[Senate Hearing 110-492]
[From the U.S. Government Printing Office]

                                                        S. Hrg. 110-492




                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION


                            JANUARY 16, 2008


          Printed for the use of the Joint Economic Committee

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                        JOINT ECONOMIC COMMITTEE

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

SENATE                               HOUSE OF REPRESENTATIVES
Charles E. Schumer, New York,        Carolyn B. Maloney, New York, Vice 
    Chairman                             Chair
Edward M. Kennedy, Massachusetts     Maurice D. Hinchey, New York
Jeff Bingaman, New Mexico            Baron P. Hill, Indiana
Amy Klobuchar, Minnesota             Loretta Sanchez,  California
Robert P. Casey, Jr., Pennsylvania   Elijah Cummings, Maryland
Jim Webb, Virginia                   Lloyd Doggett, Texas
Sam Brownback, Kansas                Jim Saxton, New Jersey, Ranking 
John Sununu, New Hampshire               Minority
Jim DeMint, South Carolina           Kevin Brady, Texas
Robert F. Bennett, Utah              Phil English, Pennsylvania
                                     Ron Paul, Texas

                  Michael Laskawy, Executive Director
             Christopher J. Frenze, Minority Staff Director

                            C O N T E N T S



Hon. Charles E. Schumer, Chairman, a U.S. Senator from New York..     1
Hon. Jim Saxton, Ranking Minority, a U.S. Representative from New 
  Jersey.........................................................     4
Hon. Carolyn B. Maloney, Vice Chair, a U.S. Representative from 
  New York.......................................................     6
Hon. Edward M. Kennedy, a U.S. Senator from Massachusetts........     6


Statement of Dr. Lawrence Summers, former U.S. Treasury 
  Secretary, Cambridge, MA.......................................     8
Statement of Dr. Lawrence Mishel, president, Economic Policy 
  Institute, Washington, DC......................................    11
Statement of Mr. William W. Beach, director, Center for Data 
  Analysis, The Heritage Foundation, Washington, DC..............    14

                       Submissions for the Record

Prepared statement of Senator Charles E. Schumer.................    34
Prepared statement of Representative Jim Saxton..................    37
Prepared statement of Representative Carolyn B. Maloney..........    38
Prepared statement of Senator Edward M. Kennedy..................    40
Prepared statement of Senator Dr. Lawrence Summers, former U.S. 
  Treasury Secretary, Cambridge, MA w/attachment.................    42
Prepared statement of Dr. Lawrence Mishel, president, Economic 
  Institute, Washington, DC w/attachment.........................    49
    Letter dated January 15, 2007 from Economic Policy Institute 
      and other organizations to the congressional leadership 
      urging changes in unemployment insurance...................    54
Prepared statement of Mr. William W. Beach, director, Center for 
  Data Analysis, The Heritage Foundation, Washington, DC.........    56
Chart entitled, ``The Unemployment Rate Jumped in December: 
  Civilian Unemployment Rate 2007''..............................    61
Chart entitled, ``Real Oil and Gas Prices Approaching Record 
  Highs: Feb. 1991-Nov 2007''....................................    62



                      WEDNESDAY, JANUARY 16, 2008

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The Committee met at 9:30 a.m. in room SH-216 of the Hart 
Senate Office Building, the Honorable Charles E. Schumer 
(Chairman of the Committee) presiding.
    Senators present: Kennedy and Bennett.
    Representatives present: Maloney, Hinchey, Hill, Cummings, 
Saxton, English, and Brady.
    Staff present: Christina Baumgardner, Heather Boushey, Nate 
Brustein, Stephanie Dreyer, Connie Foster, Chris Frenze, Tamara 
Fucile, Nan Gibson, Colleen Healy, Israel Klein, Michael 
Laskawy, and Jeff Wrase.

                     SENATOR FROM NEW YORK

    Senator Schumer. OK, good morning, everybody. Thank you all 
for coming, and welcome to the first hearing of the new year of 
the Joint Economic Committee.
    It's also the first Congressional hearing in 2008 to 
examine the most effective ways to stimulate the U.S. economy, 
which is teetering on the brink of recession.
    We're lucky to have such a distinguished panel, who I will 
introduce in a few minutes, but I just want to say a special 
thank you to Larry Summers, my friend and a former Treasury 
    His willingness to make time here today and think about 
these difficult issues during the course of his career, make 
this Committee, the Congress, and the American people, much 
better informed.
    I also want to thank the JEC's Vice Chair, Congresswoman 
Maloney, from my home State, our Ranking Republican, Jim 
Saxton, and Senator Ted Kennedy, who is the longest-serving 
Member of this panel.
    Now, economists--from former Federal Reserve Chairman, Alan 
Greenspan, to New York Times columnist, Paul Krugman--are 
suggesting that we're either in a recession already, or on the 
brink of recession.
    The discussion of economic stimulus is no longer an 
academic exercise. In fact, real economic stimulus measures, 
enacted quickly, could be the last thing between us and a deep 
or protracted recession.
    The December turndown in retail sales and new concerns that 
auto loans and credit card payments could follow the pattern of 
mortgage payments and head south, makes quick action on a 
stimulus package all the more necessary.
    Even the current Fed Chairman, Ben Bernanke, said last week 
that the economic outlook for 2008 had worsened, and he listed 
all of the various forces dragging down the economy.
    On Monday, I called Chairman Bernanke personally to get his 
thoughts on the economy, and he said that fiscal stimulus is 
certainly needed, and that he would be generally supportive of 
the Congress and the President enacting such a stimulus.
    He said that while he wasn't going to endorse a specific 
plan, if an economic stimulus package was properly designed and 
enacted so that it enters the economy quickly, it could have a 
very positive effect on the economy.
    He said that monetary policy, which is obviously important, 
should be augmented by a stimulus package.
    In some ways, much of the bad news that we're faced with 
now could have been averted. Last year, with the subprime 
mortgage crisis staring us in the face, the Bush administration 
was unwilling to act to stem that crisis, and refused to 
consider the possibility that a recession was on the horizon.
    As many economists predicted, the subprime mortgage 
meltdown spilled over into the broader housing market, damaged 
credit markets, and brought us to the precipice of recession.
    Because of Presidential inaction to mitigate the effect of 
the subprime mortgage meltdown, the economy is now on the edge 
of recession.
    This Nation desperately needs a strong stimulus package. 
There are six key points informing our actions as Democrats as 
we move forward on a stimulus package:
    First, we want to work with the President to get something 
done quickly that will help the economy and middle class 
American families.
    There was much partisanship in last year's Congress, but 
the state of the economy makes it imperative that we put 
partisanship aside and enact a stimulus package.
    Speaker Pelosi and Majority Leader Reid sent a letter to 
the President saying they want to work with the White House and 
Republicans in Congress to achieve a stimulus package, and next 
week's meeting is a good first step toward achieving that goal.
    We are prepared and willing to work with President Bush and 
our Republican colleagues in Congress to craft a bipartisan, 
balanced, economic stimulus package.
    Second, we must enact a stimulus package that is timely, 
targeted, and temporary. Economists across the ideological 
spectrum agree that to deliver effective stimuli, the Federal 
Government needs to act with those principles in mind.
    It should be targeted at the middle class, who will bear 
the brunt of the economic decline, and who, with dollars in 
their pockets, will provide a stimulus to the economy that is 
much needed.
    It should be timely because we can't introduce policies 
that won't kick in until long after a recession is already upon 
    It should be temporary because we don't want to enact 
stimulus policies today that permanently burden our children 
    Third, to be effective, these proposals need to include a 
combination of both tax cuts and spending stimuli. Direct 
injections of cash into the economy through both immediate 
consumer and government spending are the shots in the arm 
needed to ward off a recession.
    In fact, many economists believe that spending stimuli have 
a greater immediate effect on the economy than tax cuts, 
because the former guarantee that the dollars authorized will 
be spent, while the latter do not.
    Both tax cuts and stimulus spending cash infusions are 
important because they support otherwise declining demand that 
stems from rising unemployment and falling household incomes. 
Monetary policy alone cannot address those necessary goals.
    An effective stimulus package that includes both 
expenditures and tax cuts in combination with monetary policy 
is the best way to avoid a recession.
    Fourth, as we create a stimulus package, we must jettison 
ideological baggage on both sides. The last thing the economy 
needs right now is inaction while the parties fight old and 
ongoing battles.
    Renewing the Bush tax cuts, which don't expire until the 
end of 2010, should be off the table because they will thwart 
any chance of passing a stimulus package.
    They are not timely, they are not targeted, and they are 
not temporary. Some congressional Republicans may be planning 
to add these tax cuts to the stimulus package, or even make 
them the centerpiece of the package.
    The President should and must resist attempts to include 
making his tax cuts permanent part of the package, especially 
in the Senate, because they will impede or even kill such a 
    Fifth, on the question of PAYGO, I believe there is a 
growing consensus, not unanimous, in the Democratic Caucus, 
that paying for the stimulus now would take away from the 
economic boost we're seeking to create. The stimulus, by 
definition, must have a net of spending over income.
    Sixth and last, the Administration needs to focus on the 
housing crisis and declining home values. The housing crisis 
has been the epicenter of this potential recession, and the 
President's hands-off approach to the housing crisis, clearly 
has not worked.
    Fortunately, because of the important work of economists 
across the ideological spectrum, and, most recently, by the 
nonpartisan Congressional Budget Office, we know what works and 
what doesn't work when it comes to economic stimulus.
    We know that extending unemployment insurance is one of the 
most effective stimulus proposals, because we have deployed it 
successfully in the past, and it gets lots of bang for the 
    Lump-sum payments to households in the form of tax rebates 
or tax holidays are also very effective.
    On the other hand, we know from experience that long-term 
top relief for the very top on the economic spectrum, is not a 
successful stimulus.
    So, some of the important stimulus measures we're 
considering include the broad-based tax rebates, extending 
unemployment insurance and food stamps, targeted business tax 
cuts to stimulate job creation, and Federal assistance to the 
    In conclusion, it is long past time to scrap the old Bush 
economic playbook of tax cuts for the wealthy as the only 
economic policy, and replace it with a balanced strategy that 
lifts the economic fortunes of all American families.
    I hope that this hearing today and subsequent conversations 
with my colleagues and the Administration, will get us to a 
bipartisan package the American people deserve as quickly as 
    Now, given the fact that Dr. Summers needs to leave by 11, 
I'm going to limit opening statements, in addition to myself, 
to Congresswoman Maloney and Congressman Saxton, and I would 
like to extend this courtesy to Senator Kennedy because he is 
Chairman of the Senate Health, Education and Labor Committee. 
He's the longest-standing Member of this Committee and he will 
play a critical role in his Committee in crafting the economic 
    I invite other Members to submit statements to be included 
in the official record.
    Congresswoman Maloney.
    [The prepared statement of the Senator Charles E. Schumer 
appears in the Submissions for the Record on page 34.]
    Representative Maloney. Thank you. I'd like to thank the 
senior Senator----
    Senator Schumer. Oh, I'm sorry. Congressman Saxton is next.
    Representative Saxton. Please go ahead.
    Representative Maloney. No, I defer.
    Senator Schumer. Congressman Saxton, I apologize.


    Representative Saxton. Thank you very much. I am pleased to 
join in welcoming the witnesses this morning. Thank you, each 
of you, for being here.
    This is a very important hearing. It's important not only 
to those of us in this room, but it's extremely important to 
the American people, all of whom, of course, take part in our 
    The recent slowdown in the economy is a serious concern to 
the public and to all of us as policymakers, alike.
    According to standard measures of performance, such as 
economic growth and the unemployment rate, the U.S. economy 
appeared to be doing quite well through the third quarter of 
    However, more recent data indicate that the pace of 
economic growth slowed sharply in the final quarter of the 
year. Recent economic data makes clear that there are a number 
of challenges facing us in the economy.
    Residential investment declined at a 20 percent rate in the 
third quarter, continuing a longer trend. Housing prices are 
falling in many areas of the country, as housing inventory 
levels rise. Oil prices are near $100 a barrel and the dollar 
is falling.
    Since last summer, it has become clear that a number of 
large financial institutions have invested in mortgage 
securities of dubious quality. Huge writedowns of assets by 
Citicorp and Merrill Lynch highlight serious concerns about the 
value of mortgage-backed securities.
    Uncertainty about the extent of bad investments related to 
subprime and other mortgages has spread, resulting in sharp 
declines in the valuation of bank stocks.
    Financial markets have become very volatile. The Fed has 
acted by reducing interest rates and developing new ways to 
inject funds into the banking system.
    As a CBO report released yesterday noted, the Federal 
Government also has in place automatic fiscal stabilizers that 
have boosted the economy in past recessions, quite 
substantially. Unemployment insurance, for example, and various 
other programs which have been important in past slowdowns have 
boosted GDP by the equivalent of up to $350 billion during 
those downturns, according to the CBO report.
    The actions of a powerful central bank and these automatic 
stabilizers ensure that a policy response to any severe 
slowdown is already in place.
    Although most economists view Federal Reserve monetary 
policy as the best means to stabilize the economy, additional 
steps may be considered.
    In considering its options, the first thing Congress should 
do is to make sure that such actions do not further damage the 
economy. For example, policymakers should resist the temptation 
to use targeting as a rationalization for channeling resources 
into earmarks at the behest of special interest groups or 
others. How all of this new spending can be reconciled with the 
Majority's PAYGO rules is rather unclear at this point.
    Furthermore, as the CBO report notes, infrastructure 
projects are not appropriate components of economic stimulus 
legislation, because these appropriations will not be expended 
quickly, but will be drawn down over time.
    There is real risk that a stimulus package will morph into 
a special interest Christmas tree. As The Congress Daily 
headline said yesterday, ``K Street Lines Up for Slices of the 
Stimulus Pie'' This must be avoided.
    With politicians designing the economic stimulus package, a 
positive impact on the economy is far from guaranteed, and so I 
look forward to these discussions.
    I guess I would just like to add one final note: I agree 
with much of what my friend, Senator Schumer, said.
    Our one area of disagreement, is this: Because the private 
sector drives our economy and because business people and 
investors are currently making plans for their economic 
activities over the next couple of years, it seems to me that 
to send the message that we are automatically going to reject 
the notion of continuing the tax cuts that are currently in 
place past 2010, given expectations on the part of people who 
are making plans for their investments today, would be a very 
bad mistake. Thank you very much.
    [The prepared statement of Representative Jim Saxton 
appears in the Submissions for the Record on page 37.]
    Senator Schumer. Thank you, Congressman Saxton.
    Congresswoman Maloney, our Vice Chair.


    Representative Maloney. Thank you very much. I'd like to 
thank the Senior Senator from New York, Senator Schumer, and 
Senator Kennedy, for their long-term leadership on the economy, 
and all of our distinguished panelists.
    Since some of you are under a time constraint, I would like 
unanimous consent to put my opening statement in the record, so 
that we can move forward.
    Dr. Summers has said that any stimulus should be targeted, 
timely, and temporary, and I'd like to hear from all of the 
panelists on what four actions they would take to stimulate our 
economy? I am hopeful that the President and Congress can move 
forward swiftly with a stimulus package, and I'd like to know 
also, what impact this would have on the long-term 
competitiveness of our country.
    So I yield back my time and place my opening statement in 
the record.
    [The prepared statement of the Representative Carolyn B. 
Maloney appears in the Submissions for the Record on page 38.]
    Senator Schumer. Thank you, Congresswoman Maloney.
    Senator Kennedy.

