act.2 Growth-oriented 

policymakers should reject mechanistic budgeting like caps in favor of funding core 

roles of government contingent on quality analysis and outcomes. 

In defense, budgets should reflect the capabilities needed to address the threats 

identified in the Quadrennial Defense Review- not simply a desire to spend more 

without justification. Similarly, infrastructure projects should receive funding only if 

a rigorous analysis shows they improve economic outcomes.3 Education dollars 

should reward actual achievement and progress, while health dollars should be 

contingent on quality outcomes. And most importantly, poverty programs must be 

re-oriented away from a focus on making sure enough money gets to the poor and 

towards the real solution to poverty: economic self-sufficiency.4 

The key issue is that it is a budget strategy focused on annual funding of programs 

consistent with our founding principles and focused on quality outcomes. 

Of course, something has to give and the obvious candidates are the large, and evergrowing, entitlement programs. Reforming entitlement programs turns out to be the 

right thing to do for reasons beyond budget math. The U.S. economy is characterized 

by big federal debt- now 77 percent of GDP and rising unsustainably- and poor 

growth. A Jesson of other countries faced with this unpleasant economic cocktail is 

that the route to better economic performance is to keep taxes low and cut spending 

to deal with the budget imbalance. But not all spending is created equal. Instead, it is 

better to cut transfer programs and preserve core functions of government. The 

historical lesson dovetails perfectly with a pro-growth budget strategy. 

Importantly, the large entitlement programs need reform in their own right. Social 

Security is a good example. The "plan"- the law of the land -will cut across the 

board the retirement checks of those in retirement by 21 percent in two decades. 

That is a disgraceful way to run a pension system. It is possible to reform Social 

Security to be less costly overall and financially sustainable over the long term. 

Similar insights apply to Medicare and Medicaid, the key health safety nets for the 

elderly and poor. These programs have relentless appetites for taxpayer dollars yet 

do not consistently deliver quality outcomes. Reforms can address their open-ended 

draws on the federal treasury and improve their functioning at the same time. 
20 

The growth-oriented fiscal strategy will re-orient spending priorities away from 

dysfunctional autopilot spending programs and toward core functions of 

government. It will focus less on the dollars going into programs and more on the 

quality of the outcomes of those programs. It will do so because it is the principled 

approach; because it coincides with the best strategy to deal with the debt and 

growth dilemmas; and because it will force a restructuring of the entitlement 

programs to generate a quality social safety net. 

Structural Reforms to Enhance Trend Growth 

Entitlement Reform and a Sustainable Debt Trajectory 

The policy problem facing the United States is that spending rises above any 

reasonable metric of taxation for the indefinite future. Period. There is a miniindustry devoted to producing alternative numerical estimates of this mismatch, but 

the diagnosis of the basic problem is not complicated. The diagnosis leads as well to 

the prescription for action. Over the long-term, the budget problem is primarily a 

spending problem and correcting it requires reductions in the growth of large 

mandatory spending programs-entitlements Social Security and federal health 

programs. 

At present, Social Security is running a modest cash-flow deficit, increasing the 

overall shortfall. There are even larger deficits and future growth in outlays 

associated with Medicare, Medicaid, and the Affordable Care Act (ACA). These share 

the demographic pressures that drive Social Security, but include the inexorable 

increase in health care spending per person in the United States. 

For this reason, an immediate reform and improvement in the outlook for 

entitlement spending would send a valuable signal to credit markets and improve 

the economic outlook. The spending future outlined above represents a direct 

impediment to job creation and growth. The United States is courting further 

downgrade as a sovereign borrower and the ensuing increase in borrowing costs it 

would generate. Any sharp rise in interest rates would have dramatically negative 

economic impacts; even worse an actual liquidity panic would replicate (or result in 

an experience worse than} the experience of the fall of 2008. 

Alternatively, businesses, entrepreneurs and investors perceive the future deficits 

as an implicit promise of higher taxes, higher interest rates, or both. For any 

employer contemplating locating in the United States or expanding existing facilities 

and payrolls, rudimentary business planning reveals this to be an extremely 

unpalatable environment. 

In short, entitlement reform is a pro-growth policy move at this juncture. As 

summarized by an American Action Forum paper, research indicates that the best 

strategy to both grow and eliminate deficits is to keep taxes low and reduce public 

employee costs and transfer payments.s 
21 

The Role of Infrastructure in Faster Trend Growth 

Among the most common policy proposals are those that increase federal outlays on 

"infrastructure" (defined in a variety of ways), with the assertion that it will 

generate more rapid economic growth. This would be true if infrastructure 

spending had a long-term impact on productivity. Over the long-term, higher 

productivity-the ability to generate more output and income from each dollar of 

capital or hour of work-is the key to higher labor earnings and improved 

standards of living. Because higher productivity is so central to economic growth, it 

must be an explicit concern -rather than a presumed outcome- when 

contemplating increased infrastructure spending. The notion that investing in 

infrastructure will generate productivity has an intuitive appeal: imagine an 

economy with trucks but no roads, or trains and no tracks. Moreover, there are 

countless testimonials across the country asserting that a new road, or airport, or 

other project generated a boom in economic activity. 

High-productivity infrastructure investments can generate improvements in 

economic well being by increasing connectivity or reducing congestion or providing 

a necessary productive input. If so, this is a critical dimension of improving longterm employment, allowing labor to enhance its productivity at lower cost and 

encouraging private capital investments in structures, equipment, and technologies 

to reap higher returns from American industry. 

But there are reasons to be cautious as well. First, the test for a high-productivity 

public investment is that it should generate a rate of return to society that exceeds 

the market return in the private sector. The resources for any public investment are 

ultimately drawn from the private sector through taxes and fees, or in some cases by 

borrowing from the private sector. In each case, the dollars used to make these 

investments constitute foregone opportunities to make other market investments. 

To meet a productivity test, federal investments should have a greater impact in 

terms of raising future standards of living than other uses of funds as measured by 

the return on other market investments. Thus, to ensure the best use of taxpayer 

dollars, government must channel funding to the projects that offer the highest 

returns to society. 

That means choosing programs that do the most to enhance long-term productivity. 

A second concern is that politics interfere with making sure that the right projects 

are chosen. Not every road, high-speed rail, or water project can meet the test. Will 

public policy actually consist of a portfolio of well-selected and thoughtfully 

targeted investments that may make a substantial contribution to aggregate 

economic productivity? 

A third issue is that any shift in resources creates losers as well as winners. A dollar 

spent on any project means a dollar less to spend on another project. In an 
22 

environment of finite resources, funding infrastructure projects will generate some 

productivity, but at the expense of jobs that could have been created in other sectors 

had the money been used differently. This is why reform to direct government 

spending to the most productive investments is so crucial. Even if infrastructure 

always raises productivity, its net effect on the economy as a whole-taking into 

account the benefits that will be foregone as a result of reduced public spending in 

other areas of the economy-will be positive only if government investments are 

rigorously selected to meet productivity criteria. 

Shifts of investment and employment occur not just across industries and sectors, 

but also across counties and states. Even a sub-optimal investment is likely to be 

able to show some positive output impacts, especially in the short-term, from the 

perspective of the winning state or city. But from a national perspective and over 

time these gains could be-and often are-outweighed by losses elsewhere. Federal 

infrastructure policy should guide federal dollars so as to produce a net gain for the 

economy as a whole, rather than for one area or region in the short-term. 

The construction of the Interstate Highway network, for example, created jobs near 

interstate interchanges as new and existing businesses were drawn to locations 

where they could take maximum advantage of the accessibility afforded by the new 

highway system. Towns that were bypassed by the Interstates, however, lost jobs as 

some of their businesses moved to these new locations and as other businesses that 

stayed "died on the vine" because they could no longer compete. Nevertheless, the 

federal investment creating the interstate highway network was justified because 

overall gains exceeded overall losses. 

Evidence 

The histogram below, reproduced from Born and Ligthart [2014], summarizes 578 

estimates from 68 studies that cover various time periods, nations or states, levels 

of government (municipal, state, federal), and types of public capital. 
23 

Figure 3: Relationship Between Output and Infrastructure 

e 

The histogram shows the distribution of what the researchers call "8", the 

percentage increase in output for a comparable percentage rise in infrastructure. As 

one can see by inspecting the figure, there are large positive (over 2.0) and large 

negative (below -1.5) examples in the literature. However, the bulk of the estimates 

cluster closely around zero. The overall shape of the distribution does suggest a 

greater chance of positive impacts than negative ones, so a consensus estimate of 

the elasticity might be slightly above zero. 

What does this mean? Government general capital is roughly $10 trillion, according 

to the Bureau of Economic Analysis of the Department of Commerce, so $100 billion 

for additional infrastructure spending is roughly a (100/10000 =) 1.0 percent 

increase. Using a productivity elasticity of, say, 0.03, that suggests that the level of 

productivity and output eventually rises by 0.03 percent. Since GOP is roughly $18 

trillion, then $100 billion in extra infrastructure spending generates $5.4 billion in 

extra output per year, which is hardly a productivity boom. 

Tax Reform 

The U.S. tax code is broadly viewed as broken and in need of repair, and for good 

reason- it hasn't been overhauled in 30 years. Whereas the previous administration 

made the tax system worse -adding higher rates and new taxes, including on the 

middle class- the Committee should support a fundamental overhaul of the nation's 
24 

tax system.6 A sound reform of the U.S. tax code is an essential element of any progrowth strategy, and could substantially increase trend economic growth, boosting 

the economy and tax revenue.? 

Fundamental modernization and simplification of the tax system has been an 

elusive dream for Congresses and administrations over the past 30 years, and a 

wholesale reform of the code is invariably difficult during an election. 

The last time the United States undertook a fundamental tax reform was with the 

Tax Reform Act of 1986 (TRA). If history is any guide, a 1986 style reform offers 

faster economic growth. This is borne out by retrospective analysis of the TRA that 

found that the 1986 tax reform produced about one percentage point higher growth 

over a long period. Further studies have shown a negative relationship with higher 

marginal rates and taxable income, hours worked, and overall economic growth.B 

A more robust reform along the lines proposed by the recent task force proposal 

offers even greater growth benefits. Highly respected economists David Altig, Alan 

Auerbach, Laurence Kotlikoff, Kent A. Smetters, and Jan Walliser, simulated multiple 

tax reforms and found GOP could increase by as much as 9.4 percent from tax 

reform.9 The highest growth rate was associated with a consumption-based tax 

system that avoided double-taxing the return to saving and investment. The study 

also simulated a "clean," revenue-neutral income tax that would eliminate all 

deductions, loopholes, etc.; and lower the rate to a single low rate. According to their 

study, this reform raised GOP by 4.4 percent over ten years-a growth effect that 

roughly translate into about 0.4 percent higher trend growth, resulting in faster 

employment and income growth. 

Regulatory Reform 

Another important step is a new approach to regulation. The recent rapid increase 

in burdensome regulations comes at a considerable cost to American businesses, 

consumers, workers, and the economy in general. Over the last decade the federal 

government imposed $1 trillion in compliance costs and an estimated 615 million 

net paperwork burden hours on American businesses and individuals. 10 These are 

not just abstract cost but take a real toll on employment. just $1 billion in new 

regulation burden is associated with a 3.6 percent decline in industry 

employment.1 1 The cumulative effect of regulation is significant and that 

policymakers should take existing regulatory burdens into account when writing 

new rules. A comprehensive re-evaluation of existing regulations, starting with the 

most burdensome, duplicative, and costly, should be undertaken to limit the 

negative impact on employment and prosperity. 

Immigration reform 
25 

Immigration reform can raise population growth, labor force growth, and thus 

growth in GDP. In addition, immigrants inject entrepreneurialism in the U.S. 

economy.lz New entrepreneurial vigor embodied in new capital and consumer 

goods promises a higher standard of living. 

Without this policy effort, low U.S. birth rates will result in a decline in the 

population and overall economy. A serious, economically-based immigration reform 

would raise the pace of economic growth substantially, raise GDP per capita, and 

reduce the cumulative federal deficit. 

Education reform 

Our economy's future workforce is in crisis. Of 100 children born in 1983 who 

started kindergarten together in 1988, 30 of them would not have graduated on 

time in 2001. Of the 70 who would have graduated, 50 would start college, and just 

28 of those 100 kindergartners would have a college degree by spring 2007. But it 

gets worse. 

Our nation continues to report significant achievement gaps between students 

based on race and socioeconomic factors. On average, students of color have a much 

lower likelihood of graduating at 7 6 percent. Of those students of color who do 

graduate, they typically exit high school with the functional equivalent of an 8th or 

9th grade education. Despite more than $16 billion annually in targeted federal aid, 

our poor neighborhoods usually Jack fundamental resources such as great teachers. 

This feeds an embarrassingly persistent and worsening gap between our students' 

performance and that of students in the rest of the industrialized world. The 

Organisation for Economic Co-operation and Development (OECD) found that in 

2012, America ranked 27th out of 34 industrialized countries in math and 20th in 

science. 

In the past, only parents with enough money could choose a school outside their 

government assignment- and money can still buy escape. However, around the 

"assigned sector" of public education, there is a whole other world slowly emerging. 

Increasingly, there are more choices in the public sector that families can access, 

among them public charter schools and access to private schools with scholarship or 

tax credit support. 

The tragedy is that the government near-monopoly has prevented these new 

choices from being fully implemented; from throwing open doors to the students 

that need them most. While thousand of parents have accessed choice programs 

immediately as they become available, thousands more sit on waiting lists while 

their children and their hopes languish. Better options driven by parental choice can 

expand as quickly as we can provide them the students and the resources to do so. 
26 

Trade Agreements 

Trade is an important driver of productivity and economic growth in the U.S. and 

globally. Trade creates jobs, increases GDP, and opens markets to American 

producers and consumers. The U.S. is the world's largest participant in global 

trade-with $2.2 trillion in exports of goods and services and imports of over $2.7 

trillion-and has established free trade agreements with 20 countries.B The U.S. is 

the largest exporter of services in the world. 14 Trade supports over 11 million jobs 

in the U.S.15 and U.S. exports comprise nearly 13 percent of U.S. GDP.16 

While the United States failed to pursue the Trans-Pacific Partnership (TPP), two 

other trade agreements, the Transatlantic Trade and Investment Partnership (TTIP) 

and Trade in Services Agreement (TiSA), are, in principle, currently being negotiated 

and offer opportunities for expanding global markets. TTlP would fully open EU 

markets, boost GDP by $125 billion, and create more than 7 40,000 U.S. jobs.17 TiSA, 

the first trade agreement in services since 1995, could bind together 70 percent of 

the world's $55 trillion services market.18 If effectively negotiated, these agreements 

offer significant economic potential. 

Conclusion 

More rapid trend economic growth is the most pressing federal policy issue. 

Fortunately, the roots of subpar growth are found in subpar growth policies. 

Changing the policy strategy to focus on permanent structural reforms to 

entitlement, tax, regulatory, immigration, education and trade polices holds the 

promise of improving the economic outlook for this generation and those that 

follow. 
27 

1 https: /lwww.cbo.gov /sites /default/files/115th-congress-20 17-20 18/reports/52370-

budeconoutlook.pdf 

2 https://www.americanactionforum.org/research/federal-funding-thc-budget-control-act-and-thestate-o f-fed eral-approp ria ti I 3 https://www americanactionforum.org/research/better-decisions-in-a-time-of-scarce-resources/ 4 http: I linegualiJy.stanford.edu /sites /default/files /Pathways Presidential Republican -Way.pdf 

s http: I Ia mericanactio n fo ru m.o rg /insights I repairing -a-fisc a 1-hoi e-how -and-why-spending -cutstrump-tax-increases 

6 http:jjamericanactionforum.org/insightsjooops 

7 http:/ /americanactionforum.org/researchfeconomic-and-budgetary-consequences-of-pro-growthtax-modernization 

8 See: Feldstein, Martin, "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 

1986 Tax Reform Act." Journal of Political Economy, june 1995, (103:3), pp 551-72; Carroll, Robert, 

Douglas Holtz-Eakin, Mark Rider and Harvey S. Rosen, "Income taxes and entrepreneurs' use of 

labor." Journal of Labor Economics 18(2) (2000):324-351; Prescott, Edward C., "Why do Americans 

Work So Much More Than Europeans." Federal Reserve Bank of Minneapolis july 2004; Skinner, 

jonathan, and Eric Engen. "Taxation and Economic Growth." National Tax journal49.4 (1996): 617-

42; Romer, Christina D., and David H. Romer, "The Macroeconomic Effects of Tax Changes: Estimates 

Based on a New Measure of Fiscal Shocks." National Bureau of Economic Research NBER Working 

Paper No. 13264 july 2007 Web.http:j fwww.nber.orgjpapersjw13264 9 Altig, David, Alan). Auerbach, Laurence). Kotlikoff, Kent A. Smetters and jan Walliser, "Simulating 

Fundamental Tax Reform in the United States." American Economic Review, Vol. 91, No.3 (2001), pp. 

574-595 

1o https:/ fregrodeo.com/ 11 Batkins and Gitis, "The Cumulative Impact of Regulatory Cost Burdens on Employment". 12 Holtz-Eakin, "Immigration Reform, Economic Growth, and the Fiscal Challenge." 13 https: //www.census.gov /foreign-trade /Press-Release /current press release /exh 1.pdf' 

https: I /ustr.gov /trade-agreements /free-trade-agreements 14 https://www.wto.org/english/res e/booksp e/world trade report15 e.pdf 15 

http: I fwww. trade .gov /mas j ian/build/groups j public I @tg_ian j d acumen ts /we bco ntentjtg_ian_ 0 0 55 

OO.pdf 

16 http: 1/data.worldbank.org/indicator /NE.EXP.GNFS.ZS 17 

https: f/www.gov.uk/government/uploads /system /uploads /attachment data /file /245085/TTI P an 

d the 50 States GovUK.pdf 

1s https://ustr.gov /TiSA 
28 

Chairman BLACK. Thank you Dr. Holtz-Eakin, and Dr. Furman, 

you are recognized for 5 minutes. 

STATEMENT OF JASON FURMAN, Ph.D. 

Mr. FURMAN. Thank you, Chairman Black, Ranking Member 

Yarmuth, members of the Committee. It is a privilege to be here 

with my fellow economists, and I think you will see a lot of commonality in a lot of what we have to say in our testimony. I wanted 

to make five points. 

The first point is that the primary source of the slowdown in economic growth over the last decade has been our demographic situation. That going forward, those demographics will continue. But a 

secondary source has been a worldwide slowdown in productivity 

growth and the slim chance of partially reversing that. 

If we had tax cuts, regulatory reform, and everything else on the 

agenda that reproduced exactly the same productivity growth that 

we had during the 1980s under President Reagan with today’s demography, that would only be sufficient to have a 1.7 percent 

growth rate. Reagan’s policies, Reagan’s economy, today’s demography would be a 1.7 percent growth rate. 

And the reason that is so dramatically different than the growth 

rate we actually had in the 1980s is shown in that first chart there, 

which is that the working-age population was growing at about 2 

percent a year in the 1980s. Now it is growing at about zero percent a year. Two-thirds of the slower growth is due to this dramatic 

demographic change, which is the result of fertility decisions decades ago. 

My next slide shows the other source of slower growth, which is 

productivity growth has slowed down. It has slowed down in most 

of the major economies in the world. The United States has had 

faster productivity slowdown than other advanced economies, but 

not as fast as it used to be. My next slide shows the major economic forecasters are forecasting between 1.7 and 2.4 percent 

growth, most of them clustered around 2 percent. All of these forecasters are assuming that the demography continues, and they are 

assuming some rebound in productivity growth as well. 

