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57–056 2010

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THE ROAD TO ECONOMIC RECOVERY: 

POLICIES TO FOSTER JOB CREATION 

AND CONTINUED GROWTH 

HEARING 

BEFORE THE

JOINT ECONOMIC COMMITTEE 

CONGRESS OF THE UNITED STATES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

FEBRUARY 23, 2010 

Printed for the use of the Joint Economic Committee 

( 

(II) 

JOINT ECONOMIC COMMITTEE 

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

HOUSE OF REPRESENTATIVES 

CAROLYN B. MALONEY, New York, Chair 

MAURICE D. HINCHEY, New York 

BARON P. HILL, Indiana 

LORETTA SANCHEZ, California 

ELIJAH E. CUMMINGS, Maryland 

VIC SNYDER, Arkansas 

KEVIN BRADY, Texas 

RON PAUL, Texas 

MICHAEL C. BURGESS, M.D., Texas 

JOHN CAMPBELL, California 

SENATE 

CHARLES E. SCHUMER, New York, Vice 

Chairman 

JEFF BINGAMAN, New Mexico 

AMY KLOBUCHAR, Minnesota 

ROBERT P. CASEY, JR., Pennsylvania 

JIM WEBB, Virginia 

MARK R. WARNER, Virginia 

SAM BROWNBACK, Kansas, Ranking Minority 

JIM DEMINT, South Carolina 

JAMES E. RISCH, Idaho 

ROBERT F. BENNETT, Utah 

ANDREA CAMP, Executive Director 

JEFF SCHLAGENHAUF, Minority Staff Director 

(III) 

C O N T E N T S 

MEMBERS

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

Hon. Sam Brownback, Ranking Minority, a U.S. Senator from Kansas ............. 3 

Hon. Vic Snyder, a U.S. Representative from Arkansas ...................................... 4 

Hon. Kevin Brady, U.S. Representative from Texas ............................................ 5 

Hon. Maurice D. Hinchey, a U.S. Representative from New York ...................... 6 

Hon. Elijah E. Cummings, a U.S. Representative from Maryland ...................... 8 

WITNESSES

Hon. Douglas W. Elmendorf, Director, Congressional Budget Office .................. 9 

SUBMISSIONS FOR THE RECORD

Prepared statement of Representative Carolyn B. Maloney, Chair .................... 30 

Prepared statement of Senator Sam Brownback .................................................. 31 

Prepared statement of Representative Kevin Brady ............................................ 32 

Prepared statement of Hon. Douglas W. Elmendorf ............................................. 34 

(1) 

THE ROAD TO ECONOMIC RECOVERY: 

POLICIES TO FOSTER JOB CREATION 

AND CONTINUED GROWTH 

TUESDAY, FEBRUARY 23, 2010 

CONGRESS OF THE UNITED STATES, 

JOINT ECONOMIC COMMITTEE, 

Washington, DC. 

The committee met, pursuant to call, at 11:30 a.m., in Room 

2325, Rayburn House Office Building, The Honorable Carolyn B. 

Maloney (Chair) presiding. 

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

Senators present: Casey and Brownback. 

Staff present: Brenda Arredondo, Andrea Camp, Gail Cohen, 

Colleen Healy, Andrew Wilson, Rachel Greszler, Jeff Schlagenhauf, 

Ted Boll, and Robert O’Quinn. 

OPENING STATEMENT OF THE HONORABLE CAROLYN B. 

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

Chair Maloney. The meeting has come to order. I would like to 

thank everybody for coming. And I would like to thank you for 

being here. And we are waiting for the ranking member to get 

here, and given time constraints for Members on both sides of the 

aisle—we are all trying to make up snow days and have many, 

many hearings planned—we are going to give all members a 

chance to ask questions. I would like to limit the ranking member 

or his designee for 5 minutes and others for 3 minutes. 

I would like to give my opening statement before I introduce 

Doug Elmendorf, who will be testifying before us today. Today’s 

hearing continues the JEC’s focus on our country’s unemployment 

problem, an effort that we are intensifying this year. The historic 

one-two punch of snow a few weeks ago delayed our series but we 

are trying to get back on track today. We will be examining ways 

to help our economy recover from the great recession of 2007, 

which was fueled by the double blow of crises in both the housing 

and financial services sectors. 

Most economists believe we have two broad job-creating policies: 

increased demand through stimulus and giving incentives to employers to hire additional workers. 

Today we welcome the Honorable Doug Elmendorf, Director of 

the Congressional Budget Office. He will give CBO’s assessment of 

policies and strategies to spur job creation in the near term. 

2 

On Friday we will continue our hearing from business leaders 

and economic forecasters as we explore the prospects for employment growth in the coming months. 

Today’s hearing is timely, since the Senate plans to consider additional actions this week to put Americans back to work. Creating 

jobs is the top priority for Congress on both sides of the aisle and 

for our country. 

With almost 15 million Americans out of work, it is clear that 

immediate targeted actions are needed to spur hiring and boost 

employment. The questions before us are: How do we create jobs 

quickly? And which policies are most efficient? Which offer the 

most bang for the dollar? This hearing will help shine a light on 

the specific actions Congress should take right now, not in some 

distant future. 

Just over 1 year ago, the current administration took office taking the helm of a country suffering from the worst crisis since the 

Great Depression. During the last 3 months of the Bush administration, we lost an average of 720,000 jobs per month. In contrast, 

the most recent 3 months of the Obama administration, we lost an 

average of 35,000 jobs each month. The trend is heading in the 

right direction. 

Thanks to the Recovery Act, the economy is growing. The Bureau 

of Economic Analysis reported that in the final quarter of 2009, the 

economy expanded at a rate of 5.7 percent. The Recovery Act included a tax cut for 95 percent of American families and created 

jobs while investing in clean energy technologies, infrastructure, 

and education. 

While we have brought the economy back from the brink, we are 

not yet where we need to be in terms of job creation. Over 8.4 million jobs have been lost during this great recession, and in addition 

to the 14.8 million workers who are currently unemployed, there 

are 8.3 million workers who currently work part-time but would 

like to work full-time. 

In the last year, Congress has enacted policies to support struggling families and encourage job creation. These actions include 

creating and extending the first-time home buyers credit; boosting 

funding for small business loans via the Small Business Administration; extending safety net programs, such as unemployment benefits and food stamps; and extending the net operating loss carryback provision that will help small businesses hire new employees. 

But we need to redouble our efforts to create jobs. In order to 

bring creative ideas on job creation to Congress, I started the year 

reaching out to CEOs of Fortune 100 companies and leaders of 

small businesses. And I asked these employers to share with us 

their ideas for job creation. 

In order to jump-start job growth, I have introduced an employer 

tax credit cosponsored in the Senate by my JEC colleague, Senator 

Casey, and my fellow New Yorker, Senator Kirsten Gillibrand. The 

idea was suggested by several of the responders to our survey. The 

credit will give employers an incentive to hire new workers and 

raise wages. This will help workers get back on their feet, spark 

consumer spending, and brighten our economic climate. 

I welcome CBO’s input about how to best design an employer tax 

credit. A recent CBO study showed that an employer tax credit, 

3 

similar to the one in our bill, is one of the most effective and efficient ways of spurring hiring. The object of this week’s hearing is 

to get feedback from experts to make sure that our actions work 

and help to create jobs. For example, CBO has pointed out that one 

of the lessons of the 1970s employer tax credit was that many employers did not even know about the tax credit until they filed their 

returns, too late to effect hiring decisions. 

I look forward to CBO’s perspective on finding solutions to the 

most pressing issue of the day—creating jobs. Thank you very 

much. 

[The prepared statement of Representative Maloney appears in 

the Submissions for the Record on page 30.] 

And I recognize Mr. Brownback, the ranking member, for 5 minutes. 

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

Senator Brownback. I thank the Chair for the hearing. I appreciate this very much. 

Director Elmendorf, you have one of the most challenging jobs in 

government. I welcome you here, and I look forward to the question-and-answer session. 

I will submit my full statement into the record so we can get to 

the questions as soon as possible. But the one thing I would note 

to the director is, we are seeing the Fed now start developing policies to pull back some on the monetary supply, which I think is a 

wise move on the Fed’s part, having put a lot of money out there 

during the recession, the key parts of it, to try to keep the banks 

going, keep the economy as liquid as you possibly could. And I 

think that is a wise move on the Fed’s part. 

I sure think on our part, then, we ought to be looking at how we 

get our deficits down. I mean, you would think if the Fed is looking 

at the economy and saying, okay, it is probably starting to hit bottom, maybe it is going to start coming out, and I would love to hear 

your thoughts and comments on this. We have to work on the jobless rate, yet it almost seems like now would be the time period 

we would start looking at how you pull back on some of the deficits 

that the Federal Government is running? 

And those numbers are absolutely horrific. We have seen the 

President’s proposed budget. The publicly held national debt will 

nearly double from 40 percent of GDP in 2008 to 75 percent of GDP 

in 2018. And that is the publicly held debt. The total U.S. debt will 

surpass 90 percent of GDP this very year. I know, Director, you 

know these numbers very, very well. But that 90 percent total debt 

threshold number is one that I have heard a number of economists 

cite and say, this is a troubling level. 

Now, when you get to this point in your debt level, then it starts 

being a drag on your economy and can drag it down. I have seen 

numbers as high as reducing it 4 percent in its growth rate. So it 

seems to me that we are at one of these crossroads that the Fed 

has identified that now, after having put a lot of money out there 

to try to stimulate the economy to try to help, now you have got 

this debt and deficit debt at 90 percent of GDP, and it is time you 

start looking at ways to pull this back so that you can get that 

4 

under control so it won’t drag on your economy or so that the Fed’s 

numbers won’t create an inflationary situation. And I really think 

this is something we have got to start looking at aggressively for 

us as a country. 

I would note, finally, that I will be hosting, along with my colleague, Mr. Brady, a discussion this afternoon, a seminar at the 

Capitol Visitor Center, about return to prosperity, creating the 

strongest economy of the 21st century. We have a Nobel prize winning laureate, Dr. Edward Prescott; a noted monetary economist, 

Dr. Allan Meltzer; a former OMB director and some others at that. 

I think we have to start looking at this in the big broad picture. 

I think we all want the same thing; we want a strong vibrant 

growing economy. But you have got to start making these moves 

to get the deficit under control. That is what we control. And I hope 

you can help us identify some of the paths and ways that we can 

do this so that the deficit and the debt doesn’t drag our potential 

for some real economic growth to take place. I want to thank the 

Chair again for the hearing. 