                       FROM MASSACHUSETTS

    Senator Kennedy. Thank you, Mr. Chairman. I want to commend 
Senator Schumer for holding these important hearings. There are 
a lot of important things that are happening in the country 
today, but I think this hearing has to be right up there with 
all of them, because its implications, in terms of the future 
of our economy, are so profound.
    I join in welcoming Larry Summers, an old friend, a 
distinguished public servant, one of the Nation's preeminent 
economists. Larry Mishel, who I have enjoyed working with for 
many years, welcome; William Beach, from the Heritage 
Foundation, I look forward to your testimony, as well.
    Americans are increasingly anxious about making ends meet. 
Many economists say a recession is coming and that it may be 
severe. For millions of families, the recession is already 
    They're seeing their jobs disappear, their savings gone, 
their homes at risk--their costs are going up week after week 
and month after month.
    We're committed to action to stabilize the economy and 
relieve the distress that families are facing. We'll work with 
President Bush, our colleagues on both sides of the aisle in 
Congress, to pass an effective stimulus package, but we've got 
to adhere to some core principles.
    First, anything that we do, should be quick and temporary. 
We need to get money into workers' pockets in 2008, to 
encourage spending to boost the economy.
    What we don't need, are long-term tax cuts that will drag 
our economy down in future years.
    Second, our plan should be focused on average Americans 
facing tough times. Ninety percent of the benefit of any 
stimulus package should go to 90 percent of ordinary Americans 
who work for a living, depend on a paycheck, and struggle to 
pay their bills. They are the ones who will make our economy 
start growing the fastest again.
    Third, we need a robust package of reforms. We can't just 
tinker at the margins. Americans need real help that will make 
a real difference in their lives, and they need it as soon as 
    That means additional unemployment benefits to help workers 
pay their bills while they look for new jobs. It means 
transitional health coverage, so that workers don't lose 
insurance if they lose their jobs.
    It means assistance to States that are forced to cut 
budgets for critical necessities like Medicaid.
    It means emergency heating assistance for families swamped 
by soaring costs of energy.
    And it also means emergency job training to help workers 
quickly gain the skills they need for new jobs.
    In my State, 76,000 jobs are out there looking for workers. 
There are 24 applicants for every slot for training. People are 
out there; they want to get the skills; they want to go to 
work; they can, and we ought to give them the help they need.
    We must increase food stamps so that low-income workers can 
feed their families.
    Last, but far from least, we should consider the immediate 
tax rebate for low- and middle-income families. A rebate makes 
sense as another effective way to help jump-start the economy.
    We must be careful to reject any attempt to use the current 
crisis as a pretext for permanent new tax breaks for wealthy or 
corporate America.
    In all these efforts, we must be guided by a simple 
principle: People do not work for the economy; the economy 
should work for the people.
    If we want an economic recovery that works, if we want real 
opportunity and sustainable growth, that effort starts and ends 
with working families.
    Our economy is at a crossroads. We must act carefully to 
choose the right path for the future. It's time to rebuild an 
economy that puts working families first.
    I'm confident we can do it; I'm certain that we must do it. 
We owe the American people our best efforts, and I look forward 
to working with my colleagues on both sides of the aisle to put 
our economy back on track. Thank you, Mr. Chairman.
    [The prepared statement of Senator Edward M. Kennedy 
appears in the Submissions for the Record on page 40.]
    Senator Schumer. Thank you, Mr. Chairman, and I want to 
welcome Senator Bennett here, as well. He doesn't wish to make 
an opening statement, but we'll ask for unanimous consent that 
his statement be entered into the record next, and all other 
statements will be entered into the record.*
    *Senator Bennett's statement was unavailable at time of 
    Senator Schumer. It is now my honor to introduce our 
witnesses. We first have Dr. Larry Summers, who is the Charles 
Eliot University professor at Harvard University, the 27th 
president of Harvard University, an eminent scholar, and an 
admired public servant.
    He's taught on the faculty of Harvard and MIT, served in a 
series of senior public policy positions, including as Domestic 
Policy Economist for the President's Council of Economic 
Advisers; chief economist of the World Bank, and, of course, 
Secretary of the Treasury of the United States.
    In 1993, he received the John Bates Clark Medal, given 
every 2 years to the outstanding American economist under the 
age of 40. Could you still get that?
    Senator Schumer. Next, Dr. Lawrence Mishel who came to the 
Economic Policy Institute in 1987 as EPI's first research 
director, then as vice president and now president. He played a 
significant role in building EPI's research capabilities and 
    He's researched, written, and spoken widely on the economy 
and economic policy as it affects middle- and low-income 
families. Dr. Mishel received his B.S. from the Pennsylvania 
State University; his M.A. in economics from American 
University; and his Ph.D. in economics from the University of 
    Mr. William Beach is director of the Center for Data 
Analysis at the Heritage Foundation. In that role, he is the 
think tank's chief number-cruncher. He oversees Heritage's 
original statistical research on taxes, Social Security, crime, 
education, trade, and a host of other issues.
    Prior to joining Heritage, Mr. Beach held a variety of 
posts in the public and private sectors. He's a graduate of 
Washburn University in Topeka, Kansas, holds a Master's Degree 
in history and economics from the University of Missouri at 
Columbia, and is a visiting fellow at the University of 
Buckingham in Great Britain.
    Dr. Summers, you may proceed. The entire statements of all 
three of you will be read into the record and you may all 
proceed. We'll try to limit the statements to around 5 minutes. 
If you need a little more, take it.

                    SECRETARY; CAMBRIDGE, MA

    Dr. Summers. Thank you, Mr. Chairman, for the opportunity 
to testify before this Committee.
    This Committee has its roots in a post-World War II 
recognition that Government can act strongly to tame the 
business cycle and respond to the threat of recession, and so 
it is perhaps fitting that your first hearing this year address 
the concern of managing demand in our economy so as to avoid 
    I want to ask and to try to answer six questions bearing on 
our current economic situation and the prospects for fiscal 
stimulus: First, is fiscal stimulus desirable at present? Yes.
    There was considerable debate a month ago about the 
prospects of recession, and I would say some of us who felt a 
recession was likely held a strong minority position. 
Unfortunately, in the last month, the data stream has virtually 
all been negative, with a very weak employment report, very 
unfavorable retail sales, and reports from major financial 
institutions in the last couple of days that suggest growing 
problems in the consumer sector and consumer credit.
    At this point, I think the preponderance of probability is 
on a U.S. recession this year. There is the possibility, though 
not yet the probability, that a recession could prove long and 
severe, if a vicious cycle occurs in which credit problems 
cause economic problems, which cause further credit problems, 
which in turn exacerbate the economic problems.
    Over the next 2 years, the difference between economic 
performance with and without fiscal stimulus is likely to be 
several hundred thousand jobs and a loss in the range of one 
thousand dollars for the average family.
    If fiscal stimulus is successful in preempting a severe 
recession that would otherwise occur, the gains would be far 
    A second question: Why not rely on monetary policy to 
stimulate the economy and focus fiscal policy on longer-term 
    As Chairman Bernanke has certainly recognized, monetary 
policy has an essential role to play in maintaining demand and 
growth and in combatting financial instability.
    However, fiscal policy also has a critical role to play for 
a variety of reasons: Fiscal policy is faster and surer, 
especially in the presence of the kind of financial problems 
that we have today.
    Second, proper fiscal policies can target the innocent 
victims of recession and directly promote job creation.
    Third, full reliance on monetary policy is problematic in 
an environment where excessively low interest rates would put 
the dollar at risk, could lead to excessive increases in 
commodity prices, and could, as we've seen, exacerbate the 
problems of asset bubbles and moral hazard that contribute to 
the difficulties that brought us to this point.
    In a situation of such uncertainty, a diversified approach 
to stimulus is best.
    This question: How great is the risk of overheating the 
economy and causing inflation? Should we wait further for 
definitive evidence of recession?
    In my judgment, the balance of risks is now unambiguously 
on the side of recession and slowdown.
    Inflation over the least year, measured exclusive of the 
transient factors of food and energy, was 1.9 percent. Thanks 
to the introduction of indexed bonds during the 1990s, we now 
have a market measure of inflation expectations and can look at 
the difference between nominal bonds and indexed bonds to gauge 
inflation expectations.
    They are low today, relative to where they have been over 
the last 2 years.
    Any of us who have talked to workers or to business, sense 
that this is an environment where people are scared, not an 
environment where they are pushing to create the kind of wage-
price spiral that has given rise to inflation in the past.
    Economic cooling is a much greater risk today than economic 
overheating. There is sufficient weakness in the economy now to 
justify stimulus legislation that will take effect as rapidly 
as possible.
    Fourth, how large should a stimulus package be? I have 
previously advocated a stimulus in the range of $50 to $75 
billion. Given recent data, I now believe that it would be 
appropriate to enact a program of this magnitude, as soon as 
possible, while at the same time making provision, perhaps with 
a contingent trigger, for a second tranche of similar magnitude 
if the economic data continue to prove negative, as I expect 
they will.
    A program of $50 to $75 billion would represent between a 
third and a half of a percent of GNP, and would run very little 
danger of overheating the economy.
    If delivered in the second and third quarters of 2008, this 
program could have a material impact on consumers and on 
confidence, more generally. A larger program might be 
problematic, particularly if it contains measures that would 
have impact only with a delay.
    However, because policy has been behind the curve for some 
months now, it would be appropriate to design a program in 
which further stimulus could take effect without the need for 
additional legislative debate and action if the economic 
situation deteriorated even more.
    The two-tranche approach could involve a trigger based on 
payroll employment numbers, or, alternatively, a discretionary 
trigger based on how the Secretary of the Treasury or another 
Government official reads the economic statistics.
    Five: What should be contained in a stimulus package? Mr. 
Chairman, you were kind enough to repeat my mantra on this 
topic. It should be timely, targeted, and temporary.
    In my judgment--and here, very similar judgments have been 
issued by the Congressional Budget Office--measures that are 
most likely to fulfil these criteria include: Across-the-board 
tax rebates that go to all consumers; adjustments in 
withholding schedules that benefit all taxpayers to an equal 
extent; increases in unemployment insurance benefits; and 
increases in food stamps.
    To echo a judgment that you reached, in my judgment, 
announcements today of future tax reductions--taking effect 
several years hence--would have a negative impact because of 
their effect on projected future budget deficits that would 
dwarf any positive incentive impacts that they have on 
investment incentives. Therefore, they should be avoided.
    The question of business incentives naturally arises. My 
reading of the evidence suggests that the case for business 
incentives is not compelling. The principal inhibitor of 
business investment is lack of market demand, not the cost of 
capital, and the experience with the 2001 stimulus program is 
not terribly encouraging.
    On the other hand, there is a reasonable argument that 
temporary investment tax credits or accelerated depreciation 
schemes, might pull some investment forward into 2008 and 
thereby, provide stimulus.
    Though the cost of a business incentive program is not 
terribly compelling, if one is enacted, it should be 
incremental and apply only to investment above some benchmark, 
such as two-thirds of the previous year's investment or 
depreciation. This would assure all the benefits in terms of 
encouraging the scheduling of investments forward, at only a 
small fraction of the revenue cost, and permit a greater 
fraction of resources to be targeted to those households that 
have been most hurt by recession.
    On the spending side, the measures most likely to be 
effective are temporary increases in benefits, perhaps for the 
long-term unemployed and food stamp recipients.
    I would stress, in general, that the more detailed the 
efforts to achieve specific programmatic objectives, whether on 
the tax side or the spending side, the greater the risk of 
    A high burden of proof should be placed on any newly 
designed program proposed as a stimulus measure, to demonstrate 
that it can have rapid impact.
    Should stimulus be paid for within a given budget window? 
As you noted, Mr. Chairman, any program in which stimulus was 
paid for contemporaneously would vitiate itself because the 
withdrawals from the economy would equal the injections.
    The more difficult question is, what about paying for 
stimulus over a 5 or a 10-year window? Here there is some 
economic support because it would reduce any adverse impact on 
capital costs and avoid the resulting increase in interest 
    On the other hand, the need for offsets would likely lead 
to substantially more protracted discussion and debate over a 
stimulus program, which could compromise its ability to be 
enacted on a timely basis.
    In my judgment, it would not be irresponsible to enact 
stimulus without offsets, as long as the stimulus program that 
was enacted was unambiguously timely, targeted, and, most 
important in this regard, temporary.
    Mr. Chairman, in conclusion, any economic policy judgment 
is a matter of balancing risks. The risks of doing too little, 
too slowly, with respect to the recession forces that are 
gathering, are far greater than any risk that the political 
process will do too much, too rapidly.
    I urge the Congress to take prompt action.
    [The prepared statement of Dr. Lawrence Summers appears in 
the Submissions for the Record on page 42.]
    Senator Schumer. Thank you, Dr. Summers.
    Dr. Mishel.

                   INSTITUTE; WASHINGTON, DC

    Dr. Mishel. Thank you very much, Mr. Chairman and Members 
of the Committee. I want to thank you for the opportunity to 
explain why the U.S. economy needs a large economic stimulus to 
boost demand for goods and services and to prevent a serious 
and protracted loss of jobs, rising unemployment and income 
    My testimony makes three key points: First, the economy, 
and especially the labor market, is in serious trouble and 
immediate intervention of sufficient size is needed to prevent 
a vicious cycle of job loss and reduced demand.
    And, most importantly, we are--I think all forecasters see 
rising unemployment this year and next.
    We project that if the unemployment rate rises as much as 
Goldman Sachs has projected it will, then the typical middle 
class family will lose $2,400 over this year and next. That is 
something we need to try to ameliorate.
    Second, the right stimulus needs the biggest bang for the 
buck. The idea of timely, targeted, temporary, I endorse. We 
think increasing unemployment compensation, providing State 
fiscal relief, and issuing targeted tax rebates, fits this.
    Third, we also believe that targeting spending toward 
infrastructure repairs, not our grandfather's public works 
programs, but repairs, can be done quickly and efficiently and 
put more than a million people to work.
    In terms of the timeliness of this, the concern with what 
I'm urging, is that we focus on unemployment. Unemployment is 
going to be high this year. It will be high next year.
    If there are infrastructure repair programs that are begun 
this spring and actually carry over into early 2009, that's 
just fine. Unemployment is expected to be over 6 percent in 
    Mr. Chairman, the economy has been broken for some time. We 
are in the last stages, probably, of the first economic 
recovery where the typical middle class family will have 
achieved less income than they had at the beginning of the 
business cycle, in this case in 2000 or 2001.
    We're not here to talk about all the ways the economy is 
broken, but to prevent the further damage of rising 
unemployment and the income losses that families will face.
    Let me return to this first big point about unemployment. 
You can either believe there's a recession, the economy is 
going to contract--and job growth will contract--and there will 
be a sharp rise in unemployment, or you can believe--as I think 
my friend Bill Beach here believes--that we're going to have 
very slow growth, very modest job growth, and rising 
unemployment this year and next.
    The key issue is, there's going to be rising unemployment. 
Don't focus totally on GDP, the way that brokerage house 
economists might. What American working families need are jobs 
to ameliorate the impact of the higher unemployment.
    As I said, Goldman Sachs and others are projecting that 
even by the end of this year we will see an unemployment rate 
of 6.2 percent, and this will put downward pressure on wages 
and income.
    If we don't see bold action, we're going to end up with the 
same kind of lousy recovery we did at the beginning of this 
decade where even after the economy so called was recovering, 
we had 2 years of further job losses and rising unemployment. 
We can't afford to do that again.
    I want to point out that my Institute, along with some 
other organizations--the National Employment Law Project, the 
Coalition on Human Needs, National Women's Law Center, the AFL-
CIO, and others--have written a letter to the Congressional 
leadership, urging some changes in the unemployment insurance 
system; that I would like to enter into the record.
    [The letter referenced appears in the Submissions for the 
Record on page 54.]
    Dr. Mishel. I think everyone agrees--it sounds like--that 
unemployment insurance is very important in a downturn. It 
gives money to the people who are the most likely to spend it. 
It has the biggest bang for the buck.
    Our system is broken, overall, in the unemployment 
insurance system. It is definitely broken during recessions 
when our triggers don't really work to give people the extended 
benefits, and so we are always too late to do that.
    I think it really makes sense to fix this system for all 
time, to make an automatic stabilizer better, to send some 
money to those long-term unemployed who will not be able to get 
benefits under the current system, and to make sure that our 
unemployment compensation system reaches low-income, part-time 
workers, and other people that are now excluded from the 
    We also believe that it's important to give fiscal relief 
to the States, as States who have to balance their budgets in 
times of recession are forced to raise taxes and cut spending. 
This only exacerbates a recession.
    We can give relief to the States that will prevent them 
from doing damage to the economy. In the last recession, there 
was $20 billion of aid to the States; this time, we recommend 
$30 billion, split equally between a general block grant and an 
increase in the Medicaid match.
    Third, let me turn to infrastructure repairs. At a time 
when demand by private-sector employers for customers is 
lacking, it's a really good thing to create public investment 
that will create jobs and create demand and help break a 
downward spiral.
    Managed wisely, it can be well-targeted and timely, and is 
definitely temporary if we have a one-time boost for 
infrastructure repairs, which we believe can be done for 
bridges, for schools, for water treatment and sewage plants. 
Anyone reading about the dilapidated state of our school 
systems or the many, many deficient bridges, should be 
concerned about this.
    We have an incredible backlog, and I think that we can get 
this money out quickly. For those people who doubt we can get 
it out quickly, I looked into one particular school system. I 
picked New York City, just as a random city, and noted that 
they were given $1 billion to improve school buildings, as part 
of a court order.
    They told us that within 4 months, the entire $1 billion 
was committed and that it was completed over the next 12 
months. I think this experience can be repeated over and over 
with deficient bridges, water and sewage projects, et cetera.
    I talked to the head of the National Governors Association 
yesterday, and he assured me that, as well.
    One word on tax policy: I want to agree that we should have 
a tax rebate. I think that it is important that it go to all 
people who pay taxes--payroll taxes or income taxes.
    I want to suggest that, as between well targeted and timely 
tax rebates and infrastructure spending, as you said, Mr. 
Chairman, all of the infrastructure money is spent. Tax 
rebates, part of it is spent; part of it is saved.
    Part of tax rebates are spent overseas. Almost all of 
infrastructure repair is spent domestically.
    Given the fact that these are spending needs that we have 
anyway, we get two things out of it: We get to create jobs--
boost the economy, and we get a long-term productivity effect, 
to boot. Thank you very much.
    [The prepared statement of Dr. Lawrence Mishel with 
attachments appears in the Submissions for the Record on page 
    Senator Schumer. Thank you, Dr. Mishel.
    Mr. Beach.