The Trump administration’s forecast is dramatically out of step 

with all of these, and as shown in the next slide, that one percentage point above the consensus forecast is the most optimistic that 

any administration forecast has been since at least the 1980s. In 

fact, under Presidents Clinton, George W. Bush, and Obama, the 

administrations never forecasted growth more than one-tenth of 1 

percent above the consensus. Now it is 1 percentage point above 

the consensus. 

My second point, which I can state in one sentence, is that more 

growth would be good. It would help family incomes rise; it would 

help deal with our fiscal situation. My third point is one Dr. HoltzEakin has already made, that that additional growth can come 

maybe a tiny bit from the demand side of the economy, putting 

people back to work. But mostly it is going to have to come from 

expanding supply, increasing productivity, increasing the underlying structural workforce. 

My fourth point is that a number of policies would help us increase supply. Those include revenue-neutral business tax reform, 
29 

increased investments in public infrastructure and research, expanding the labor market through active labor market policies and 

efforts to make workplaces more flexible for workers, and finally, 

immigration reform and expanded educational opportunity would 

boost both productivity growth and the labor force. 

The last point I wanted to make is that a number of the policies 

advanced by President Trump would worsen economic growth. Outside of the fiscal arena, these include limitations on international 

trade and immigration, but I wanted to focus on three fiscal policies. My first slide shows estimates from the Tax Policy Center and 

the Penn Wharton Budget Model, a model run by a former economist from the Bush administration that shows that under the 

Trump campaign plan, the tax cuts initially would have a small 

benefit for the economy, but over time, they would cause such large 

deficits that they would overwhelm those benefits and reduce economic growth. 

My second point would be that President Trump’s budget includes initial increases in infrastructure, but then over time would 

cut infrastructure spending, and those cuts to infrastructure spending would do more damage to the economy. And then, my third 

point not shown in a slide is that cutting low-income programs like 

Medicaid and SNAP, evidence shows, would reduce the mobility 

that low-income children have, reduce their income growth over 

time, cut state budgets, which would reduce their investment, and 

by increasing inequality harm overall economic growth. Thank you. 

[The prepared statement of Jason Furman follows:] 
30 

Prepared Testimony for the Hearing "The Economic and Fiscal Benefits of Pro-Growth 

Policies'' 

Jason Furman 

Senior Fellow, Peterson Institute for International Economics 

U.S. House of Representatives 

Committee on the Budget 

June 7, 2017 

Chair Black, Ranking Member Yannuth, and Members of the Committee: 

Thank you for the opportunity to testifY on the important topic of the economic and fiscal 

benefits of pro-growth policies. In my testimony today I would like to make five points: 

I. The growth rate has been slower over the last decade primarily because of demographic 

factors. The baby boom generation contributed to growth from the 1970s up until about a 

decade ago, but now the generation is beginning a retirement boom that is subtracting 

from growth. In addition, women's entry into the workforce from the end of World War 

II to about 2000 was another engine of growth that cannot be repeated on the same scale 

a second time. 

2. Additional economic growth would be welcome and would help both increase household 

incomes and improve the long-run fiscal outlook. 

3. Additional demand could help strengthen tl1e economy in the short nm, but with the 

cyclical recovery largely complete, faster growth will require a combination of faster 

productivity growth and an expanded labor force. 

4. A number of budgetary policies would contribute to these goals. Productivity growih 

could be enhanced by well-crafted, revenue-neutral business tax reform and increased 

investments in public infrastructure and research. The labor force could be expanded 

through active labor market policies and efforts to make workplaces more flexible for 

workers. Finally, immigration reform and expanded educational opportunity would boost 

both productivity growth and the labor force. 

5. A number of fiscal policies advanced by President Tmmp would worsen economic 

growth. These include unpaid-for tax cuts, reductions to infrastructure and research 

investments, and reductions to safety net programs that foster mobility. Other policies, 

like restiictions on immigration and restrictions on trade, would also worsen economic 

growth. While some policies could have a very small positive impact on measured 

economic output, these effects would not be sutlicient to overcome their other 

drawbacks. 

Let me now elaborate on these five points. 
31 

Point #1: The Growth Rate Has Been Lower Primarily Because of Demographic Factors 

During the Reagan era, the economy grew 3.1 percent a year, with some arguing that this growth 

was spurred by tax cuts and regulatory reforms. A closer look, however, shows that the 1980s are 

not an argument for optimism-precisely the opposite. 

There are two components to economic growth: adding more workers and increasing their 

productivity. Faster growth in the 1980s was the result of the former, an expanding workforce 

driven by two iiTeproducible demographic factors: the baby boomers' entering their prime 

working years, and women's continuing influx into the workforce. From 1980 to 1990, labor 

productivity-the amount of goods and services the average worker can produce in an hourgrew only 1.6 percent a year, below the figure marked since 200 l. 

Today, the baby boomers are hitting retirement. As a result, Reagan-era productivity gains of 1.6 

percent a year would now generate economic growth of only 1.7 percent. The dramatic change in 

the demographic outlook can be seen clearly in Figure 1, which shows that in the 1980s the 

prime-age (25-54) population was growing at over 2 percent a year, while it has barely increased 

over the last. 

Figure 1 

Growth of Civilian Noninstitutional Population 25·54 

Percent, Annual Rate (Ten-Year Trailing Average) 

2.4 

2.2 

2.0 

1.8 

1.6 

1.4 

1.2 

1.0 

0.8 

0.6 

0.4 

0.2 

0.0 

2026 

1960 1970 1980 1990 2000 2010 2020 

Source: Bureau of Labor Statistts. Current Population Survey; Social Sewrity 

Administration; author's calcula!Ons. 

In addition, as Federal Reserve Chair Janet Yellen (2017) has said, "women's incorporation into 

the economy contributed importantly to the rapid rise in economic output and well-being over 

the 20'h century". This can be seen in Figure 2, which shows how the share of U.S. women either 

employed or looking for work-known as the labor force participation rate-rose from 33 

percent in 1948 to 60 percent in 1999 before it levelled off and started declining. As I will 

discuss later on, there is certainly room for further increases in women's labor force 

participation, but nothing like the sustained upswing of the second half of the 20'h century. 

2 
32 

Figure 2 

Female Labor Force Participation Rate Percent 

70 r---------------------------------~ 

60 

50 

40 

30 

1945 1955 1965 1975 1985 1995 2005 2015 

Source: Bureau of Labor Statistics, Current Population Survey; author's calculations. 

Although demography has been the largest source of the slowdown in growth in the past decade, 

it is also the case that productivity growth has been disappointing. This has been a worldwide 

trend, as productivity growth has slowed in nearly all of the advanced. In fact, the United States 

has actually had faster productivity growth than the other G-7 economies, as Figure 3 shows. 

This strongly suggests that the major sources of the productivity growth slowdown are not U.S.-

specific factors like the passage of the Affordable Care Act (ACA) or the Dodd-Frank Wall 

Street Refom1 and Consumer Protection Act. 

Figure 3 

Labor Productivity Growth, G-7 Countries Percent. Annual Rate 

3.0 .---------------------, 1111996-2006 1112006-2016 

2.5 

2.0 

1.5 

1.0 

0.5 

0.0 

-0.5 ... _____________________ ___, 

United Japan Canada Germany France United Italy 

Stales Kingdom 

Source: Conference Board, Total Eronomy Database: author's calculations, 

The unfavorable demographic headwinds will continue over the next decade, but economic 

forecasters are generally expecting a rebow1d of productivity growth from 1.2 percent a year 

over the last decade to around 1% percent, which is the average over the last four decades. 

3 
33 

Together with the known path of demographic trends, this would be sufficient to generate 

economic growth of about 1.9 percent a year-the same as expectation of the Congressional 

Budget Office (CBO) and close to the median expectation for long-run growth of Federal Open 

Market Committee (FOMC) participants. The Blue Chip consensus forecast is slightly higher at 

2.0 percent, as shown in Table !. 

Forecaster 

Table 1 

Summary of Long-Run Economic Growth Pr~ecti.=.occ.ns"--~~ 

Long-Run Annual 

Real GOP Growth 

(Percent) 

International Monetary Fund (IMF) 

Federal Open Market Committee (Median) 

Congressional Budget Office 

1.7 

1.8 

1.9 

World Bank 1.9 

Blue Chip consensus forecast 2.0 

Consensus Forecasts 2.1 

Organisation for Economic Co-operation and Development (OECD) 2.4 

Trump Administration 3.0 •• Source: Office of Management and Budget Congressional Budget Offtce; Board of Governors of the Federal Reserve System; Slue 

Chip Economic lndlcators; Consensus Economics Inc.; International Monetary Fund, World Economic Oulfook; Organisation for 

Economic Co-operation and Development; World Bank; aulhor's cakulations. 

The Trump Administration's economic forecast of3.0 percent long-run growth is a major outlier. 

In fact, as shown in Figure 4, the current Administration's forecast is the largest outlier in an 

ultimate growth rate forecast in over three decades. Hitting this target would require productivity 

growth rates about as high as the United States has ever experienced. My own detailed 

simulations put the odds of hitting or exceeding this target at 4 percent (Furman2017). 

Figure 4 

Trump Forecast More Optimistic Than Any 

Administration Since the 1980s: 

Long-Run Real Output Growth Forecast, Administration vs. 

Blue Chip Consensus, FY 1985- FY 2018 

Percentage Point Difference 

1.2 .9.\:ti.T.i~!lf: ................................................................................................ . 

0.8 

0.4 

0.0 

-0.4 

-0.8 t__ Pessimistic _______________ _.J 

1984 1992 2000 2008 2016 Note: Difference in annual growth rate !nlast yea- ava!lab.e for both sources. Forecast is 

for real GNP prior to FY 1993 and real GOP thereafter. 

Source: Office of Management and Budge!; Co11Jressiona18udget0ffice; Blue Chip 

Economic lnd!cators: Congressbnar Research Setvice; auttnr's cak::ulations. 

4 
34 

Point #2: Additional Growth Would Be Welcome for Both Household Incomes and the 

Long-run Budget 

From 1948 to 1973, the typical U.S. family saw its income rise 3.0 percent a year, as shown in 

Figure 5-a pace at which incomes double roughly every generation. Since 1973, however, 

median family income growth has slowed to only 0.4 percent a year-a pace at which it takes 

over a century for incomes to double. The largest factor in this slowdown has been slower 

economic growth, largely because the productivity growth rate fell from 2.8 percent a year in the 

first period to 1.8 percent a year in the second period. Another important factor in the slowdown 

in family income growth has been the increase in inequality: in 1973, the bottom 90 percent of 

households received 69 percent of income, but by 2015 that figure had fallen to 50 percent of 

U.S. income. This combination of a slower-growing pie and its increasingly uneven division has 

been very challenging for American families. 

Figure 5 

Real Median Family Income, 1948-2015 2015 Dollars (Log Scale) 

100.000 

1948-1973: 1973-2015; 

3.0%/yr 0.4%/yr 

Faster economic growth would help support stronger income growth for U.S. households. Over 

the last four years, for example, real compensation has increased at a 1.2-percent aunual ratewhich exceeds the 0.8-percent annual growth rate of productivity. This is possible over a shorter 

period of time as the profit share has been compressed, but over the longer run the only 

sustainable basis for more rapid wage and income gains is faster economic growth. 

Increased economic growth would not, however, guarantee faster income growth for middleclass households. If the gains from any increase in productivity growth were largely enjoyed by 

high-income households and if inequality were to increase as a result, then the typical household 

might still see slow income growth. This is why it is important that growth is both sustained and 

widely shared. 

Additionally, faster economic growth would be favorable for the fiscal outlook-reducing the 

magnitude of spending cuts or tax increases needed for long-mn fiscal sustainability. Based on 

CBO (20 17), a one-quarter point increase in the annual growth rate of productivity would reduce 

5 
35 

deficits by $340 billion over the next decade-amounting to 0.5 percent of GDP in the tenth year 

of the budget window. These effects compound over time, so the impact on the long-range 

forecast is even more dramatic. The Office of Management and Budget (2016) estimated that this 

increase in productivity growth would reduce the 25-year fiscal gap by 0.8 percent ofGDP, 

closing roughly half of the fiscal gap. 

Point #3: Going Forward, the Main Source of Increased Growth Will Be Expansions in 

Supply, Although More Demand Could Also Help 

Economists break growth into two sources: (i) cyclical aod (ii) structural. Cyclical growth comes 

about as more underutilized resources are put back into production-notably, as the 

unemployment rate declines. Structural growth-also called potential growth-is dependent both 

on the underlying growth of the labor force and on its productivity. 

The unemployment rate peaked at 10.0 percent in 2009. Since then, declining unemployment has 

helped to undergird the cyclical component of growth as more Americaos have been put back to 

work. But, as shown in Figure 6, both the headline unemployment rate (U-3) and a broader 

concept that includes discouraged workers, marginally attached workers, and those working parttime for economic reasons (U-6) are now below their respective pre-crisis levels. There still may 

be some additional room for cyclical expansion as workers rejoin the labor force-helping to 

boost the age-adjusted participation rate-but likely not a substantial amount. 

Figure 6 

Unemployment and Underemployment Rates 

Percent 

18 r---------------------------------~M~ay~-1~7 

16 

14 

12 

10 

8 

6 

4 

2 

2002 2004 2006 2008 2010 2012 2014 2016 Note: Dashed lines indcae Decerrber 2001~Decembs-r 2007 averages, Shading 

del"\otes ~cession, 

Source: Bureau of Labor Statistics. Current Population Survey; authOr's calculatloM. 

Going forward, sustained growth will require either faster growth in output per hour 

(productivity growth), faster population growth, or an increase in the fraction of the population in 

the workforce. Some increase in each of these is possible with the right policies, as I will discuss 

in my next point. 

6 
36 

Point #4: Sound Policies Could Increase the Growth Rate 

No single magic bullet would transfonn the outlook for U.S. growth. But a combination of 

policies could have a meaoingful effect over time. The following is not a complete list, but it is 

indicative of some budget policies, or at least policies with major budgetary implications, that 

would increase the level of output aod thus, over a given period, the growth rate: 

Selected Policies That Would Primarily Increase Productivity 

• Revenue-neutral business tax reform. The United States has high statutory tax rates but 

an uneven tax base that does not result in substantial revenue collection. In addition, our 

international system is broken. Tax reform that would cut the corporate rate to around 28 

percent, shift to more of a cash-flow tax base, and pay for these changes by eliminating 

major tax expenditures and reforming the international system would have the potential 

to improve the quality of capital formation aod thus boost economic growth. 

• Infrastructure and scientific research. From 2010 to 2015, U.S. public investment 

averaged only 3.8 percent ofGDP, a fraction that has fallen over time and puts us 16'h 

among members of the Organisation for Economic Co-operaiton and Development 

(OECD). At the same time, public investment in research aod development (R&D)-

which focuses on higher-risk, more basic research than private R&D-has also fallen as a 

share of the economy since the 1960s and is now less than l percent ofGDP. The 

economic evidence clearly shows that increased investment in these two areas would 

have high returns going forward. 

Selected Policies That Would Primarily Boost the Workfbrce 

• Active labor market policies, including training, job search assistance, and subsidies 

for jobs. The United States has among the lowest labor force participation rates for 

prime-age workers of aoy of the OECD economies. There is substantial scope to boost 

participation, which would help to offset some of the demographic challenges going 

forward. Part of the participation challenge we face is due to the fact that the United 

States invests only 0.1 percent of GDP in helping to train people for jobs, lind people 

jobs, or, when necessary, subsidize those jobs, a level that puts us third from the bottom 

in the OECD. Expanding training in well-targeted, evidence-based ways, better 

integrating job search assistaoce into unemployment insurance, and subsidizing jobs in a 

raoge of circumstances-including expanding the Earned Income Tax Credit (EITC) for 

lower-income workers without children and establishing wage insurance for older 

workers who cannot find higher-paying jobs-would all be helpful. 

• Flexible workplaces. U.S. workplaces are very flexible for employers but much less so 

for workers. The United States is one of two countries in the world without a national 

paid leave law and also lacks mandatory provision of sick leave for workers. Federal 

legislation to establish a public program for paid leave and to mandate employers to 

cover sick leave would make workplaces more flexible and help keep workers attached to 

jobs, increasing labor force participation-especially for women. 

7 
37 

Selected Policies That Would Simultaneously Boost Productivity and the Workforce 

• Immigration reform. One of the biggest policy levers to increase growth would be to 

reform the U.S. immigration system. The bipartisan legislation passed by the Senate in 

2013 would have strengthened border security, reformed the system for legal 

immigration, and provided a pathway to citizenship for undocumented immigrants. CBO 

(20 13a) estimated that the Senate bill would add 5.4 percent to real GDP after two 

decades both by expanding the U.S. labor force and by attracting skilled immigrants and 

creating more certainty for the undocumented, boosting productivity and innovation. 

Additionally, this legislation would have reduced the deficit by $843 billion over the 

following twenty years- even without counting its full dynamic benefits for the 

economy (CBO 2013b). 

• Education from pre-school through college. Finally, additional investment in 

everything from pre-school-where the United States lags substantially-through college 

is a well-established way to increase skills, both boosting productivity growth and raising 

labor force participation by helping Americans connect with high-quality jobs. 

Point #5: Unsound Policies-Including Many Advanced by the Trump AdministrationCould Reduce the Growth Rate or Lead to Undesirable Tradeoffs 

A number of policies pursued by the Trump Administration, however, have the potential to 

reduce longer-run growth. In my testimony I will discuss on three specific fiscal policies: 

unpaid-for tax cuts, reductions to infrastructure and scientific research, and cuts to the social 

safety net. It is important to note that while I will not discuss policies advanced by the 

Administration that are outside the fiscal area, including restrictions to immigration and trade, 

these efforts could also have a deleterious impact on economic growth. 

• Unpaid-for tax cuts. Tax rate reductions can lead to increased work, savings and capital 

formation-increasing the level of output and, over a period of time, the growth rate. But 

increases in the deficit have the opposite effect. While they may help expand demand in 

the short run, over the medium and long run, increases in the deficit lower national 

savings, reducing capital formation and increasing foreign borrowing-both of which 

reduce national income and growth over time. The Tax Policy Center, in collaboration 

with the Penn-Wharton Budget Model, estimated that the tax cuts proposed by President 

Trump during the 2016 campaign would follow this pattern: they would increase output 

initially, but over time the costs of higher deficits would outweigh the benefits of tax 

cuts, leading to a reduction of 4 percent in output after twenty years, as shown in Figure 7 

(Nunns et at. 2016). The tax principles put forward by the Administration in April are 

similar but somewhat smaller than the campaign plan, so one should adjust this analysis 

accordingly. CBO, the Joint Committee on Taxation (JCT), and the Bush Administration 

Treasury Department have all reached a similar conclusion that deficit-financed tax cuts 

can hurt the economy in the medium and long run (De1mis et al. 2004; JCT 2005; OTA 

2006). 

8 
38 

Figure 7 

Change in Real GOP Under Trump Campaign Tax Plan 

Percent Change from Baseline 

2 2040 

0 

-2 

-4 

-6 

-8 ,__ __ _._ __ __, ___ _..._ __ _._ ___ .._. 

2015 2020 2025 2030 

Note: Based on medium el;sticlties scenario, 

Source: Nunns et aL (2016); author's cabiations. 

2035 2040 

• Reductions to infrastructure and science. The President's Budget also includes large, 

immediate reductions to scientific research and over time also reduces investments in 

surface transportation infrastructure. President Trump's Budget proposes substantial cuts 

to investments in science in FY 201, including a 22 percent cut for the National Institutes 

of Health (NIH) and an 11 percent cut for the National Science Foundation (NSF). The 

Budget proposes an initial boost to infrastructure, but, beginning in 2021, proposes to 

limit highway spending to current levels of receipts without any proposal to boost 

receipts or bring in additional funding. As the Analytical Perspectives of the Budget 

notes, "Relative to baseline levels, this presentation shows a reduction in total HTF 

[Highway Trust Fund] outlays by $95 billion over the 2021-2027 window" (OMB 20 17). 