[The prepared statement of Senator Brownback appears in the 

Submissions for the Record on page 31.] 

Chair Maloney. Thank you. 

Representative Sanchez. 

Representative Sanchez. I have no opening statement. 

Chair Maloney. Okay. 

Mr. Campbell. 

Representative Campbell. No. 

Chair Maloney. Representative Snyder. 

OPENING STATEMENT OF THE HONORABLE VIC SNYDER, A 

U.S. REPRESENTATIVE FROM ARKANSAS 

Representative Snyder. Thank you, Madam Chair. 

Mr. Director, I appreciate you being here. I want to make a few 

comments about banking. I know you are not a banker. It was actually me that had my staff call to get a list of all your publications 

over your entire life, just to see if you have ventured into the area 

of banking, and I decided you had the kind of background I could 

ask the question to, so I am going to take advantage of this time. 

I want to tell my own personal experience about overdraft fees 

and some of the things with Bank of America and then lead up to 

my comment. But $35 overdraft fees. I had the experience some 

time ago of discovering the hard way that the checks are processed 

in your account not in the order that you incur them but in the 

order of biggest to smallest. You are probably aware of that. I 

pulled it on a Saturday, checked my account, had $140 or something, took out $100. By the time it was processed that following 

Monday, the $100 was, the order was changed. So, in fact, the $100 

incurred an overdraft fee because they are processed not in the 

order in which I took money out but in an order that is most advantageous to Bank of America to drive me into overdraft fees. 

And then we are all familiar with the delay. From the time I 

make a purchase, it may show on my account pending Starbucks 

$3.95, but it may be a while before the merchant gets that dollar. 

The banks are holding that money and making some money on 

that. 

5 

But this is what got me started. I was approached at a ball game 

not long ago in Little Rock by an employee of Bank of America who 

said there are some practices going on that are shameful. He said 

that what is happening is that people may well get their overdraft—and we are all responsible for keeping track of our money; 

I make mistakes on this stuff like a lot of people can—but he said, 

in fact, that money then does not immediately go to the merchant. 

It is still held for a period of time, during which the Bank of America makes money on that. And he said, how can this money suddenly have a new owner? It is either mine, or it is the merchant’s. 

It is not the bank’s. So I am paying $35 for the privilege of the 

merchant getting the money, but in fact the bank is holding the 

money for an additional period of time. And he came to me because 

he was embarrassed by what, in his view, I don’t know if he is 

right or not, but this is what he told me happened. And then the 

occasion of—— 

Chair Maloney. The gentleman’s time is almost up. 

Representative Snyder [continuing]. I am sorry. 

And then if you want to have a cash transfer made from your 

Bank of America credit card into your checking account, it is a 25 

percent interest rate. And the last time I did that, a few weeks ago, 

I felt like I was dealing with a loan shark. And the comment and 

question I want to make is, how can we think small business in 

the American community, business community, is going to do well 

if their bankers are not on their side? It is like we are no longer 

dealing with Jimmy Stewart; we are dealing with Mr. Potter, to 

put it in a metaphor that we can all understand from ‘‘It is a Wonderful Life.’’ 

And I know the chairwoman has done a lot of work on this. But 

you are talking a lot about job creation. It seems like we still have 

an issue that the dynamic between business people and customers 

and their bankers has changed over the last several decades. 

Thank you, Madam Chair. 

Chair Maloney. Thank you. Mr. Brady. 

OPENING STATEMENT OF THE HONORABLE KEVIN BRADY, A 

U.S. REPRESENTATIVE FROM TEXAS 

Representative Brady. Thank you, Madam Chairman. 

Director Elmendorf, thank you for being available to the committee this morning. Given the depth and length of this recession, 

economists would normally expect a sharp V-shaped recovery with 

a strong rebound in output and employment. As we all know, this 

hasn’t been the case. Real GDP grew at an annualized rate of 2.2 

percent in the third quarter of last year. It accelerated to 5.7 percent, which was encouraging, but most of that growth was due to 

one-off restocking of inventory. So the fourth quarter spike revealed how deeply businesses emptied their shelves last year, but 

doesn’t give us an indication of how confident they are in bringing 

back workers or hiring new ones. Real final sales, which probably 

are a better indicator, rose by just 2.2 percent last quarter. 

This is consistent with the sluggish economic growth forecast for 

the next 2 years. You, the CBO, forecast real GDP will grow by 2.2 

percent this year, a little less than 2 percent, 1.9 next. The February Blue Chip Consensus is a little more optimistic but still slow 

6 

when compared to the normal growth after a severe recession like 

this. Weak economic growth means less job creation. It will be anemic. The unemployment rate will remain elevated for a number of 

years. CBO again has forecast an average unemployment rate 10.1 

percent for this year; slightly lower, 9.5 percent, in 2011. 

And I think, while January’s declining unemployment rate to 9.7 

percent is encouraging, most of the improvement was attributable 

to an increased number of part-time jobs reported by households. 

Payroll employment fell by another 20,000 jobs. And this divergence between the household and establishment surveys is unusual. I think we will all be watching in the future to see exactly 

what all this portends. 

When I look at the recovery under the Obama administration 

versus that after the August of 1981 to November of 1982 recession, which was similar in depth and length, there are major differences. Comparing the Reagan and Obama recoveries so far, the 

average annualized rate of real growth was 7.2 percent in the first 

two full quarters of the Reagan recovery, compared with about half 

of that, 4 percent, in the first two full quarters of this recovery. 

During the first 7 months of the Reagan recovery, payroll jobs increased by 1.2 million jobs. We lost about that amount, 1.1, in the 

first 7 months of the Obama recovery. 

So the question is, why are jobs and real GDP growth so different? I really believe, as Senator Brownback said, the uncertainty; cap and trade, tax increases, health care mandates, all that 

they are seeing up here is having a dramatic effect on businesses’ 

decisions to invest capital, make that expansion decision, bring 

back an old worker, hire a new. And one of the questions, Director, 

I am going to ask you is how that plays into some of your economic 

projections going forward. Thank you. 

[The prepared statement of Representative Brady appears in the 

Submissions for the Record on page 32.] 

Chair Maloney. Mr. Hinchey. 

OPENING STATEMENT OF THE HONORABLE MAURICE D. 

HINCHEY, A U.S. REPRESENTATIVE FROM NEW YORK 

Representative Hinchey. Well, thank you very much, Madam 

Chairman. 

And Mr. Director, it is nice to see you. And thank you very much 

for being here. I am looking very forward to all the things you are 

going to tell us so that we can solve this problem. And we know 

it is a serious problem because last year we experienced, at least, 

the largest deficit that we had seen since the Second World War. 

Now, a lot of that has to do with the way in which spending was 

engaged in over the previous administration over the loss of the 

last several years and including tax cuts. There was a big tax cut 

which concentrated wealth in the hands of the wealthiest 1 percent 

of the population of this country. So we have right now the greatest 

concentration of wealth in the wealthiest 1 percent of the people of 

this country since 1929. Now, that is indicative also in many ways 

of the economic circumstances that we are dealing with. 

Also, the prescription drug plan. The prescription drug plan took 

a huge amount of funding out and increased this budget deficit 

7 

hugely. That is another thing that has to be dealt with and has to 

be corrected. 

And, of course, the war in Iraq; the war in Iraq, which had no 

justification whatsoever and which has cost us huge amounts of 

money, hundreds of billions of dollars. There are estimations that 

that amount may go to as high at $1 trillion at some point in the 

not-too-distant future. 

And all of these things have to be corrected. And there are other 

things that have to be corrected. We have a lot of the manufacturing operations in this country that have been exported out to 

other places around the world. That has got to be dealt with, and 

we have got to deal with that intelligently. There is an interesting 

reluctance on the part of a number of members of the Congress 

here to invest appropriately in this economy, not those three things 

that I just mentioned, the tax cuts, the prescription drug plan, the 

war in Iraq, but to invest in the internal needs of this country. And 

there is a reluctance to do that, even though there was no reluctance to do the three things that I mentioned in the past. 

That has got to happen. This is a country that needs to focus attention on the internal needs and therefore the creation of jobs. It 

was very interesting to me about how the Senate yesterday passed 

that jobs bill. And if I remember correctly, I think there were four 

Republicans, including one brand new one, who voted for that bill, 

enabling it to pass. And that jobs bill is going to stimulate a lot 

of economic growth through the creation of jobs, including the manufacturing or the upgrading of the transportation industry in this 

country, roads, bridges, et cetera. All of those things are in dire circumstances. 

We have had too many administrations that failed to focus their 

attention, and too many Congresses, that failed to focus their attention on the internal needs of this country and to invest in it appropriately to create the jobs and to stimulate economic growth 

generally. All of that really needs to be done. And it needs to be 

done in the way in which other administrations, if you think back 

to the Great Depression, the way in which the Roosevelt administration did and how they continued to operate until 1937, until a 

larger number of people said, oh, my goodness, we are spending too 

much money, and then it stopped. 

And the increase in the economic growth stopped, and the recession dropped down deeply again, making it even worse. So there 

are an awful lot of things that we know. All you have to do is look 

back on history for the answer to a lot of questions. And all you 

have to do is look accurately and honestly in the context of the circumstances that we are dealing with to get the answer to those 

questions as well. 

Hopefully this Congress, maybe even through the example of 

what happened in the Senate yesterday, may now be on the edge 

of doing things in the right way; stimulating economic growth, investing in the internal needs of this country and creating the kind 

of jobs that we need. I am very interested in seeing what you have 

to say about all those things. 

Chair Maloney. Thank you very much. 

And I now would like to introduce Dr. Doug Elmendorf—Mr. 

Cummings, oh, I am sorry, I didn’t see you. 

8 

OPENING STATEMENT OF THE HONORABLE ELIJAH E. 

CUMMINGS, A U.S. REPRESENTATIVE FROM MARYLAND 

Representative Cummings. That is okay. That is all right. 

Thank you very much, Madam Chairlady. 

And I want to thank you, Director Elmendorf, for being here. 

You know, I was thinking about what Mr. Hinchey said, and I 

associate myself with his words. 

I held my third foreclosure-prevention event the other day. More 

than 1,000 people showed up, and we were able to get bankers and 

lenders to come together, and we saved at least 700 or 800 people’s 

houses. And they are all consistently like that. 