    Mr. Beach. Senator Schumer, Congresswoman Maloney, 
Congressman Saxton, Members of the Committee, I'm very pleased 
to be here today. You have my bio from Senator Schumer.
    There is an increasingly held view that the U.S. economy is 
slipping into a sustained period of slow economic growth, 
perhaps even recession. The root of that worsening news is 
believed to be the collapsing housing sector and the financial 
institutions and practices that surround residential 
construction and mortgages.
    Further, it is beginning to look as though declines in 
housing sales, construction, and mortgage credit industries, in 
general, will continue in 2008, as the mortgage default rate--
principally on adjustable-rate mortgages increase.
    It is estimated that something above 2 million subprime 
adjustable-rate mortgages will reset to a higher interest rate 
in the first few months. The specter of further declines in 
home prices, more turmoil in credit markets, and the emergence 
of secondary adverse effects in other part of the economy 
stemming from these price and credit events, have raised 
concern about the general economy's near-term outlook.
    So, what should Congress do? As I will argue later in this 
testimony, Congress obviously should do nothing to harm the 
economy. That's an obvious point, but worth stating.
    It should let the Federal Reserve lead the effort to 
stabilize economic activity, and it should keep its focus on 
crafting long-term pro-growth economic policy.
    Congress should take this moment of slow growth to do what 
it does best: To set broad economic policy. In this instance, 
Congress should concentrate on signaling to investors and 
workers alike, that its principal focus will be on improving 
pro-growth economic policy, mainly in the areas of tax, 
regulatory, and spending policy areas.
    Serious work by the Congress in these areas will create 
greater predictability for investors and business owners, and 
assure workers that they will have a better chance of improving 
their wages through increased productivity.
    How do I see the economy? Larry has basically signalled my 
testimony, but let me just hit a few points.
    While I continue to believe that the U.S. economy's 
strength and robustness are its principal characteristics now, 
I, too, have concluded that near-term prospects are poor.
    For example, the probability of recession has risen in our 
models, from 35 to 40 percent, and I could easily see little or 
zero growth in GDP when the fourth quarter estimates are 
    The decline in residential construction will continue for 
some time; consumer and investor spending will slow, and 
growing inventories--principally in the automotive sector--will 
become a drag on the economy, for inventory buildup in the 
third quarter actually explains some of the large 4.9 percent 
growth rate we saw then.
    That said, we expect GDP growth in 2008 to remain around 2 
percent, and monthly employment growth averaging 75,000 jobs. 
This is slow growth; this is not recession.
    The reason I believe we avoid recession in 2008 is due, in 
large part, to the substantial contributions to GDP from 
exports. While domestic demand is expected to grow by a paltry 
\9/10\ of a percent over the next two quarters, exports are 
forecasted in our models to expand by 10 percent.
    Recent U.S. export growth stems from the lengthening above 
trend growth in world GDP, largely due to economic strength in 
Europe and the long-awaited emergence of China and India in the 
top tier of industrial economies.
    What should Congress do, given the slow growth? I'm only 
going to talk about tax policy. I do, in my written testimony, 
have mortgage markets regulation and long-term spending, as 
well, and I direct you to that.
    On tax policy, what can we do to decrease risk? Risk is 
part of the problem here, because investors--the people who 
drive the economy, that create the jobs, that buy the 
equipment, that improve the productivity, which causes wages to 
rise--have seen a signal of increasing taxes.
    Among the first things Congress can do to address the 
current slowdown, is to pronounce definitively, one way or the 
other on the tax increases scheduled for 2009 and 2011. There 
are projects, new businesses, and expansion of existing 
businesses, that would be undertaken today, if Congress 
signalled that taxes would be lower in 3 years.
    Since nearly all major capital undertakings last beyond 
this 3-year period, it is likely that making all or most of the 
Bush tax reductions, in some fashion permanent, would stimulate 
economic activity today, as well as in 2011.
    I am probably not the only one here today who knows of 
businesses that are preparing now for higher taxes in 2011. 
They are preparing themselves by reducing their riskier 
projects and providing for stronger cashflows in 2010.
    It is altogether possible that there are projects being 
canceled today, that would otherwise go forward today, if taxes 
were not scheduled to rise in 2011.
    The present speech of policymakers is as important as the 
policy actions they take. The decisionmakers in business and 
investment are watching Washington as closely as ever to 
discern the direction that Congress will take when responding 
to this crisis.
    If that direction includes tax increases, then investors 
will find more favorable economies to support; and business 
owners will, as much as they can, locate their expanded 
activities in places with more favorable tax regimes.
    Thus, Congress should signal today what it plans to do on 
taxes today and in 2 and 3 years. For my part, I urge the 
Congress to make permanent the key provisions of the 2001 and 
2003 tax law changes. Maintaining lower tax rates on labor and 
capital income will encourage both labor and capital to work 
harder now when we need that greater activity.
    In addition, we know from past experience that accelerating 
the tax depreciation of capital equipment and buildings, or 1-
year expensing of business purchases that otherwise would be 
depreciated over a longer period of time for tax purposes, can 
help during periods of slow growth.
    This was certainly the record in the last slump.
    Demand side stimulus, tax rebates, child tax credit, 10 
percent tax record have done little in fact to change the 
course of sluggish economies, and that record is now fairly 
    The tax rebates of 2001 did little to stimulate the economy 
or move it from a prolonged sluggish growth trend. Indeed, the 
contraction in investment, and thus job creation, did not begin 
to improve until after the 30 percent partial expensing in the 
2002 Act and the 50 percent partial expensing in the 2003 Act, 
which also cut the tax rates on dividend and capital income.
    I am all in favor of temporary tax cuts, especially in this 
area. If you look at businesses and how they behave when you 
put in front of them bonus depreciation, especially if it is 
targeted in industries that have poor job performance, they eat 
those tax cuts up. There is almost an infinite elasticity on 
this point.
    So I will join with everybody at this table and with what I 
have heard here in supporting a stimulus package, or in writing 
about it, that includes the right kind of pro-growth tax 
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Beach appears in the 
Submissions for the Record on page 56.]
    Senator Schumer. Thank you, Mr. Beach.
    I want to thank all of our witnesses for both interesting 
and, as you can see, divergent testimony. The first question I 
have is for Dr. Summers:
    I would just like you to elaborate. You mentioned, and as 
you can see from the panel and from some of the discussions 
here on this side of the table, one of the major issues, I 
think we can come fairly close to reaching a consensus on what 
should be, for what kinds of stimuli should be used under the 
temporary, targeted, and timely rubric.
    The biggest problem I see, the biggest hurdle, is what are 
we going to do about the permanent tax cuts that some think we 
should enact--as you do, Mr. Beach, and my friend Jim Saxton, 
and many of us think, both from a policy, but more importantly 
from an immediate stimulus point of view, don't help.
    Now you went a step further, Dr. Summers. You said that 
they might actually--extending these tax cuts might have a 
negative impact overall on creating growth in the short term in 
overcoming recession. Could you just elaborate on that a little 
    Dr. Summers. Sure, Mr. Chairman. If you imagine that the 
tax cuts were extended today, what would the effect be? That 
would not change tax behavior--it would not change the tax law 
in 2008, or 2009, or 2010. It would only change tax law in 
2011, and there would be two principal consequences of that 
    The first, and in my judgment larger, consequence would be 
an increase in the projected deficit over the subsequent decade 
and beyond, which would be measured in the multiples of 
trillions of dollars. This would translate into a projected 
increase in the magnitude of the National Debt in the trillions 
of dollars, which in turn would translate into a lower level of 
national saving and a shortage of capital long after any 
recession we have now was over.
    That would lead to higher capital costs measured in both 
long-term interest rates equity prices, because of the impact 
of the expected deficit on the supply and demand for capital 
and because of the increased risk premiums that would result.
    Because markets look forward, the impact would be higher 
capital costs not just in the future, but today. That would be 
reflected in every mortgage rate, in every company's stock 
price. In my judgment, this would be the primary effect.
    There is, to be sure, a second effect--which was the one 
that Mr. Beach emphasizes and the one that Congressman Saxton 
spoke of. To the extent that businesses contemplating an 
investment today place substantial value on the tax law as they 
expect it to prevail in 2011, the anticipated tax cuts might 
encourage them to invest more.
    In my judgment the first effect is far greater than the 
second effect, in no small part because I think the primary 
question investors ask themselves today is why should we make 
an investment today when the product demand isn't there?
    So I think in the current recession environment, the whole 
set of issues around cost of capital is very much secondary. 
Maybe it is easier to put a plant in place today than it would 
be to put a plant in place 2 years from now, but if I do not 
have any use for the output that is going to come from that 
plant, there is no reason to build it today.
    No conversation that I have had with leaders of 
organizations that invest in large scale suggest to me that 
their investment decisions today are driven, to any important 
extent, by what they think the corporate tax rate is going to 
be in 2011, much less what they think their own tax rate is 
going to be on any dividend payment they receive.
    Senator Schumer. Thank you. Another quick question. Do you 
think we should, in this stimulus package, try to deal 
specifically with the housing crisis in certain ways? Or should 
that be apart from it?
    Dr. Summers. I think it is a question more of legislative 
tactics than anything else. I think further action with respect 
to housing is a good idea. If you can do it all quickly in one 
package, so much the better. If the housing component is 
controversial, and putting it together with a stimulus package 
will delay the passage of stimulus, then I think you are better 
off keeping them on separate tracks.
    Senator Schumer. Thank you, Dr. Summers. My time has 
    Ranking Member Saxton.
    Representative Saxton. Thank you.
    Dr. Summers, I listened intently to your testimony and 
quite frankly it is very impressive, particularly with regard 
to the concept of targeting and timeliness.
    With regard to targeting, I assume that your notion would 
be to target--or the correct notion, I should say, would be to 
target expenditures in such a way that they would give what I 
would call the most bang for the buck----
    Dr. Summers. Yes.
    Representative Saxton [continuing]. Of economic growth.
    As I understood your testimony, you are targeting--you 
mentioned food stamps and unemployment insurance, and Dr. 
Mishel mentioned infrastructure repair. More recently, Senator 
Schumer mentioned issues that had to do with other sectors of 
the economy. Here is my question: As we sit here, as Members of 
Congress, there are going to be suggestions that come here to 
us from sectors throughout the economy as to what would give 
the most bang for the buck, and this Congress--the House and 
the Senate--will make decisions about what is the most bang for 
the buck.
    And I can assure you that after 24 years here, I know there 
will be no shortage of ideas about how to do that, and that the 
political process will work to put in place something that the 
institution compromises on which will be different from what 
you say, or different than Dr. Mishel says; and I am wondering 
how we get around that problem which I see as a major 
impediment to a fiscal stimulus?
    Dr. Summers. I think it is a very fair question. I think 
the reason why I emphasized relatively across the board tax 
rebates was because I thought they had the potential of 
avoiding what would otherwise me more devisive sectoral 
    If this becomes the vehicle for everyone's particular 
agenda, then I think the process becomes that much more 
    In the name of being timely, I do think you should try to 
reach an agreement that is as across-the-board as possible. So 
while there are certain tax measures, or certain spending 
measures that seem to me to be particularly constructive, from 
the point of view of the long-run health of the economy, I have 
resisted the temptation to include them in my testimony, not 
because I am in doubt about whether they are good ideas, but 
because it seems to me that if everybody includes their 
preferred measures, you are going to have a very difficult 
    I also think that it is important to recognize that 
economics is about demand and supply, and they each have their 
day. At a moment like the present--when the principal risk is 
recession--the main problem is not that the economy has got 
various bottlenecks, but that the economy has got a lack of 
    And so the priority should be to stimulate demand. Much of 
our longer-term policy thinking relates to the supply issues, 
whether it is education--as I would tend to emphasize--or 
whether it is reductions in top marginal tax rates, as others 
would tend to emphasize.
    Unfortunately, because of these gathering recession 
pressures, the constraints on our economy over the next couple 
years are less likely to be about supply than they are about 
demand. And that diagnosis should frame the discussion.
    Representative Saxton. Thank you.
    Let me just very quickly ask Mr. Beach: Would the prospect, 
Mr. Beach--in your opinion--would trillions of dollars of tax 
increases after 2010 undermine investment and economic growth?
    Mr. Beach. Yes.
    Representative Saxton. A short question and a short answer. 
Thank you.
    Senator Schumer. And your time has expired.
    Congresswoman Maloney.
    Representative Maloney. Thank you.
    Dr. Summers, how important is it that we enact a stimulus 
package that does not worsen our long-term economic outlook, 
but boosts our competitive position in the world economy?
    Dr. Summers. Two things, Congresswoman.
    One, with respect to measures that would be adverse to the 
long-term fiscal outlook--I tried to address that in answering 
Congressman Saxton's question--but I would go in a slightly 
different direction with this and say I think it is very 
important for the long run that we avoid a recession, if 
possible. Because avoiding recession may be very difficult, we 
should focus on mitigating one to the maximum extent possible.
    This is necessary because it seems to me, if you think 
about all of our country's medium-term and long-term 
objectives--whether it is the ability to address issues like 
health care, like income security, or like education--over the 
medium term, they depend on how strong our economy will be. 
They depend on what our budget outlook will be a couple of 
years from now, and that outlook will be very adversely 
affected if we have a serious recession.
    The degree to which the United States is vulnerable in the 
global economy, at this moment of indebtedness, is going to be 
very sensitive to how strong our economy is, and how attractive 
we are as a place for others to invest. These two issues will 
depend very much on the seriousness of any downturn.
    The attractiveness of the American model in the world--what 
my Harvard colleague Joe Nye has referred to as our ``soft 
power''--is going to depend very much on how well our economy 
is functioning.
    If you think about our ability to maintain support for an 
engaged internationalism, which I think is terribly important 
to do on a bipartisan basis in a rapidly changing global 
economy, it is going to be much easier to do that in the 
context of a strong economy that is producing benefits for 
middle-class families, rather than a deteriorating economy 
where economic insecurity is increasing.
    So I think you hit on a crucial issue: There is enormous 
potential suffering that we can mitigate by responding to the 
threat of recession, but far beyond that, there are very large 
stakes for whatever the agenda of the country is going to be 
with new leadership beginning in 2009. I'm not talking about a 
Democratic agenda, or a Republican agenda, because whatever the 
agenda is, we are going to be in a much better position to 
accomplish it with an expanding economy than with a declining 
economy. The decisions we make in the next several months will 
affect very much how the agenda is framed a year or a year-and-
a-half from now.
    Representative Maloney. In this recession--or economic 
downturn--do you think it will be short and shallow, or deep 
and long?
    Dr. Mishel.
    Dr. Mishel. I think that it is a dangerous thing to predict 
the future. And I think the comfort zone that we all agree on 
is, unemployment is going to be high in 2009. So that all the 
issues before us are: Let's do something to mitigate that. And 
I think that is the bottom line, and I think a lot of the 
technical talk about how deep is it going to go and will we 
actually see declining output doesn't matter.
    Think about unemployment and what it does to families. 
Think about the people that are going to lose wages and jobs, 
the kids that will not be able to go to college, the people 
that are going to move around so the kids will be displaced 
from schools. I mean, just think about the permanent damage 
that is done as people lose income and suffer extended 
    That is what I think Congress needs to focus on.
    Representative Maloney. What timeframe do you believe is 
too late to have a proper stimulus on our economy? Anyone.
    Dr. Mishel. I will just--well, I think we should implement 
something as soon as we can. And we would try to get a lot of 