The result of this combination of a $200 billion increase in infrastructure spending and 

eventual reductions to highway spending would be an initial modest boost to 

infrastructure followed by growing reductions, as shown in Figure 8. 

9 
39 

Figure 8 

President's FY 2018 Budget: Change in Infrastructure 

Spending Relative to Baseline by Fiscal Year 

Billions of Dollars 

50 r-------------~------------------~202~7 

40 

30 

20 

10 

0 ~------------------~~---------; 

-10 

-20 

-30 

.::- "'0 ""' (\,<:;, f'v" ~~.;)- (\,"> a\' (\,<;, tB' a: ~ ~ ~ ~ ~ ·~ ~ ~ ~ ~ ~ 

Source: OMB {2017). 

• Cuts to safety net programs that benefit children, like Medicaid, nutrition 

assistance, and tax credits for low-income households. The Budget also makes 

dramatic cuts to safety net programs, including (but not limited to) Medicaid, the 

Supplemental Nutrition Assistance Program (SNAP), the Children's Health Insurance 

Program (CHIP), Temporary Assistance for Needy Families (TANF), unemployment 

insurance (UI), and the EITC-a total of$2.5 trillion in cuts to programs for low- and 

moderate-income households. Economic researchers have not quantified the impact of 

these specific programs on aggregate macroeconomic performance, but there are three 

reasons to be concerned that these cuts could have a negative impact on the U.S. 

economy as a whole. First, there is substantial and credible microeconomic evidence that 

a wide range of programs that benefit children-such as Medicaid, SNAP, housing 

vouchers, and the EITC-have substantial long-run benefits for the children in 

households that receive them, including greater likelihood of graduating from college, 

higher lifetime incomes, and improved health; all of these outcomes would improve the 

performance of the U.S. economy in aggregate (Furman 2017a; Cohodes et al. 2016; 

Hoynes, Schanzenbach, and Almond 2015; Chetty, Hendren, and Katz 2016; Manoli and 

Turner 2014). Second, more speculatively, economists at the International Monetary 

Fund (IMF) and OECD have found evidence that suggests that programs that reduce 

aggregate inequality could boost aggregate growth (Ostry, Berg, and Tsangarides 2014; 

OECD 2015). Finally, many of the cuts proposed by the Trump Administration would 

shift costs to States-reducing growth to the degree that some States address declines in 

Federal contributions by redirecting funds from other, growth-enhancing areas of State 

expenditures like education and infrastructure. 

Finally, it is important to emphasize that in some cases policies that would have a small positive 

impact on growth that would not be sufficient to justifY the tradeoffs inherent in those policies. 

For example, suppose that raising taxes or cutting benefits by an average of$10,000 a year on 

the bottom 90 percent of households to pay for an average tax cut of$! 00,000 a year for the top 

I 0 percent of households was shown to increase the average armual growth rate by 0.2 

10 
40 

percentage point per year for the next decade. The typical household would see its income 

boosted by about $1,000 by the higher growth but would lose $10,000 in taxes or benefitsmaking them worse off on net. Moreover, to the degree that the $1,000 in additional income was 

generated by additional work by members of the household, they would also lose valuable 

leisure or family time-making the net reduction in household welfare even worse (Furman 

2016). 

This example sounds hypothetical, but a number of proposed policy changes have this character. 

For example, CBO (20 15) estimated that full repeal of the ACA without replacement would 

increase the average annual growth rate by less than 0.1 percentage point over the next decade. 

This estimate may miss some of the positive effects of the ACA on growth, like the positive 

effects of access to health insurance on workers' health and the increased flexibility that the 

ACA exchanges provide to workers who want to switch jobs. But assuming CBO's estimate is 

correct, this would boost the income of a household at the 20'h percentile of the distribution by 

about $200 after a decade--a tiny fraction of the thousands and in some cases tens of thousands 

of dollars the household could lose in tax credits and/or Medicaid benefits. 

Similarly, regulatory refom1-which I do not discuss in my testimony because it is outside the 

scope ofthc budgetary policy I have focused on-can in some cases be a sensible way to 

improve the efficiency of meeting existing goals. In other cases, however, regulatory reform 

may reduce costs for businesses and produce a small additional increment of growth at the 

expense of much more valuable goals like worker safety or environmental protection and 

conservation. 

Conclusion 

Much of the underlying cause of slower growth rates in the last decade-namely, demographywill not change. Policymakers need to realistically assess the prospects for future growth and 

make policy decisions based on conservative, plausible expectations for the coming years. At the 

same time, policymakers should actively push for the types of policies that increase economic 

growth while avoiding policies that either would reduce growth or would generate very small 

amounts of growth at the expense of broader goals. 

Thank you, and I would be happy to take your questions. 

II 
41 

References 

Chetty, Raj, Nathaniel Hendren, and Lawrence F. Katz. 2016. "The Effects of Exposure to Better 

Neighborhoods on Children: New Evidence from the Moving to Opportunity Experiment." 

American Economic Review !06 (4): 855-902 

Cohodcs, Sarah R., DanielS. Grossman, Samuel A. Kleiner and Michael F. Lovenhcim. 2016. 

"The Effect of Child Health Insurance Access on Schooling: Evidence from Public Insurance 

Expansions." Journal of Human Resources 51 (3): 727-759. 

___ . 20 13b. "S ... J.'!:4_,_l3grdrr~J;1!Ii!Y~~JJJ2!lQ!llis: Opp.Qrtunit)!J!lliU.DJn!im:;tlion 

MQd_erni£atiQ!l_Act." 

. 2015. 

___ . 2017. "The Budget and Economic Out!Q.QK; .. .f.Q12JQ.2J)_:Q ." 

Dennis, Robert, Douglas Hamilton, Robert Arnold, Ufuk Demiroglu, Tracy Foertsch, Mark 

Lasky, Shinichi Nishiyama, Larry Ozanne, John Peterson, Frank Russek, John Sturrock, and 

David Weiner. 2004. "Macrocconomi(,LAnalvsis of a 10 I:_ercent Cut in Income TaxJsl!J9~." 

Congressional Budget Office Technical Paper. 

Furman, Ja~on. 2016. "Speech at 

the National Bureau of Economic Research Tax Policy and Economy Conference. Washington, 

DC. September 22. 

___ . 2017a. "Red;g;Jil!tli'q'{.ltf!Y: Tl!!iLii'nlgres;; We Have Made and the Path FQtJ::Vard." 

Speech at Center on Budget and Policy Priorities. Washington, DC. January 17. 

___ . 2017b. ".What T?JLMiJliQn .. S.im\!latiQ!lsJ:I;(l.LUs about President Trump's Chances of 

Achieving 3-Perccnt Economic_QIQ.J::Vth." Peterson Institute for International Economics Blog. 

May 23. 

Hoynes, Hilary, Diane Whitmore Schanzenbaeh, and Douglas Almond. 2016. "Long-Run 

Impacts of Childhood Access to the Safety Net." American Economic Review 106 (4): 903-34. 

Joint Committee on Taxation, U.S. Congress (JCT). 2005. 

Proposals to Provide S50QJ3illion inJ'f!!S Rs:licf." 

12 
42 

Nunns, James R., Leonard E. Burman, Jeffrey Rohaly, and Joseph Rosenberg. 2016. "An 

'·'-~'~·'-''=~'-'·""·""·'-'-"·'-'L.,.L,"'-ll'3·-"''"-"'""'···'-''" .,,.t.""'" Washington: Urban-Brookings Tax Policy 

Center. 

___ . 2017. /lll_s/g§_t_s>f.the U!ic.f.:c.m:!11J.1i!fl[,_fisral Year21WLdb1t;.>!:tl.!1lJJ4.HiianiJE 

American Greatness. Washington. 

Organisation for Economic Co-operation and Development (OECD). 2015. In It Together: Why 

Less Inequality Benefits All. Paris: OECD Publishing. 

Ostry, Jonathan D., Andrew G. Berg, and Charalambos G. Tsangarides. 2014. "Redistribution, 

Lll£9.1J'!lity,(l.Qd Gro~:_th." IMF Staff Discussion Note 14/02. 

Yellen, Janet L. 2017. 

Economy." Speech at Brown University. Providence, Rhode Island. May 5. 

13 
43 

Chairman BLACK. Dr. Diamond, you are recognized for 5 minutes. 

STATEMENT OF JOHN W. DIAMOND, Ph.D. 

Mr. DIAMOND. Chairman Black, Ranking Member Yarmuth, and 

members of the Committee, it is an honor to present my views on 

the benefits of economic growth. Growth is important in determining the future size of the economy and the standard of living. 

Small changes in growth can have a significant impact on the size 

of the economy. 

For example, increasing the growth rate from 2 to 2.5 percent 

would increase the size of the economy by 28 percent after only 10 

years. Accordingly, policies that increase the growth rate of the 

economy by a small amount can have significant impacts in the 

long run. Enacting pro-growth policies is particularly important at 

this point in time for two reasons. 

First, the U.S. faces a fiscal policy that is on an unsustainable 

path, with deficits and debts projected to continue to grow dramatically as the baby boom generation ages and transitions from work 

to retirement. Thus, this is going to decrease the ratio of workers 

to retirees, while increasing public expenditures on retirement and 

healthcare programs. Second, there is substantial uncertainty regarding the future growth-rate of the American economy. 

One view is that continued innovation will spur productivity 

growth in the coming decades as new technologies lead to significant increases in output per person. However, another view is that 

the recent advances in technology have not led to significant and 

lasting increases in productivity, and that, in addition, the U.S. 

economy is facing a number of impediments that may reduce the 

real growth rate of real GDP per person. 

Such as large Federal budget deficits and budget deficits on the 

state and local level, demographic changes such as an aging population, the growth and accumulation of regulatory policy, and slower gains in educational achievement. In addition, rising inequality, 

changes in family structure and other social indicators, as well as 

the effects of globalization including increased competition from 

abroad may also dampen future growth rates. 

The most apparent impediment is the current path of U.S. fiscal 

policy, which is unsustainable. CBO projects that total spending 

will increase as a shared GDP from 20.7 percent in 2017 to 29.3 

percent in 2047. Total revenue is already projected to increase from 

17.8 to 19.6 percent of GDP over that period. Deficits are projected 

to increase from 77 percent to 150 percent. As noted, demographic 

changes are driving much of that increase, with the remaining increase related to rising interest payments on the national debt. 

The obvious conclusion is that projected expenditure increases in 

the United States are unsustainable, and fiscal restraint is imperative. The United States must reduce its projected level of expenditures and reform its tax system to reduce economic distortions and 

maximize economic growth. 

Tax reform should include a focus on limiting government expenditures that occur through the tax system; otherwise, the combination of a rising debt and a relatively distortionary tax system 

will significantly hamper economic growth. Demographic changes 
44 

will also reduce economic growth in the future because the retirement of the baby boom generation will further reduce the labor 

force participation rate. 

Another important impediment is the accumulation of government regulations. Excessive regulation of the U.S. economy is likely 

slowing growth and limiting risk-taking behavior. Mulligan, in 

2015, argues that the Affordable Care Act will reduce employment 

and hours worked by 3 percent, and labor income and GDP by 2 

percent. 

Dawson and Seater, 2013, find that regulation added since 1949 

is responsible for decreasing the size of the U.S. economy by 28 

percent as of 2005. They argue that their results explain much of 

the decline in productivity since the 1970s. 

Obviously, major reform of regulatory law is long overdue. The 

slowing growth in educational attainment is also likely to impede 

economic growth in the future relative to the past 50 years, and we 

should be active on that front as well. Policymakers should focus 

on reducing the government debt through spending restraint, reforming and reducing entitlement programs, reprioritizing other 

expenditure items to fit within a sustainable budget, and minimizing marginal tax rates while reforming expenditures that occur 

through the tax system. Thank you. 

[The prepared statement of John W. Diamond follows:] 
45 

THE ECONOMIC AND FISCAL BENEFITS OF PRO-GROWTH POLICIES 

Testimony before the House Budget Committee, United States House of Representatives 

June 7, 2016 

John W. Diamond, Ph.D. 

Edward A. and Hermena Hancock Kelly Fellow in Public Finance 

Rice University's Baker Institute for Public Policy• 

*The opinions expressed herein are solely my own and do not represent the views of the Baker Institute, 

Rice University, or any other organization. 
46 

Chairwoman Black, Ranking Member Yarmuth, and Members of the Committee, 

it is an honor to present my views on the economic and fiscal benefits of pro-growth 

policies. 

Growth is important in determining the future size of the economy and the 

standard of living. Small changes in growth can have a significant impact on the size of 

the economy. For example, an increase in the growth rate from 2.0 percent to 2.5 percent 

would increase the size of the economy by 28 percent in 10 years, and reduce the time 

required to double the size of the economy by seven years, from 35 to 28 years. 

Accordingly, policies that increase the growth rate of the economy by a small amount can 

have significant impacts in the long term. 

Enacting pro-growth policies is particularly important at this time for two reasons. 

First, U.S. fiscal policy is on an unsustainable path, with deficits and debts projected to 

continue to grow dramatically as the baby boom generation ages and transitions from 

work to retirement, thus decreasing the ratio of the number of workers to retirees while 

increasing public expenditures on retirement and healthcare programs. The Congressional 

Budget Office (hereafter CBO, 2017) reports that retirement and healthcare expenditures 

are expected to increase faster than GDP because the population is aging (which accounts 

for 3.5 percent of the increase in expenditures) and the average price of health care 

services is increasing faster than GDP (which accounts for 2.9 percent of the increase in 

expenditures). Second, there is substantial uncertainty regarding the future growth rate of 

the American economy. One view is that continued innovation will spur productivity 

growth in the coming decades as new technologies lead to significant increases in output 

per person. However, another view is that the recent advances in technology have not led 

to significant and lasting increases in productivity, and that in addition the U.S. economy 

is facing a number of impediments that may reduce the growth rate of real GDP per 

person below the levels of 2.4 percent per year that characterized the period 1920-1970 

or even the growth rate of 1.8 percent per year from 1970-2014 (Gordon, 2016). Gordon 

projects that from 2015-2040 the growth in real GDP per person could be as low as 0.8 

percent per year. The major impediments to future growth rates include large and 

growing debts at the federal, state and local levels, demographic changes such as the 

population aging noted previously, the growth and accumulation of regulatory policy, and 

slower gains in educational achievement. In addition, rising inequality, changes in family 

structure and other social indicators, as well as the effects of globalization, including 

increased competition from abroad, may also dampen future growth rates. 

The current path of U.S. fiscal policy is unsustainable. CBO (2017) projects that 

total spending will increase as a share of GDP from 20.7 percent in 2017 to 29.3 percent 

in 2047, and total revenue is projected to increase as a share of GDP from 17.8 percent in 

2017 to 19.6 percent in 2047. The federal debt is projected to increase as a share ofGDP 

from 77 percent in 2017 to 150 percent in 2047. As noted above, demographic changes 

are driving much of the increase in federal spending with the remaining increase related 

to rising interest payments on the national debt. 
47 

Table 1 

The Federal Budget Under the Extended Baseline 

Percentage of Gross Domestic Product 

Net Interest 

Other Non interest Spending 

Major Health Care Programs 

Social Security 

Total Spending 

Revenues 

Deficit 

Other Revenues 

Corporate Income Taxes 

Payroll Taxes 

Individual Income Taxes 

Total Revenue 

Source: Congressional Budget Office, The 2017 Long-Term Budget 

Outlook. 

1.4 

8.9 

5.5 

4.9 

20.7 

2.9 

1.5 

1.7 

6.0 

8.6 

17.8 

6.2 

7.6 

9.2 

6.3 

29.3 

9.8 

1.5 

1.6 

5.9 

10.6 

19.6 

The obvious conclusion is that the projected expenditure increases in the United 

States are unsustainable and fiscal restraint is imperative. The United States must reduce 

the projected level of expenditures and reform its tax system to reduce economic 

distortions and maximize economic growth. Tax reform should include a focus on 

limiting government expenditures that occur through the tax system. Otherwise, the 

combination of rising a debt level and a relatively distortionary tax system will 

significantly hamper economic growth more so than has already occurred. 

These developments have not gone unnoticed, as numerous proposals for fiscal 

and tax reform have emerged, with tax reforms ranging from base broadening, rate 

reducing reforms to consumption-based tax reforms. An outline of the first approach was 

put forward by the co-chairs of President Obama's 2010 fiscal commission, Erskine 

Bowles and Alan Simpson. They issued a report, A Path Forward to Securing America's 

Future, which included $2.5 trillion in deficit reduction, including a reform of both the 

corporate and individual income tax systems. 

There is in particular a strong case for business tax reform. The last major reform 

was the Tax Reform Act of 1986. Since that time, however, many countries have 

reformed their tax structures, lowering statutory rates while removing tax preferences. As 

a result, the United States now has the highest statutory corporate tax rate in the 

industrialized world. 

Proponents of corporate tax reform argue that high tax rates discourage 

investment and capital accumulation and thus reduce productivity and economic growth. 

In addition, the combination of a high statutory tax rate coupled with a wide variety of 
48 

tax preferences distorts the allocation of investment across asset types and industries and 

reduces the productivity of the nation's assets, while exacerbating the many inefficiencies 

of the corporate income tax, including distortions of business decisions regarding the 

method of finance and organizational form (corporate vs. non-corporate), and the mix of 

retentions, dividends paid, and share repurchases. 

There is also widespread discontent with the individual income tax system. High 

individual tax rates coupled with a multitude of tax preferences distort decisions 

regarding labor supply, saving, and consumption; they also significantly complicate tax 

administration and compliance while encouraging tax avoidance and evasion. Moreover, 

many tax preferences are poorly designed. For example, the home mortgage interest 

deduction's primary purpose is to encourage home ownership. It is poorly designed to 

achieve this goal, as it offers little or nothing to low- and middle-income individuals who 

do not itemize, have total deductions that are less than or roughly equal to the standard 

deduction, or are subject to relatively low marginal tax rates. Instead, the vast majority of 

the benefits of the home mortgage interest deduction accrue to high-income taxpayers, 

encouraging overconsumption of housing at the expense of investment in the rest of the 

economy. 

Studies by the Organisation for Economic Co-operation and Development (2008), 

Viard and Diamond (2008), and the Joint Committee on Taxation (2005) show that the 

corporate tax is the most harmful tax instrument to economic growth, followed by 

individual income taxes. While tax reductions in the fom1 of increased personal 

exemptions, deductions, and credits are likely to reduce long-run growth. Thus, 

policymakers should adopt a tax system characterized by low capital and labor income 

tax rates, and minimal tax expenditures. 

ln fact, serious consideration should be given to a more fundamental reform of the 

tax structure- adopting a consumption- rather than income-based tax. However, if 

consumption-based tax reform is not feasible, current personal income tax provisions that 

encourage saving should be maintained but simplified, and serious consideration should 

be given to reducing the burden of the corporate income tax on investment income. 

Demographic changes are also a major impediment to economic growth in the 

future because the retirement of the baby boom generation will further reduce the labor 

force participation rate. Aaronson et al. (20 14) find that about half of the change in the 

labor force participation rate since 2007 is related to an aging population. This effect will 

continue to dampen the economic growth rate over the next two decades. 