But there are some people we can’t save. Those are the people 

who have lost their jobs. And it is really, really very sad. And I 

guess, you know, going back to what Mr. Hinchey said, you know, 

everybody jumped up and down when Scott Brown was elected on 

the other side. But do you know what? I thought about it yesterday, and maybe it will work just the opposite. Maybe he will be a 

breath of fresh air coming in. And thinking about the people that 

I saw on Saturday, the ones that left my prevention conference in 

tears, you know, sometimes I wonder whether we up here don’t 

think about enough people, like the fellow and his wife who were 

sitting on the front row in my conference with tears running down 

their face the whole time I was talking, for 15 minutes, trying to 

tell them to save their houses. And so I think we are going in the 

right direction. 

To be frank with you, I don’t think the Senate bill does enough, 

but it damn sure beats standing still. I mean, at least we are now 

getting our Republican friends to work with us. And I encourage 

the President to continue to reach out, because he is right; it is not 

about us. Sometimes I think we think this is about us. It is not 

about us. It is about the people that we represent and the people 

you try to help every day. 

And so, you know, I am glad you are here. I don’t know whether 

you are going to comment on the Senate bill or the House bill. But 

I do want to know what you see as being the most effective and 

efficient and fastest way to get people back to work because, and 

as you said in your testimony, a lot of these jobs aren’t coming 

back. So then we have to deal with training and things of that nature. So I look forward to your testimony. 

Madam Chair, and with that, I yield back. 

Chair Maloney. Thank you very much for all your hard work 

in preventing foreclosures and for policies that create jobs. 

I now would like to introduce Director Elmendorf, Director of the 

Congressional Budget Office. And immediately prior to becoming 

the CBO Director, he was a senior fellow in the Economic Studies 

Programs at the Brookings Institution. He served as co-editor of 

the ‘‘Brookings Papers on Economic Activity,’’ and the director of 

the Hamilton Project, an initiative to promote broadly-shared economic growth. 

Director Elmendorf also served as a Deputy Assistant Secretary 

for Economic Policy at the Treasury Department and an Assistant 

Director of the Division of Research and Statistics at the Federal 

Reserve Board. 

9 

Thank you for your service. We look forward to your comments. 

Thank you. 

STATEMENT OF THE HONORABLE DOUGLAS W. ELMENDORF, 

DIRECTOR, CONGRESSIONAL BUDGET OFFICE 

Dr. Elmendorf. Thank you, Chairman Maloney and Senator 

Brownback. 

To all the committee, I appreciate the opportunity to testify 

today on policies to foster economic growth and employment this 

year and next. 

The United States has just suffered the most severe recession 

since the 1930s. At 9.7 percent, the unemployment rate is nearly 

twice what it was before the recession began in December of 2007. 

Since that time, employers have shed about 8.5 million jobs. And 

if one accounts for the jobs that would have been created had the 

economic expansion continued, the recession has lowered employment by about 11 million jobs relative to what it otherwise would 

have been. 

The economy is starting to recover with inflation-adjusted GDP 

growing in the second half of 2009. Moreover, as Congressman 

Brady mentioned, severe economic downturns often sow the seeds 

of robust recoveries. During a slump in economic activity, consumers defer purchases, especially for housing and durable goods, 

and businesses postpone capital spending and try to cut inventories. Once demand in the economy picks up, spending by consumers and businesses can accelerate rapidly, which in turn generates demand for workers. 

Although CBO expects that the current recovery will be spurred 

by that dynamic, in all likelihood, recovery will also be dampened 

by a number of significant factors. Those factors include the continuing fragility of some financial markets and institutions; declining support from fiscal and monetary policy; and limited increases 

in household spending because of slow income growth, lost wealth, 

and a large number of vacant houses. 

We expect that these factors will cause spending, output and employment to rebound only slowly, a view shared by most private 

forecasters. As shown by the first figure, CBO projects that the unemployment rate will average slightly above 10 percent in the first 

half of this year; fall below 8 percent only in 2012; and return to 

its long-run sustainable level of 5 percent only in 2014. 

As a result, more of the pain of unemployment from this downturn lies ahead of us than behind us. Concerns that the recovery 

will be slow and protracted have prompted the consideration of further fiscal policy actions. For a number of policies that have received public attention, CBO used evidence from empirical studies 

and models to estimate the impact on output and employment. I 

want to emphasize the uncertainty of the 10 such estimates, which 

we have tied to communicate using ranges of numbers. 

The second figure summarizes the results of our analysis. I am 

afraid it is a little small to see on that screen. I will try to talk 

through it. The figure shows for each policy the cumulative effect 

on years of full-time equivalent employment per million dollars of 

budgetary cost. In other words, this is the cost effectiveness of different policies at increasing employment, and we measure cost efVerDate Nov 24 2008 12:03 Aug 20, 2010 Jkt 055045 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 C:\DOCS\57056.TXT SHAUN PsN: DPROCT
10 

fectiveness per million dollars of total budgetary cost by its cumulative effect on years of full-time employment. 

The lighter set of bars at the top of the picture refer to policy 

options that are estimated to have a substantial proportion of their 

impact beginning in 2010. On the darker bars are options that 

were estimated to have most of their impact beginning in 2011. 

Let me briefly run through the policy options we considered. The 

top bar reflects increasing aid to the unemployed. Households receiving unemployment benefits tend to spend the additional benefits quickly, making this option both timely and cost effective in 

spurring output and employment. 

The second bar is the effect of reducing employers’ payroll taxes. 

Firms will probably respond to this sort of tax cut through a combination of lower prices, higher wages, and higher profits. The 

changes in prices, wages and profits would spur additional spending, which would boost employment. In addition, the reduced cost 

of labor would directly encourage the use of more labor and production. 

The third bar shows the effect of reducing employers’ payroll 

taxes only for firms that increase their payroll. This policy would 

generate a larger employment gain than the previous one per dollar of budgetary cost because the tax cut is linked to payroll growth 

and therefore uses fewer dollars to cut taxes for workers who would 

have been employed anyway. Alternative ways of designing such a 

tax cut could have significant impact on its effectiveness, and I 

would be happy to discuss that if you would like. 

The next bar shows the effect of reducing employees’ payroll 

taxes. This option would have a smaller stimulative effect than reducing employers’ taxes. It would not immediately affect employers’ 

costs, but instead would have an effect similar to those of reducing 

other taxes for those people. That is, it would raise spending and 

therefore production and employment. 

The next bar is the effect of providing an additional one-time Social Security payment which would increase consumer spending. 

And the last of the light bars would allow for full or partial expensing of investment costs which would provide a greater incentive for business investment. 

Now I will turn to the darker bars, the ones for policies that we 

estimate would have their largest effect beginning in 2011. The 

highest of those darker bars is investing infrastructure. Many, but 

not all, infrastructure projects involve considerable start-up lags; 

thus most of the increases in output and employment from this option, even if enacted in the very near term, would probably occur 

after 2011. 

The next bar is providing aid to States for purposes other than 

infrastructure. As most States struggle to respond to huge budget 

gaps, additional Federal aid would lead to fewer layoffs of State 

employees, smaller increases in State taxes and so on. 

The next bar is providing additional refundable tax credits for 

lower- and middle-income households in 2011. This approach would 

increase after-tax income for households that are likely to spend 

the significant share of the funds received. 

The next bar, now I am down to the next to last bar, is extending 

higher exemption amounts for the AMT in 2010. This option would 

11 

have a more limited impact on spending because it largely affects 

households whose spending is not constrained by their income in 

a given year. 

And the last bar shows the effect of reducing income taxes broadly in 2011. Again, only a fraction of such a tax cut would probably 

be spent. 

In conclusion, in our analysis, fiscal policy actions, if properly designed, would promote economic growth and increase employment 

in 2010 and 2011. However, despite the potential economic benefits 

in the short run, such actions would add to already large projected 

budget deficits, as Senator Brownback noted. Unless offsetting actions were taken to reverse the accumulation of additional government debt, future incomes would tend to be lower than they otherwise would have been. Thank you. I am happy to take your questions. 

[The prepared statement of Dr. Douglas W. Elmendorf appears 

in the Submissions for the Record on page 34.] 

Chair Maloney. Thank you very much. 

And I think that—oh, Mr. Casey just came. 

Is he here? 

Welcome. And I would like to have you begin the questioning 

since I know you have to get back immediately. 

Senator Casey. Well, thank you very much. 

Mr. Elmendorf, thank you again. I appreciate your testimony 

today and your service. 

I was struck by the graphic that you walked through that differentiates between impacts in 2010 versus 2011, especially in a 

couple of different areas. One is obviously the bar for impact in 

2010, according to your graph, is substantial as it relates to aid to 

the unemployed. Is that correct? 

Dr. Elmendorf. Yes. We think that policy is cost effective and 

can work very quickly. 

Senator Casey. Just so I am reading, I want to make sure I am 

reading the graphic right, you are saying that years of full-time 

employment—I want to have you say it—in terms of the impact 

that an extension of unemployment compensation insurance, what 

that would provide in terms of a job impact? 

Dr. Elmendorf. What this picture shows in the top bar is that 

over 2010 and 2011 together, that increasing aid to the unemployed 

would add in our estimate between 8 and 19 years of full-time 

equivalent employment per million dollars of budgetary cost. 

Senator Casey. And I know that in the Senate as well as in the 

House, we are going to be debating extending so-called safety-net 

provisions, whether that is unemployment insurance or COBRA 

health insurance as well as food stamps. So that is very helpful for 

our deliberations about how to do that. 

The other part that I wanted to review is with regard to payroll 

taxes. I have a bill in the Senate, a tax credit proposal, which 

would provide a tax credit for employers that are adding to their 

payroll. For less than a hundred they would get a 20 percent credit, 

and above a hundred would get a 15 percent credit. Chairwoman 

Maloney has a companion bill in the House, and we think it is a 

really good idea for a number of reasons, in addition to several 

other tax credit ideas that are out there. 

12 

I want to have you walk through the next two if you could, or 

maybe the next three, in terms of what a—and I should say for the 

record, although I won’t be able to quote from it directly, but I 

know that CBO, the Congressional Budget Office, has given this 

kind of idea a good review, and we are grateful for that. 

But if you can just walk through the payroll tax sections here 

and the impact of a tax credit. I know I have just described mine 

in broad terms, but just your thoughts on that to help us with our 

own deliberations. 

Dr. Elmendorf. Let me just note briefly, as you know, we have 

written you a letter analyzing the effects of—alternative ways of 

designing a tax credit of this sort. Of course, we don’t review proposals with an eye to supporting or objecting to them. We are just 

doing an analysis, and it is up to you and your colleagues to decide 

what policies to pursue. 