the expenditure, both taxes or spending, implemented and going 
this year. But it could last into next year.
    And I think as the other Larry has been saying, you know we 
can keep our eye out for whether we need to do more, but I 
think we should do something now. Keep our eye open. Anything 
that impacts the economy this year and early next year is well 
worth doing.
    We are so far from having to worry about overheating the 
economy I just do not understand what the issues are.
    Mr. Beach. Let me just have a quick word on that. You are 
already beginning to have an effect on the economy by holding 
hearings and having these debates. Your speech, if I could just 
say, is important to how people plan.
    And you do not need to have definitive evidence of a 
recession to act. We know that there is a slowdown. We are all 
predicting a slowdown. And the mere prediction of the slowdown 
is in a sense going to be self-fulfilling because people will 
now be more cautious.
    So there is right now a window for action. If you wait 
awhile and you do not signal what you are going to, on taxes, 
the legislative process is slow, so you are going to have to do 
something that will pass through quickly, you will miss the 
    The credit markets are probably going to self-correct in 
some respects, wiping out businesses and taking care of 
borrowers. There is an action period and it is now. We know 
from 2001, when the action was taken in an appropriate fashion, 
that there was some bump-up in GDP. It wasn't a very effective 
move, but we know that that was a bump-up, so that moved now.
    Dr. Summers. Congresswoman----
    Mr. Beach. Go ahead.
    Dr. Summers. [continuing]. It is an Olympic year. Gold 
medal for legislation in the first quarter with impact in the 
second and third quarter.
    Silver medal for legislation in the second quarter that 
fully has its impact during this year.
    And because this is a different kind of Olympics, no medal 
if the legislation----
    Representative Maloney. Well said.
    Dr. Summers. [continuing]. Does not happen in the second 
quarter and have its impact this year.
    Senator Schumer. Thank you.
    Representative Maloney. Thank you.
    Senator Schumer. Senator Bennett.
    Senator Bennett. Thank you very much, Mr. Chairman.
    Welcome to all of the witnesses. First, Dr. Mishel, I 
endorse absolutely what you say about infrastructure. I cannot 
escape some historic context here.
    I remember when we were passing the Highway bill. We were 
attacked as spenders, big spenders--drunken sailors; some of 
that language is still out there in the campaign rhetoric.
    I voted for the Highway bill with great enthusiasm, even 
though I am a conservative Republican who is supposed to be 
concerned about fiscal responsibility, because I recognized 
exactly what you are saying here, not only because of the 
economics, but because our infrastructure is crumbling, as 
witnessed in Minneapolis.
    And I am very interested that a lot of people who were 
saying, ``Gee, you are spending far too much money! You are a 
bunch of drunken sailors up there who have lost control.'' When 
the bridge collapse said, ``You did not spend nearly enough 
money on the infrastructure! What's the matter with you?''
    Well that is the life we live here in the political world. 
But I think there is no question but what spending now on an 
infrastructure that is crumbling is the right thing to do. And 
if PAYGO requires that I vote for an increase in the gasoline 
tax, I will do it. Which signals that I am never going to run 
for President of the United States.
    Senator Bennett. But I am interested in all of this 
conversation about unemployment and labor, because the reality 
is that we have, in various sectors of the economy, severe 
labor shortages right now that cannot be filled. This is not a 
single labor market where you either have a job or you do not 
have a job.
    I will give you the anecdotal evidence. TVA is trying to 
rebuild certain facilities in the Tennessee Valley, 
infrastructure long since needed. They cannot find welders. 
They cannot find welders in Tennessee. They cannot find welders 
anywhere in the country.
    They are advertising nationwide for welders to come work 
there, and for a variety of reasons that particular trade has 
dried up and people do not want to do it.
    In my home State of Utah where unemployment is around 3 
percent--having risen to that level from 2.6--the employers 
say: Our major problem is that we cannot find labor in a whole 
series of industries.
    Now Utah may be an anomaly, but you do not have a single 
national labor market that is either filled or unfilled based 
on what the Congress does. And we could do serious damage to 
the economy, if in the name of trying to get the overall number 
changed, we do things that are not targeted to the reality out 
on the ground.
    Mr. Beach, you say in your testimony you know others in the 
room who--let me read it exactly because it caught my eye. By 
the way, I think there is a misprint in your testimony because 
you have the question: What can increase risk? Didn't you want 
to say ``decrease'' risk?
    Mr. Beach. Well, I am shocked that I made a mistake in my 
testimony, but I will go and take a quick look at that.
    Senator Bennett. OK. But you say, ``I am probably not the 
only one here today who knows the businesses that are preparing 
now for higher taxes.''
    Secretary Summers, I can introduce you to some people who 
will give you a different answer than the one you say you get 
from the people you talk to. I was in Senator Schumer's city 
talking to a group and said that the tax cuts are probably not 
going to be made permanent. Given the political situation, I do 
not see any chance that they will be.
    They were absolutely stunned. They said, ``Do you mean to 
say that all our taxes are going to go up? Back to where they 
    I said, ``Yes, that is exactly what the political landscape 
looks like.''
    They said, ``Good heavens! Number one, we have got to 
immediately tell Congress how stupid that is. And Number two, 
if in fact that is the case, Senator, we have got to 
recalibrate all of our plans.'' Now that conversation was a 
year ago.
    So let us not assume that 2010 is so far in the future, and 
we do not really need to worry about it, and it is not 
affecting decisions today. Anybody who makes the calculation 
that we are going to take our present circumstance where we 
have probably the highest corporate tax rate of any developed 
country in the world and see that go up so that we have the 
dubious distinction of being even higher, that that is not 
going to have an impact on the economy and that somehow that 
can just be fed into a computer and spill out numbers about 
deficits two decades from now is frankly not the kind of long-
term economic thinking I think we need to do.
    Now reactions from all of you to that particular tirade.
    Senator Schumer. That's good, because your time is up, 
    Senator Bennett. All right. I apologize.
    Senator Schumer. OK.
    Dr. Summers. Senator Bennett, I think it is a balance-of-
risks question, and clearly the impact of what happens on the 
tax cut would depend on how people thought about whether it was 
going to be paid for and what they think the impact would be on 
the long-run deficit.
    I guess I am very struck by the experience of the 1990s, 
which I think was pretty powerful in demonstrating that putting 
deficit problems behind us exerted a very potent positive 
impact on the economy through its impact on capital costs. This 
positive impact occurred despite very strong warnings from many 
of the kind of people you are describing, who cautioned that 
the measures enacted in 1993 were certain to lead to a serious 
recession and a period of very slow economic growth.
    So I think we probably do not see eye to eye. I recognize 
that the effects you are describing are present; I just think 
they are substantially exceeded by the adverse fiscal impact. 
And in any event, I think the worst risk here would be if that 
debate paralyzed us with respect to the measures that could 
otherwise be agreed on to provide stimulus to the economy in 
the short run.
    I think if anyone were to have the idea that making the tax 
cuts permanent should be part of the stimulus, taking that 
position would on my assessment be tantamount to opposing 
stimulus. As you recognized, I do not think there is any 
conceivable chance that these two measures will happen in the 
next several months.
    I think the decision is going to have to be made as to 
whether one is serious about the stimulus issue, and if so, 
that requires deferring any discussion around extending the tax 
    Senator Schumer. Senator Kennedy.
    Senator Kennedy. Thank you, Mr. Chairman.
    You know, just to get back to the reality, when we look at 
where we are in terms of--as this chart over here shows--on the 
problems of December's unemployment, if you look at what has 
happened in a number of parts of the country in terms of home 
heating oil--would you put that chart up, please--40 percent 
since the last year.
    [The charts entitled, ``Unemployment Rate Jumped in 
December'' and ``Real Oil and Gas Prices Approaching Record 
Highs'' appear in the Submissions for the Record on pages 61 
and 62 respectively.]
    If you look at what is happening to American families who 
face losing their homes, this has gone up 181 percent from 
    If you look at the bankruptcies that have taken place just 
from 2006, this is up 40 percent. These are economic 
indicators. And they have triggered--for Mr. Beach saying, as 
well, we have got a window now. Action, period.
    The results of all this are, people out there are 
suffering. And I think the enormous value that we have from 
this panel is the recommendation and suggestion that there are 
a number of things out there that can really help people that 
are being adversely impacted by this--however you want to 
describe it--this recession.
    We should get about the business of getting something 
simple and quick that has been tried and tested and is going to 
have the greatest impact on those people that are hurting. I 
think that is what I am hearing from this panel. I think the 
recommendations have been enormously constructive.
    I think Larry Summers and the response to the earlier 
question about giving out the medals just reminds us about the 
urgency. I do not know whether there is anything further that 
he would want to say on it, but I also am enormously impressed 
by what Dr. Mishel has mentioned: That even if we are able to 
get the economy moving in a more positive direction in terms of 
growth, we are going to have a lot of people that are going to 
be unemployed, and they are going to be hurting. They are going 
to be hurting.
    I would just like to come back to that for a minute, if you 
can, for the panel. You have given us a sort of prescription 
about how we need to address the economy, but how are we going 
to lessen the impact on real people, on working families, 
people that have been the most adversely impacted up to now and 
are being adversely impacted while we are having this hearing 
    We could do one thing on the economy. We have something 
else with regards to the impact on real people. Dr. Mishel 
mentioned the changes in the unemployment compensation. These 
are people who are paid into the unemployment compensation and 
now are facing adversity. And instead of being able to get out 
what they have paid in, are still being shortshrifted.
    That is a suggestion, and certainly one if we go the route 
of the unemployment compensation, but what, in addition to what 
you have said here, do you think would be valuable for this 
Committee to understand to lessen the impact on the people that 
are going to be really suffering through this period, even if 
we are able to get the economy moving back in a positive 
    Maybe we will start with Dr. Summers, and then Mr. Beach.
    Dr. Mishel. Well I would like to point out that the higher 
unemployment has its effect, not only on those people who 
become directly unemployed. And over the course of a year, you 
may have 6 percent unemployment, but 14, 15 percent of the 
workforce may be unemployed at some point during the year. But 
it is also the effect of the higher unemployment that lowers 
wage growth.
    And so many working families will lose income because of 
that. And my friend Larry had an estimate of a loss for average 
families of $1,000, I think, this year. Mine is very similar 
with an additional loss next year of another $1,400 on top of 
the original $1,000. And so we also need to deal with those----
    Senator Kennedy. Just describe that. What does that mean, 
the loss, to a family? What does that mean in real terms?
    Dr. Mishel. That a middle class family who may have income 
of about $52,000, that as a result of the higher unemployment 
their incomes are going to be $1,400 less this year than what 
they were in 2007. And there will be a further deterioration in 
    So to me that is a pretty big deal.
    Senator Kennedy. That is across the country? Is that 
    Dr. Mishel. On average across the country, yes. And I think 
it is going to affect everybody who lives in markets where 
unemployment is going to rise. And it is going to 
disproportionately affect those people who are at the bottom.
    Listen, when we get 6 percent unemployment in this country, 
the minority communities are experiencing 12 percent 
unemployment. Communities who you could say live permanently in 
a recession are in a very, very deep recession.
    But to move to the discussion about the unemployment 
insurance system that I know you are very interested in, I 
think it is really important for us to get on the table now--
because we have done it so late in past recessions--to have 
some extended benefits for 20 weeks beyond the regular 26 weeks 
for all States.
    And to be able to have in very high unemployment States 
even longer extended benefits and perhaps even a $50 per week 
benefit increase across the board. Unemployment Insurance 
benefits are very low, and we know these people are going to 
spend it. We know they are hurting. So that is a very easy 
thing for Congress to do.
    And I also want to agree with my friend Larry that we 
should be thinking about stimuli that involve existing 
vehicles. No new programs. No changes in fundamental 
legislation. Let's use existing vehicles. It can be done for 
infrastructure. It can be done for unemployment insurance, food 
stamps, et cetera.
    Senator Schumer. Thank you.
    Dr. Summers. Could I add two things, quickly?
    Senator Schumer. Yes.
    Dr. Summers. One, Senator, I was struck by someone I spoke 
with recently who lives in New Hampshire and works in 
Massachusetts. You know, it is one thing for farmers to watch 
the weather report very nervously wanting to know what the 
weather is going to be, but it is another thing for people 
whose work does not have anything to do with farming to watch 
the weather report very nervously because whether they are 
going to be able to afford to heat their house all winter 
depends upon just how potent global warming is this winter.
    I think that is an indicator of the kind of distress that 
becomes much more likely when you have a recession.
    If you look at policy in historical context over the last 
25 or 30 years, in a variety of ways we have much lower 
marginal tax rates than we did 30 years ago. In many ways that 
is a positive thing because of some of the other changes we 
have made, such as welfare reform. As a side effect of these 
other changes we have made--I would say mostly desirable 
changes--one adverse consequence has been that there is a 
little less automatic stabilization than there used to be.
    Automatic stabilizers can be a useful policy tool because 
they kick in automatically as the economy declines. I think it 
would be worth some reflection, not just on what measures we 
can do right now, but on what automatic stabilizers might be 
useful. For example, we could reform unemployment insurance so 
that we have got a systematic set of formulae that extend 
benefits automatically when the unemployment rate goes down.
    Similar kinds of changes could be useful with respect to 
other benefit programs. When the economy goes down and oil goes 
up, whatever the right size of the heating oil assistance 
program was 2 years ago, it should be bigger now.
    So I think it would be profitable to consider some 
mechanisms for generating a little bit of automaticity that 
would lead to even more rapid responses in the future than is 
ever going to be possible through legislation.
    Senator Schumer. Thank you.
    I am going to try now to keep us within the 5-minute rule 
because we must end at 11:15 and I want to give everybody a 
    Congressman English.
    Representative English. Thank you, Mr. Chairman.
    I have been concerned for months about a softening economy. 
I have been meeting privately with close to a dozen respected 
economists out of both the Government and private sector. What 
has struck me is there appears to be universal agreement that 
the economy is now slowing down, particularly based on the 
latest reports.
    Many economists that I have met with recommend proactive 
stimulus, regardless of whether there is a technical 
recession--and certainly as somebody who represents Northwest 
Pennsylvania, I appreciate that whether or not it is 
technically a recession, it certainly feels like one, 
particularly when we slide below a 1 to 2 percent growth rate.
    I would think this is not the time for partisan politics, 
but there are some legitimate philosophical concerns here that 
hopefully should not get in the way of our stepping in on 
behalf of working families now and acting quickly.
    I would like to think there is a lot of common ground here. 
I would hope that we would have the courage to embrace a pro-
growth stimulus package that would help jump-start the economy 
by helping job creators, as well as easing the financial burden 
on workers.
    I think we need to extend full expensing and bonus 
depreciation for business investment, and limit the reach of 
the corporate AMT.
    I would also like to extend unemployment benefits, repeal 
the income taxes on UC, increase the child tax credit, and 
provide a modest rebate for low-income families. I am not sure, 
Dr. Summers, that all of that could fit within your $50 to $75-
billion parameters, and I am doubtful that we can recreate the 
miracle of the fishes and loaves.
    But I guess I am more concerned about doing too little than 
doing too much. I also think that Congress should provide 
stability to the financial markets by making clear that the tax 
reforms enacted in 2001 and 2003 are not going to be allowed to 
expire. And I certainly would rather do that, rather than 
threaten tax increases of historic proportions, as were 
contemplated in recent budgets.
    I think that if we are serious about stimulus, I think we 
should avoid over-promising, but also I think we should avoid 
some of the PAYGO rhetoric which seems to be hobbling action on 