Another important impediment to growth is the accumulation of government 

regulations. Excessive regulation of the U.S. economy is likely slowing growth and 

limiting risk taking. The regulatory burden affects a wide range of markets, including the 

market for prescription drugs, the labor market through licensing requirements and the 

implicit taxes in the Affordable Care Act, the energy market, the financial services sector, 

and many others. For example, Mulligan (2015) argues that the Affordable Care Act will 

reduce employment and hours worked by 3 percent and labor income and GDP by 2 
49 

percent. Dawson and Seater (2013) find that regulation added since 1949 is responsible 

for decreasing the size of the U.S. economy by 28 percent as of 2005. They argue that 

their results explain much of the decline in productivity growth in the 1970s. Haidar 

(20 12) finds that "each business regulatory reform is associated with a 0.15 percent 

increase in growth rate ofGDP." Coffey, McLaughlin, Peretton (2016) find that since 

1980 the cumulative effect ofregu1ations reduced economic growth by 0.8 percent. While 

the exact cost of regulation in terms of reduced growth is uncertain, the growing number 

of regulations is almost certainly a hindrance to economic growth and a major reform of 

regulatory law is overdue. 

The slowing growth in educational attainment is also likely to impede economic 

growth in the future relative to the past 50 years. Achieving the educational gains from 

that period will be nearly impossible. In addition, other factors such as rising inequality 

and break downs in family structure and social capital are likely to impede the growth of 

educational attainment. Reforming and re-organizing the education system is necessary to 

maximize future growth rates. Finally, increased competition from a continuing trend 

toward globalization (and to some extent immigration) will likely continue be a drag on 

the income growth of the lower- and middle-income cohorts in the United States. While 

both globalization and immigration can have positive growth impacts there are also 

winners and losers from the disruptions they cause to the U.S. economy. 

Policymakers should focus on reducing the government debt through spending 

restraint, reforming and reducing entitlement programs, reprioritizing other expenditure 

items to fit in a sustainable budget, and minimizing marginal tax rates while reforming 

expenditures that occur through the tax system. 
50 

REFERENCES 

Aaronson, Stephanie, Tomaz Cajner, Bruce Fallick, Felix Galbis-Reig, Christopher 

Smith, and William Wascher, 2013. "Labor Force Participation: Recent Developments 

and Future Prospects," Federal Reserve Bank of Cleveland, Working Paper no. 14-10. 

Bowles, Erskine and Alan Simpson, 2013. "A Bipartisan Path Forward to Securing 

America's Future," 

http://www.momentoftrnthprojectorg/sites/default/files/Full%20Plan%20of"/o20Securing 

%20America's%20Future.pdf 

Coffey, Bentley, Patrick McLaughlin, and Pietro Peretton, 2016. "The Cumulative Cost 

of Regulations," Mercatus Center Working Paper, ApriL 

Congressional Budget Office, 2017. The Long-Term Budget Outlook. Congressional 

Budget Office, Washington, DC. 

Dawson, John, and John Seater, 2013. "Federal regulation and aggregate economic 

growth," Journal of Economic Growth, 18(2), 137-177. 

Diamond, John W., and Alan D. Viard, 2008. "Welfare and Macroeconomic Effects of 

Deficit-Financed Tax Cuts: Lessons from CGE Models." In Viard, Alan D. (ed.), Tax 

Policy Lessons from the 2000s, 145-193. The AEI Press, Washington, DC. 

Gordon, Robert J., 2015. The Rise and Fall of American Economic Growth: The US. 

Standard of Living since the Civil War. Princeton University Press. 

Haidar, Jamal Ibrahim, 2012. "The Impact of Business Regulatory Reforms on Economic 

Growth," Journal of Japanese International Economies, 26, 285-307. 

Joint Committee on Taxation, 2005. "Macroeconomic Analysis of Various Proposals to 

Provide $500 Billion in Tax Relief," JCX-4-05, March 1. 

Organisation for Economic Co-operation and Development, 2008. "Taxes and Economic 

Growth," Economics Department Working Paper No. 620. http://www.oecd.org/tax/taxpolicy/41 000592.pdf 
51 

Chairman BLACK. I thank the witnesses for their testimony. I 

want to begin with you, Mr. Holtz-Eakin, since you were once a director of CBO. CBO is expecting an annual economic growth average of about 1.9 percent over the next ten years, and, as you well 

know, CBO is obligated to base its forecast on current law and not 

on future economic policies that this administration or Congress 

will likely enact this year. 

So, what aspects of the current law economic policy, whether it 

is the tax policy, which you mentioned in your opening remarks, or 

regulations or rising debts and deficits do you think are contributing to such a dismal economic forecast? 

Mr. HOLTZ-EAKIN. I think there is the net effect of a combination 

of things, and you have listed some of the most important. As I 

said, I think the number one concern in the projections is the fiscal 

outlook, which is genuinely unsustainable, which will lead inevitably to either a crisis which is not pro-growth, or a sharp increase 

in taxes which is not pro-growth, or the one possibility that is beneficial, reforms of the large entitlement programs that put us on a 

sustainable track. But only one of those three possibilities is beneficial, and CBO is obligated to simply say, ‘‘Well, we will sail 

straight into the crisis.’’ So, that would be at the top of my list. 

Second would be the tax policies. We have, especially as Dr. 

Furman mentioned, a corporation income tax which has sort of 

reached the ultimate trifecta of bad outcomes. It does not raise that 

much revenue; it increasingly drives production and headquarters 

overseas; and it is incredibly costly and difficult to comply and administer. A genuinely solid business tax reform is at the top of the 

list of things that would improve the capacity of the economy to 

grow more rapidly. 

CBO is also saddled with the current regulatory state, and over 

the past 8 years the agencies have reported that they have put in 

place new major regulations with a cumulative increase in the compliance costs of over $800 billion. And I think if we had had $100 

billion tax increase every year for 8 years, most people would 

think, ‘‘Jeez, that is a lot, and that is maybe not such a good idea.’’ 

So, I think those three things together lead to a lot of the problems 

in the growth outlook. 

Chairman BLACK. Is it fair to say that not one of those is a silver 

bullet, but it is the combination thereof that would really result in 

our strong economic growth? 

Mr. HOLTZ-EAKIN. I concur with that completely. As I said, the 

key here is faster growth than number of workers and productivity 

per worker. There is no single lever you can pull to make productivity growth come back and go faster, so I would encourage the 

Congress to think of everything they can to try to get better progrowth policies. 

Chairman BLACK. Dr. Diamond, I want to ask you about there 

seems to be a discrepancy between the current low unemployment 

rate of 4.3 percent and a quite lackluster economic output, and you 

mentioned some of those factors in your opening comments. Is one 

of the factors causing the fact that we have 14 million people that 

have left the workforce since 2009? Is that impacting it? And if we 

could enact policies that would encourage some of these people to 

get back into the workforce, thereby increasing that labor supply, 
52 

would that help to boost the growth potential as well, just getting 

these people back into the marketplace of productivity? 

Mr. DIAMOND. Absolutely. I think that, if you look at what has 

happened with labor force participation rate, the articles I read 

tend to imply that about half of the reduction has been because of 

aging of the population. The other half is because people are leaving the workforce voluntarily, and this is largely because we have 

implemented policies that are, in effect, implicit taxes on work. 

And so the Affordable Care Act is basically a very large implicit tax 

on working, and so people are choosing to not work as much. And 

if we could, instead, implement policies that promote work instead 

of discourage it, I think that would offset at least a large part of 

the labor force participation reduction that is not due to the aging 

of the population. 

Chairman BLACK. You mentioned ObamaCare, in particular, and 

the ruling on the 30 hours and employers. I know I have heard 

throughout my district about those that were working part-time 

that maybe occasionally would go over the 30 hours. Now, they 

were getting less than that, which meant they had to have two 

jobs, which is really difficult, especially on families. 

So, that is one of the policies. Do you have other thoughts on 

other policies that we might be able to put into place to encourage 

these 14 million people to get back in the workforce? Because I 

know, when we hear that there is a 4.3 percent unemployment 

rate, people think, ‘‘Oh, everybody is working.’’ 

And if we did have a time where we did have everybody working, 

we saw more productivity, we actually saw more economic growth. 

But the true number on that is not the unemployment rate, it is 

the workforce participation rate where we have 14 million people 

out of the workforce, literally almost one-third of those who should 

be working. Fixing the healthcare piece is one of those, but do you 

have other ideas of some of the policies that we might need to fix 

in order to bring people back into the workforce? 

Mr. DIAMOND. Yes. Two other policies that would be, I think, 

most important would be regulatory reform. It is amazing that, you 

know, one of the benefits of innovation is it is a lot easier to reach 

people and to start businesses. The problem is, from a regulatory 

perspective, it has become a lot harder to start businesses. 

And so, we need regulatory reform to allow people to create businesses and create products that consumers want. I think that 

would be helpful. We also need tax reform. The tax system is complex and very distortionary. I think if we could simplify the system 

while maintaining the revenue needed to fund expenditures, that 

would have a positive benefit on people getting back to work. 

Chairman BLACK. Okay, thank you. My final question is, we can 

just go right across, and if we can start with you Dr. Holtz-Eakin, 

that we have now got this new normal of a 2 percent GDP. We 

think that is the new normal. Yet if we look at history, we see that 

3 percent really has been the average over a long period of time 

up until the last several years. And so, in other words, that is really an aberration, it is not really a trend. 

With the correct pro-growth policies in place, do you think that 

we can achieve those higher growth rates in future years other 

than just saying we are going to just say 2 percent is the normal 
53 

and that is what we can expect? How much higher also do you 

think that we could reasonably go if we were to put these reforms 

that have already been talked about in place? So, I do not leave 

you all very much time, but let’s start with Dr. Holtz-Eakin. 

Mr. HOLTZ-EAKIN. So, if the Congress and the administration 

were to hit a home run and do all the things that I wanted exactly 

the way I wanted it, I think you could add a percentage point to 

the growth rate of the U.S. economy. I, certainly, think that a good 

tax reform and putting the fiscal path on a sustainable basis will 

get you half a percentage point or more by itself. So, I think those 

are the things to focus on. 

Chairman BLACK. Dr. Furman, if you could be brief, so we could 

get to Dr. Diamond, that would be great. 

Mr. FURMAN. Sure. I think we could certainly with the right policies do better than the 1.8 percent that the Congressional Budget 

Office is forecasting. To get all the way up to 3 percent, the obstacle to that is the average woman used to have more than threeand-a-half children in the 1960s. That fell to two children by 1975, 

and so our population is growing more slowly in the working ages 

than it used to, and no policy is going to change that, which is why 

I think getting all the way to 3 percent is something that would 

be very unlikely, even with my version of a home run of policies. 

Chairman BLACK. Dr. Diamond? 

Mr. DIAMOND. I think a percentage point, as Dr. Holtz-Eakin predicts, is possible. I agree with Dr. Furman’s point as well, though. 

I think what that would require is immigration reform that really 

focuses on bringing more high-skilled people to the U.S., not lowskilled people. Without that, I would say maybe around 2.6 percent. 

Chairman BLACK. Okay. Well, I appreciate your input on that. 

My own feeling that I am just going to insert here is that we need 

to get the 14 million people that are sitting wherever, whether it 

is in their parents’ homes or whether they are just out of the workplace because they cannot find a job, I think education is a piece 

of that, and getting skilled workers because one of the things I 

hear in my district, especially with my manufacturers, is that if we 

had more skills at that level, not necessarily 4-year degrees, but 

more of the technical degrees, that we could actually be putting 

people into those very good jobs that are well-paying jobs. 

And so, I think the educational piece and then maybe shifting 

our focus from 4-year degrees to something that is more what the 

marketplace is needing in the job market might help us also to 

bring people back into the workforce. So, thank you. I now yield 5 

minutes to the Ranking Member. 

Mr. YARMUTH. Thank you, Chairman Black. 

Chairman BLACK. Excuse me, 10 minutes. I apologize, I cut you 

by 5. 

Mr. YARMUTH. Thank you very much. I was not going to stop, do 

not worry. 

Chairman BLACK. And you should not. So, now your time starts. 

Mr. YARMUTH. Thanks very much. Thank you all for your testimony and your responses. First of all, I would like to just make a 

couple of comments regarding Chairman Black’s opening, because 

I know it is nice to forget about the condition that the economy was 
54 

in when President Obama took office, and the Chairman wants to 

blame all of this, what she would call lower growth rate, on President Obama’s policies. 

But as you recall, when he took office in January of 2009, we 

were running a $1.4 trillion annual deficit. We had lost the month 

he took office 800,000 jobs, that was the trend at that point. We 

had the worst economic downturn since the 1930s, and we had a 

significant financial crisis that threatened to tank the economy. 

And as we got our feet on the ground as coming out of that very, 

very precarious situation, we have had now 70-something consecutive months of job growth. And while the percentage of growth 

would not be what we all would want, certainly, I think that any 

objective look at the Obama administration’s economic performance 

would be a positive one. But I want to return to this notion about 

historic rates of growth. 

And we had Director Mulvaney here a couple of weeks ago, and 

a lot of my Republican colleagues talked about the growth after 

World War II and the growth rate leading up to current times and 

the average of the growth over basically 60 or 70 years. And I 

think you can infer from all of your testimony that the world is 

very different now than it was following World War II: demographics, certainly, the number one difference. We did not talk 

about life expectancy. It is not just that many people are retiring; 

it is that they are living a lot longer and, therefore, Social Security 

is paid out a lot longer, and medical care as well. 

Income disparity was mentioned; technology was mentioned and 

its effect on automation. Would all of you concede that talking 

about the growth rate in the 1950s and 1960s and 1970s and 1980s 

is pretty much irrelevant to dealing with the world we are in now? 

What possible relevance could post-World War II growth rates have 

to what we are facing now? Anybody want to make the case that 

it is relevant? Okay, nobody does. Well, no. We had that number 

of times brought up again with Director Mulvaney. 

So, another factor I would think is that the sheer size of the 

United States economy also makes historic growth rates more difficult. Is it not fundamentally true, and we are seeing it in China 

as well, that as economies age and grow that getting a growth rate 

as high as you have had in the past is just mathematically more 

difficult? Is that not a factor as well? Anybody can take it. 

Mr. FURMAN. There is some evidence that, certainly, as countries 

converge, like China, they do not have as much low-hanging fruit, 

and there is a number of economists who have done research that 

you have to put more money into any amount of innovation and research to get a given amount of output from that. 

Mr. YARMUTH. All right. And let’s talk about the labor participation rate; I saw just this morning there are now 6 million jobs 

available in the United States. So, certainly there is the opportunity for people to go to work, those who may have left the workforce, there is certainly every chance for them to do it if they have 

the right skills and the right education. But would that not dictate 

that we invest more heavily in job training and education so that 

people who may be out of work, whether voluntarily or not, can 

better access the jobs that are available in the country? 
55 

Mr. FURMAN. I agree with that, too. Also, if you look at the 

United States compared to other countries, some of our underperformance in this reflects the fact that we invest much less in 

training and helping our workers find jobs than a lot of other countries do. 

Mr. YARMUTH. I think tax reform has been mentioned as a possible way to stimulate economic growth both by Dr. Holtz-Eakin 

and certainly by Dr. Diamond. Would you, too, give me your sense 

of what comprehensive tax reform would look like in your ideal 

version of the best way to promote economic growth through tax reform? Dr. Holtz-Eakin? 

Mr. HOLTZ-EAKIN. I would point out as a specific example the 

House blueprint, which if executed is a comprehensive corporation 

plus past business reform of business taxation in the United States 

that moves us from a tax system that prefers foreign production to 

a tax system that is neutral, and that is a shift toward production 

in the United States. 

It has incentives for increasing the level of investment. It is neutral in its treatment of tangible versus intangible capital, so you 

can invest in ideas or physical capital. It is neutral with respect to 

how it is financed, debt versus equity. It is neutral with respect of 

the length of life of that investment. It takes the Tax Code out of 

the business of dictating investment choices, and lets capital markets find the most productive uses for America’s saving and investment. 

I think that is exactly what is needed at this point in time. Those 

businesses that will hire workers, that will, if they are more productive, be able to pay them more. It is focused entirely on the 

place where we have the biggest problem, the rate of growth of capital, productivity, and as a result, the standard of living. We do not 

have legislation, but my understanding is it is intended to be revenue-neutral. I think that is very important. We have large fiscal 

problems, as I have said, and will repeatedly say. And I think that 

you do not want to contribute to making them worse. 

I also think that if you have a tax reform that is not revenueneutral, you ultimately come to a situation where you have generated a fiscal problem through the tax reform. There is going to 

be a desire for more revenue, you will open up the Tax Code, and 

the integrity of the reform will disappear. That is what happened 

after 1986. 

And so, I do not want to see, when it is so hard to get tax reform 

done to begin with, sowing the seeds of its own destruction by not 

having it be revenue-neutral. Those are the things I am looking for 

in tax reform. 

Mr. YARMUTH. All right, I appreciate that. Dr. Diamond, would 

you like to respond to that? 

Mr. DIAMOND. I agree with Doug, that the blueprint has some 

very good qualities to it. I would also offer up proposals under 

President Bush’s advisory panel on tax reform, as well as the proposal put forth by the fiscal commission created under President 

Obama. I think, really, we have had a lot of good examples of decent tax policy put forward over the last two decades. Unfortunately, none of them have been enacted. 
56 

Mr. YARMUTH. Would you say that a consideration of economic 

disparity is important in any discussion of tax reform, since we 

now have some of the greatest economic disparity in this country, 

in our history? 

Mr. DIAMOND. I think any tax reform should be looked at in 

terms of its efficiency, its simplicity, how administrable it is, as 

well as how fair it is. And the fairness question is, ultimately, a 

decision that is left in your hands. 

Mr. YARMUTH. Right. What about the question of tax expenditures? We now have well over a trillion dollars annually in tax expenditures, and no Congress over the last 6 or 7 years has been 

willing to touch any of them. We have certainly talked about cuts 

in many other areas of investment that Democrats care very significantly about, but no talk about reducing tax expenditures. 

Dr. Furman, would you like to respond to that? 

Mr. FURMAN. Sure. In his testimony, I believe to this Committee, 

Director Mulvaney endorsed the standard that tax reform should 

be revenue-neutral on a static basis. He said the administration 

and its budget was not counting the economic growth due to taxes, 

towards tax reform. 

I think that could be a very prudent thing to do, because then 

you are cutting rates, you are eliminating tax expenditures. And if 

the theory works out that that adds to economic growth, that is 

great; we get extra deficit reduction; that is not a bad mistake to 

make. That the growth comes in more than you think, and the deficit goes down even more than you would think. But for that to 

work, you need to go after those tax expenditures rather than, you 

know, wishful thinking, assume that economic growth. And that is 

the standard that Director Mulvaney did explicitly endorse. 

Mr. YARMUTH. I think all three of you have talked about immigration reform and supported the need for immigration reform. 

This is directed to Dr. Furman. Would not comprehensive immigration reform also have a positive impact on our programs like Social 

Security and Medicare, where you would have presumably many 

more younger Americans paying into the system and not using benefits for a long time? 

Mr. FURMAN. That is exactly right. And part of our Social Security problem is the reduction in fertility. Immigration would help 

to offset that. 

Mr. YARMUTH. Thank you. Just a final comment, this relates to 

Chairman Black’s opening comments when she said we should not 

be surprised if the Congress cannot take on these tasks. The evidence is there that Congress is not particularly capable right now 

of taking on very many difficult tasks, so I would like to think that 

we were capable of it, but I have not seen much evidence. So, 

thank you again for your responses, and I yield back. 

Chairman BLACK. I thank the gentleman. And now I would like 

to recognize the gentleman from Indiana, Mr. Rokita, the Vice 

Chair of the Committee. 

Mr. ROKITA. I thank the Chairman, and I thank everyone for 

their testimony. And I would say to the Ranking Member, if we 

could just stop obstructing around here, maybe we can get some 

agenda moving and done, but every day we talk about Russia, Russia, Russia. It is less of a day that we are talking about tax reform, 
57 

immigration reform, for that matter, healthcare reform, or anything else. 