Senator Casey. I was doing my best to put words in your 

mouth. 

Dr. Elmendorf. And I am doing my best not to let you, Senator. 

What we have said in our initial report and our letter to you, and 

you can see in those bars, is that in our judgment, policies that cut 

employers’ payroll taxes are more cost effective in terms of stimulating employment over the next couple of years than many of the 

other policies that we have considered. 

In our judgment, what firms will do with a cut of that sort is 

partly to take advantage of their lower cost by cutting the prices 

of their goods and thus trying to stimulate demand, and it is really 

the shortfall in demand that is the crux of the recession and the 

crux of the problem in hiring. 

Additionally, these tax credits provide an incentive to use more 

labor by lowering the cost of labor in particular. In our judgment, 

a broad tax, payroll tax cut applying to all firms would raise fulltime equivalent employment by 5 to 13 years per million dollars of 

total budgetary cost. A tax cut that was focused on firms that increased their payroll would have a larger effect of 8 to 18 years of 

full-time equivalent employment per million dollars. It has a larger 

effect in our judgment because less of the money goes toward paying for jobs that would have existed anyway. By only granting the 

tax cut for firms that are increasing employment, it is more focused 

on those increases. So per dollar of lost revenue, there is a greater 

incentive effect. 

Now, as people have noted, for firms that have kept their payrolls going, that sort of approach does not provide a reward, and 

that is a tradeoff that you need to wrestle with. 

We have not analyzed your specific proposal. It is complicated 

enough to do hypothetical proposals of the sort that we have been 

working on for a number of months, and we haven’t tried to apply 

this methodology to any of the actual bills moving or being discussed in the Congress because there have just been a lot of pieces 

on all of these bills, not all of which we have analyzed, and specific 

features of your legislation and others that we haven’t modeled at 

this point. So I can’t give numbers to your proposal, but this is the 

basic thrust of our analysis. 

Senator Casey. Thank you. I know I am out of time. I just say 

by way of comment, it is helpful that you have not only differenVerDate Nov 24 2008 12:03 Aug 20, 2010 Jkt 055045 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 C:\DOCS\57056.TXT SHAUN PsN: DPROCT
13 

tiated between tax credits versus other strategies, but within the 

realm of tax credits with increase payroll, those kinds of tax credits 

have a bigger impact, and that you are talking about 2010, so that 

is very helpful. Thank you very much. 

Dr. Elmendorf. Thank you, Senator. 

Chair Maloney. Thank you very much. 

Senator Brownback. 

Senator Brownback. Thanks, Madam Chair. I appreciate that. 

Director Elmendorf, I asked you as I walked in whether you had 

any number of projections on the administration’s new health care 

proposal. And what you told me is that you do not; you do not have 

the detail necessary to make budget projection. Is that correct? 

Dr. Elmendorf. That is right, Senator. 

We saw that proposal for the first time yesterday when you and 

others did and have started to look through it. In our initial read, 

we don’t think there is enough detail on some aspects of the proposal for us to do a cost estimate. And even if such detail were provided, it would take us some time to do that. As Members of Congress have learned over the past year, for very complicated proposals, we try to do a very careful analysis, and that takes us a 

good deal of time. 

Senator Brownback. I noted to you in my opening comments 

that our debt is now 90 percent of GDP, our total debt, and that 

most economists believe when you get at that 90 percent level you 

have a significant drag on your overall economy. Do you agree with 

the assessment of most economists that when you get that level of 

debt that it is a drag on your overall economy? 

Dr. Elmendorf. We certainly agree, Senator, that increasing 

levels of government debt provide an increasing drag. 

Whether there are tipping points, and if so, what they are, is a 

much more difficult point to ferret out of the data. And there certainly has been some prominent analysis that suggest that 90 percent of GDP is a sort of tipping point; that countries that have had 

debt above those levels have experienced significantly slower 

growth than countries with debt below those levels. 

But as I say, I think the level to which one can take debt and 

how the risks rise as one increases the level is a difficult thing for 

economists to quantify. I think there isn’t as much consensus 

around that. But there is a very clear consensus that rising levels 

of debt will over time reduce standards of living, will reduce the 

flexibility of the government to deal with crises, and will raise the 

risks of some sort of financial crisis. 

Senator Brownback. Is there general agreement among economists that once you get over 90 percent debt to GDP, that this does 

create a significant drag on the economy? Would you agree with 

that and would you say that there is general agreement among 

economists on that notion? 

Dr. Elmendorf. I am reluctant, Senator, to point specific levels. 

I think that is a very subtle proposition. For example, many 

economists and we at CBO tend to focus on publicly held debt, 

which will be, at the end of this fiscal year, we think about 60 percent of GDP, rather than gross debt that you point to. 

But again, that is one of the issues that people do disagree about. 

So I don’t want to point to there being a specific number that most 

14 

economists think is a sort of tipping point. But I think, again, it 

is a very widespread view that if we go through the next decade 

with debt at 60 percent of GDP and going up, that will mean lower 

standards of living over time than if we were persisting through 

this decade with debt at say 40 percent of GDP, where it was a few 

years ago. 

Senator Brownback. On our current trajectory, we are on a 

track to have lower standards of living. 

Dr. Elmendorf. Yes, that is right, Senator. 

Relative to what otherwise would have happened, of course— 

there is other progress in the economy as well, and we project rising GDP over time. But relative to what would have happened with 

lower debt, the path that we are on, would represent a lower standard of living. 

Senator Brownback. So clearly it would be wise to get that 

debt and deficit down? 

Dr. Elmendorf. I think there is widespread agreement among 

analysts that getting that deficit and debt down over time is important. At this point in time, it is more complicated. I think there is 

a very substantial group of economists who believe that, given the 

current shortfall of employment relative to what it could be, of production relative to what it could be, that there should be stimulus 

provided at this point. 

I think there are very few economists who argue that we should 

be looking for higher deficits 5, 6, 7, 8, 9, 10 years from now. I 

think there is much more disagreement about what should happen 

in the near term. And partly that is because, under current law, 

as CBO projects it, deficit does fall considerably in the next few 

years. As the economy recovers, even though we are looking for a 

slow recovery, we are expecting the deficit to fall from nearly 10 

percent of GDP this year to about 4 percent 2 years from now, in 

fiscal year 2012. So under current law, and, again, that assumes 

that tax cuts are not extended and so on, there is a very substantial fiscal consolidation (a term people often use) over the next few 

years. And some economists are worried that that is too fast; others 

think that is not fast enough. 

But what I think there is a very widespread consensus about is 

that the persistence of deficits beyond the cyclical downturn at the 

levels we expect under current law, and even more so if you extend 

tax cuts and make other changes, are a level that would be very 

damaging to the U.S. economy. 

Senator Brownback. Or enact other spending that would exacerbate the deficit or debt. 

Dr. Elmendorf. Yes, that is right, over that longer time frame, 

yes, would be harmful, yes, that is right. 

Senator Brownback. Thank you, Chair. 

Chair Maloney. Thank you. 

And also, Ms. Sanchez is under a time constraint, so I recognize 

her for 5 minutes. 

Representative Sanchez. Thank you, Madam Chair. 

And thank you, Director, for being before us and for your really 

great report actually. 

I think back to my economic training and the whole issue of how 

one invests for the long term, which is ideally the way I always 

15 

think about things when I look at my own personal household income, for example. And we always look at things like education, 

movement of goods or people, communication, i.e., e-mail, Internet, 

et cetera, health of people, your basic investment in research, and 

then I think also to that, your access to capital is an important 

issue there. 

And I think as we have been trying to pass policies and as we 

put forward the Recovery Act and as we are looking at this jobs 

act, we are really trying to take care of people in the short run but, 

at the same time, understanding that we need to invest in the long 

term in order for us to be able to pay back what we are pulling 

forward and spending right now. 

And I think your graph shows that, you know, when you keep 

people—when you extend unemployment, when you give more moneys to commodities for food for people who really don’t have jobs, 

et cetera. And then where you go into investment of infrastructure, 

we can see how something impacts immediately and how something will impact a little bit later as the funds come out. 

But my question, and it goes back to what you and I were discussing before everybody came in, this whole issue of jobs are really created at the local level by our smaller- and medium-sized businesses and their real lack of ability to get that working capital that 

they need. And I gave you some examples of people that I have 

been talking to, some very close to me, about just what is happening out there. 

What policy could you counsel us to think about really in trying 

to make a little bit more liquid the place for small- and mediumsized businesses to go and get that working capital they need to 

start the economic machine to go? 

Dr. Elmendorf. You ask a very important question, Congresswoman, and I am afraid I don’t have an answer equal to it. We 

have not had an opportunity yet to look hard at ways in which the 

government could improve the flow of capital to particular sectors 

of the economy. 

It is certainly true that small businesses are having the most 

persistent problems in gaining access to capital. For large businesses, particularly for large businesses, with better credit ratings, 

capital is available, but less, much less so for small businesses. 

And the lack of capital is repeatedly cited as an obstacle to small 

businesses. 

And I should say that a larger obstacle in the minds of small 

business people, according to surveys and another one was released 

this morning, is a lack of demand for their products. And one thing 

that would help them is for that demand to increase through higher consumer spending or business spending or government spending, and the policies that we are talking about today have some potential for doing that. 

In terms of increasing access to capital, it is difficult, I think, for 

the government to set up a bank of its own in a sense. Part of what 

has worked and is important for small businesses is their connection with bankers who know their business and know them. And 

if those banks that they are used to dealing with, as you mentioned 

to me earlier, go out of business themselves or are taken over by 

other banks, that connection is broken, and it is very difficult to 

16 

replace that. And there is some evidence that one of the reasons 

that recoveries from financial crises tend to be protracted in other 

countries and the U.S. in past history is because of a breakdown 

in some of that financial intermediation. So you put your finger on 

an important question, but we just haven’t done enough work ourselves to offer options on policies. 

Representative Sanchez. We do have guarantee type of organizations like SBA, which, you know, when you look at trying to get 

through that paper work and the weight that it takes on, something like that, and really the higher level of loan that one needs 

to take out from that many times, it doesn’t hit those businesses 

that really are looking to hire one or two people. So I am hoping 

that maybe, and I have got to go talk to, obviously, Nydia Velazquez, who is our chairwoman over here on Small Business, but how 

we really drive maybe the Small Business Administration to be less 

full of red tape and paper work and time and maybe to smaller 

loans that can really be accessed by our local businesses. 