the other side of the aisle.
    I would hope in our discussion about infrastructure 
investment and handouts to States and certain programmatic 
tinkering, that we are not contemplating a stimulus package 
along the style that the Japanese embraced during the 1990s. 
That clearly did not work.
    You will remember, Dr. Summers, when you were at the 
Treasury, the Japanese experience with that sort of stimulus 
really did not take them in the right direction.
    Now Mr. Beach, you have talked I think eloquently about the 
impact of pending tax increases on calculations within the 
economy. Do you feel that the talk about tax increases, which 
has proliferated in Washington over the months leading up to 
our recess, has contributed to the threat of a slowdown? And do 
you believe that some of the tax reforms floated out there by 
some of our friends, particularly in my Chamber, have 
potentially contributed to the atmospherics which seem to be 
slowing growth?
    Mr. Beach. Well, anecdotal evidence here is what we have. 
We do not have the statistical evidence yet, but I can affirm 
that based on conversations I have had and observations I have 
    I have also begun to suspect, and some research is now 
beginning to come in, that stock market volatility may be due 
to the threat of the increase in taxes as chief financial 
officers rebalance portfolios to produce cash-flows in 2010.
    So, yes, I think that the discussions in the House recently 
on the Ways and Means bill which was I think a large tax 
increase may have contributed to uncertainty about the future.
    Representative English. Dr. Summers--I know I am almost out 
of time--but you had mentioned the idea of a discretionary 
trigger being wired into stimulus.
    Certainly we have discussed both programmatic stimulus and 
tax stimulus here. Are you comfortable with the idea of 
including discretionary triggers in the Tax Code? And doesn't 
that also potentially have unintended consequences?
    I just wanted--I would like you for the record, because of 
the standing you have up here, to maybe offer your perspective 
on that.
    Senator Schumer. You just have to do it briefly.
    Dr. Summers. I don't think, Congressman, that there would 
be any significant adverse impact to a provision that would 
allow the Secretary of the Treasury over a 6-month period to 
certify that in his judgment recession had become more likely 
than not, and that an additional round of uniform rebates would 
go into effect.
    Dr. Mishel. But not supply side tax provisions----
    Dr. Summers. But I think, in general, we have a separation 
of powers, and pursuant to this separation, Congress legislates 
the tax cut. I think the exercise of discretion over a 
circumscribed set of measures and over a circumscribed 
interval, so as to provide for a better cyclical response might 
produce more accuracy than a quantitative trigger in terms of a 
3-month move, but the discretion would need to be very much 
    Senator Schumer. Congressman Hinchey.
    Representative Hinchey. Thank you very much, Mr. Chairman, 
and thank you, gentlemen, very much for being here with us 
today. I think we have all benefited greatly from the 
insightful testimony and the very interesting responses to 
questions that you have provided us. I am very, very grateful 
to you.
    Dr. Summers, I wanted to thank you also for that mention 
you made of the Gold Medal, which I think is very interesting 
in this particular context. The price of gold is now, what, 
something above $900 an ounce.
    Dr. Summers. Yes.
    Representative Hinchey. Which has gone up a lot more 
rapidly even than the price of energy, including the price of 
gasoline, which indicates that a certain amount of investment 
capital is now focused on something that is a lot more secure 
than it might be in other places, putting more and more of that 
investment capital into gold.
    I think that, in and of itself, is an interesting 
    As you pointed out, I think the economy that we are dealing 
with is essentially a demand economy. It is an economy that is 
based on demand. Roughly 70 percent of the gross domestic 
product of our country is based upon consumer demand and 
consumer spending.
    So in the context that we are dealing with what I think 
frankly, is a recession at this moment--I think we have seen a 
downturn in the economy continue over the course of roughly the 
last year, and I think it is pretty clear now that we are in 
the early stages of a recession.
    And so if that is true, we need to begin to deal with this 
very aggressively in the ways that you have suggested. And I 
think that most of that has got to do a little with tax cuts, 
having those tax cuts focus on middle income, low or middle 
income people, blue and white collar working people. They are 
the ones that are going to generate the stimulation of the 
economy with whatever money they get.
    They need to have additional spending ability. If you look 
at what has been happening to working people over the course of 
many, many years now, the unemployment insurance has not been 
what it should be. The minimum wage is not what it should be.
    People who are working are not getting the kind of wages or 
the kind of benefits that they deserve. People who are in a 
situation where they get unemployment insurance for which they 
have to contribute in the context of their job, for them the 
cost of that unemployment insurance has gone up something in 
the neighborhood of $1,500 over the course of the last year or 
    So working people are really in distress here. And I think 
that we have to focus on the demand aspect of this economy and 
provide as much help as we can for these working people.
    One of the ways that you talked about, both Dr. Summers and 
Dr. Mishel, was about investment in the basic infrastructure.
    When you mentioned schools, Doctor, I was reminded of how 
the Clinton administration tried to get a substantial 
investment, public investment of capital into upgrading 
schools, which have not been upgraded in decades across this 
country. Many of them are in desperate condition. Those are the 
kinds of things that I think we should be engaged in.
    We are facing what I think is potentially a very dangerous 
situation, not just with inflation, but with the value of the 
dollar dropping as dramatically as it has, and with the price 
of energy and food going up so substantially, making the 
inflation rate not 2.3 percent, but something in the 
neighborhood of 4.3 percent. That means we've got to have a 
large focus on this situation, which is likely, not just on 
inflation, but on something that confronted our economy back in 
the late 1970s and the early 1980s, a situation of stagnation 
of the economy down-turning and costs going up, resulting in 
    I think that is one of the words that we have to put in our 
minds as we deal with this complex set of issues that confront 
us right now--and I would appreciate what you think of that and 
how you think we ought to handle it in that context.
    Dr. Summers. I would make two comments: First, how can we 
tell our kids that their education is the most important thing 
for their future and for our society's future, and then ask 
them to sit in classrooms all day, where the paint is chipping 
off the walls. How can we ask them to go work in chemistry 
labs, as we do all over this country, where the kids have to 
step out of the classroom three times during the experiments 
because they are sick and nauseated, because the ventilation 
system doesn't work? How can we ask our children to do these 
things and then talk about how we've got to produce more 
    There's plenty to argue about--how we should fund it, how 
quickly it should be implemented, and what its role is as part 
of stimulus--but it is hugely important. It was hugely 
important 8 years ago that we do something about 
infrastructure, and it's more important today,.
    ``Stagflation'' is a big issue. Part of the reason why a 
balanced program of fiscal and monetary stimulus, is, in my 
judgment, a better idea than relying only on monetary policy, 
is because it's less likely to be inflationary for a variety of 
reasons, particularly due to commodity prices.
    Senator Schumer. Thank you.
    Congressman Hill.
    Representative Hinchey. Is my time up?
    Senator Schumer. Yes, plus 22 seconds.
    Congressman Hill.
    Representative Hill. Thank you, Mr. Chairman. I'm a Blue 
Dog Democrat in the House, and budget deficits and fiscal 
discipline is something that's very important to me. I think, 
in terms of the long-term health of the economy, it's very 
    We just recently passed, as you know, an AMT bill that 
threw PAYGO rules out the door, and here we are getting ready 
to do it all over again with this fiscal stimulus package, and 
I'm troubled by it, to be honest with you.
    Now, there's been a great deal of discussion about the need 
for a stimulus package to be adopted, and that we ought to 
temporarily delay PAYGO rules, but all of you are so matter of 
factly convinced that this stimulus package is needed.
    I looked at and read from a lot of different economists who 
are not convinced that it is needed. And it is going to 
contribute to the budget deficit.
    Where is the empirical, historical evidence that past 
stimulus packages have contributed to the rebounding of our 
economy, particularly in the years 2001 and 2003?
    Mr. Beach. Amen. I happened to bring along today, some 
graphs, which I'm happy to leave the Committee. They are from 
    Senator Schumer. Without objection, they will be entered 
into the record.
    [The graphs referred to appear in the Submissions for the 
Record on pages 61 and 62.]
    Mr. Beach. They're from the Bureau of Labor Statistics, and 
they go directly to your point. There are stimulus packages 
that work; there are stimulus packages that sound good, but are 
    And the ones that we have tried, where we have stimulated 
demand, just haven't delivered as much as one would have hoped 
for them.
    On the other hand, those that are targeted on the 
investment side, building new plant and equipment to create 
jobs and improve incomes, and, thus, through improving incomes, 
stimulate demand, tend to perform very, very well.
    If you're going to suspend PAYGO rules, do it for programs 
that have a proven record of success, rather than ones that 
don't have a proven record of success. And it doesn't cost you 
a thing today to signal what you're going to do on taxes in 3 
    That doesn't even qualify for the PAYGO rules, and your 
speech is important. I am very concerned about spending.
    Spending is a drag on the economy, if it is for non-
productive purposes or purposes which have less productive 
purposes than similar money used for private concerns and 
you're right to be concerned about it.
    I would hope that Congress would find a way to get this 
done without having to depart from a discipline in the signal 
which was so important at the beginning of this year, that 
Democrats and Republicans are really going to be serious about 
    Dr. Mishel. Representative Hill, I understand your concern 
for fiscal responsibility and I salute it. I would point out 
that all efforts to pass balanced budget amendments, PAYGO 
rules, always have, and for good reason, exceptions for a 
recession and a downturn.
    And the reason is for what Larry Summers said, that if you 
put money into the economy through some kinds of spending or 
tax cuts and take it away in others, you end up not having an 
    So if we do something that is temporary, that is a one-time 
thing and doesn't build into higher deficits forevermore, it 
makes a lot of sense.
    I would also add that at this point, we have a deficit 
that's about 1 to 1.5 percent of GDP, which is actually a 
little bit higher than I would like at the end of a recovery, 
but it's not very large by historical circumstances, and I 
think that given what families are facing with higher 
unemployment and wage losses, that I think, to me, the concern 
should be on, as Larry says, mitigating the rise of 
unemployment, as long as we don't build in a permanent hole in 
the budget. I would suggest that would be a way to think about 
    Dr. Summers. Here's the problem: This is a case where 
preemption is probably a good idea. If you wait until it's 
absolutely 100-percent definite that we're in a recession, by 
the time your stimulus takes effect, it's going to be too late.
    You know, I've followed the economic debate pretty closely, 
and I've been part of it. It makes a big difference, whether 
you're reading things that are dated January 14 or whether 
you're reading things that are dated January 2 because the data 
is really quite consistently coming in negative.
    I don't think the risk is very great that this is going to 
be unnecessary, though I wish I had a different view.
    The fiscal prudence certainly is a big part of it, and in 
the best of all worlds, you'd be legislating measures in the 
out years that would offset anything that was done in the in 
    I think that's a reason to focus on keeping whatever you do 
timely, targeted, and temporary, and to be serious about 
imposing that kind of condition.
    But let me be very clear, stimulus is not going to pay for 
    On the other hand, to the extent that stimulus is 
responsive to reigning in the recession, that's got a quite 
significant positive effect on the health of the economy, which 
feeds through into the budget over the longer term.
    Senator Schumer. Thank you.
    Last, but not least, Congressman Cummings.
    Representative Cummings. Dr. Mishel, you used a term that I 
found so interesting. You talked about there are people in a 
permanent recession.
    You know, yesterday, I saw something that was just so 
interesting. They were doing the election coverage up there in 
Michigan, and I saw a fellow who had been out of a job for 2\1/
2\ years. He said he was putting in 10 applications a week.
    And he couldn't move, either. He had a house. I think maybe 
his wife was working. I don't know, but the money was coming 
from somewhere.
    And, you know, I said to myself, you know, this man is 
getting hit at least twice. He can't move, because he's worried 
about the price of his house which had dropped so far. 
Therefore, he was trying to wait it out, as to allow an 
opportunity for the price of his home to increase or gain 
    But at the same time, he didn't have a job. And I was just 
thinking, I was just thinking about some of the things that you 
and Dr. Summers have said. Is there such a thing as throwing 
good money after bad?
    In other words, I think your organization talks about $100 
billion, Dr. Summers talks about $50 to $75 billion to include 
in the overall stimulus package. Is there some point where you 
don't go high enough, and it does not do any good? Are you 
following me, gentlemen?
    Dr. Mishel. Yeah. Our economic rebound plan actually 
recommends 1 percent of GDP which is $140 billion. I think 
Larry, who started out half that size, is now saying that we 
may need that much, and be ready to do it.
    And I think that, you know, when you talk to people from 
the financial sector, or other people who talk as if they're 
looking into a deep, dark abyss, and if you don't throw a big 
lifeline to the economy, they're wondering, why bother? So you 
really do have to do something to scale.
    And I know those stories that you're talking about with the 
man in Michigan, and it's a shame that our policies over the 
years haven't really done anything to address the kind of 
issues that that man faces.
    And I would actually say that I wish we could also be 
talking about a policy of job creation in communities that 
always experience high unemployment, because whether or not we 
come out of a recovery or not, those communities are still 
going to need jobs.
    I think we should be going even so far as direct government 
job creation, because those communities do live in a permanent 
recession, and they need training and they need access to jobs, 
so I applaud your attention to this.
    Representative Cummings. Dr. Summers, how urgent is urgent? 
In other words, I think all of you said that we need to get a 
stimulus package to the American people quickly; we don't have 
to have a lot of arguments over. However, how urgent is 
urgent--because you know how this place runs up here?
    Dr. Mishel. Start meeting tomorrow.
    Dr. Summers. If the legislation is on the President's desk 
and signed within the next 2 months, you've done great. If the 
legislation is passed and on the President's desk and signed 
before you recess for Memorial Day, you've done OK. If there is 
no legislation before Memorial Day, but it comes before July 
4th, you're passing. But if the legislation comes after that, 
it might or might not have been worth the bother, and the main 
opportunity to help has been lost.
    Representative Cummings. So if you've got a preference 
between things like unemployment--dealing with those people 
that are closer to the permanent recession--or dealing with the 
tax cuts, I take it that you all have a preference there?
    Mr. Beach. I don't think you're actually legislating for 
the recession or the slowdown right now, because I think you 
should be looking past it.
    It's probably going to be slight, anyway. You know, it 
started in March, and it was over in November of 2001. The bill 
was signed in May; it took effect over the Summer, but really 
none of the effect really was there until late in the year.
    So, in a sense----
    Representative Cummings. You know, I wish you could tell 
that to the people I represent. They would not agree with that, 
because a lot of them fall within that permanent recession 
class, unfortunately.
    Dr. Mishel. May I suggest also that he's suggesting--he's 
talking about GDP. And your own forecasts would say that the 
unemployment rate at the end of this year is going to be about 
6 percent. You said it was 5.5 percent for the year as a whole.
    So, it's not about when the economy actually contracts and 
when it stops contracting; it's how long people are going to 
experience high unemployment. I would hope you would agree with 
that, Bill.
    Representative Cummings. Thank you, Mr. Chairman.
    Dr. Summers. Real quick, as Senator Schumer suggested 
earlier, I'm no longer young. I've watched the economy, and 
I've watched Washington for at least a little while now, and I 
think the risks here of too little too late are far, far, far 
greater than the risks of too much, too soon.
    Senator Schumer. And on that note, we'll conclude. I just 
want to say that the one consensus we seem to have among the 
witnesses, is that we should do this quickly.
    There may be differences on what we should do. When I spoke 
to Chairman Bernanke the other day, that was his greatest 
concern, as well. So we've tried to set a good trend in this 
Committee. We were supposed to finish by 11:15. I know you have 
deadlines, and we came pretty close.
    The hearing is adjourned.
    [Whereupon, at 11:22 a.m., the hearing was adjourned.]
                       Submissions for the Record