Following up on where the Ranking Member left off regarding 

immigration reform, I note, Dr. Holtz-Eakin, that you talk about 

immigration reform in your laundry list, as you call it, of things 

you could do to help the supply side of the economy. Could you add 

to that discussion, please? 

Mr. HOLTZ-EAKIN. Certainly. The fertility of the native-born population of the United States is low enough that, without immigration, we would actually shrink; we would look like Japan. And we 

would shrink in population—— 

Mr. ROKITA. I want that to be repeated for the record. Without 

immigration reform, without getting an additional number of workers, skilled, unskilled, probably imagining that to mean at all levels, our work pool would actually shrink; we would be more like 

who? 

Mr. HOLTZ-EAKIN. Japan. Japan has essentially no immigration 

and has an aging population. It has sub-replacement fertility. All 

of that is the characteristics of the native-born population in the 

U.S. The flip side to that observation is that by choosing our immigration policies, we are dictating our economic future. It is a powerful tool for economic policy, for the potentials for economic growth. 

I do not think it means that you want to have exclusively, you 

know, immigrants with Ph.Ds. in STEM fields. We need skills 

across the spectrum. Markets will send those signals. And I think 

that a powerful sort of economically-based immigration reform is 

one of the things that could have a big impact on the future growth 

of the U.S. 

Mr. ROKITA. Thank you, doctor. Dr. Furman talks about, in his 

testimony, the low labor participation rate, which I think is something we all acknowledge. However, he also mentions that we need 

to not only maintain but possibly increase social programs like food 

stamps and other things. 

I just spoke with, not 10 minutes ago, a gentleman who owns an 

RV supply company in northern Indiana, Jason Obendorf. And he 

tells me that he hires low-skilled workers, pays them about $13 to 

$15 an hour, which in fact is the average entitlement given to folks 

who do not work, about $33,000 a year. What effect do these programs that actually incentivize folks, in my opinion, to sit out the 

workforce, sit on their couch, in fact, have on the low labor participation rate? 

Mr. HOLTZ-EAKIN. At the most basic—sorry. 

Mr. ROKITA. No, that is to Dr. Holtz-Eakin. 

Mr. HOLTZ-EAKIN. At the most basic level, you are making a decision between working and not working. You look at the returns 

to working and not working, and if you raise the returns to not 

working, you should expect people to not work too much. 

Mr. ROKITA. In your opinion, what should the policy be? I mean, 

it seems to me that we have programs and safety nets that have 

become hammocks, and that go on for too many for too long. 

Mr. HOLTZ-EAKIN. I think that at every point, we should look at 

the social safety net, and make sure that it is pro-work. 

Mr. ROKITA. Pro what? 
58 

Mr. HOLTZ-EAKIN. Pro-work. We know that in the data, the difference between poverty and non-poverty in the U.S. is work. Those 

who work are far less likely to end up in poverty, and we should 

support their desire and the satisfaction they get from work, and 

the standard of living. 

So, you know, the Affordable Care Act, as Dr. Diamond mentioned, is an example of a social safety net program that, whatever 

the desirability of providing health insurance to people, in the end 

had implicit taxes on labor supply, and rewarded people who did 

not work. So, we need to rethink that, and one of the things that 

the American Health Care Act does is take out those incentives. 

And I think it should be respected for that. 

Mr. ROKITA. Your larger point, again, is more workers would add 

to the supply side of the economy, and, therefore, produce the 

growth that we need to get to 3 percent, again, which I do not 

think is a fairy tale. I know we were kind of negative starting out 

here, especially on the other side of the aisle, with things like 3 

percent growth being, ‘‘absurd,’’ ‘‘faith-based.’’ But I think we can 

get there again, with supply-side reforms. 

Dr. Diamond, do you have anything to add the conversation we 

just had? If not, I have some questions for you. 

Mr. DIAMOND. I agree with Dr. Holtz-Eakin’s points. I did see in 

the news yesterday, there was an article about 13 counties in Alabama that had implemented work requirements to get SNAP benefits, and SNAP benefits fell by, I cannot remember if it was 50 percent or 85 percent, but immediately, it made me think that maybe 

some more pro-growth safety net policies are needed. 

Mr. ROKITA. Thank you. Dr. Furman, I am out of time. I apologize. 

Chairman BLACK. The gentleman’s time has expired. And I just 

want to add here that we talk about this as productivity for our 

Nation. But I think even more important to that is dignity. There 

is a dignity to work, and I think we lose that here in our country, 

when we do not recognize and uphold that. 

I often say to people, the second question you ask them after you 

ask them their name is, ‘‘What do you do?’’ And if we cannot say 

what we do, we lose our dignity. And I think that is a stronger net 

than the safety net, is that net within our country of dignity. 

I now recognize the gentleman from New York, Mr. Jeffries, for 

5 minutes. 

Mr. JEFFRIES. Thank you, Madam Chair. It was mentioned by 

the previous speaker, who I greatly respect, that if we on this side 

of the aisle just stop obstructing, we could get things done. I have 

heard a lot of things during my 4-plus years here in Congress, but 

the notion that Democrats, who are in the minority in the House, 

the Senate, do not have the White House, are somehow responsible 

for your inability to get things done, is itself a fantasy. 

And what is amazing to me is that the party that for 8 years 

adopted the policy, ‘‘Obstruction today, obstruction tomorrow, obstruction forever,’’ as long as Barack Obama was President of the 

United States of America, now wants to lecture us about governmental etiquette. We will decide on our own, based on representing 

our constituents, what the rules of engagement should be. We are 
59 

not taking advice on etiquette in doing our duty from the other side 

of the aisle. That is absurd. 

Now, there is a difference between optimism and fantasy. Optimism is based on the notion of the power of American 

exceptionalism. We can all embrace that, Democrats and Republicans. Fantasy is based on alternate facts. And what we are trying 

to figure out is whether this projection of 3 percent growth, $2 trillion increase in revenue projected over a 10-year period, is that just 

optimistic based on our belief in American exceptionalism, or as the 

President said, ‘‘I am the only one who can fix it?’’ Or is it just alternate facts? 

And maybe I can start with Dr. Diamond. You testified that we 

should implement policies that encourage work; is that correct? 

Mr. DIAMOND. Correct. 

Mr. JEFFRIES. And you also said that tax reform should include 

limiting expenditures as part of an approach to encourage work, 

true? 

Mr. DIAMOND. Correct. Well, not for work, just limit expenditures 

through the tax system. 

Mr. JEFFRIES. Okay. And one of the largest expenditures through 

the tax system would be the mortgage interest deduction; is that 

right? 

Mr. DIAMOND. Correct, and it should definitely be reformed. 

Mr. JEFFRIES. It should be reformed. Do you think it should be 

eliminated? 

Mr. DIAMOND. I would not argue for elimination of it. I would 

argue that the home mortgage interest deduction does not do what 

it is supposed to do, which is supposed to encourage low-income 

people to be able to buy houses. But, unfortunately, low-income 

people do not itemize their taxes, and they have relatively low 

rates, so really, all it does is encourage high-income people to overconsume housing. And so, if we went to a system that actually encouraged low-income people to be able to afford houses, I would 

support that. And so, I think it needs to be reformed, not eliminated. 

Mr. JEFFRIES. Okay, so we have to substantially reform the mortgage interest tax reduction, widely viewed as helping middle-class 

Americans achieve the dream of home ownership. Would you also 

suggest that one of the policies we should adopt are tax cuts for 

the wealthy and the well-off, millionaires, billionaires, people who 

are at the highest income bracket in this country? 

Mr. DIAMOND. I would not state it that way. And I would actually say, in some sense, we could actually raise taxes on them, but 

you are talking about a comprehensive reform that, you know, the 

final effect is going to depend on how you structure the reform. So, 

if we go to full expensing, could we raise the rate on capital gains 

and dividends, and not reduce the corporate rate as much? Absolutely. Those are all trade-offs. 

Mr. JEFFRIES. Setting aside the corporate rate, because I think 

there is widespread agreement amongst many of us that, you know, 

33 percent is too high; the Obama administration proposed going 

to 28; Trump says 15, you know. Maybe there is some common 

ground that can be found there. But let us talk about the tax rate, 

because you support lowering the top tax rate on millionaires and 
60 

billionaires; is that not right? I mean, I can restate it: 39.6 percent 

is the rate; you support lowering that. True? 

Mr. DIAMOND. I say we should minimize it. I do not think I gave 

a number as to how low it should be. That is going to depend on 

how much we want to spend, and trying to raise revenues that 

fund our expenditures. 

Mr. JEFFRIES. Now, we experienced approximately 4 percent 

growth during the 1990s; is that right? 

Mr. DIAMOND. Four percent growth in the 1990s, I do not believe 

so. 

Mr. JEFFRIES. Were there periods of time where we experienced 

substantial growth during the 1990s, which in part led to eliminating the deficit? 

Mr. DIAMOND. Post-1995, we experienced some innovation-driven 

growth in the 1990s, as this new web technology and other things. 

The computer, which could, you know, allowed secretaries to have 

typings that were already done; they did not have to retype everything, made people more productive. There were a lot of productivity increases in the middle and late 1990s that increased growth, 

that have seemingly disappeared since, say, 2004. 

Mr. JEFFRIES. Thank you. My time has expired. 

Chairman BLACK. Thank you. I now recognize the gentleman 

from California, Mr. McClintock. 

Mr. MCCLINTOCK. Well, we raised this point before, in the last 

hearing. I recall, after the drubbing you took in 1994, President 

Clinton came to Congress and announced the era of big government 

is over. And he made good on that, he reduced Federal spending 

by a miraculous 4 percent of GDP. He approved the biggest entitlement reform in history, in his words, ‘‘Ending welfare as we know 

it.’’ 

He approved what amounted to the biggest capital-gains tax cut 

in American history. Those were policies that worked. The problem 

is, we have been more recently engaged in policies that do not 

work, essentially, the opposite. Dr. Furman, I want to thank you 

for your advice and counsel today. Is that the same advice and 

counsel that you gave to the Obama administration? 

Mr. FURMAN. It is certainly very similar to the advice I gave 

President Obama. 

Mr. MCCLINTOCK. Okay, and the result of that was the lowest 

economic growth rate in the post-war era. Dr. Holtz-Eakin, when 

Dr. Furman said, ‘‘Oh, our economic problems are mainly demographic, and that if we had the same demographics under the 

Reagan administration, we would only have 1.7 percent growth,’’ 

you looked rather puzzled. Now, 1.7 percent is still better than 

what we saw averaged under the Obama administration, but way 

low of what we are shooting for. What is the source of your puzzlement, or did I misread your expression? 

Mr. HOLTZ-EAKIN. I do not fully understand the computation. So, 

is it top-line GDP growth of 1.7 percent? That is too low. We grew 

at an average of 1.9 in the recovery. He is saying that, if we did 

all that, we would do worse? That I do not understand. 

Mr. MCCLINTOCK. I do not either. Well, let me go on; my time 

is limited. One of the sources of my puzzlement is the fact he 

seems to have completely ignored the fact that we have the lowest 
61 

labor participation rate since the Carter administration. Is not a lot 

of our problem the fact that near-record numbers of able-bodied 

workers have simply given up looking for work? 

Mr. HOLTZ-EAKIN. That certainly harms the top line GDP 

growth. 

Mr. MCCLINTOCK. And if they came back into the workforce, we 

would see an improvement in growth. What is causing that? 

Mr. HOLTZ-EAKIN. I think Dr. Diamond summarized it pretty accurately. We know that about half of that is genuinely demographics, aging of the baby boom population, retirements. And 

about a half is some combination of discouragement in the economic environment, poor incentives from public policy. 

Mr. MCCLINTOCK. Also, we talk about macroeconomic growth, 

growth of GDP. Essentially, that is population times productivity, 

correct? So, in that analysis, then, we could have a huge population 

increase and very low productivity increases, and that would be essentially the same as a very low population increase with very high 

productivity increases. Do I have that right? 

Mr. HOLTZ-EAKIN. That would give you the same top line growth. 

But I would say the one you want is the one with high productivity 

growth. 

Mr. MCCLINTOCK. Well, that is my point, is that when you get 

down to where the rubber meets the road, where the average family is actually struggling to get on, is not the productivity side of 

that pretty much everything? I mean, if you are stuck in a parttime job, because your employer cannot give you more than 30 

hours a week because of government restrictions, if you have got 

little prospect of betterment in a stagnant economy, if your wages 

have been flat for the 8 years of the Obama administration, productivity is really important to that family, is it not? 

Mr. HOLTZ-EAKIN. Yes. I rarely quote Paul Krugman, but he did 

say it best, ‘‘In the long run, productivity is not everything, but it 

is pretty close to everything.’’ 

Mr. MCCLINTOCK. Wages stagnated under Obama; they skyrocketed under Reagan. That is not population-driven; that is productivity-driven. So, my question is, what are the policies we need 

to get off of the wage stagnation we have seen under the Obama 

administration? 

Mr. HOLTZ-EAKIN. We know that labor productivity is aided by 

having more and better capital. And we have had a very weak investment performance recently, as a Nation. We know that it is 

aided. 

Mr. MCCLINTOCK. And that is because of regulatory impositions 

that have made access to capital more difficult, in part? 

Mr. HOLTZ-EAKIN. I think there is a regulatory story; I think 

there is a tax story, and I worry about the fiscal outlook. 

Mr. MCCLINTOCK. And you also mentioned government borrowing. When government borrows money, it borrows from the 

same capital market that would otherwise be available for, among 

other things, consumer purchases and business expansion, correct? 

Mr. HOLTZ-EAKIN. Yes. The other thing I really focus on, and Dr. 

Diamond mentioned this, is there has been a steady and recently 

sharper decline in the rate of business startups across the economy. 

Mr. MCCLINTOCK. Well, it seems to me that the—— 
62 

Mr. HOLTZ-EAKIN. That is where new business models and productivity come from. 

Mr. MCCLINTOCK. I look at the Trump proposals, and they look 

very much like the Reagan proposals that gave us one of the most 

prolonged periods of economic expansion in our Nation’s history, 

and huge improvements for working Americans. 

Chairman BLACK. The gentleman’s time has expired. I now recognize the gentleman from California, Mr. Khanna. 

Mr. KHANNA. Thank you, Madam Chair. Maybe it is from the 

vantage point of the district I represent, representing a district 

with Apple, Google, and having large presences, Intel, Facebook, I 

am less concerned about our country’s long-term innovation and 

economic growth, and more concerned about issues of income inequality and income disparity, and who will gain and benefit from 

the economic growth. Whether it will just be entrepreneurs in certain parts of this country, or whether that growth will be distributed. 

And given that, I wanted to ask about a proposal which in the 

past has enjoyed bipartisan appeal, it was actually a Milton Friedman idea, which was the earned income tax credit. At a time where 

the investor class and capital already has an extraordinary return, 

it would seem to me that our tax policy should be more geared towards helping working families, and helping folks who have had 

wages stagnate. And I would be curious to all three economists’ 

view of expanding the earned income tax credit, the benefit that 

would provide to working families, and the benefit it would provide 

to the labor market, given it would provide a subsidy, a supplement, for people to enter the workforce, and also some subsidy to 

the employer to increase recruitment. And all the studies I have 

shown suggest it actually helps employment. Maybe we could start 

with Dr. Furman, and I would love to have the other two economists weigh in as well. 

Mr. FURMAN. I very much agree with everything you said. The 

earned income tax credit is the type of policy that both helps our 

economic growth by bringing people into the workforce, and better 

rewards that growth making sure that people share in it. I think 

going forward, probably the number one priority would be households without children, or without qualifying children, getting more 

of an earned income tax credit. They get a very small one right 

now, but there is additional benefits for families with children as 

well. 

Mr. DIAMOND. I agree. I would support an increase in the earned 

income tax credit. It is a pro-work safety net provision, and I think 

it is generally productive. It does create certain issues, but overall, 

I support it. In fact, in my discussion of reducing tax expenditures, 

I think the tax expenditures we should not eliminate would be ones 

that incentivize people to work, such as the EITC, or that 

incentivize a larger stock of capital to make workers more productive. 

Mr. HOLTZ-EAKIN. I think you will find a consensus in the profession on the past efficacy of the EITC in getting people into the 

labor force and to working. I think the place most people are concerned about is non-custodial males, and having a larger EITC for 

that population. And I hope there is a consensus that the one thing 
63 

left on that is to worry about the error payment rate, which is 

about 25 percent. A more efficient EITC would be much, much better. 

Mr. KHANNA. Great, consensus among the economists on expanding the earned income tax credit. My next question is just more 

philosophical, and it is this open question about what is technology 

going to do for the future of work. And what is your view? I think 

there is this overwrought sense of ‘‘Okay, people are just not going 

to have jobs,’’ which in the past, you know, John Maynard Keynes 

had written this whole article how we were all going to work 15 

hour workweeks, it has not turned out to be true. On the other 

hand, there is going to be a displacement of fact, and I wonder 

what your thoughts are on how we should prepare for this transition. Dr. Furman, and then the others. Go ahead. 

Mr. DIAMOND. I will just say, our profession earned the name, 

‘‘the dismal science,’’ because we have often made wrong predictions on this front. And so, I would say that, yes, it is going to 

change the face of work. I think other jobs will crop up, just like, 

you know, moving from the typewriter to the computer did not put 

everybody out of work. I do not think the robots are going to put 

us all out of work, either. 

Mr. FURMAN. I think to a first approximation, that is correct. 

Machines do 90 percent of what humans could do in the year 1900, 

and yet lots of humans still have jobs. But I think what matters 

is less the technology and more the policies we use to address that 

technology. And you look at different countries, some have been 

more successful at handling these disruptions and changes than 

others, and the ones that have been successful have put an emphasis on programs like training that we were talking about earlier, 

not just assumed it would all work out. 

Mr. HOLTZ-EAKIN. I would emphasize the basic need for a betterperforming K–12 education system. There is now well-documented 

failure throughout that system, and the future of work is about the 

future education of people that are going to go to work. I think that 

is the key. 

Mr. KHANNA. Thank you for your thoughtful replies. 

Chairman BLACK. Gentleman yields back his 7 seconds, thank 

you. I now recognize the gentleman from South Carolina, Mr. Sanford. 

Mr. SANFORD. My thanks, Chairwoman. I would say to my colleague from California, I saw a freaky movie over the weekend entitled ‘‘Her,’’ and it is about this guy that falls in love with his operating system. But the happy ending for all of us is at the end of 

the day, it does not work out, and he goes back to human form. 

Not every human is replaced on that front. 

And in deference to my Chairwoman, I made it very clear in the 

last hearing we held that I do not believe that 3 percent growth 

is realistic at this particular 10-year juncture, as much as I would 

like to see it. But I think in deference to my Chairwoman, I am 

going to leave that subject alone for the moment, and I am going 

to skip on to three points of economic growth that I do think are 

important. 

One is infrastructure. Would all of you agree, going back to the 

consensus that my colleague found, that infrastructure ought to be 
64 

paid for, or do you say, ‘‘No, you know, it is dynamic, and it does 

not need to be paid for?’’ Where are each of you on that? Again, 

simple, quick, paid for or no? 

Mr. HOLTZ-EAKIN. Pay for it, yeah. I think it is overstated, the 

productivity effects. 

Mr. FURMAN. I think it is better to pay for it, and then we would 

end up with higher growth, and it would bring our deficit down. 

Mr. SANFORD. So, paid for, or no? 

Mr. FURMAN. Pay for it, and let the growth lower the deficit. 

Mr. DIAMOND. In a world with 77 percent debt-to-GDP ratio, it 

should be paid for. 