Chair Maloney. Thank you. The gentlewoman’s time is expired. 

Mr. Campbell is recognized. 

Representative Campbell. Thank you, Madam Chair. 

And thank you, Director Elmendorf. 

Several questions. First one. In this committee last October, 

Christina Romer, the chairman of the President’s Council of Economic Advisers, said that the stimulus would have its most, greatest effect on growth in 2009 and that, by mid-2010, would have little effect on growth. But yet it is my understanding that only a 

third roughly of the money has gone out the door yet. And those 

two, the statement and that fact, don’t seem to work together for 

me. So I guess my question is, how much of the money is out? How 

do you see that? What is the effect now and in the future of the 

stimulus plan? 

Dr. Elmendorf. Of course, I don’t want to try to interpret what 

Christina Romer meant particularly, but from our perspective, I 

think the way to think of this is that as the money flows out, and 

that is partly on the spending side and partly in the form of lower 

taxes, so essentially less money coming in if you will, but as that 

deficit effect mounts, that provides a stimulus to consumer spending and business spending and spending at State and local government levels, and that helps to push up GDP relative to what it otherwise would have been. Actually a better hand gesture would say 

GDP is going like this, and our judgment, the stimulus act brought 

it like this. And that happens as the money goes out. 

As more money goes out, then the effect gets larger. But you 

reach a point at which, even if the flow of money continues so that 

the level of GDP is still above where it otherwise would have been, 

as it is in our judgment, you are not stimulating the growth anymore. And then, in fact, as the stimulus effects wane over time, 

which we think begins to happen later this year, then even if the 

level remains a little higher than it used to be, you start to come 

back on to the path you would have been on otherwise so that you 

are not really raising growth; you are actually lowering the growth 

rate of the economy later this year relative to what would have 

been basically because you have gone into less deep of a hole. 

17 

Representative Campbell. Does that mean that, using your 

kind of efficiency sort of chart that you have there, that if we reduced some of that spending, in other words, if we took some of 

that stimulus money that hasn’t been spent yet and didn’t spend 

it, that perhaps that might be an efficient way for the government 

to save a little money and reduce the deficit and debt? 

Dr. Elmendorf. Taking back that money fast—taking back that 

money, not using the rest that was intended to be used, so it would 

save the government money would, in our estimation, make the 

economic outcomes a little worse. That part of the economy would 

recover more slowly without the continuing flow of those funds. 

How those particular policies compare to other uses of the funds 

you might make, we haven’t done that analysis. 

Representative Campbell. Right. Because the question becomes an efficiency thing, sort of. 

Okay. Another question. The Federal Government spending as a 

share of GDP is now, I believe, over 25 percent, which is I think 

the highest since the end of the World War II or something like 

that. State and local governments, it is my understanding, are 

about another 10 percent. So you add those together, and the public sector, if you will, governments at all level, is now over 35 percent of the total economy, over a third of the total economy. 

And I would argue that the public sector and governments right 

now are in some trouble. Now, from California, where I come from, 

obviously, my State is in deep trouble, but other States are as well. 

I am in the greater Los Angeles area. The City of Los Angeles, a 

former mayor believes that the city will have no alternative but to 

declare bankruptcy at some point in the future; City of Los Angeles 

is in deep trouble. And we know that the Federal Government is 

in deep trouble, in terms of what you and everyone agrees is an 

unsustainable level of deficit and debt. What impact—I mean, my 

concern is that the public sector now is bigger than it has been, 

and it is in trouble, and that the public sector may actually be 

dragging the economy down in the future through this debt or 

through whatever actions, because they got to tax more, spend less, 

or all of this, or they crash. And so what is your view on how the 

public sector may be actually dampening the private sector going 

forward? 

Dr. Elmendorf. I think, in the view of most analysts, during the 

recession and in its early period of recovery, when we were still so 

far short of full employment and full use of our capacity, that the 

extra spending and lower taxes that the government is doing, partly through the automatic stabilizers and partly through the discretionary actions that have been taken, are helping to fill in for some 

private demand that is not there. 

And that is why, in our estimation, the automatic stabilizers and 

the stimulus package have improved outcomes relative to what 

they otherwise would have been. But as you go forward and as private demand recovers, which we and others expect that it will, albeit somewhat slowly, then the government ends up being in competition with private spending and private investment. And it is at 

that point when the budget deficits become increasingly costly to 

the economy. 

18 

And that is the usual discussion that economists will provide 

about how deficits are damaging. And it is that gap between spending and revenue which has to be borrowed, competing in capital 

markets with the borrowing that large and small businesses are 

trying to do, and households are trying to do to buy homes and 

mortgages and so on, and that crowding out is what lowers standards of living over time. 

But I think the focus then is on the deficit as it will be 3, 4, 5 

years from now, less so than what it is in the next few years when 

in this recession and the slow recovery the government is helping 

to fill in for some private demand that is not there. I think that 

is the consensus view of the situation that you describe. 

Representative Campbell. Thank you. 

Chair Maloney. I would like to look at the deficit that we have 

been talking about and ask about the impact of the recession on 

the tax revenues and the deficit. But I would like to understand 

more about it. What percentage of the deficit over the next 10 

years is due to the stimulus and due to TARP? 

Dr. Elmendorf. I haven’t done those calculations exactly. Our 

baseline forecast for the deficit for the next 10 years under current 

law is about $6 trillion. The stimulus legislation we think has the 

cost of about $850 billion. That is not all in the next 10 years; some 

has already happened and I can’t do all of that math in my head. 

The 850, of course, is less than a sixth of the $6 trillion that we 

project in deficit over the next 10 years. The net cost of the TARP is turning out to be about $100 billion. 

Of course, that is less than we initially estimated because there 

was a lot of uncertainty at the beginning of this process of installing the TARP about which way the financial system would go. And 

as it turned out, the financial system has healed in a way that it 

has lowered the cost. 

Chair Maloney. How much of it is due, do you believe, to the 

Bush tax cuts? 

Dr. Elmendorf. I don’t have an estimate of that. In our budget 

outlook, we do report what the effects would be of extending the 

tax cuts versus letting them expire as scheduled. Under current 

law, the 2001 and 2003 tax cuts expire at the end of this year. In 

that sense it has no effect on the next 10 years if you assume that 

they expire. If you want to see what the cost is if continued, it is 

in our book. I don’t recall offhand. It is several trillion dollars. 

Chair Maloney. And how much is due to the wars in Iraq and 

Afghanistan? 

Dr. Elmendorf. Again, as you know the way that we project discretionary spending over time is to take the latest levels that Congress has approved for budget authority and to project that forward. 

What actually happens in Iraq and Afghanistan, of course, depends on policy judgments here in Washington and effects around 

the world. So how much it will actually affect deficits, I don’t know. 

I don’t know what the projected amount of spending is based on the 

most recent appropriations. 

Chair Maloney. What is the impact of Medicare Part D? 

Dr. Elmendorf. Again, I don’t have an answer. I don’t know the 

forecast of that. We are currently updating our baseline in connecVerDate Nov 24 2008 12:03 Aug 20, 2010 Jkt 055045 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 C:\DOCS\57056.TXT SHAUN PsN: DPROCT
19 

tion with the analysis of the President’s budget and we will report 

that for you in a few weeks. 

Chair Maloney. And then talking about the stimulus that some 

of my colleagues have raised, in your November reports you estimated that the Recovery Act added between 1.2 and 3.2 percentage 

points to growth by the third quarter. Additionally, CBO estimated 

that between 600,000 and 1.2 million additional people were employed by the third quarter of 2009 due to the Recovery Act. 

How do you respond to critics who say that the Recovery Act has 

not worked when the numbers from CBO, the numbers from communities, the numbers that have been given from other economic 

institutions, are very similar to yours? 

Dr. Elmendorf. So let me note first, Chairman Maloney, that 

we will be releasing today our analysis of the fourth quarter. We 

are required by the ARRA law to release a quarterly review of the 

numbers being collected by the administration. That report will be 

coming out today. 

As we say in the report, we don’t actually put much weight on 

the counts of jobs, which I think are very limited in their scope, 

in addition to issues of their reliability. We rely on economic modeling, and as I said in reference to our analysis of potential future 

policies, there is a very uncertain business. In our judgment, and 

I think it is consistent qualitatively with the judgment of a number 

of outside forecasters and analysts, the policies that were enacted 

in the stimulus bill are increasing GDP and employment relative 

to what it otherwise would be. To be sure, not every analyst agrees 

with that proposition. But we think it is well founded in economic 

degree and evidence. And I am happy if you want to talk, probably 

off-line, about some of the details of that analysis. 

Chair Maloney. And your numbers are coming out at what time 

today? 

Dr. Elmendorf. I am not sure. I had a nearly final draft in my 

hand before we left. I am told they have come out. 

Chair Maloney. They have come out. Great. Can you share 

them with us? 

Dr. Elmendorf. Our analysis is that the effects of the ARRA law 

were to raise the level of GDP in the fourth quarter by between 11⁄2

and 31⁄2 percent. That is not the growth rate in the fourth quarter. 

It represents the cumulative effect of the higher growth rates over 

the preceding three quarters. And we think it has raised the level 

of employment in the fourth quarter by about 1 to 2 million jobs, 

with slightly larger effects on full-time equivalent employment 

which is the measure we have used in this analysis and tries to 

incorporate not just the number of extra people with jobs, but also 

people moving from part-time to full-time work. 

Chair Maloney. Thank you very much. 

Mr. Brady. 

Representative Brady. Thank you, Director, for being here. 

Now, I think if you are a government worker or belong to a teachers union, the stimulus has worked. But if you are in a manufacturing business or if you work in a construction industry, or in the 

private sector in general, those employment numbers have decreased. And I think that has been one of the main criticisms, government jobs only stay stimulated if taxpayers keep paying for 

20 

them. Private sector jobs are investments that can drive the economy and almost every economist agrees the only way we will have 

a sustainable recovery is if the private sector begins rehiring, new 

expansions, increasing new hires. I appreciated, Director, your 

identification of some of the policy options, what the impact is. 

I am not sure economic models work as well in this environment. 

And I say this because I think we are in uncertain times. Over the 

District Work Period, I had a number of roundtables with smalland mid-size businesses simply asking them, ‘‘What would it take 

for you to rehire and make that expansion decision?’’ I ran through 

many of those options in both the House and the Senate bill from 

tax credits for rehiring to lowering payroll taxes and all of that. 