Prepared Statement of Dr. Lawrence H. Summers, Charles Eliot University 
                     Professor, Harvard University

    I am grateful for the opportunity to testify before this 
committee at this important juncture. I have submitted for the 
record a speech I delivered recently on the current state of 
the economy and the broad range of policy questions it 
presents. Here I address the main issues at stake in the debate 
over fiscal stimulus for the American economy and provide my 
views as of this moment. The best policy response may change as 
we receive new economic data and our understanding of the 
current, highly volatile economic situation improves.


    Yes. Following recent economic reports particularly the 
last employment report and yesterday's retail sales data, my 
judgment, like that of many economists, is that a recession is 
more likely than not. At this point this is or is very close to 
being a consensus judgment. Even if there is not an officially 
defined recession, there is almost certain to be a significant 
slowdown in the economy that will feel like a recession in many 
parts of the country and to many businesses and families.
    Fiscal policy measures that succeed in increasing spending 
will mitigate the severity of the coming downturn and 
accelerate the eventual recovery. Crucially they will also 
provide insurance against the possibility of a scenario 
unfolding like that in Japan in the 1990s where an economic 
downturn becomes very severe and lengthy because a vicious 
cycle starts with credit problems hurting the real economy, in 
turn exacerbating the credit problems with the cycle 
    Over the next 2 years the difference between economic 
performance with and without fiscal stimulus is likely to be 
several hundred thousand jobs and a loss in the range of $1000 
for the average family. If fiscal stimulus is successful in 
preempting a severe recession that would otherwise occur, the 
gains would be far 


    As Chairman Bernanke recognized in his most recent speech, 
monetary policy has an essential role to play in maintaining 
demand and growth as well as in combating financial 
instability. In the current context however it is best 
complemented by fiscal policy for a variety of reasons: (i) in 
normal times fiscal policy is faster acting than monetary 
policy, and given the financial problems it may be even more 
true today. (ii) proper fiscal policies can target the innocent 
victims of recession and can directly promote job creation 
(iii) full reliance on monetary policy could easily mean 
lowering interest rates to levels that would be problematic for 
the dollar, commodity prices, future asset bubbles and moral 
hazard (iv) in a situation where policy impacts are uncertain 
it is most prudent to rely on a diversified set of stimulus 


    The balance of risks is now on the side of recession rather 
than inflation. Inflation measured by personal consumption 
expenditures excluding food and energy was 1.9 percent over the 
last year. Measures of inflation expectations as inferred from 
Treasury indexed bonds are close to their lowest point in the 
last 2 years. Moreover, in a climate of great uncertainty about 
workers' jobs and firms' profit margins inflation pressures are 
more likely to diminish than increase. Increases in inflation 
that have been observed recently reflect to a significant 
extent the impact of developments in oil as well as other 
commodity markets as well as declines in the dollar. Even if 
they are not reversed, these markets are unlikely have as large 
an inflationary impact in the future as in the recent past.
    The major problem with past stimulus efforts is that the 
stimulus has come too late. If stimulus is to be timely, it 
should be delivered promptly. By the time it is conclusively 
established that a recession has started, policy is likely to 
have been substantially delayed from what would have been 
    There is sufficient weakness in the economy to justify 
stimulus legislation now with provision for rapid 
implementation. As discussed below, consideration should be 
given to providing for a second tranche of stimulus that would 
be implemented if/when clearer evidence of economic weakness 


    I have previously advocated stimulus in the range of $50-
$75 billion. Given recent data, I now believe that it would be 
appropriate to enact a program of this magnitude as soon as 
possible and to make provision--perhaps with a contingent 
trigger for a second tranche of about the same magnitude.
    Sizing a stimulus package cannot be reduced to hard 
science. A program of $50-$75 billion would represent .35%-.55% 
of GDP and would run very little danger of overheating the 
economy on any plausible scenario. If delivered in the second 
and third quarters of 2008 it could have a material impact on 
consumers and on confidence more generally. A larger program 
particularly if it contained measures that would have their 
impact only with a delay would on current evidence risk an 
imprudent pattern of expanding the budget deficit at a future 
time when growth had been restored.
    However, policy has been behind the curve for some months 
now. So it would be appropriate to design further stimulus that 
could take effect without the need for new legislation and 
debate if the economic situation deteriorated either as 
Congressional debates continue or after legislation takes 
effect. The two tranche approach could deliver stimulus in the 
range of 1 percent of GDP if the situation warranted. One 
reasonable trigger would be changes over a quarter in payroll 
employment as suggested by Martin Feldstein. An alternative or 
supplement would give the executive branch the right to trigger 
the second tranche of stimulus based on their assessment of 
economic conditions.


    As with any potent medicine, stimulus if misadministered 
could do more harm than good by increasing instability and 
creating long run problems.
    A stimulus program should be timely, targeted and 
    Timely stimulus requires both that Congress and the 
President act quickly and that measures be chosen which can be 
implemented rapidly and then which will have their ultimate 
impact on spending in short order. This puts a premium on 
simple measures that work through existing modalities such as 
adjustment of withholding schedules or tax refunds or 
enhancements of benefits. It calls into question the wisdom of 
designing new programs or using approaches where Federal 
spending is not injected fairly directly into the economy but 
is instead only transferred to other units of government that 
historically have spent out new funds only gradually.
    Targeted stimulus requires that funds be channeled where 
they will be spent rapidly and where they will reach those most 
in need. This also argues for use of simple changes in 
withholding schedules, or tax refunds as well as for change sin 
benefit formulas. In general targeting in both the sense of 
assuring maximum spending and fairness are likely both to be 
achieved by measures that target those with low incomes and 
whose incomes have sharply declined.
    Temporary stimulus is necessary if stimulus is not to raise 
questions about the country's long run fiscal position. If 
stimulus were not credibly temporary, it would likely raise 
long term interest rates and increase capital costs offsetting 
its positive impact. Moreover if stimulus is not temporary, the 
risks that it will continue even after the economy recovers and 
lead to inflation or very high interest rates is greatly 
increased. Stimulus should be designed so that its proximate 
impact on consumer or government spending is all felt within a 
year of enactment and in any event by the end of the first 
quarter of 2009. It is important also that no measures be 
enacted on a temporary basis that will generate overwhelming 
political pressures for their extension if fiscal credibility 
is to be maintained.
    On the tax side these considerations suggest the 
desirability of across the board equal tax cuts or refunds for 
all taxfilers Measures which reduce taxes in proportion to 
taxes currently paid or that disproportionately favor upper 
income taxpayers or recipients of capital income are likely to 
be far less effective as such taxpayers spend much less of new 
income than low and moderate income taxpayers. Measures which 
commit today to reduce future taxes relative to current law are 
likely to be counterproductive because of the fiscal doubts 
they raise and because they do not provide liquidity now at the 
moment when consumers are facing the need to cutback spending.
    My reading of the evidence suggests that the case for 
business tax cuts is not compelling. The principle inhibitor of 
business investment right now is lack of market demand not the 
cost of capital. And the experience with the 2001 stimulus 
program is not very encouraging with respect to the efficacy of 
business incentives as stimulus. On the other hand a temporary 
investment tax credit or accelerated depreciation scheme might 
pull some investment forward from future years into 2008. To 
maximize the bang for the buck such a program should be 
incremental and apply only to investment above some benchmark 
such as 2/3 of previous investment or depreciation.
    On the spending side the measures most likely to be 
effective are temporary increases in benefits perhaps for the 
long term unemployed and food stamp recipients. Such increases 
can be implemented quickly and go to people who will spend them 
fast. The more detailed efforts are made to achieve specific 
programmatic objectives through increased spending, the greater 
the risk of delays. A high burden of proof should be put on any 
new spending program proposed as a stimulus measure to 
demonstrate that the spending will be rapid.


    Fiscal stimulus to an economy in recession operates by 
increasing demand in an economy that is constrained by lack of 
demand. If it is paid for contemporaneously, its point is 
largely lost as there is no net stimulus to demand because 
money injected in one area is withdrawn in another.
    As long as a fiscal stimulus program is temporary and does 
not create expectations of future spending or tax cuts it does 
not make a large economic difference whether or not it is 
offset by specific future fiscal actions. Including offsets in 
a 5 or a 10-year window would magnify the impact of fiscal 
stimulus a little bit by reducing any adverse impact on capital 
costs because it would avoid any increases in long run debt 
levels. And the need for offsets might operate to prevent 
fiscal stimulus from being extended or allowed to grow 
    On the other hand, if it delayed the process of coming to a 
conclusion on fiscal stimulus or generated so much disagreement 
that timely legislation could not be enacted a requirement of 
offsets would have serious adverse consequences. A judgment on 
offsets is ultimately political--depending on the economic 
advantage of the extra discipline offsets bring relative to the 
disadvantage of the extra complexity and delay that their 
negotiation would require.

Risks of Recession, Prospects for Policy (Brookings Institution: State 
                          of the U.S. Economy)

    I am speaking here today because I believe that our current 
economic situation requires a comprehensive program of measures 
to contain the fallout from problems in the financial and 
housing sectors and to assure sufficient policy support for 
economic growth over the next several years. Perhaps because of 
a failure to appreciate the gravity of our current situation 
and the problems our political process has in responding 
quickly and collaboratively to emergent threats, such a 
comprehensive program is neither in place nor in immediate 
    No economic projection put forward with anything like 
complete confidence should ever be trusted. The current 
consensus suggesting that growth is likely to be slow over the 
next several quarters and that the odds of a technically 
defined recession are in the 40 percent range is troubling 
enough given that it means rising unemployment and budget 
deficits, likely falls in real family incomes and a downturn in 
plant and equipment spending.
    For the last year, the economic consensus, and the policy 
actions that have flowed from it, has been consistently behind 
the curve in recognizing the gravity of the problems in the 
housing and financial sectors and their consequences for the 
overall economy. This continues to be the case. In my view it 
is almost certain that we are headed for a period of heavily 
constrained growth, quite likely that the economy will 
experience a recession as technically defined and distinctly 
possible that we are headed into a period of the worst economic 
performance since the stagflation of the late 1970s and 
recessions of the early 1980s.
    The late Rudi Dornbusch was fond of remarking that in 
economics ``things take longer to happen than you think they 
will and then they happen faster than you thought they could.'' 
So it has been recently. The related but distinct patterns of 
excessive valuations in housing markets and excessive 
complacency in credit markets were pointed out for years by 
experienced observers. The cracks took longer to appear than 
many expected and have now proven to be far more structurally 
damaging than almost anyone supposed.
    Economic downturns historically come in two categories. For 
most of the post war period, economic expansions did not die of 
old age. They were murdered by the Federal Reserve in the name 
of fighting inflation. This was the story in 1958, 1971, 1974 
and 1982 as sharp increases in credit costs drove the economy 
into downturns.
    Before World War II, and in recent years as inflation has 
come under control, expansions have ended as a consequence of 
the workings of the financial system, sometimes in conjunction 
with oil shocks. After a period of optimism, asset prices 
expand beyond fundamental values, credit expands, investors 
embrace financial innovations that allow greater leverage so as 
to better take advantage of rising asset values. At some point 
the party ends, asset prices fall, financial structures that 
once looked impregnable become vulnerable, confidence 
collapses, propensities to consume and invest fall off, and the 
economy turns down.
    Experience suggests that downturns driven by falling asset 
prices and credit problems tend to be recognized relatively 
slowly and to be quite protracted. Two extreme examples are the 
American experience after 1929 and Japan's experience in the 
1990s after the 1989 asset price collapse. Our last two 
recessions associated respectively with the bursting Savings & 
Loan real estate bubble and the NASDAQ collapse revealed gaps 
of several years between asset price peaks and the restoration 
of satisfactory rates of economic growth. Nationally housing 
prices peaked less than a year ago, and credit spreads reached 
their minimum levels only about 6 months ago.
    History's caution that situations like our current one are 
likely to surprise on the downside for a considerable time and 
prove quite protracted is confirmed by forward looking 
indications regarding the economy.
      300,000 home foreclosures were initiated in the 
first half of last year. The vast majority of them involved 
mortgages that had not yet reset. Even with recent policy 
changes up to 1 million foreclosures are expected over the next 
2 years.
      The new and relatively crude futures markets that 
exist are predicting that peak to trough national housing 
prices will fall by 24 percent according to an index that has 
only declined 6.6 percent from its peak so far. Already prime 
mortgages are defaulting at the same rate sub-prime mortgages 
defaulted 3 years ago.
      Freely traded shares in Real Estate Investment 
Trusts (REITs) are suggesting that the value of commercial real 
estate if marked properly to market may be down by as much as 
20 percent and the rate of transactions in commercial real 
estate has declined by more than half over the last year.
      The most important driver of U.S. economic growth 
over the past 7 years has been consumption which has 
outstripped GDP growth. The combination of a near zero personal 
saving rate, lost housing wealth, reduced availability of 
credit, reduced real incomes caused by rising oil prices, a 
falling dollar and rising food prices and increased uncertainty 
constitute a perfect storm depressing consumer spending.
      Even looking out 5 years the spread between safe 
liquid Treasury borrowing rates and the rates at which major 
financial institutions borrow is at well above normal levels. 
The debt of some of our countries largest and most prominent 
financial institutions is trading at levels suggesting a market 
judgment that their odds of defaulting on their debts over the 
next five years approach one in ten.
    Of course it is possible that improved trade performance 
coming from the falling dollar, the working through of the 
Fed's monetary policy actions and typical American resilience 
will carry us through the next year robustly. But this is not 
where the preponderant probability lies.
    Economic policymaking is about balancing risks. I have 
already suggested that the probability of subpar growth exceeds 
the chance that growth will be robust. There is an additional 
crucial point as well. The adverse consequences of policy 
choices that fail to deal with a potential recession and fail 
to stimulate the economy and that do not allow for financial 
repair far exceed the adverse consequences of over-insuring 
against an economic slowdown.
    Consider the costs if we experience even in a relatively 
mild recession:
      Losses of close to $5,000 in income for the 
average family of four quite heavily concentrated among the 
disadvantaged who are inevitably last hired and first fired 
along with cutbacks in Medicaid, child welfare and other social 
safety net programs as state budgets contract.
      A several hundred billion dollar increase in our 
national debt and a significant reduction and a substantial 
cutback in investment in plant and equipment, education and R&D
      Hundreds of thousands more foreclosures and 
greatly increased risks to the financial system.
      Greatly complicated international relations as 
the our downturn slows the rest of the world economy, the 
American economic model is called into question, protectionist 
pressures rise, and the dollar's centrality to the 
international financial system is called into question
    Of course if a downturn turns into more than mild 
recession, the risks are that much greater.
    Against these risks, what do those who counsel against what 
they see as imprudent activism worry about? They fear that 
stating the need for strong action will somehow undermine 
confidence by laying the problem bare. And they worry that 
inflation might tick upwards or that those who have made 
financial errors will be insufficiently punished.
    I only hope that history will see these as the main 
economic problems faced by whoever is elected President of the 
United States in 2008.
    It is the great irony of financial crisis that the very 
measures that could have prevented crisis are counterproductive 
in a time of crisis. Of course it would have been better to 
have had more fear on the part of lenders, less rampant 
liquidity, and higher saving 2 years ago when imbalances were 
building. But that is not what we need now.
    The most urgent priority for policy over the next several 
months is containing the incipient economic downturn. I am 
convinced this is possible without giving rise to either 
excessive complacency in the future or accelerating inflation. 
I want to briefly sketch what would seem to me on current 
information to be the appropriate evolution of policy in a 
number of areas. Of course as data comes in and alternative 
measures are debated, any particular combination of policies 
might look less and less appropriate. I will have served my 
purpose if I have advanced the debate by contributing an 
example of an ambitious policy program.