Mr. SANFORD. Okay. And I think that that point is underscored 

by the fact that, if you look at Japan, which went on a tremendous 

infrastructure spending binge, if you want to call it that, in an effort to restart and reboot their economy, ultimately, ended up with 

a lot of debt but not that much in the way of economic growth, and 

I do think that demographics are a driver here. 

I appreciate Mr. Diamond’s sobriety by which you approach the 

deficit issue. I do not think that it is emphasized enough in Washington, either from an administration standpoint or a congressional 

standpoint. I mean, I think you really hit hard how important that 

is and how it will ultimately be a driver with regard to economic 

growth in our country as well as budgetary impact. 

But I want to talk about one part of economic growth that really 

has been, I think, diminished of late. And that is David Ricardo’s 

notion of competitive advantage, and the need, in fact, to trade 

with other parts of the world. We grow great moss and mosquitoes 

on the coast of South Carolina. We do not grow wheat that well. 

In Kansas, they grow wheat well. It is just natural to that area. 

And there are other areas that have competitive advantage with regard to certain products. 

I think it has been sort of underscored here lately, and so when 

you begin to look at ‘‘Buy American’’ or Davis Bacon, or go down 

a long list of things that begin to restrict one’s ability to trade freely, or even the way in which some people are saying, ‘‘Well, it is 

not that advantageous altogether.’’ The notion of free trade, if you 

look at the port in Charleston, Charleston and South Carolina have 

been transformed as a result of open commerce and open investment and free trade. 

In the 1 minute and 50 seconds I have got left, if you all would 

each touch lightly on how important you believe free trade is to 

economic growth, and is budgetary impacts going forward. 

Mr. HOLTZ-EAKIN. I think it is very important. We have examples. For example, semi-conductor tariffs, when we eliminated 

those through a trade agreement, the U.S., which was deemed to 

be unable to compete with Japan, turned around and has the most 

vibrant of technologies. And so, opening it up to the competition 

will be good for America, will raise productivity, and is something 

I endorse. 

Mr. DIAMOND. I also think it is critical. Most of the consumption 

growth in the world will occur outside of the U.S., and so if we 

want to sell to the most number of consumers, we are going to need 

to sell around the world. 
65 

Mr. FURMAN. I also agree that it is critical, and think trade 

agreements can help create the type of level playing field that enables the United States to succeed on the global stage. 

Mr. SANFORD. I hand back to you, Madam Chairwoman, my 54 

seconds. 

Chairman BLACK. You are going to yield back 51 seconds; boy, 

you are going to get a star. I now recognize the gentlelady from 

Washington, Ms. Jayapal. 

Ms. JAYAPAL. Thank you, Madam Chair. And thank you for your 

testimony, very thoughtful. I wanted to go back to the issue of immigration reform, which all three of you have touched on. 

Dr. Furman and Dr. Holtz-Eakin, you have wrote about it in 

your testimony more in-depth. Not only can we look at the impact 

on population growth and what would happen if we were to really 

stop immigration, but I wanted you to comment also on the effects 

to the economy of restrictive immigration policies that have been 

proposed. So, in the Judiciary Committee, we just passed on a 

party-line vote bills that would essentially criminalize all the undocumented immigrants in this country, and seek to deport 11 million. 

Can you speak, theoretically, if that were to happen, and I think 

there are many people across the country on both sides of the aisle 

that do not believe it is possible or desirable to do that. But since 

the rhetoric is out there, and the policies have continued to focus 

on that, can you comment on the economic impacts of those kinds 

of restrictive policies? And Dr. Furman, why do we not start with 

you, and then I would like Dr. Holtz-Eakin as well. 

Mr. FURMAN. Yeah. We are used to hearing businesses talk about 

what uncertainty does to their ability to invest and grow. The type 

of uncertainty that legislation like that would create for 11 million 

people already in our country would mean their ability to be in the 

right job, to get an education, to start a business, and to contribute 

to our economy, would go down. So, it would not just harm them, 

it would hurt all of us, and our economy overall. 

Ms. JAYAPAL. What would happen to the dairy industry, for example, in this country? 

Mr. FURMAN. Yeah, I think there are a lot of industries that are 

particularly dependent on those workers, and that would be one of 

a number of agricultural industries. And it would hurt our, you 

know, productivity growth and economy. So, just from a pure economic perspective, I would be opposed to it, and I think there is 

a broader human dimension that I am not a special expert in. 

Mr. HOLTZ-EAKIN. My think tank, the American Action Forum, 

actually did a study of what it would do if we deported all those 

here illegally, whether over a 20-year period or even quickly, 2 

years. I forget the numbers, but it is an overwhelming Federal 

budget expenditure. We have to hire 30,000 lawyers, I am opposed 

to anything that hires 30,000 lawyers. You know, create 1,200 new 

administrative courts, detention facilities. You need to send people 

back to their country of origin, that takes buses and planes, and 

it costs, like, $300 billion. You get rid of about 5 percent of the 

labor force, so you have yourself a pretty good-sized recession. But 

other than that, it is a good idea. 
66 

Ms. JAYAPAL. Thank you. And can you speak to the effects on Social Security? And thank you for that study, by the way, it was 

very good. Can you speak to the effects on Social Security, something a lot of Americans do not think about? But you think about 

the billions of dollars that have gone into the Social Security suspense fund, that are actually paying for our older Americans now 

who are in retirement. What would happen if we were to get rid 

of undocumented immigrants in terms of Social Security fund, and 

that suspense fund? 

Mr. FURMAN. We would need to raise taxes or cut benefits to 

have the same solvency that we have today. 

Ms. JAYAPAL. Did you want to add anything? Okay, okay. The 

other question I wanted to go to on education. Actually, all three 

of you have spoken about the need to invest in education. In Washington State, my home state, we actually looked at the job gap. In 

2020, we would have a 60 percent job gap in our state, with jobs 

that are available but we are not graduating enough people to actually fill those jobs. 

Can you speak, Dr. Furman, to how you would address the inequality in education? And Dr. Holtz-Eakin, you called it in your 

testimony, ‘‘an embarrassingly persistent and worsening gap between the student performance and the rest of the industrialized 

world.’’ Do you want to speak to what some of the prescriptions 

might be for that? 

Mr. FURMAN. Sure. It starts very young. We are relatively low 

in the OECD, in terms of the fraction of our 3- and 4-year-old’s that 

go to school. So, having universal preschool to help put students on 

a more equal footing before they even get to K–12. There are a 

number of improvements that we could make to K–12 as well. And 

then after that, making college more accessible. It is a great investment for most people, but it is a risky investment, and if that investment does not pay off, making sure that people are not saddled 

with all of the debt and costs of that investment. 

Ms. JAYAPAL. I know you talked about school choice in your testimony. It is not an area that we necessarily agree on, but can you 

speak about apprenticeships and investment in training programs 

to actually bring people back into the workforce as the chair had 

mentioned earlier? 

Mr. HOLTZ-EAKIN. So, you know, I would just stipulate, I think 

the larger, more durable improvements will come from a K to 12 

system that functions better. There are some legacy issues for 

those who are in the workforce now, do not have the skills to find 

the jobs that are available there. 

We have some examples of successful apprenticeship programs, 

so South Carolina, for example, stands out. We have some examples of successful community college programs. But we do not have 

what appears to be a playbook for doing a nationwide scale-up of 

these programs to be successful. So, that remains something that 

needs to be figured out. 

Ms. JAYAPAL. Oh, I am sorry. I did not realize my time had expired. Right back to you, Madam Chair. 

Chairman BLACK. The gentlelady’s time has expired, and now I 

recognize the gentleman from Ohio, Mr. Renacci, for 5 minutes. 
67 

Mr. RENACCI. Thank you, Madam Chair. And I want to thank the 

witnesses for being here. I do think there is something all three of 

you agree on, as well as the Comptroller General. But I want to 

ask, the Federal Government is on a fiscal path that is 

unsustainable. The Comptroller General was here, he said that. Do 

all three of you agree with that? 

Okay. So, let us talk about the revenue side. I am a business 

guy. There is either revenues or expenses. On the revenues side, 

let us start there first. If we do not reduce tax rates, both corporate 

and personal, since 67 percent of businesses pay as a pass through 

on to their personal tax return. So, if we do not reduce business 

taxes, do we risk more businesses leaving the U.S. to go to countries with lower tax rates? Agree or disagree? 

Mr. FURMAN. I think we should lower the tax rate, but not worsen the deficit in the process. 

Mr. RENACCI. I agree with that, too. I am sticking to the income 

side. So, if more businesses leave, do we face lower tax revenues 

into the Treasury and a greater risk to our fiscal unsustainable 

path? Agreed, all three of you? 

Mr. FURMAN. If you lower tax rates, that will cost money, if you 

make no other changes. 

Mr. RENACCI. Well, my question is, if more companies leave because we do not lower our rates, and we are lowering money into 

the Treasury, are we going to continue to grow this fiscal 

unsustainable situation? Okay, do any of you disagree that corporations do not pay taxes, and instead pass on their taxes to consumers as a cost of goods sold? 

Mr. HOLTZ-EAKIN. Corporations do not pay taxes. People do, one 

way or another. It could be in the form of lower wages, lower returns to capital, or higher prices. 

Mr. RENACCI. I look at it this way, I was a business guy. If I had 

a product, it cost me a dollar and I sold it for a $1.10, most of the 

reason I sold it for a $1.10 was to make money and cover the taxes 

that I had to pay. 

So, I always say we are passing it on, not only to consumers but 

in lower wages, so I agree with you. So, if we are able to reduce 

the business income tax rate to a much lower consumption tax, I 

am switching gears, and I know Dr. Diamond, you have talked 

about this in your testimony, would that be a pro-growth policy 

that could help grow the economy? 

Mr. DIAMOND. Yes, it would. I think it would grow the economy, 

and it is a policy that I have supported for several years. 

Mr. HOLTZ-EAKIN. What he said. 

Mr. FURMAN. I think there are aspects of that that could help, 

but the details matter a lot. 

Mr. RENACCI. Okay. So, if I am looking at a path of fiscal 

unsustainability, which I keep saying back home, and we know 

that we have to cut taxes to avoid companies from leaving, that is 

one thing. And I also assume that if we cut taxes, we will grow the 

economy at some rate. Would you agree or disagree? 

Mr. DIAMOND. I would argue that we need to lower the rate, and 

maybe we move to expensing, but we will need to offset some of 

that revenue loss by taking away other preferences. Some of the 
68 

studies I have written have said that preferences you do not want 

to take away are the investment-related preferences. 

Mr. RENACCI. I want to get to the expense side, though. We are 

on the revenue side now. 

Mr. FURMAN. I think if you cut tax rates and do nothing else, you 

will lower economic growth because it will result in higher deficits. 

That will reduce capital formation, reduce business investment, 

and we would ultimately be poorer as a result of that. 

Mr. HOLTZ-EAKIN. As I said, I think reform should be revenueneutral. But I would do that revenue-neutrality on a dynamic 

score, taking into account the growth that is generated. 

Mr. RENACCI. Okay, so we have talked about the revenue side, 

and in the business world you look at the revenue side. And now 

I want to look at the expense side, because I would agree with you. 

We can do a couple things. We can reduce tax preference items. 

But in the business world, should we not be looking at the expense 

side, which is expenses of the Federal Government, which are 

Medicare, Medicaid, Social Security, interest, you know, and all the 

other expenses? Should we not be looking there as the other side 

of where we should be cutting expenses? 

Mr. HOLTZ-EAKIN. I cannot emphasize that enough. That, in the 

end, is the key issue. Once you spend the money, you are going to 

have to pay it forward, one way or another, and there is too much 

on the books. 

Mr. FURMAN. I think we should use a combination of revenue increases and spending cuts along the lines of Bowles-Simpson, 

which—— 

Mr. RENACCI. Okay, but I was waiting for that one. Because how 

can we raise revenues without hurting? Because we all just agreed 

to that. We have to cut our tax rate, or we are going to lose more 

business. So, now you just ruined a curveball. How do you cut tax 

rates and raise revenue—— 

Mr. FURMAN. For example, limiting tax expenditures for high-income households without raising the tax rate at all. We cannot only 

raise money, but have fewer distortions in our economy. 

Mr. RENACCI. Okay, so that is a tax expenditure. See, we are all 

agreeing. Republicans, Democrats, we are all agreeing. We got to 

cut rates. We got to reduce our unsustainable path, and we got to 

look at what we are spending. Now, whether you would call it tax 

preferences or actual spending, it is the same thing. It is the other 

side of the aisle. Would you not agree? 

Mr. DIAMOND. I completely agree. And as I noted in my testimony, spendings are projected to increase from 27 percent of GDP 

to 29.3 percent. That is a staggering increase over the next—— 

Mr. RENACCI. Well, I guess I am out of time. I apologize. I yield 

back. 

Chairman BLACK. No, your time has expired. Good questions. I 

now recognize the gentleman from California, Mr. Carbajal, for 5 

minutes. 

Mr. CARBAJAL. Thank you, Chairwoman Black, and Ranking 

Member Yarmuth. Dr. Holtz, after President Trump’s budget was 

released, you indicated that 3 percent growth was at the outer 

bound of what was feasible. And you, Dr. Furman, indicated that 

the chances of achieving 3 percent growth was about one in 25. Ob-
69 

viously, 3 percent growth would be nice, if we could get it. But do 

you believe it is responsible for us to build the Federal budget on 

such an unlikely assumption? 

Mr. HOLTZ-EAKIN. So, the President’s budget, under every President, is put together under the assumption that all of the President’s policies are enacted as proposed, and work as intended. And 

so, every President’s budget is, effectively, a dynamic score of what 

they perceive to be the best set of policies. That is true for President Trump, President Obama, President Bush. So, I do not think 

that is how you, as a Congress, should set up your budget. You 

should do the budget process in a disciplined fashion, and decide 

what you believe will pass through legislation, go to the President’s 

desk, and build it on that. 

Mr. CARBAJAL. Dynamic or not, do you think it is responsible? 

Mr. FURMAN. If I can answer that? First of all, Dr. Holtz-Eakin 

was one of the people responsible for putting together the forecast 

under President Bush. And none of the forecasts that he helped put 

together was the growth rate more than one-tenth of 1 percent 

higher than what the consensus forecast at the time was. The 

Trump administration’s is 1 percentage point higher. I would be 

thrilled to get 3 percent growth, but the cost of being wrong is 

asymmetric. 

If the growth rate turns out higher than we expect, that is great 

news, and the deficit is lower than we thought. If we make a mistake, though, and the growth rate is lower than what we are counting on, then we will have higher deficits, higher debt, and that will 

compound and magnify our economic problems. 

So, I think it would be much better to build a budget on a conservative forecast, and then hope for the best. Maybe we will get 

3 percent; I think there is a 4 percent chance we get it. And if we 

do, that would be a good thing. But if we come in below our expectations, that is a big problem. 

Mr. CARBAJAL. Thank you. Secondly, to all the witnesses, there 

has been a lot of discussion of the merits of tax cuts. Many of it 

on the other side think that the top marginal tax rate is the most 

powerful force in the universe, or at least in the economy. That 

seems, to me, a bit overstating the case. After all, we saw a relatively strong economy, economic growth, in the 1980s after President Reagan cut taxes on the wealthy. We similarly saw strong economic growth in the 1990s after President Clinton raised taxes on 

the wealthy. It seems pretty clear that other factors are at work 

here, and that tax rates are not the primary factor driving growth. 

Do you all agree? 

Mr. FURMAN. I think on the individual side, tax rates do not have 

a huge impact. I think on the business side, we are in a global 

economy. We are dealing with other countries that have lower tax 

rates than us, so I do think there is some importance to lowering 

those tax rates, and paying for them with a broader base. 

Mr. HOLTZ-EAKIN. I would emphasize what Dr. Diamond said a 

number of times, which is there is an enormous amount to tax policy that is not in the wraiths. It is in the investment incentives and 

elimination of preferences, which do not lead to good economic decisions. And that is part of tax policy that is not in the wraiths. 

Mr. CARBAJAL. Dr. Diamond? 
70 

Mr. DIAMOND. I think tax rates are important, but as Dr. HoltzEakin mentioned, I also think there is another side of the Tax Code 

that we need to look at. Overall, I mean, taxes are not the only factor, and you mentioned that. And I mean, obviously, there are a 

lot of factors. Regulation, deficits, and the negative effects of deficits that will also affect growth. So, they are a piece of the puzzle, 

but not the puzzle. 

Mr. CARBAJAL. hank you. Chairwoman Black, I yield back. 

Chairman BLACK. Wow, thank you. We have got a number of 

folks that are yielding back today. You are all going to get stars. 

I am now recognizing the gentleman from Minnesota, Mr. Lewis, 

for 5 minutes. 

Mr. LEWIS. I would like to thank the Chair and the gentlemen 

for coming to testify today. You are right. Taxes are not the only 

thing that matter. We seem to be focused a lot on tax expenditures, 

and not actual budget expenditures. Last year, we had record revenues, $3.26 trillion, and yet, $600 billion deficits. So, when we talk 

about, you know, what causes a deficit or the debt, we need to 

make certain we keep our eye on the prize. 

And it certainly has not been a lack of tax revenue. It has been 

increasing expenditures, which crowd out the capital markets, the 

same as deficits. In fact, one could argue, it is not the deficit that 

crowds out the capital markets; it is actually the expenditure, especially inefficient ones. 

But be that as it may, rarely do I get a chance to quiz three 

economists, so I am going to take the opportunity, probably all 5 

minutes. Let me ask each of you, first of all, what the fundamental 

goal is, when you are formulating, whether it is tax policy or 

whether you are serving on the Budget Committee, for that matter. 

Is the goal of good policy economic growth or a balanced budget? 

Let’s start with you, Dr. Eakin. 

Mr. HOLTZ-EAKIN. Economic growth. 

Mr. LEWIS. Dr. Furman? 

Mr. FURMAN. Economic growth that is shared. 

Mr. DIAMOND. I would say that economic growth, but an unbalanced budget is going to lead to lower economic growth, so in a 

sense, it is the same question. 

Mr. LEWIS. It is really interesting because when you look at the 

question we have got, as those trying to formulate a budget, that 

seems to be the principal question. Can you have one without the 

other, or does one predate the other, or prerequisite for the other? 

In that regard, there is an elasticity of labor and investment I want 

to talk about a little bit. 

We all remember the late 1970s. We have been talking about 

that today, it seems to me, and the malaise, and we cannot grow. 

And we have gotten where, you know, turn down the thermostat 

and put on our cardigans. And yet, all of the sudden, we had an 

explosion of growth after the Carter administration and into the 

1980s and the 1990s. The tax rates never got back to the Carter 

tax rate. That is one thing someone ought to point out, that we did, 

in fact, grow out of the deficits because even with the Clinton tax 

hikes, we never got back to anything close to 70 percent marginal 

income. 
71 

But something happened in the 1970s that is very enlightening, 

and that was the Steiger Amendment and the cut and capital gains 

from 49 percent to 28 percent. At the time, the Treasury secretary 

said it would cost the government $2.2 billion. And, in fact, the 

capital gains taxes went from $8 to $11, almost $12 billion. 

So, this clearly an elasticity at some particular rate on investment. Is there, at the top income tax rate, an elasticity for work, 

i.e., the people who have the greatest option, the greatest choice, 

the greatest elasticity for working are the wealthy? So, if you raise 

their rates even higher than what they are, will they quit working? 

Go ahead, Dr. Holtz-Eakin. 

Mr. HOLTZ-EAKIN. So, I think the best evidence on this is something to take into account more than just the work/not work dimension. You can imagine working/not working, how long you work, 

how hard you work, what areas you work in. All of that gets bundled into the taxable income you report to the Treasury, and there 

is a sizable and well-established taxable income elasticity, with respect to the top marginal tax rate. Some of that, you know, if you 

raise the rate and taxable income goes down, it is going to be an 

avoidance activity. The wealthy are quite good at hiring smart 

folks to avoid paying taxes. Some of it will be genuine reductions 

in economic activity, and neither of those are good phenomena. 