They rejected all of those. 

And here is what they said just listening to them. Looking at my 

notes from the roundtables, Keith Walls who has a dry cleaning 

business encapsulated everything. He said: Get rid of the fear. The 

fear of health care mandates, the cap and trade costs on energy 

prices, the fear of tax increases and reregulation, he said is holding 

back their decisions. 

Margie Claybar has a cafe in Orange said: We need certainty. 

Sue Cleveland in Lumberton, Texas, just north of Beaumont, they 

do renovation work in homes and businesses and she said: Basically it is the fear about what is going to happen. Again, health 

care, cap and trade, tax increases across the board. And Lori from 

State Farm Insurance said people are scared to invest. 

And I think what we are seeing is the issue of economic rational 

expectations. What businesses and people will do looking forward. 

Does all of this spending require tax increases in the future? Clearly, yes, it does. And it is having as one business said last week, ‘‘it 

is hard enough for you to predict the market, trying to predict the 

market and Congress both is impossible, so we are holding our 

cash. We are not willing to make that decision until we see where 

things are going.’’ 

And this morning in The Wall Street Journal, Robert Barro, a 

Harvard University economist did an op-ed and basically talked 

about what the impact of the multiplier for deficit finance government spending is. And his point is, since the fiscal multiplier was 

less than one in the first year of the stimulus, that the stimulus 

itself was partially offset by lower private consumption and investment expenditures. His summary was the stimulus plan likely reduced our economy about $300 billion over the next 4 years because private expenditures are reduced more than the stimulus 

spending. Rational expectations. 

Again, you have a good area of study. You guys do a lot of modeling. It is difficult, obviously, by the ranges you gave us. Do your 

models incorporate the concept of rational expectations in a very 

uncertain market economy at this point? 

Dr. Elmendorf. So I should say I am familiar with the work of 

Robert Barro. He is one of my teachers in economics and we cite 

the study of his in the appendix of our report on ARRA where we 

talk about different methodologies for doing these kinds of estimates. So we take that approach seriously. 

I think economic models are not very good. Even the best of them 

are not very good. And that is why we use ranges and so on. And 

21 

I think you are hitting on an important point which is that even 

if a model provides accurate estimates in the normal course of affairs, it may not do a very good job under particular circumstances. 

And we wrestled with that in doing these estimates. 

I think this current situation is unusual but it is unusual in different sorts of ways. I think the uncertainty about policy plays a 

role. And future tax policy, future regulatory policy, there is a good 

deal of uncertainty. Our own judgment is that the biggest uncertainty—and I think your businesspeople would agree with this—is 

about the demand for their products. And the extent to which the 

government can provide additional demand, we think that does 

help to stimulate activity. 

On this jobs tax credit, for example, we think one way that works 

is that firms, business even though they might not decide themselves at first blush to hire workers, lower costs so that they can 

lower prices and get more business in the door. And then that business then can indirectly spur hiring. 

Now, so it is hard to know from specific answers how things will 

play out in a complicated economy. We are relying on cumulative 

evidence, but we do not have evidence of what happens in recessions like this one, this deep, caused in this way, under this set of 

policy circumstances. 

Under rational expectations, we do give some weight, and models 

generally give weight to people looking ahead. How well they look 

ahead, how rational those expectations are, is one of the disputed 

issues in economics. And the models that we rely on don’t assume 

that people are completely rational. But they do have some forward 

looking behavior and we have written about this that a temporary 

tax cut has less effect on spending than a permanent tax cut because you are trying to figure out if this is $100 that you have 

every year or $100 that you only have this year. 

So we have some forward looking behavior. It is not as rational 

I think as Robert Barro would support. Or as Ed Prescott, who you 

are hearing this afternoon, would support. We are solidly in the 

mainstream of the economics profession, and particularly the people who focus on forecasting employment output over the near term 

and we are pleased that our estimates of GDP and employment 

bracket the private forecasters that we have seen. But there is no 

guarantee that that is right. I would readily admit that. 

Chair Maloney. The gentleman’s time has expired. 

Representative Brady. I understand. Thank you, Director. 

Chair Maloney. Mr. Snyder. 

Representative Snyder. Thank you, Ms. Maloney. Mr. Elmendorf, I am going to continue my discussion about banking because 

it relates to a lot of these discussions here and I know it does not 

fall under the CBO kind of thing. I agree with you that businesses 

will take the incentives over the moneys available; it may not be 

determinative of their decision. 

I met with a businessman some time, a landscaper who wanted 

to buy a small excavator. A guy who never had problems getting 

money from the bank. Couldn’t get the loan. Had to lease an excavator. What that means is whoever makes small excavators did not 

get that product to sell. So it was one less product to sell, which 

22 

relates back to banking and credit policies that I think we are talking about. 

If you have any comment—and I am prepared for you to not have 

any comment—but it seems to me that, and I will overstate it, that 

banks have become more of an adversary as institutions. Wonderful people at Bank of America in Little Rock. Every person I talk 

to on the phone politely enforces their policies. But it seems there 

are too many banking policies that work as adversary. More interested in encouraging policies that encourage overdrafts rather than 

finding Mr. Brady’s businesspeople to loan money to because they 

would like to advance a product. 

Do you have any comments about the nature of what banking 

has become in America over the last two or three decades? 

Dr. Elmendorf. Congressman, I appreciate your confidence in 

the breadth of my knowledge, but I am afraid that I have to disappoint you. I actually don’t know anything about overdraft fees or 

these payments—I am aware of them from my own statements 

from my bank, but I don’t know of any analysis of them. It is not 

a topic that CBO has done a lot of work on, although there may 

be some that does not come to my mind offhand. 

I think economists believe that most businesspeople are mostly 

interested in supporting their business. And Adam Smith, founder 

in a sense of modern economics, said that it is not through the benevolence of the butcher that we get our meat or the baker that 

we get our bread. They are looking out for themselves, the way 

they provide for themselves is they provide a service or product 

that somebody else wants to buy. And that in a competitive market, leaving aside a whole variety of complicated and important 

issues, that competition induces people to run businesses in a way 

that provides value to others and that is how they sell their products. 

Representative Snyder. I think that makes sense, but the examples I gave, if I have an employee that comes to me and says 

here is how it is working. We debit your account, we hold the 

money for several days so we can make money, the businessman 

does not have it that I bought the product from, I don’t have it. 

They stole my money for several days and then charged me $35 

for that honor. That doesn’t seem to be the kind of thing that Adam 

Smith would think was good policy for building America. Would 

you agree with that. 

Dr. Elmendorf. I think I am already too far out on a limb 

speaking for Adam Smith. 

Representative Snyder. I did not know him. 

Dr. Elmendorf. Nor I. I have been to where he is buried in Edinburgh, Scotland. An interesting place. The issue for banks, seriously, is that they need to make a profit like other businesses, and 

there are different ways, different combinations of interest rates 

they can charge, interest they can pay on accounts, and fees for 

other services. And I just do not know how those decisions are 

made or how they really evolve over time. It is not something I 

have looked into. 

But I think in some ways one might think about the overall profit that banks make. Might also of think about how they do. Whether they are doing it by pricing certain kinds of services in certain 

23 

ways. So I think the issue you raised is of how they are doing it, 

but the broader issue is do you think they are making too much 

money and how would one judge that? 

And the last few years, of course, a lot of banks have taken very 

substantial losses. Given the losses on the loans, the interest that 

they are paying to customers on their bank accounts, interest that 

they are charging on new loans, a lot of banks have been in trouble. So one needs to weigh that against the other examples you 

raise, cases where it seems like they are maybe making money in 

ways that seem to you undesirable. But we just haven’t looked at 

that carefully. 

Representative Snyder. Can we ultimately solve our indebtedness if we don’t grapple with the costs of health care, whether it 

is military health care, veterans health care, Medicare, Medicaid or 

Indian Health Service? 

Dr. Elmendorf. No, I don’t think so, practically speaking. I 

mean, the health spending is now a large share of total Federal 

spending. It is growing more rapidly than the rest of spending, 

more rapidly than GDP, and thus more rapidly than the tax base. 

For some period of time, one could cut other spending or taxes 

enough to cover the cost of rising health care. But if the current 

rate of growth of health spending at the Federal level continues for 

decades in the future, that becomes increasingly untenable. 

Representative Snyder. Thank you for being here. 

Chair Maloney. Thank you. And Mr. Hinchey. 

Representative Hinchey. Well, this is always a fascinating discussion, and I very much appreciate you and your work. The circumstances we are dealing with are very complex, and I think that 

if we are going to deal with them effectively, we need to understand what we are dealing with. 

So fundamentally, the sort of deregulation of the financial industry, which began back in the mid-1990s and which generated that 

Wall Street bailout was one of the major problems that we had to 

deal with and we consistently have to deal with. The other things 

I mentioned in the first context of these question, the Bush tax 

cuts, which I understand expires now at end of this year. Is that 

true? 

Dr. Elmendorf. The 2001 and 2003 tax cuts expire at the end 

of this year. 

Representative Hinchey. The end of this year? 

Dr. Elmendorf. Right. 

Representative Hinchey. So that will be a positive thing. 

Those tax cuts are going to make some more money available, 

won’t it? 

Dr. Elmendorf. The expiration of the tax cuts increases Federal 

revenue relative to extending them. Just remember our baseline 

assumes those tax cuts expire. So if Congress takes no action and 

they expire and everything else turns out just the way we expect, 

then we will have the same forecast for the budget deficit than we 

now have. 

Representative Hinchey. We will have the same? 

Dr. Elmendorf. Our baseline forecast assumes current law so it 

assumes the expiration. 

24 

Representative Hinchey. So your baseline forecast assumes 

the elimination of these tax cuts and then the moving into availability more money that is going to come into the Federal Government from those tax cuts? 

Dr. Elmendorf. That is assumed. That is part of why the deficit 

narrows after this fiscal year. 

Representative Hinchey. That is one of the problems that we 

are dealing with. The loss of that money over this long period of 

time. The prescription drug plan and I mentioned the war in Iraq 

and all of those things are the issues that we are dealing with. 

Have you done—now, I assume that you make recommendations 

specifically to this Congress and to the President in some way, one 

way or another. Or at least the analysis that you create becomes 

available to them. That is the way it is. 

Dr. Elmendorf. We make no recommendations. All our analysis 

is made available to you. 

Representative Hinchey. You just provide the information and 

anybody can take advantage of the information if they want to? 

Dr. Elmendorf. Right. 