    One former economist official whose advice I sought in 
preparing these remarks referred to recent events as 
``adjusting for raised expectations, the greatest failure of 
risk management in financial history.'' This is too 
apocalyptic. But it is suggestive of the extent to which major 
financial institutions are unsure of their own and their 
counterparties creditworthiness.
    In normal times the spread between the rate at which the 
Treasury borrows and the LIBOR rate at which banks lend each 
other money for 3 months is typically well under half a 
percentage point. Currently it is about 2 percentage points. In 
the United States and Europe large and persistent spreads have 
also opened between the policy rates of central banks and the 
lending rates at which banks make credit available to each 
other and to firms and households.
    In this environment the dominant risk is a downward spiral 
in which financial problems curtail credit and spending thereby 
reducing economic activity, which in turn exacerbates the 
financial problems, creating a vicious spiral. Once in 
progress, such a spiral may prove very difficult to arrest. It 
is much more important to establish credibility that policy is 
ahead of the credit crunch spiral than to reassure yet again 
that it is not behind the inflation curve.
    I say this not because I am unconcerned about inflation. 
The achievement of price stability over the last generation is 
one of the most important factors contributing to improved 
economic performance. It is a matter of balancing risks. With 
workers and firms as insecure as they are today, I see little 
risk of the kind of wage-price cycle that has set off inflation 
in the past. Data on indexed and nominal bonds suggest that 
despite what has happened to oil prices and to the dollar there 
has been no increase in the expected price level several years 
out. Moreover, failure to contain a credit spiral could cost 
the economy years of satisfactory economic performance. If I am 
wrong and policy creates undue inflation pressures, they can be 
removed at a much less perilous moment.
    So far the Fed has responded by cutting its policy rates by 
a full percentage point and with a number of programs to make 
liquidity available to banks. The seriousness of the problems 
is suggested by fact that liquidity provision has not yet made 
a large dent in the spread between bank and government 
borrowing rates. While reductions in policy rates have 
translated directly into lower lending rates, it appears that 
half or more of their impact has been offset by increases in 
the spread between policy and lending rates. This means that 
the apparent easing in monetary policy in recent months has 
been much greater than the actual easing.
    What does this suggest going forward? First it suggests 
that policymakers should consider focusing attention not on 
their traditional policy rate but on targeting some more 
meaningful indicator of the cost of credit to households and 
businesses (such as 3 month LIBOR). In this way, increases in 
credit risks will not automatically translate into de facto 
tighter policy as they do today.
    Second, assuring full transparency with respect to the 
valuation of assets and the recognition of losses and 
liabilities should be the top regulatory priority. The Japanese 
experience taught painful lessons about the dangers of 
government support and encouragement for measures that seek to 
rearrange balance sheets so as to avoid facing painful 
realities. Wherever possible assets should be marked to market, 
not to model, and liabilities should be explicitly recognized.
    Third, regulatory policy needs to focus on assuring that 
financial institutions raise adequate amounts of capital to 
maintain their activities, even if this is painful for existing 
shareholders. If a bank is at the point of indifference between 
reducing the size of its balance sheet and raising capital by 
issuing shares or cutting dividends, the broader economy is 
not. Policy in recent months has devoted considerable attention 
to destigmatizing and indeed encouraging borrowing in one form 
or other from the Fed. In the months ahead it will be equally 
important to destigmatize the raising of capital and indeed to 
insist that institutions raise enough capital to allay credit 
risks and permit the resumption of normal lending activities.

                            FISCAL POLICIES

    The success of the Clinton 1993 budget plan in setting off 
a virtuous circle of growth, reduced deficits, lower interest 
rates and still more growth--along with a growing sense that 
short-run stabilization policy is the job of the Fed--have 
reinforced the economics profession's growing aversion to the 
use of fiscal policy to stabilize the economy.
    Yet, if economic data over the next several months come in 
as I fear they will--with increasing signs of recession--
several considerations suggest that the policy response should 
include fiscal as well as monetary stimulus for several 
    If policymakers are able to act quickly and effectively, 
fiscal policy can work more rapidly than monetary policy, which 
has about a lag of a year between the change in the Federal 
funds rate and its maximum impact. Moreover, the efficacy of 
monetary policy may well be diminished by capital constraints 
that limit the ability of banks to lend or by creditworthiness 
constraints that limit the ability of businesses to borrow. As 
important, the extent to which monetary policy can be prudently 
used in the current environment is limited by concerns about 
the dollar as well as about the bubble creating effects of very 
low interest rates. Finally certain problems--such as the 
impact of mass foreclosures on affected communities--are not 
easily amenable to monetary policy.
    Fiscal stimulus is critical but could be counterproductive 
if it is not timely, targeted and temporary. Gene Sperling's 
Bloomberg column this week makes these points strongly. To 
respond to an incipient downturn, fiscal policy has to have its 
impact in a timely manner. It has to be targeted to assure that 
increased government borrowing translates directly into 
increased spending and demand. And, critically, it has to be 
temporary so that its effects are not offset by higher long-
term interest rates. Indeed from the point of view of stimulus, 
the optimal package is one that raises spending and the deficit 
in the short run while reducing the deficit in the long run and 
thereby reducing long term interest rates.
    Any actual fiscal stimulus program would have to be worked 
out in the context of events as they unfold and should be 
walled off from longer term policy considerations where actions 
to assure long term fiscal sustainability are essential.
    It is reasonable to suggest that stimulus approaching $50-
$75 billion--roughly in the range of \1/2\ of 1 percent of 
GDP--is likely to be appropriate. The largest part of this 
stimulus should come in the form of tax cuts distributed 
equally among all taxpayers and recipients of tax refunds. 
Other elements of a stimulus package should include extension 
of unemployment insurance benefits given that long term 
unemployment is already at recession levels, temporary step-ups 
in food stamp benefits which can be executed and have effect 
very quickly, and tax measures to eliminate from taxation the 
so-called income that homeowners receive when they are 
foreclosed, a step that has just been passed by Congress.
    In the context of a legislative stimulus program, 
consideration also should be given to steps that can be taken 
to help contain energy and food prices. Such measures both 
raise consumers' purchasing power and reduce inflation 
concerns. These might include reform of the strategic petroleum 
reserve to assure that the government stops the practice of 
accumulating especially scarce oil products at times when 
markets indicates that current supply is selling at a large 
premium, and adjustments in policies promoting ethanol to 
assure that they do not drive up food prices.


    Probably the single most important thing economic policy 
can do for homeowners is to minimize the risk of recession or 
the severity of recession if it comes. With the bursting of 
what now can clearly be seen as a pervasive bubble, and the 
drying up of important segments of the mortgage market, the 
last thing that the housing market needs is a recession that 
would reduce incomes of homeowners and potential purchasers. 
That is why the aggressive fiscal and monetary policies I have 
just discussed are so important.
    But it is also true that problems in the housing sector are 
an important reason for recession fears and they need to be 
addressed. The recent teaser-freezer (which freezes the initial 
teaser rate of some sub-prime mortgages) is a useful step that 
addresses that relatively small minority of subprime mortgage 
holders who on the one hand appear very unlikely to be able to 
get a new mortgage and on the other hand appear very likely to 
be able to carry their existing mortgage. It is a constructive 
step but I know of no credible estimate suggesting that it will 
reduce annual mortgage payments by more than about $5 billion.
    It is a perhaps appropriate component of a much broader 
strategy that recognizes the core problems posed by the sharp 
decline in housing prices. While the issue of resets is an 
important one, a much more fundamental problem needs to be 
addressed. Consider a homeowner who purchased a home for 
$250,000 putting nothing or next to nothing down implicitly 
relying on appreciation of the house to service the mortgage. 
That homeowner finds himself today with a home worth perhaps 
$220,000 and with the capacity to service perhaps $200,000 
worth of mortgage even before any rate reset. If the house is 
foreclosed, its value will probably decline to $150,000 and 
adversely affect the neighbors as well.
    The best outcome for both borrower and lender is a write 
down in the value of the mortgage that allows it to be serviced 
and at the same time prevents a mutually costly foreclosure 
just as Chapter 11 of the bankruptcy code prevents the 
liquidation of overly indebted but viable companies. It is 
deals of this kind in the subprime, alt A, and prime space that 
need to be negotiated if families are to be saved the agony of 
foreclosure and lenders are to maximize their recoveries.
    The answer may lie in bankruptcy law reform, standard 
templates for mortgage restructuring or other means. Various 
tax and regulatory obstacles to shared appreciation mortgages 
in which lenders reduce monthly payments in return for a share 
in a house's appreciation when it is sold should be removed. 
Until there is recognition that many individuals who cannot 
meet their original mortgage obligations are nonetheless the 
highest value occupants of their homes, we are not going to 
fully respond to the problems in the housing sector.
    Additional steps that should be taken in the next several 
months include:
      the provision of Federal assistance to those who 
are foreclosed in locating new rental housing and to 
communities that wish to purchase foreclosed homes and convert 
them into rental properties.
      support for an adequate supply of mortgage 
credit. Proposed increases in the availability of FHA 
guarantees are a positive development though they are 
manifestly insufficient to assure an adequate flow of mortgage 
capital across the entire housing spectrum.
      The Government-Sponsored Enterprises (GSEs), 
Fannie Mae and Freddie Mac, should be granted significant 
temporary increases in their portfolio limit so that they can 
perform their market stabilizing function at the time it has 
been most needed in two generations. They should also be freed 
on a temporary basis from punitive capital requirements and the 
conforming loan limit should be increased to about $600,000.
    It is of course possible that developments in the housing 
sector will prove less serious than I fear and that not all of 
these measures will have been necessary. How serious a problem 
will this be? A substantial fraction of the originators of 
subprime mortgages have gone bankrupt. If I read the political 
winds correctly, those who remain will face greatly enhanced 
regulation. The concern that too many homeowners will learn 
from these events that it is a good idea to excessively lever 
up their homes seems less than paramount at this point. On the 
other hand, if policy remains behind the curve families in 
communities across the country will bear the brunt of the 


    While it has not been my topic this morning, I trust that 
extensive efforts will be made to learn from painful 
experience. Most obviously and visibly there is the need to 
protect vulnerable people from the kind of predatory lending 
practices that have been all too common in recent years. Recent 
experience also suggest the need for reevaluation of 
traditional approaches to monetary policy, the regulation and 
provision of liquidity to different types of financial 
institutions, the role of the rating agencies and much else.
    It has always seemed to me that those of us involved with 
finance bear great responsibility. There is the great 
importance of well functioning capital markets and the 
credibility of the currency. Much more important is the reality 
that when the economy is successfully managed people's fortunes 
are determined by their own choices and efforts. When the wrong 
economic policy choices are made people's lives can be wrenched 
apart as they lose their jobs or their homes or their ability 
to provide for their family because of complex forces entirely 
beyond their control.
    The economy is at as critical a juncture as it has been in 
many years. Policy must balance risks at a highly uncertain 
moment. The lives of millions of people who will never think 
about countercyclical policy, moral hazard, lending facilities 
or the Federal funds rate may be profoundly affected by the 
policy choices made in this city in the next few months. I hope 
they will be made both urgently and wisely.

 Prepared Statement of Dr. Lawrence Mishel, President of the Economic 
                            Policy Institute

    Mr. Chairman and members of the Committee, I am Lawrence 
Mishel, President of the Economic Policy Institute. Thank you 
for this opportunity to explain why the U.S. economy needs a 
large economic stimulus to boost demand for goods and services 
and to prevent a serious and protracted loss of jobs and rising 
unemployment. My testimony will make three key points:
    1. Because the economy, and especially the labor market is 
in serious trouble, immediate intervention of sufficient size 
is needed to prevent a vicious cycle of job loss and reduced 
consumer demand and spending.
    2. The right stimulus will have the biggest bang for the 
buck, which comes from increasing unemployment compensation, 
providing state fiscal relief, issuing targeted tax rebates, 
and direct Federal spending on low-income families through such 
means as increases in food stamps.
    3. Infrastructure spending, especially school repair and 
maintenance, can be done quickly and can efficiently put a 
million people to work. But even if it takes a year or more to 
employ large numbers of workers on infrastructure projects, the 
impact will be timely and important in counteracting rising 
unemployment and the kind of glacially slow job creation we saw 
following the 2001 recession.
    The economy has been broken for some time, and the economic 
growth we have seen has not reached the vast majority of 
families. This will probably be the first business cycle where, 
at the end of the recovery (last full year being 2007), the 
typical family will have lower incomes than they did at the 
start of the downturn (2000, the last full year of recovery). 
Fixing this disconnect between growth and the pay and incomes 
of the vast majority of Americans requires a policy agenda on 
health care, retirement, labor policy, trade policy, and work/
family policy that is much more substantial than what we will 
be talking about today. The focus today should be on offsetting 
the rising unemployment and the corresponding income losses 
that families will shortly face.