Mr. LEWIS. Dr. Furman? 

Mr. FURMAN. I think there is some responsiveness to tax rates 

for work, and all the dimensions that Dr. Holtz-Eakin talked 

about—— 

Mr. LEWIS. Is it higher at the top end? 

Mr. FURMAN. I think I am not aware of convincing evidence. 

There is, I think, capital gain realizations that are much, much, 

much more elastic than labor supply is because it is very easy to 

not sell a stock this year and, instead, and sell it next year. Much 

easier it is than it is to take off this year—— 

Mr. LEWIS. Yeah. But it is easier for the wealthy to stop working, 

too, correct, than those at the lower end? 

Mr. FURMAN. I think people have a lot of different motivations 

for work, for primary earners, there is not a lot of responsiveness 

of work to tax rates. For secondary earners, there is. 

Mr. LEWIS. Let’s move to income inequality, because I am fascinated by this topic. If we have got a rising economic growth, and 

every quintile is going up, but we have got Jeff Bezos, and we have 

got Steve Jobs or Bill Gates, and they go up a whole lot. My goodness, that is a rise in income inequality. Juxtapose that with the 

Great Depression. 

Everybody’s income fell, but there is a bottom to that, so income 

inequality actually shrinks during the downturn. Why are we so focused on income inequality? And show me where changes in the 

marginal tax rates have any effect at all on income inequality that 

is primarily an education or socioeconomic issue? Let’s start with 

Dr. Diamond there, quickly. 

Mr. DIAMOND. Well, we saw this after—during the Great Recession inequality, actually, reduced a little bit as the rich were hit. 

I mean, so, it is an important factor. I mean, I think it is important 

to be concerned about how everyone is doing. I do not think we 

should necessarily respond by raising marginal tax rates. 
72 

Mr. LEWIS. Can taxes make a difference? 

Mr. DIAMOND. Taxes can make a small difference, but they are 

not going to solve a problem that is caused by something other 

than taxes. 

Mr. LEWIS. Unfortunately, my time is up. I could go on for another 10, 15 minutes if you would like, but I yield—— 

Chairman BLACK. Your time is expired, the gentleman from Minnesota. I now yield 5 minutes to the gentlelady from Texas, Ms. 

Jackson Lee. 

Ms. JACKSON LEE. I would be delighted for the gentleman to 

keep going because I am trying to, my dear friend, understand his 

line of reasoning. But let me refer ourselves, gentlemen and ladies, 

to the Tale of Two Cities. And that is why we are concerned about 

income inequality. I cannot imagine that we would sit here and 

talk about not being concerned whether Americans are dragging 

themselves through the streets with no jobs and maybe nothing to 

eat, since nutrition and lack thereof is one of the high elements of 

this country. Whether or not children can be educated, and young 

people can get a college education. That is income inequality. 

And this budget, from my perspective, as we indicated before, let 

me not try to paint the Rosie scenario program. I do not know if 

anyone knows her, but she is missing in action today. I would 

clearly say this is a dead-on arrival budget, and I do not know why 

we are so fearful of going back and comparing Reagan and Clinton 

in the years where under Reagan, we had a $1.4 trillion deficit. 

Clinton had a $63 billion surplus. Reagan had a 3.64 growth; Clinton, 3.82. Created 22 million jobs. Monthly, Clinton created 242,000 

jobs, with 166 by Reagan, both of whom I certainly respect as 

presidents, because they handled themselves as presidents. President Obama was a good custodian of the work that Bill Clinton had 

done. 

But here we are today, traveling down a path that makes absolutely no sense. So, let me just quickly try to raise some points on 

the basis of history. September 25, 2008, I recall. I was here. I was 

here in 2007, Dr. Furman. That was the debacle when Lehman 

brothers was not bailed out, while others were. That was when we 

went home to Americans, and they could not believe it, and they 

said to us, ‘‘Do not bail anyone out. Do not do anything. They were 

in shock.’’ But we were on the verge of collapse. Wall Street did 

take a deep dive. The resilience of this Nation and the leadership 

of Democrats brought us to the fact that we are still standing. 

So, my question is, if you look at the budget overall, I want you 

to answer two questions. One, and I am going to ask the other panelists the value of the CBO analysis that we have always done. Is 

it important that Congress looks at an independent arbiter to deal 

with numbers? CBO has done that. 

Secondarily, with baby boomers, of which none of us are in. We 

are all millenniums at this point, are getting older; we are not infusing the workforce. We have an immigration policy that takes 

away hard working immigrants, young people, who want to be 

here, who are not dangerous. And so, we need a workforce. With 

this type of budget, does that suggest 3 percent growth? Does that 

say that we have a vision of growth? And the other part of it is: 

is it not valuable that government invest in its people? I am trying 
73 

to get the right now. I remember I voted for it. The proposal we 

had under President Obama that we all voted for did a lot to energize the economy. 

My question to you, Dr. Furman, are those. Based on the back 

drop of the Clinton/Reagan analysis, the custodian work that 

Obama did, you are in administration and the vision of this budget. 

Mr. FURMAN. I think I agree with the premise of all of your questions. Congress should be relying on the Congressional Budget Office. No one can predict the future with certainty, but the CBO is 

not biased. Sometimes, they are too high. Sometimes, they are too 

low. On average, they are right. I think the policies in President 

Trump’s budget are more likely to lower growth than they would 

be to raise it by cutting the type of investments in our people and 

in our infrastructure that we need for future economic growth. 

Ms. JACKSON LEE. Dr. Holtz-Eakin, you were at the CBO. Would 

reliance, and does this overall budget have a vision of investment 

in the American people? Or are my premises incorrect, that we 

have a growth problem, with respect to human beings to be able 

to energize the workforce, and energize the economy? 

Mr. HOLTZ-EAKIN. First of all, I have nothing but high praise for 

the CBO as an institution, and I believe Congress should continue 

to rely on it for its analysis. I think the administration budget is 

a mixed bag, from the point of view of economic growth. 

One of the things that I do not like about it is that it perpetuates 

the current budgetary mismatch between mandatories and 

discretionaries by taking off the table serious mandatory reforms. 

It continues to crowd out the discretionary accounts, which are national security, basic research, infrastructure, education; indeed, all 

things the Founders saw as the role of government. I think that is 

a fundamental budgetary problem that needs to be addressed. 

Ms. JACKSON LEE. Dr. Diamond, in my last seconds here, let me 

add a little caveat. We have got a lot of people incarcerated. We 

have been trying to pull back on mass incarceration. And it has 

been bipartisan, the Koch Brothers and others. Does that not undermine the workforce? And are my premises not right about how 

the economy is energized by people working? And if you have thousands completely constantly locked up, does that not have an impact as well? 

Mr. DIAMOND. I definitely think incarceration has a negative impact on people and the economy. I think the CBO is important, and 

we need to continue to rely on them. And I think budget goes in, 

at least, I do not agree with the budget in total, but my point in 

my testimony is we are spending too much money. We are projected to spend too much money. At some point, we are going to 

have to slow the growth of spending. 

Chairman BLACK. The gentlelady’s time has expired. The gentleman from Arkansas, Mr. Westerman, is recognized for 5 minutes. 

Mr. WESTERMAN. Thank you, Madam Chair, and thank you to 

the witnesses for being here today. Just want to go down the line, 

and ask for just a brief comment on the relationship between 

growth and growth productivity. Are the curves similar? As you get 

more growth, you naturally get more productivity? Would you all 

agree to that? 
74 

Mr. DIAMOND. I guess I would make a distinction between leveling up. So, an increase in GDP that is just like a one-time change 

in the level, which may come from some policies, versus a small 

change in a growth rate, which endures over time, and which 

builds on itself so that you get growth on top of growth. I think 

that is more important in a long run sense than just a level-up approach. 

Mr. FURMAN. I think faster productivity growth is one for one 

into faster economic growth, everything else equal. 

Mr. WESTERMAN. All right. So, the consensus is that growth and 

productivity are correlated; they are not inversely related by any 

means. But if we look at the chart that was probably shown earlier 

that shows our growth since 2012, we went from 3 percent in 2012 

on GDP down to 1.9 percent is what is projected for 2017. So, we 

have seen a decrease in growth, which, if growth and productivity 

are correlated, you would think you would also see a decrease in 

productivity. 

However, we also see a low labor participation rate. So, I would 

argue that over that same time period, if we look at productivity 

on a per capita basis, we have actually seen an increase per capita 

productivity. Would anybody care to comment on that? 

Mr. HOLTZ-EAKIN. So, I think the key is that, looking forward, 

it is too difficult to anticipate anything like a business cycle. So, 

we have gone through this deep recession recovery. Take that piece 

out of it, and you are left just two pieces. Piece number one is how 

fast does the labor force, and thus the workers, grow? And public 

policies should make sure that we do not stop people from working, 

and we do get the growth that we want. And then, the second is 

productivity growth for everyone who is working. And those are the 

two objectives, and each should be independently the focus of public policy. 

Mr. FURMAN. I think as a growth accounting framework, I would 

agree with that. 

Mr. WESTERMAN. So, you know, if you look at the actual numbers 

of people in the labor force in 2012, it was about 159.5 million in 

the United States, and now, it is about 162.8. So, with population 

growth, we have seen the labor participation rate drop from 63.7 

to 62.7. When I talked to people in my district, I know of people 

who are working second jobs. They are working longer hours. 

So, there is information there that leads me to believe that per 

capita productivity has increased, and I think if we see more technology, we will continue to see per capita productivity increase, 

which gives me hope that if we can get more people into the job 

market that we could actually see greater GDP growth than what 

we have actually seen in the past. And maybe, even get above 3 

percent growth if we get these more highly productive workers employed. Any comments on that theory? 

Mr. FURMAN. You still have this mathematical problem that the 

prime aged population, 25 to 54, some of the key workers, that population is going at 2 percent a year. Now, it is growing at close to 

zero percent a year. I think we can do better on labor force participation. That will be a challenge because the labor force participation rate for prime aged men has fallen every year from the 1950s 

through the present. Under President Reagan, it fell. The labor 
75 

rate for men fell under President Reagan. So, I think this is going 

to be a hard thing to reverse. But if we did, it would add to our 

economic growth. 

Mr. WESTERMAN. So, does that mean that we actually have to get 

more productivity out of the labor force that we have if we expect 

to see any kind of increase in growth in GDP? 

Mr. HOLTZ-EAKIN. I think that is very important. For example, 

they just released the data for the first quarter of this year, and 

there was no productivity growth. And so, if you combine that with 

Dr. Furman’s observation that the labor force, the prime aged labor 

force is not growing; that is not a particularly good set of results 

that we got a flat economy in that kind of world. 

Mr. WESTERMAN. So, how can you mathematically not have productivity growth if you have any kind of economic growth? 

Mr. HOLTZ-EAKIN. You can have more workers producing the 

same amount per worker and get more in total, but productivity 

will not be rising. 

Mr. WESTERMAN. But back to the other point, you would have 

higher per capita productivity. 

Mr. HOLTZ-EAKIN. My concern is that you want to have much 

more rapid growth in productivity per worker, so essentially, a percapita measure, and you want to raise the number of workers per 

capita, which is essentially, have greater labor force participation 

from those who are currently not participating. 

Mr. WESTERMAN. Thank you, Madam Chair, and I am out of 

time. 

Chairman BLACK. The gentleman’s time has expired. I now recognize the gentlelady from New Mexico, Ms. Lujan Grisham for 5 

minutes. 

Ms. LUJAN GRISHAM. Thank you, Madam Chairwoman, and 

thanks to the Committee members. I want to do two things, because certainly interested in a return on any investment and growing the economy. And I am sure this Committee gets tired of me 

reminding them, but I am always happy to do that for a new group, 

that New Mexico has the highest unemployment in the country, 

and we are not, now, the worst economy in the country, but by no 

means are we in a position where we are seeing real, or any quite 

frankly, economic growth. 

And the strategy that we have taken in New Mexico, particularly 

over the last 8 years, but even before then, under both Democratic 

and now Republican leadership, is to invest in huge tax breaks at 

the top 1 percent and corporate tax breaks, which has left the state 

without any sufficient or viable resources. And the end result has 

been zero economic growth. No trickle down investments. No effort 

that has given us any aspect of a strategy. 

So, for me, living that in my current state and situation, I do not 

see how these strategies are going to work at a national level. And 

if we are looking for something where there is bipartisan agreement on clear economic growth, I am interested in your opinions 

about comprehensive immigration reform, which, particularly in a 

state like mine, provides an immediate return into the pocketbooks 

of every New Mexican, as well as stabilizing and moving growth for 

a variety of industries, not just A.G., and for us, health care and 

long-term care, but entrepreneurship, in fact, which we lead in the 
76 

nation. Or, I need to be careful, because I have not checked that 

data, at least in an hour. 

So, it changes that quickly. But we have been one of the leading 

states in entrepreneurship, particularly in minority women in the 

state. 

So, I would be interested in the panel’s reaction on, I am living 

in a state that is seeing benefit from any of the strategies that continue to be presented, not only here today, but in previous budget 

hearings, but in addition, what you think about economic growth 

under comprehensive immigration reform. Anyone? All of you? 

Mr. HOLTZ-EAKIN. So, as I mentioned earlier in the hearing, as 

in my written testimony, I think immigration reform is a powerful 

tool for economic policy. The data on the immigrant populations 

speak quite clearly to the fact that they tend to work more, higher 

labor force participation. They retire later. They have a disproportionate number of entrepreneurs who start businesses, hire people, 

bring capital to the United States. All of those are economic benefits from immigration that we can take greater advantage of if we 

choose to. So, I think the data are real clear on that. 

In terms of other strategies, the thing I tried to emphasize in my 

opening is that there should not be a strategy. We have a deep 

need to grow more rapidly, and the public policies that can affect 

it: the tax reforms, the fiscal reforms, the regulatory reforms, education reforms, immigration reforms, trade policies. I think all of 

them have to come into play. And a reliance on any single one 

would probably be a mistake. 

Mr. FURMAN. I agree with a wide range of policies. If you quantify everything on Dr. Holtz-Eakin’s list, on my list, the number 

one, in terms of the largest impact on growth, would be comprehensive immigration reform. That would do more for our economy than 

any other single policy that we could do. 

Mr. DIAMOND. I agree that immigration reform is an important 

pro-growth policy. 

Ms. LUJAN GRISHAM. So, and not that I am disagreeing that you 

should not have a variety of strategies, and in fact, in our economy, 

I find it difficult to weigh in and say that one set of policies by one 

policymaker, whether that is the legislative body or the governor 

or local elected policymakers, the reality is in New Mexico, they did 

not create the 2008 recession. 

They did not ask to have oil and gas commodity prices and related ad commodity prices drop. They, certainly, did not call Congress and say, ‘‘We ought to do a sequester. We are a defense industry state.’’ So, it is all those things combined, certainly, tell you 

that you need to have a diversified economy with several strategies 

that allow you to more meaningfully react to economic changes. 

However, in addition to all of those factors, you know, as I said, 

we are a state that also provided massive tax efforts in an effort 

to create job growth. It has created zero job growth. And again, we 

are, not only as I described earlier in this hearing, having such economic woes, but in fact, we are the only state in the nation that 

is losing population which means we have a brain drain. 

We do not have any young people, and we do not have a qualified 

workforce. So, even if these trickle down strategies work, and they 

do not, in my opinion, there is not anybody to trickle to because 
77 

we have lost the opportunity to do job creation, and train a qualified workforce. 

And Mr. Chairman, I did not have it when I started, but I would 

love to have unanimous consent to enter the article into the record 

from our main newsprint media source that talks about the problems with the tax cuts and tax cut policy in our state. 

Mr. WOODALL. Without objection, that will be included in the 

record. 

[The information follows:] 
78 

l Submission of Ms. Grisham] lJunc 6, 2017; Albuquerque Journal! 

NM's Corporate Tax Revenues Decline 

By Ellen Marks 

Corporate income tax revenues have plunged in New Mexico over the past several years, 

falling beyond what was predicted when a tax cut package was passed in 2013. 

The drop is expected to be nearly 65 percent, from the year the cuts began to the current 

fiscal year projection. 

The reasons go beyond the tax package, pushed by Gov. Susana Martinez and approved 

by lawmakers, and have much to do with the plunge in the oil and gas industry, state 

finance officials say. 

They defend the phased-in tax cuts and say the changes are helping to diversify a state 

economy too long dependent on government and oil and gas jobs. 

"We saw what the oil and gas crash has done to our state," Duffy Rodriguez, secretary of 

the Department of Finance and Administration, said Monday. "To put something in place 

to not have that happen in New Mexico again is extremely important." 

The 2013 tax package, a compromise passed by lawmakers in the final minutes of that 

year's legislative session, called for the state's top corporate income tax rate to drop from 

7.6 percent to 5.9 percent over a five-year period. The package included several other 

provisions, such as expansion of the state's film tax credit. 

This year, corporate income tax collections are expected to account for 1.2 percent of the 

state's general fund revenue and are considered more volatile than other taxes. 

The package, which the governor at the time called the "New Mexico Jobs Package,'' was 

aimed at making the state more competitive in attracting jobs and supporting existing 

ones. 

Since then, the state's unemployment rate has hit the bottom or near-bottom compared 

with all other states, and the number of jobs remains below the level it was before the 

start of the recession in late 2007. 

But Clinton Tumer, chief economist for the Department of Finance and Administration, 

pointed to job growth in New Mexico's private sector. Private businesses were up 9,000 

jobs, or 1.4 percent, compared with last year- the biggest gain since June 2015, 

according to the state Department of Workforce Solutions. April year-over-year figures 

showed overall job growth of 1.2 percent, the highest in almost two years, according to 

the department. 

The Journal on Friday and Monday requested an interview with Martinez, but spokesman 

Michael Lonergan said Monday that she was unable to fit it into her schedule. 
79 

Jim Peach, New Mexico State University economist, said the tax package and increased 

funding for economic development programs "have not put New Mexico at the forefront 

among the states in employment growth. There is very little evidence that lowering tax 

rates promotes economic growth. You're kind of seeing that here." 

Instead, Peach said, firms are looking for a "well-trained and highly educated 

workforce." 

"When you talk to industry people and read industry newsletters ... tax rates are not the 

first thing that firms look for," Peach said. 

Matt Geisel, state economic development secretary, disagreed, saying the cuts and New 

Mexico's other business incentives "are opening the doors for us." 

The state has suffered a series of blows, including the Great Recession, automatic federal 

budget cuts in 2013 and a devastating drop in oil and gas prices in 2014. 

On top of that, Intel's plant in Rio Rancho has shed more than 2,000 jobs over the past 

few years, he said. Intel was once the largest private industrial employer in the state. 

The most recent figures show corporate income tax collections were down 63.6 percent 

year-to-date as of March, compared with the same period the year before. The drop for 

personal income tax collections was 4.9 percent. 

"The reality is, if we didn't do what we have done ... we as a state would be in much 

worse shape," Geisel said. "The diversification is taking foot, and when you factor in the 

impact of these headwinds ... many of which are global in nature, we have made forward 

progress." 

Turner also pointed to a 6 percent boost in construction jobs over the past year and said 

the oil and gas industry has "finally hit the bottom." 

That industry is a big reason for the corporate revenue drop, and other "commodityheavy" states have seen similar or even "more drastic" reductions, he said. 

Some lawmakers, facing a huge budget deficit, proposed last October a two-year halt to 

the phase-in of the tax cut, but the Martinez administration opposed the move. 