Representative Hinchey. Have you provided any information 

with regard to the context of the budget situation that the Obama 

administration inherited when they came into office? 

Dr. Elmendorf. I am not sure we have written it up in quite 

that way. As you know we report several times a year on the budget projections and one could go back to the projection we made before the Obama administration took office and look at our current 

projection. And we try to decompose revisions into those caused by 

legislation and those caused by evolution in the economy or technical factors. We haven’t put those features together in the way 

that you are asking about. 

Representative Hinchey. You haven’t put them together? You 

don’t think it is necessary to do so or you don’t think it is part of 

your responsibility? 

Dr. Elmendorf. We have been busy. We haven’t had a specific 

request to do the analysis this that way. I think the information 

is out there in the document to be used. 

Representative Hinchey. I am just focusing on the title of your 

representation here today which you presented up there in the TV 

screen: The policies for increasing economic growth and employment in the short term. So in effect, you are making recommendations. You are talking about the policies that could come into play 

and should come into play. 

Dr. Elmendorf. We are analyzing policies that we know have 

been discussed in the Congress. And we are providing the information so you can make your choice but we don’t have favorites 

among them. The omission of things from the list shouldn’t be 

viewed as a negative sign or the inclusion as a positive sign. It is 

a set of policies that we thought we knew how to analyze. 

Representative Hinchey. You are just making the information 

available, if anybody wants to tap into it, it might be useful and 

it might be helpful. 

We know that in the productive, intelligent expenditures of funding can be profitable, can generate huge amounts of money. Now 

that can be done personally by individuals or can only be done by 

25 

larger organizations including this entire country. So the use of the 

expenditures that are going to generate funding could be very, very 

profitable in terms of generating a stronger economy. 

We know, for example, based on one experience that for every 

dollar that you invest appropriately, internally, in the internal 

needs of the country, generates back more than a dollar. 

Dr. Elmendorf. Well, I think it depends on the sort of investment. Right? So there are good investments and bad investments. 

That is not always known until after the fact. 

Representative Hinchey. If you identify the needs and you invest in those needs and those needs then stimulate the kind of 

growth that you are anticipating, that generates more economic 

growth. And that is somewhat consistent, in the investing in infrastructure that you have here. But it is a very small piece. The investing in the infrastructure is something—like if that bill passes 

and was signed by the President, the one that passed yesterday in 

the Senate, that is going to generate a significant amount of money 

for this economy. That is going to generate jobs immediately. For 

example, in people who are doing construction. Construction work. 

And then flowing out of that through the investment in the internal needs of the country, you generate jobs immediately, but you 

also generate general economic growth through the expansion in a 

positive way of the internal needs of the circumstances that you 

have to deal with. The obligations that you have in order to maintain this country for a growing population. All of those things really need to be done, don’t you think? 

Dr. Elmendorf. Well, again, I don’t make recommendations. It 

is up to you and your colleagues Congressman to decide those 

things. Our analysis here focuses on the short term effects, the 

next few years which come principally from the hiring of workers 

to do projects, the spending that they do, and the additional workers get hired and so on. And we think there is what economists call 

a multiplier process of that sort. 

Over time, if the infrastructure that is built turns out to be useful, that will support economic activity in the future. It can be an 

investment of the sort that you are describing in our economic wellbeing down the road. The thing to keep in mind there is that the 

government borrowing, if that persists over a longer period of time, 

well, when the economy gets back to full employment will crowd 

out some private borrowing that would have gone to private investment. When investments by the Federal Government are deficit financed, one needs to weigh the extra public investment that has 

occurred and the private investment that does not occur indirectly 

in ways that are not so visible but will not occur as a result. 

A different approach, of course, is to do more investment of the 

sort you are describing. Paying for that through other spending reductions or tax increases today. In that case, then the trade-off is 

between the extra public investment and whatever other Federal 

spending is cut back or whatever private spending does not occur 

because of the tax increase. There is always a trade-off there in 

how the money is used. 

Representative Hinchey. Thank you. 

Chair Maloney. Thank you. I don’t know if you read The Washington Post op-ed article that was written by Dr.—professor Alan 

26 

Blinder, who was supposed to be part of your panel on February 

9th and it was canceled and he turned his testimony into an oped. And in it he addresses three major ways that employers may 

game a jobs tax credit. And I would like to ask a few questions 

about a job tax credit and the way it should be formulated. My colleague, Mr. Casey, and I have one bill, but there are numerous approaches out there. 

If you had to design a tax credit or a jobs credit, what would be 

the key parts? For example, would we target firms of a particular 

size or age? Would you include everyone? Would you target it? 

Dr. Elmendorf. Well, so our analysis is focused on a single criterion which is the cost-effectiveness in terms of number of fulltime equivalent jobs per dollar budget cost. Other criteria can well 

matter and we have said this a number of times in our analysis 

of stimulus policies. But from that sole criterion of the cost-effectiveness, our judgment is that restricting the tax credit to smaller 

firms as is sometimes discussed, actually reduces its cost-effectiveness. Jobs created at big firms are good jobs too. Many small businesses tend to be more volatile, they tend to have rapid job growth 

and sometimes when things don’t work out unfortunately large job 

declines. What that means is that any jobs that you are creating 

through the policy may be shorter lived than jobs created at more 

stable large firms. 

Chair Maloney. Our proposal covered all firms. And one way 

firms can game the credit is to both hire and fire workers. And our 

bill only allows a credit for existing firms that increase head counts 

or payroll. But Professor Blinder, in his article, points out that 

firms that slashed employment during the recession will not be eligible for the tax credit. Is there some way to reward these firms 

without allowing others to gain the credit? 

Dr. Elmendorf. I think that is very difficult. Again, in our analysis, only rewarding firms that increased payroll is more cost-effective than rewarding others but there is, as I mentioned earlier, a 

consequence that firms that have kept their payrolls up, sometimes 

struggling to do that, don’t get rewarded then. 

I think the choice that you have is to broaden, if you would like, 

to broaden the scope of the credit to include not just those who increase but others. That does whittle away the cost-effectiveness to 

some extent, but may provide other benefits that are important. It 

is not an either/or thing. I think you can give larger credits to firms 

that increase payroll and a smaller credit to all other firms if you 

wanted to find some balance between those alternatives. 

Chair Maloney. I recently had a conversation with Professor 

Shiller, who is a critic of rational expectations and the author of 

Irrational Exuberance. And it seems to me that a lot of the uncertainty, especially about consumer spending, is due to the housing 

bubble, and most of the blame for the housing bubble can be 

blamed on lax regulations. There was absolutely no regulation of 

certain sectors of the housing market. In that case, I am certain 

it could have been avoided by better regulation. 

In the future, there is much uncertainty about the price of carbon and how to limit health care spending and some of the areas 

that were discussed here today and it seems that the House has 

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lation, we are basically trying to limit uncertainty. What is your 

opinion on that? 

Dr. Elmendorf. I think if, I understand you right, I agree that 

one can eliminate uncertainty by not regulating and sticking with 

it or by establishing regulations of a certain form and sticking with 

them. And I think that is absolutely right. Of course, the sort of 

regulation may have other effects. But in terms of the uncertainty 

alone, I agree that the key issue is establishing a policy that is 

then maintained. 

And so there are several ways to do that. Obviously adopting the 

House-passed legislation in various fronts would be one way of reducing the uncertainty. I think that is right. 

Chair Maloney. Because there was some criticism of action. It 

seems it was an effort to solve problems and to create certainty. My 

colleague, do you have further questions? 

Representative Hinchey. No. 

Chair Maloney. Well, I just would like to close by thanking you 

very much for coming today and reorganizing your schedule after 

the snowstorm. And I just would like to comment that I was confused by assertions made today by some of my Republican colleagues that unspent funds would be returned to the Treasury. 

Many of my colleagues on both the Democratic and Republican side 

have really spoken out very positively about how the recovery 

funds have provided jobs or created jobs and improved infrastructure in their districts. 

Your testimony today—we appreciate very much your insights on 

policies to promote growth and lower unemployment. We appreciate that and I hope that your comments will help enlighten the 

debate in the Senate that is taking place this week as they try to 

move forward with jobs-creation legislation. And we will be continuing this discussion on Friday when we will have members of 

the private sector, a panel of business leaders and other forecasters, come forward. We appreciate your public service and we 

appreciate you being here. Thank you. This meeting is adjourned. 

[Whereupon, at 1:00 p.m., the committee was adjourned.] 

(29) 

SUBMISSIONS FOR THE RECORD 

30 

PREPARED STATEMENT OF CAROLYN MALONEY, CHAIR, JOINT ECONOMIC COMMITTEE

Today’s hearing continues the JEC’s focus on our country’s unemployment problem—an effort that we are intensifying this year. The historic one-two punch of 

snow a few weeks ago delayed our series a bit, but with today’s hearing, we are 

getting back on track. We will be examining ways to help our economy recover from 

the Great Recession of 2007, which was fueled by the double blow of crises in both 

the housing and financial sectors. 

Today, we welcome the Honorable Doug Elmendorf, Director of the Congressional 

Budget Office. He will give CBO’s assessment of policies and strategies to spur job 

creation in the near term. On Friday, we will continue by hearing from business 

leaders and economic forecasters as we explore the prospects for employment growth 

in the coming months. 

Today’s hearing is timely since the Senate plans to consider additional actions 

this week to put Americans back to work. 

Creating jobs is the top priority for Congress and for our country. With almost 

15 million Americans out of work, it’s clear that immediate, targeted actions are 

needed to spur hiring and boost employment. 

The questions before us are: 

• How do we create jobs quickly? and 

• Which policies are most efficient—which offer the most bang for the buck? 

This hearing will help shine a light on the specific actions Congress should take 

right now—not in some distant future. 

Just over one year ago, the current Administration took office, taking helm of a 

country suffering the worst crisis since the Great Depression. During the last three 

months of the Bush administration, we lost an average of 727,000 jobs per month. 

In contrast, during the most recent 3 months of the Obama administration, we lost 

an average of 35,000 jobs each month. 

The trend is heading in the right direction. Thanks to the Recovery Act, the economy is growing. The Bureau of Economic Analysis reported that in the final quarter 

of 2009, the economy expanded at a rate of 5.7 percent. The Recovery Act included 

a tax cut for 95 percent of American families and created jobs while investing in 

clean energy technologies, infrastructure, and education. 

While we have brought the economy back from the brink, we are not yet where 

we need to be in terms of job creation. Over 8.4 million jobs have been lost during 

the ‘‘Great Recession.’’ And in addition to the 14.8 million workers who are currently 

unemployed, there are 8.3 million workers who currently work part-time, but would 

like to work full-time. 

In the last year, Congress has enacted policies that support struggling families 

and encourage job creation. These actions include: 

• Creating and extending the first-time homebuyers credit, 

• Boosting funding for small business loans via the Small Business Administration, 

• Extending safety net programs, and 

• Extending the net operating loss carry-back provision that will help small businesses hire new employees. 

But we need to redouble our efforts to create jobs. 

In order to bring creative ideas on job creation to Congress, I started the year 

reaching out to CEOs of Fortune 100 companies and leaders of small businesses. 

I asked these employers to share new ideas on ways to create jobs. 

In order to jump-start job growth, I have introduced an employer tax credit (cosponsored in the Senate by my JEC colleague Bob Casey and my fellow New Yorker, 

Kristen Gillibrand). This idea was suggested by several of the respondents to our 

survey. The credit will give employers an incentive to hire new workers and raise 

wages. This will help workers get back on their feet, spark consumer spending, and 

brighten our economic climate. 

I welcome CBO’s input about how to best design an employer tax credit. A recent 

CBO study showed that an employer tax credit similar to the one in my bill is one 

of the most effective and efficient ways of spurring hiring. The object of this week’s 

hearings is to get feedback from experts to make sure that our actions work quickly 

to create jobs. 

For example, CBO has pointed out that one of the lessons of the 1970s employer 

tax credit was that many employers didn’t know about the tax credit until they filed 

their tax returns—too late to affect hiring decisions. 

31 

I look forward to CBO’s perspective on finding solutions to the most pressing issue 

of the day: creating jobs. 

PREPARED STATEMENT OF SENATOR SAM BROWNBACK, RANKING MINORITY MEMBER

Thank you Chairwoman Maloney for scheduling today’s hearing on ‘‘The Road to 

Economic Recovery: Policies to Foster Job Creation and Continued Growth,’’ and 

thank you Dr. Elmendorf for taking the time to join us this morning. 

This hearing on job creation and economic growth comes as the House and Senate 

are both considering implementing a third round of deficit financed stimulus aimed 

at combating what has, no doubt, been a very severe economic downturn. While I 

agree that the weak projected economic recovery is of serious concern to the U.S. 

and particularly to unemployed workers and their families, to me, the greatest 

threat our nation currently faces is a national debt that has spiraled out of control. 

To-date, the federal government has enacted more than $1 trillion in deficit-financed stimulus spending, and on top of that, the Federal Reserve and Treasury 

Department have extended multiple trillions of dollars in liquidity and financial 

backing. The impact of stimulus spending to date is highly uncertain. As we will 

hear from Dr. Elmendorf, the expected effects on output and employment of further 

proposed stimulus measures are also very uncertain. However, the CBO does note 

that many of the proposed stimulus measures, such as spending on infrastructure 

and aid to the states will not have any substantial impact on the economy until 

2011. 

With two quarters of economic growth already in place through the end of 2009, 

additional stimulus support in 2011 could potentially prove detrimental to a recovery already significantly underway in 2011. Of the proposed stimulus measures 

which CBO deems to have substantial impacts beginning in 2010, only one policy— 

increasing aid to the unemployed—has an average expected multiplier effect of one 

or higher. All the other policies were estimated to have an average multiplier effect 

of between 0.60 and 0.85, meaning that each dollar of spending would only generate 

between sixty cents and eighty-five cents in additional output. 

Furthermore, the estimated cost per new full-time equivalent job created by these 

policies would be extremely high—ranging from $74,000 for increased aid to the unemployed to $182,000 for investment expensing. In my view, these estimates indicate that additional stimulus spending is not worth the added debt and lower future 

incomes that CBO warns will result if offsetting actions are not taken to reverse 

the accumulation of additional government debt. 

Under the President’s proposed budget, our publicly held national debt will nearly 

double from 40% of GDP in 2008 to 75% of GDP in 2018. And the total U.S. debt 

will surpass 90% of GDP this very year. Surpassing the 90% total debt threshold 

is a troubling reality: a recent study by economists Reinhart and Rogoff found that 

a total debt level of 90% of GDP has historically served as a tipping point for reduced economic growth. 

If the U.S. does not stop spending beyond its means and fails to address longrun imbalances contained in its unfunded entitlement promises, the often hailed 

U.S. economic powerhouse could quickly lose its status as an engine of growth and 

leave younger and future generations with a lower standard of living. Our projected 

level of debt has the potential to cause serious consequences to growth: failure to 

confront our current and long-run budget deficits and rising national debt could 

cause a significant rise in interest rates that will crowd out private investment, 

raise future borrowing costs and interest payments on the debt, and potentially 

force policymakers to enact prohibitively high tax rates that could spur a downward 

spiral in output and the U.S. standard of living. 

These threats are not just theoretical—they are very real. The recent crisis of confidence in Greece is a clear example of the potential debt threat facing the U.S. The 

only difference is that no one will be there to bail out the U.S. if financiers of our 

debt lose confidence in the U.S.’s ability to repay it. 

Rather than contemplate ways in which the U.S. can further increase our debt 

in attempts to alleviate the current economic downturn, I believe we need to change 

gears and get serious about addressing our out-of-control budget-deficits and exploding national debt that threaten to cause our generation to become the first in history to leave our children and grandchildren with a worse future. 

Finally, I’d like to note for my colleagues that Mr. Brady and I will be hosting 

an event at 1 p.m. this afternoon in the Capitol Visitor Center titled ‘‘RETURN TO 

PROSPERITY: CREATING TIIE STRONGEST ECONOMY OF THE 21ST CENTURY.’’ We have four outstanding speakers including 2004 Nobel Prize winner Dr. 

Edward Prescott, noted monetary economist Dr. Allan Meltzer, former OMB DirecVerDate Nov 24 2008 12:03 Aug 20, 2010 Jkt 055045 PO 00000 Frm 00035 Fmt 6601 Sfmt 6621 C:\DOCS\57056.TXT SHAUN PsN: DPROCT
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tor and Federal Trade Commission Chairman Jim Miller, and President of the Institute for Research on the Economics of Taxation Steve Entin. If members want to 

hear how to get the economy back on track by returning government to its proper 

role and through sound monetary policy, all are invited to join us—as is the public. 

PREPARED STATEMENT OF REPRESENTATIVE KEVIN BRADY

I am pleased to join in welcoming Director Elmendorf before the Committee this 

afternoon. 

Given the depth and length of this recession, economists would normally expect 

a sharp V-shaped recovery with a strong rebound in output and employment. However, this has not been the case so far. 

Real GDP grew at an annualized rate of 2.2 percent in the third quarter of 2009. 

While the real GDP growth rate accelerated to 5.7 percent in the fourth quarter, 

more than 57 percent of the growth in the fourth quarter was due to a one-off restocking of inventory. The fourth quarter spike reveals how deeply businesses 

emptied their shelves last year but gives no indication they are confident in bringing 

workers back or hiring new ones. Real final sales, which are a better measure of 

the underlying trend in real GDP than the headline number, rose by only 2.2 percent in the fourth quarter of 2009. 

This is consistent with the sluggish economic growth forecasted for the next two 

years. The Congressional Budget Office (CBO) forecasts that real GDP will grow by 

2.2 percent in 2010 and 1.9 percent in 2011. Likewise, the February Blue Chip consensus of private economists forecasts that real GDP will grow by 3.0 percent in 

2010 and 3.1 percent in 2011, somewhat faster than CBO, but still slow when compared with normal growth after a severe recession. 

Weak economic growth means that job creation will be anemic and the unemployment rate will remain elevated for a number of years. Indeed, the CBO forecasts 

that the average unemployment rate will be 10.1 percent in 2010 and 9.5 percent 

in 2011. Again, the February Blue Chip consensus is somewhat more optimistic 

than the CBO, but not much, forecasting average unemployment rates of 10.0 percent in 2010 and 9.2 percent in 2011. 

While January’s decline in the unemployment rate to 9.7 percent is encouraging, 

most of the improvement is attributable to an increase in the number part-time jobs 

reported by households. At the same time, payroll employment fell by another 

20,000 jobs. This divergence between the household and establishment surveys is 

unusual. We must await future employment reports to see how this inconsistency 

between the two surveys is resolved. 

Let’s compare the recovery after the recession that began in December 2007 with 

the recovery after the August 1981 to November 1982 recession, which is similar 

in depth and length to the recent recession. The National Bureau of Economic Research has not yet determined the official bottom for the recent recession. However, 

industrial production hit its bottom in June 2009, and real GDP began to grow in 

July 2009. So, until the National Bureau of Economic Research makes its official 

determination, let’s assume that the bottom of the recent recession occurred in June 

2009. 

Comparing the Reagan and Obama recoveries so far, we find: 

• The average annualized rate of real GDP growth was 7.2 percent in the first 

two full quarters of the Reagan recovery compared with 4.0 percent in the first 

two full quarters of the Obama recovery. 

• During the first seven months of the Reagan recovery, payroll employment had 

increased by 1.2 million jobs, while during the first seven months of the Obama 

recovery payroll employment fell by 1.1 million jobs. 

Why are both real GDP growth and job creation so slow after this recession? Unfortunately for American workers and their families, the current economic recovery 

is fighting the head winds of excessive government spending and debt, the prospect 

of higher income taxes in the near future, and uncertainty over the future of health 

care and ‘‘cap and trade’’ legislation. 

The expectations among entrepreneurs and business leaders for new costly and 

intrusive regulations and higher taxes on income, capital gains, and dividends starting in 2011 that will continue rising to service the explosion of federal debt under 

the Obama budget are the reason why firms, especially small businesses, are neither investing nor hiring new workers. 

Congress should not waste taxpayer dollars on another stimulus bill, deceptively 

packaged as a ‘‘jobs bill.’’ Instead of pushing controversial, costly, and job-killing 

healthcare and ‘‘cap and trade’’ bills, Washington should reduce federal spending 

33 

from President Obama’s 23 percent of GDP to no more than the post-war average 

of 19.5 percent of GDP over the next five years. Recently, Moody’s warned the 

United States that its reckless fiscal course threatens its triple-A credit rating. Congressional action to reduce and then eliminate the federal budget deficit through 

spending reductions and entitlement reforms will do more to increase business confidence and create new jobs than any ‘‘jobs bill.’’ 

I look forward to hearing today’s testimony. 

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Æ 


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