The Legislature last month wrapped up another special session to deal with the 

continuing budget crisis. The $6.1 billion spending plan that was approved is about $133 

million more than expected revenues. 

The governor vetoed a package of tax increase proposals that would have generated at 

least $215 million in new annual money, saying it would have hurt New Mexico families. 

A separate GOP-backed proposal to overhaul the gross receipts tax system stalled in the 

Democratic-controlled House. 
80 

The state now faces the possibility of a second downgrade in its credit rating, which 

would mean higher borrowing costs for state and local governments. 
81 

Ms. LUJAN GRISHAM. Thank you very much. I really do not have 

any further questions, unless maybe one—— 

Mr. WOODALL. And the good news is the gentlelady’s time is expired. 

Ms. LUJAN GRISHAM. Oh, man, I was just getting started. I 

changed my mind, Mr. Chairman. 

Mr. WOODALL. As soon as Mr. Yarmuth recognizes round two, I 

hear we will come right back, but—— 

Ms. LUJAN GRISHAM. Thank you very much to the panel. 

Mr. WOODALL.——we are standing between you and our resident 

in-house economist, the gentleman from Virginia, Mr. Brat. 

Mr. BRAT. Oh, thank you very much. All right. You all on this 

panel are in jeopardy of failing Econ 101 a bit here. When consumers, individuals, want to maximize utility, we do not talk about 

growing the economy, right? The language coming out here is for 

our economy. So, of course, immigration, if you import another 

worker, will increase the size of your economy. 

But to show the fatal flaw in the logic coming out on this immigration issue is fairly easy. Let’s just import the whole world. 

Right? Let’s just have 7 billion people move to the United States 

of America, right? So, that would be the biggest economy you have 

ever seen, right? It will increase our GDP by 400 percent or whatever, right? Global. And not one person would be better off. Right? 

So, Econ 101 says what do people care about? They care about GDP 

per capita, after transfers and taxes. Right? That is how you maximize utility. 

I do not think you can show me any papers that show, right, the 

average of folks coming across the border from Mexico, South 

America. Tenth grade education. All children of God, right? No 

issue there. We are just talking economics. They will come in. They 

will make $20,000. If you got two kids in education, that is 

$26,000. You are upside down. And we are only $100 trillion light 

on unfunded liabilities right now, and $20 trillion light on debt, 

right? Because we screwed up the logic and had not paid any attention to productivity growth. 

So, we are stuck in a bind. And so, you are offer us the little ray 

of hope you can. Well, in the short run, right, there is a pig stuck 

in a python, called the demographic thing. Gee, I wish we would 

have known about that 10 years ago. Well, we did. It is just total 

political failure on all fronts. Right, to plan for the Medicare system, and Social Security are insolvent in 2034. It is upside down. 

And so, you are saying, bring in folks in order to solve a temporary 

problem, which it will, right? 

You might get a little bit more tax revenue, short range; you 

grow the economy, but I do not know where to start on that one. 

If you can show me any papers that show immigration helps increase productivity and GDP per capita after taxes and transfers, 

I am wide open to that. 

Second, my colleague Mr. Jeffries over there talked about well, 

we had $1.4 trillion deficits coming out of the Bush years. And so, 

you know, the Obama economy, we had to fix that. Again, just a 

colossal error in Econ 101. 

What caused the financial crisis? And there is no debate. Everyone agrees: the financial crisis started in the housing sector. Do 
82 

you know any private sector bank that would give liar loans and 

no income loans for mortgages? No. Only the Federal Government 

is capable of that genius move. Right? And so, just go look up 

Fanny and Freddy and Mr. Johnson, and that empire he set up 

across the country, and you will find out why we had $1.4 trillion 

deficits. 

Now, let me get to the whole point here on productivity. Immigration, pre-K, education, et cetera. No literature, nothing, has 

been presented that that will increase GDP growth. Right? Per capita, et cetera. Right? I was in education for 20 years. So, it sounds 

great. How much do you need, right? How many more thousands? 

We spend $14,000 per kid right now, per year. And I teach freshman economics, and the kids do not know what a business is after 

13 years in K–12. They do not what a price is. They do not know 

what a cost is. They do not know what a profit is. Great. And in 

higher ed, it is widely taught that business on the supply side is 

morally corrupt, right? K–12 is neutral. Higher ed is not neutral. 

Right? So, gee whiz, I wonder why productivity growth is not great 

when we teach people that the supply side is a pejorative nasty 

work. 

So, demand curve. Supply curve. Right? Demand curve is your 

consumers. Supply curve is all business. And the supply curve is 

the supply side of the economy is bad. Really? Everybody that produces goods and services is bad? So, what we do not hear from the 

other side, we have had demand’s side stuff forever, right? Bailouts 

and non-ending demand stuff. There is no productivity growth, 

right? It is flatter than a pancake. Capital investment is flatter 

than a pancake. 

And so, I am dying to hear something from the other side that 

will enhance productivity growth. And they did have, President 

Obama, a majority of the House, Senate, and whatever. So, if you 

want to do productivity enhancements, why did they not do it? 

So, I just see a collapsing argument on the other side. I do not 

see anything they have proposed over 8 years that enhances productivity growth, and on the contrary, they are saying supply’s side 

incentives are bad, right? It is trickled down or some pejorative 

term like that. And so, I have already blown through my time. But 

you all said productivity is the whole story, right? 

And so, if you can present this panel and both sides with some 

economic papers on how immigration will enhance GDP growth per 

capita after taxes and transfers, I would love to see that. If you can 

give me any arguments on pre-K education, or enhancements in K– 

12, or higher ed that will enhance GDP growth significantly in any 

range, I am wide open to seeing it. If they do, I am all on board, 

right? And so, thank you very much for being here today, and appreciate it. 

Mr. WOODALL. The gentleman’s time has expired. I will recognize 

myself for 5 minutes. I want to pick up where my colleague left off. 

It is true. I am not an economist; I am a lawyer, and so, I rely 

on you all. And you come together with a lot of good maxims that 

I try to apply. One of those maxims, and Dr. Furman used it in 

his opening statement, is infrastructure spending is good for GDP. 

But it is not good in the same way to build a sidewalk out in front 

of my house as it is to build a rail line that runs coast to coast. 
83 

And so, you supply me with the maxims, but then, the conversation 

tends to end there. For example, immigration. Do I need folks to 

pick carrots in south Georgia? Absolutely do. Am I running out of 

families who are having three and a half kids who are raising them 

all to pick carrots? I absolutely am. But I also need more nuclear 

physicists and more entrepreneurs, on and on. 

So, can we start with you, Dr. Holtz-Eakin? You mentioned that 

35 years used to be the time period for doubling our standard of 

living. Now, that is almost doubled. Is your analysis that that is 

systemic to the American economy, or that is because we are participant in the world economy? 

Mr. HOLTZ-EAKIN. It is a set of facts about the U.S. economy. 

They are driven by decline and productivity growth. That is the 

key element. And as Dr. Furman pointed out, we are not the only 

country that has seen a decline in productivity and growth. I would 

hesitate to draw any causal errors. You know, our productivity is 

worse because theirs is worse. You know, I am a big believer that 

we should set our public policies to focus on the U.S. economy and 

its capacity to grow. 

Mr. WOODALL. Though to Mr. Brat’s point, we do set public policy. I am not sure it is focused on the economy as much as it is 

focused on the realization of the individual. We will give you a college loan to go get any liberal arts degree you want in the country. 

I would love to see the paperwork that says getting a liberal arts 

degree helps the economy more than learning an applicable skill on 

day one. And those papers may be there as well. 

Where is the data on how we are investing in human capital in 

this country? I can only spend each dollar once. What big change 

would you make in the way the Federal Government is investing 

in human capital to move the needle the fastest and in the most 

dramatic fashion on GDP? 

Mr. HOLTZ-EAKIN. So, I think the biggest change I would make 

is where the big Federal dollars are in higher education. Most of 

the K–12 systems outside, with one exemption, title 1. On the higher part, I would focus more on having programs for low income individuals be ordered on the basis of time to completion, staying on 

schedule, outcome measures. Not just take the money and go. I 

would try to keep them out of loans because they are not going to 

repay, and target the loans more toward the middle class. And 

there, again, I think you want to have the loans be loans. This notion that loan forgiveness, it should be the top priority just strikes 

me as mixing terms. They are not loans, then. They are grants. 

Mr. WOODALL. It is true. If I have asked you to invest in something that is not giving you a good ROI, then I have asked you to 

do the wrong thing. And Dr. Furman, is it obvious to you what needle you would move on investments in human capital in this country to get better outcomes? 

Mr. FURMAN. I would invest more on preschool. I would invest 

more on community college and training. I think other investments 

might be welcome, but there is a lot of things we could do for quality outside of just spending additional dollars elsewhere in the educational system. 

Mr. WOODALL. Dr. Diamond? 
84 

Mr. DIAMOND. I agree. There is a lot we could do outside of 

spending additional dollars that would make us more productive. 

I agree with trying to reach kids sooner, especially low-income kids. 

And I think a lot of that is on a state-level issue. Just more of, you 

know, re-prioritizing where we want to spend the money each year 

more so than spending more money. 

Mr. WOODALL. I would ask you all to continue that kind of intellectual investment before Mr. Grothman walked in. Mr. Yarmuth 

and I were prepared to stage a coup here. We might disagree on 

how much to spend on infrastructure, but spending those dollars 

in a way that moves the needle in the largest fashion, we would 

come to some sort of agreement on. We might disagree about how 

much to spend on education, but spending those dollars in a way 

to maximize the utility would be something we would agree on. 

And my final question is this. Irrespective of growth rates and 

president’s budgets, President Obama sent me eight budgets that 

never balanced but invested a great deal in the American economy. 

President Trump has sent me a budget that is purported to balance 

that reduces a great deal of spending in the American economy. 

From an economic perspective, is it obvious what grows a GDP 

going out in the future? Budgets that balance, or budgets that do 

not? Or is the question not that simple? Doctor? 

Mr. HOLTZ-EAKIN. I like the idea of aspiring to balance the budget because the level of debt to GDP is already too high, and it is 

on a trajectory to go even higher. We got to reverse that. 

Mr. WOODALL. Doctor? 

Mr. FURMAN. I think the proper goal is debt as a declining chair 

of GDP, President Obama never sent you a budget with a double 

count, with an overly rosy scenario. And in fact, the deficit consistently came in below what the Obama administration was expecting. 

Mr. WOODALL. Dr. Diamond? 

Mr. DIAMOND. You know, I think that what is important in the 

latest budget is not so much, and we focused a lot on the 3 percent, 

but we have proposed to reduce the growth rate and spending for 

the first time I cannot remember when. So, that is at least one 

good thing. 

Mr. WOODALL. I thank you all for your many, many years of 

service. The gentleman from Wisconsin, Mr. Grothman. 

Mr. GROTHMAN. First of all, thanks for keeping things going so 

I got a chance to answer your questions. I just point out that I 

think the amount spent per people in our schools and the number 

of people going to college, and the amount we spend on college, I 

am sure the amount per person or per pupil in K–12 has gone up 

well in excess of the rate of inflation the last 50 years. 

I, personally, do not feel that that spending still more money 

there is the key to success. I think maybe how they spend it is relevant. I think the same thing is true of a college education. At 

least, right now, I think we have maybe people graduating from 

college that cannot get jobs in their field; whereas if they would 

have stuck in tax school or would have been trained by their businesses, they would be much better off. 

So, I am not sure, you know, more government spending on education is the answer. But I want to get back to why our economy 
85 

is not growing more, and I do happen to represent the district with 

more manufacturing jobs than any other in the district in my country. And as I tour my district, be it manufacturing or being in other 

things, the number one that seems to be holding my businesses 

back is they cannot find people to work. Okay? 

They really have a hard time finding people to work out there. 

And I am trying to think what we can do to find more people to 

fill those jobs so our economy can grow. Now, right here, I noticed 

that people on disability has grown over the last 14 years by about 

60 percent. And that is despite the fact that I think, over time, our 

farms, certainly our manufacturers, certainly, have gotten safer 

and safer. 

So, normally, common sense would say, given how much safer 

things are going, you would figure the number of people on SSDIs 

is dropping. I realize the population is getting a little older. But 

when I look at this chart I see, you know, if we had the same percentage of people on disability overall that we did 14 years ago, 

maybe we would have another two and a half, 3 million people 

going to work. And you know, the economic figures should be going 

up all the quicker. 

Does anybody care to comment as to whether they feel that, you 

know, if we were a little bit more careful who we are putting on 

disability—and I realize there are people who are generally disabled need the help; I do not have a problem there—but if we were 

a little bit more careful, maybe we would be able to jump start the 

economy, as these people would fill all the jobs out there that are 

going wanting. 

Mr. HOLTZ-EAKIN. So I think there should be a genuine concern 

about disability roles being disguised unemployment in deep recessions. That is a concern that has been voiced by a lot of economists. 

In looking at the program memo, I think a second thing gets less 

attention, and that is the fact that very people ever exit the disability roles. And there are, I think, there is a good reason to look 

at that, in particular, with young Americans who get classified as 

disabled. They are on SSDI. They are capable of working, and finding routes to get people off those roles and into the labor force 

would be a good thing. 

Mr. FURMAN. I, actually, do not think the evidence is very compelling that the decline of labor force participation is due to disability. Since the 1960s, the disabilities roles have increased 1.5 

percentage points for prime-aged men. The fraction of prime-aged 

men not working has increased by 7.5 percentage points, well in 

excess of that. 

If you look, actually, since the early 1990s, on an age-adjusted 

basis, there has not been an increase in disability for men. The increase that we have seen is because of aging, and the factor you 

cited that more people are on SSDI instead of OASI because of the 

increase in the normal retirement age, and then an increased number of women in the workforce who are now qualified for disability 

who did not used to qualify for it. 

Those are the factors that explain the increase, not some increased generosity. So, I think we can look to reform the disability 

program. There are improvements we could make. I would not 
86 

start from a premise that that is the primary source of our work 

problems, or would be a major solution to them. 

Mr. GROTHMAN. Another question. When I talk to my employers, 

particularly on the lower end of the wage scale, they find people 

are not wanting raises, do not want to work full-time because it 

digs into their benefits, be it affects their low-income housing, their 

health insurance benefits, their food share. 

I know the number of people on food share has gone up from 17 

million in 2001 to 43 million last year, which is kind of dramatic. 

We have another program, the Earned Income Tax Credit, which 

was apparently designed by people who do not want anybody making more than $19,000 a year because that is another benefit you 

lose. To what degree do you think the economy is stagnating because of what I am told by my employers that people are intentionally not making as they can to get the government benefits? 

Mr. WOODALL. Want to take a shot at it, Dr. Diamond? 

Mr. DIAMOND. I think it is a legitimate issue. I think we have 

seen, with unemployment compensation, with ObamaCare, with 

other spending programs, you can put in implicit tax on work, and 

that can discourage people from working. 

Mr. GROTHMAN. Yeah, you have 43 million on food share. I know 

some people are always going to be on food share, but 43 million? 

I mean, that is a lot of people, when you shoot up from 17 million 

15 years ago to 43 million now. I mean, you wonder how many of 

those people would work harder if we did not take away their benefits if they did work harder. 

Mr. DIAMOND. I think that is a reasonable concern. We need to 

structure our policies so that we are as pro-work as possible. 

Mr. GROTHMAN. Thank you much. Thank you for hanging around 

in my two Committees, but we will be forever grateful that you 

waited for me. 

Mr. WOODALL. Thank you, gentlemen, for spending the morning 

with us, Dr. Holtz-Eakin and Dr. Furman and Dr. Diamond. Thank 

you very much for your testimony. Please be advised that members 

may submit questions in writing for you, and those answers will 

be placed in the record as well. Any member who wishes to submit 

questions or any extraneous material may have 7 days to do so. 

With that, the Committee stands adjourned. 

[Whereupon, at 12:15 p.m., the Committee was adjourned.] 
87 

Rep. Smucker Questions for Record for Dr. Holtz-Eakin: 

1.) As a former small business owner, I know first-hand that the tax and spend policies 

that were adopted under the previous Obama Administration arc not working for small 

businesses, and especially the American people. 

• Can you please help some of us understand how our current outdated tax system 

is impeding economic growth and job creation? 

• What are the long-tem1 economic gains from pro-growth tax reforms and how 

will this improve the standard ofliving for American workers and their families? 

2.) As you know, tax reform is not a short-term fix but rather a long-term solution to 

fixing our economy's dismal trajectory. Congress has traditionally used a 1 0-year budget 

window for its economic assumptions. 

• Would you recommend extending the congressional budget window to potentially 

20 years so there is more time for the anticipated economic gains from deficitneutral tax reform to go into effect and boost revenues? 
88 

Rep. Smucker Questions for Record for Dr. Holtz-Eakin: 

1.) As a former small business owner, I know first-hand that the tax and spend policies 

that were adopted under the previous Obama Administration are not working for small 

businesses, and especially the American people. 

• Can you please help some of us understand how our current outdated tax system 

is impeding economic growth and job creation? 

The U.S. corporation income tax represents the mostflawed component the 

brokenjederal tax code. The corporate tax imposes large compliance costs, 

introduces considerable distortions in the U.S. economy, and pushes investment 

overseas, while raising a relatively small amount of revenue. The U.S. corporate 

tax is a conspicuous outlier compared to other major world economies, 

combining the highest tax rate with an outdated worldwide approach to 

international taxation that most OECD countries have jettisoned. These factors 

reduce investment in the U.S., all else equal, and thus slow economic and wage 

growth. Among the most visible examples of this effect is the phenomenon of 

''inversions," whereby U.S. companies relocate abroad for tax purposes. taking 

high-quality headquarters jobs and the associated economic benefits along with 

them. Ajimdamental, pro-growth tax reform should stanch this outflow of 

investment, and make the U.S. more attractive to greater investment in the future. 

• What are the long-term economic gains from pro-growth tax reforms and how 

will this improve the standard of living for American workers and their families? 

Pro-growth tax refiJrm should be designed with the long-term in mind- raising 

trend economic growth and ultimately the standard oflivingfor American 

families. Revenue neutral, pro-growth tax reform can substantially improve 

economic growth. Highly respected economists David Altig, Alan Auerbach, 

Laurence Kotlikoff, Kent A. Smelters, and Jan Walliser, simulated multiple tax 

reforms and found GDP could increase by as much as 9.4 percent/rom tax 

reform. The highest growth rate was associated with a consumption-based tax 

system that avoided double-taxing the return to saving and investment. The study 

also simulated a "clean, " revenue-neutral income tax that would eliminate all 

deductions, loopholes, etc.; and lower the rate to a single low rate. According to 

their study, this reform raised GDP by 4.4 percent over ten years-a growth effect 

that roughly translate into about 0. 4 percent higher trend growth, resulting in 

faster employment and income growth. This represents a key element of bridging 

the gap between the current pace of economic growth and a rate ofgrowth that 

allows for material improvement in the standard of living over the course of 

someone 's career. 

2.) As you know, tax reform is not a short-term fix but rather a long-terrn solution to 

fixing our economy's dismal trajectory. Congress has traditionally used a I 0-year budget 

window for its economic assumptions. 
89 

• Would you recommend extending the congressional budget window to potentially 

20 years so there is more time for the anticipated economic gains from deficitneutral tax reform to go into effect and boost revenues? 

There is nothing uniquely inji)rmative about a 10 year budget window. Congress 

(as well as OMB) have used shorter and longer budget windows in the past to 

evaluate policies and the Congressional Budget Office regularly publishes its 

assessment of the long-term budget outlook. In the ideal, budget estimates should 

provide the most complete assessment of a given policy's budgetmy and economic 

effects, and Congress should not exclude the totality of a given policy's effects 

simply because it falls outside the I 0-year budget window.