    The economy is taking hits from all sides. December's 
declining retail sales figures show that consumers are already 
hurting. Housing prices declined by a record 6.7 percent on an 
annual basis, according to the most recent S&P/Case-Shiller 
Home Price Index, and given the record inventories of unsold 
homes, they are expected to fall further.\1\ Home foreclosures 
are on the rise: the largest U.S. mortgage lender, Countrywide 
Financial Corp., reported that foreclosures and late payments 
rose to their highest Ievels on record in December 2007.\2\ 
And, over the next 6 months, the number of adjustable rate 
mortgage re-sets will exceed those that occurred in all of last 
    \1\ See S&P, ``Broadbased, Record Declines in Home Prices in 
October According to the S&P/Case-Shiller' Home Price 
Indices'' at http://www2.standardandpoors.com/spf/pdf/index/
    \2\ Reuters, ``Countrywide says foreclosures highest on record'' 
January 9, 2008, at http://www.guardian.co.uk/feedarticle?id=7211734.
    Let me be clear that we need to keep our eyes on rising 
unemployment and weak job growth and not on technical issues of 
whether output (GDP) actually contracts. Even slow but still 
positive economic growth can lead to sharply rising 
unemployment from job losses or very modest job gains. Job 
growth slowed over the past year, and that weakness has shown 
up in the unemployment rate, which jumped to 5 percent in 
December, significantly higher than the 4.5 percent 
unemployment rate in the second quarter of 2007. A jump of this 
size is usually the sign of a recession, and analysts at 
Merrill Lynch and Goldman Sachs believe that a recession has 
already begun.\3\ Goldman Sachs projects that the unemployment 
rate will reach 6.2 percent by the end of 2008, which will put 
additional downward pressure on wages and incomes, further 
reducing consumer demand.
    \3\ See BBC News, ``Recession in the U.S. has arrived'', January 8, 
2008, at http://news.bbc.co.uk/2/hi/business/7176255.stm
    If the economy is to avoid a cycle of declining consumer 
demand that fuels more job losses, which in turn reduce 
consumer demand, Congress must act quickly. If bold action 
isn't taken, we are likely to see a repeat of the 2001 
recession and the years of jobless recovery that followed it. 
EPI released a plan last week, which I have submitted as an 
attachment, that provides $140 billion of stimulus--1 percent 
of GDP--which would begin to reverse our economic course by 
creating an additional 1.4 to 1.7 million jobs.
    The stakes are high. In the last recession, the economy 
received only a mild boost from the 2001 tax legislation, 
primarily from a provision that provided a $300 rebate to most 
taxpayers. The bulk of the legislation was vastly misdirected 
and provided, little immediate stimulus. The consequences were 
a sustained rise in unemployment and no job growth until late 
in 2003: job growth, wages, and incomes all stagnated well 
beyond the ``official'' end of the recession.


    The Democratic leadership has announced that any 
intervention should be ``timely, targeted, and temporary,'' and 
I agree. Targeted should mean targeted where it can be most 
effective as stimulus, and it is a fact that all so-called 
stimulus is not equal. In fact, the key to maximizing its 
effect is to put money into the hands of consumers who will 
spend it most quickly and to create jobs, breaking the cycle of 
job loss and falling consumer demand. The fastest, most 
efficient way to get an infusion of money into the economy 
quickly is direct government spending on people who need help.
    Estimates by the U.S. Department of Labor and by Mark Zandi 
of Moody's Economy.com rank unemployment compensation at the 
top of the list of possible stimulus choices, increasing demand 
by $1.73 to $2.15 for each dollar. By contrast, Zandi finds 
that tax cuts--of all possible cuts--rank lower, and reducing 
the estate tax ranks lowest of all possible stimulus choices.

High ``Bang-for-the-Buck'' stimulus:
  Extend unemployment benefits.............................        $1.73
  Provide state fiscal relief..............................        $1.24
  Enact a one-time uniform tax rebate......................        $1.19
  Increase Child Tax Credit................................        $1.04
Lower ``Bang-for-the-Buck'' stimulus:
  Adjust Alternative Minimum Tax exemption levels..........        $0.67
  Reduce marginal tax rates................................        $0.59
  Increase tax breaks for small business investment........        $0.24
  Cut taxes on dividends and capital gains.................        $0.09
  Reduce estate tax........................................        $0.00

Extend unemployment benefits
    Along with the National Employment Law Project, the Coalition on 
Human Needs, National Women's Law Center, the AFL-CIO, and many unions, 
we strongly recommend immediate creation of a 1-year emergency 
unemployment compensation program with 20 weeks of supplemental 
benefits in all states and 13 additional weeks in ``high unemployment'' 
states (those with a 3-month average unemployment rate of 6.0 percent); 
a $50 per week benefit increase; and additional administrative funding. 
Congress should not wait for further damage to the economy before 
making these changes: unemployment is already 0.7 percent higher today 
than it was when the recession began in 2001, and the percent 
unemployed for 27 weeks or more is higher than when the 2001 recession 
officially ended (17.5 percent vs. 13.9 percent). These changes would 
cost about $8 billion over 12 months. We also recommend Federal funding 
for modernization of state unemployment systems, including extension of 
benefit eligibility to low-income workers (by using each employee's 
most recent work history); to workers who are only available for part-
time work; and to workers who leave their jobs for compelling family 
State fiscal relief
    During times of recession, state budgets are hit particularly hard. 
Reductions in tax receipts and cyclical increases in state spending put 
pressure on budgets--and since most states have balanced budget 
requirements, they are forced to either reduce spending or increase 
taxes in times of decreased economic activity. These actions perversely 
add to economic troubles by decreasing the total demand for goods and 
services, and thus intensify a recession. As such, direct Federal 
assistance to states can help prevent these outcomes and stimulate the 
economy. In the last recession, Congress provided $20 billion in aid to 
the states, split between general revenue sharing and a temporary 
increase in the Federal match for Medicaid. The same kind of assistance 
should be provided to the states once again, with $30 billion split 
equally between a general block grant and an increase in the Medicaid 
    There is mounting evidence that states are already feeling the 
pinch. Twenty-four states are either facing a shortfall for fiscal year 
2009 or are expecting problems in the next year or two. According to 
the Center on Budget and Policy Priorities, just 13 of these states 
face a combined $23 billion shortfall.
                       3. infrastructure repairs
    At a time when softening demand is leading many private-sector 
employers to think about cutting back, public investments that create 
jobs directly can create demand and help break a downward economic 
spiral. Managed wisely, Federal investment in infrastructure can be 
both well-targeted and timely. America's unmet needs are enormous and 
growing. The state of disrepair in America's public schools, for 
example, is a disgrace that impedes both teaching and learning. GAO and 
the National Center for Education Statistics agree that deferred 
maintenance has created a backlog of more than $100 billion in needed 
repairs in U.S. public schools, and the situation worsens every year. 
We recommend that Congress distribute $20 billion for school repair and 
maintenance through existing formulas to school districts across the 
    The benefits of this ought to be obvious. School repair and 
maintenance work is highly labor intensive. A $20 billion investment 
should create about 280,000 jobs, most of them construction jobs doing 
roofing, electrical wiring, carpentry, painting, and masonry that would 
employ many of the more than 200,000 construction workers laid off over 
the past year--and the thousands more who will lose their jobs in the 
coming months as the economy stumbles. The benefit in terms of improved 
learning and the safety of students and teachers as schools are brought 
up to safety codes is reason enough to make the investment.
    Those who doubt that the money would be spent well and quickly need 
only look at the recent experience of New York City. In 2005, New 
York's schools were given $1 billion to improve school buildings as the 
result of a court order. Within 4 months the entire $1 billion was 
committed to projects that were completed over the next 12 months. City 
officials assure us that they could easily spend another $1 billion 
just as quickly, and a summary of the NYC schools' several billion 
dollars of unfunded infrastructure needs is attached to my testimony.
    State and local officials in every jurisdiction we contacted, 
including Michigan, Illinois, New Jersey, and California, affirm that 
the school maintenance needs are so well known and pressing that no 
time will be wasted trying to figure out what to do with the funds.
    The replacement and/or repair of deficient bridges or critically 
important sewage treatment systems can also be timely and effective as 
economic stimulus. Almost every economist agrees that the Federal 
Reserve should act to lower interest rates, but the impact of that 
action won't be felt for as long as a year or more. Recent experience 
shows that when there is the will to get working, there is a way. Work 
on the I-35 bridge replacement in Minneapolis began in October 2007, 
just 2 months after the collapse, and is scheduled to be completed at 
the end of this year. Similar projects begun in mid-2008 would continue 
throughout 2008 and early 2009, when the job creation and economic 
stimulus they provide would still be badly needed, if the last 
recession is any predictor.
    There are several key advantages of infrastructure spending as part 
of a stimulus package. Unlike tax rebates, all of the money will be 
spent and none will be saved--perhaps 50 percent or more of a tax 
rebate will be saved (which does not boost demand). Another advantage 
is that infrastructure spending has barely any leakage to imports--all 
the spending boosts domestic activity. In contrast, about 10 percent of 
consumer spending is for imports, boosting other economies not ours. 
Last, an advantage of spending on infrastructure relating to schools, 
water, bridges, and other areas is that we need to do this anyway: we 
get a short-term boost to demand and a long-term boost to productivity 
(and well-being).
    The economy failed to add a single net new job until two and a half 
years after the 2001 recession began. The nation must do better this 
time, and we recommend that a total of $40 billion be spent on 
infrastructure maintenance, repair, and replacement to ensure a strong 
recovery. These are needed investments that should be accelerated to 
impact the economy now, when it would make the most difference.
                               tax policy
    A final word on tax policy. Tax cuts can be an effective stimulus, 
but only if done on a temporary and ``downscale'' basis. Tax reduction 
should be targeted to those who are most likely to spend it 
immediately. Low- and moderate-income taxpayers are those who will face 
the most immediate budget squeeze due to the recession, and thus most 
likely to spend any extra money received through changes in tax policy. 
An effective way to add a broad-based boost to consumption in order to 
quickly generate economic activity and job growth is to provide an 
immediate, one-time, refundable rebate to anyone who has paid either 
payroll or income taxes for 2007.\13\ A total expenditure of $65 
billion would yield approximately $350 or more per individual, and $700 
per married couple.\14\ Basing the tax rebate on payment of either 
payroll tax or Federal income taxes ensures that the rebate will 
effectively target low- and moderate-income taxpayers, many of whom do 
not pay Federal income taxes.
    Thanks you very much for allowing me to participate in this 
hearing. I look forward to your questions.


                                                   January 15, 2007
The Honorable Harry Reid, Senate Majority Leader
S-221 Capitol Building
Washington, D.C. 20510
The Honorable Mitch McConnell, Senate Minority Leader
S-230 Capitol Building
Washington, D.C. 20510
The Honorable Nancy Pelosi, Speaker of the House of Representatives
H-232 Capitol Building
Washington, D.C. 20515
The Honorable John A. Boehner, House Minority Leader
 H-204 Capitol Building
Washington, D.C. 20515
    Dear Senator Reid, Senator McConnell, Representative Pelosi and 
Representative Boehner: We are writing to express our strong support 
for prompt congressional action on economic stimulus legislation that 
will provide extended unemployment insurance (UI) benefits for the 
families and communities hard hit by the nation's distressing economic 
downturn and address outdated rules that limit the program's economic 
stimulative impact. As Mark Zandi, one of the nation's leading economic 
forecasters, noted after the release of the December jobs and 
employment report, ``the economy is on the edge of a recession, if we 
are not already engulfed in one.''
    That action is needed now is obvious. Today's job market is already 
far weaker than it was in March 2001, when the last recession began. 
Then, the nation's unemployment rate was 4.3 percent, and the total 
number of jobless workers had grown 400,000 over the preceding 12 
months. In contrast, 900,000 more workers are unemployed today compared 
to 1 year ago, and the latest unemployment rate (December 2007) was up 
significantly to 5 percent.
    Unemployment is also exacting a harsher toll today as jobless 
workers struggle for longer periods of time to find work, and already 
inadequate UI benefits--on average, only $285 per week, or one-third 
the average weekly wage--are stretched even thinner by the rising costs 
of basic necessities. In December 2007, the average unemployed worker 
had been jobless for 16.5 weeks, compared to 12.8 weeks in March 2001. 
Meanwhile, gas costs ($3.10 a gallon this month) are up 80 cents from a 
year ago, and the cost of a gallon of residential heating oil has risen 
98 cents (to $3.40) in just 1 year. USDA also predicts that food prices 
will experience their largest increases in years, as retailers pass on 
higher energy costs to consumers.
    The economy's steadily worsening condition and the resulting 
hardship on working families demand that Congress not repeat its 
mistake from earlier this decade, when it waited until 3 months after 
the recession officially ended to enact the Temporary Extension of 
Unemployment Compensation program (TEUC). According to a major study of 
past Federal extensions, each dollar of unemployment insurance benefits 
boosts the nation's Gross Domestic Product by $2.15, while also saving 
over 130,000 jobs. Congress's belated response to the last recession 
compromised the stimulative effect of the TEUC -- and another two 
million workers lost their jobs before the TEUC program was enacted. 
Indeed, the jobs market rebounded far more slowly, and more weakly, 
after the last recession than during any other business cycle during 
the past 60 years. Thus, to help prevent a similarly weak recovery, 
Congress should act quickly and realistically in response to the 
current downturn to extend and improve UI benefits.
    Congress can further enhance the stimulative value of extended UI 
benefits by simultaneously addressing systemic UI failures that deny 
benefits to many jobless workers because of outdated eligibility rules 
that have not kept pace with the changing labor market. Only 38 percent 
of unemployed workers now collect UI benefits. According to the 
Government Accountability Office, low-wage workers are twice as likely 
to become unemployed, but only one-third as likely as higher wage 
workers to receive unemployment benefits. Over a decade ago, a bi-
partisan Congressionally chartered commission recommended reforms to 
accommodate these concerns.
    Incorporating many of the commission's recommendations, the U.S. 
House of Representatives recently passed legislation providing 
incentive grants for states to modernize their UI programs as part of 
the Trade and Globalization Assistance Act. A similar measure, the 
Unemployment Insurance Modernization Act, has strong bi-partisan 
support in the Senate (S. 1981). Absent Congressional action to include 
these reforms in a stimulus package, however, substantial numbers of 
workers will remain ineligible for UI benefits of any sort, hurting 
them and the economy overall.
    Accordingly, we urge Congress to adopt the following unemployment 
insurance policies to stimulate economic growth and help millions of 
jobless families regain their footing during the uncertain economic 
      In light of the rapid rise in unemployment, a program of 
federally funded extended benefits should take effect without delay and 
it should last for at least 1 year, with states provided appropriate 
funding to properly administer the program.
      Recognizing the growth in long-term unemployment, jobless 
workers who remain unemployed after exhausting their state benefits 
should qualify for a maximum of 20 weeks of federally funded extended 
benefits. During the 1991 and 1975 recessions, when long-term 
unemployment was not nearly as high as it is today, Congress provided 
up to 26 weeks of basic extended benefits (in contrast, Congress 
provided only 13 weeks of extended benefits in response to the 2001 
recession, and the jobs recovery was especially weak).
      Consistent with the 2002 TEUC program and most other 
recent Federal extensions, Congress should provide an extra 13 weeks of 
federally funded UI benefits to states suffering from especially high 
levels of unemployment.
      With costs for basic necessities (including gas and home 
heating fuel) reaching record levels, while average weekly UI benefits 
remain egregiously low (just $285 a week), Congress should also 
supplement Federal extended UI benefits by $50 per week.
      To help states respond effectively to the recession and 
provide benefits to 300,000 low-wage workers who fail to qualify for 
the UI program in more than half the states, the stimulus legislation 
should incorporate the incentive funding program of the Unemployment 
Insurance Modernization Act (S. 1871).
    For America's working families, recent instability caused by the 
volatile housing, credit and oil markets has exacerbated the already 
severe economic strains associated with globalization and the ongoing 
loss of good jobs in manufacturing and other sectors. Absent quick and 
effective action by Congress, workers, employers and the economy 
overall will endure substantial hardship. Economists broadly agree that 
extending benefits under the nation's unemployment system is an 
efficient strategy to stimulate the economy, create and preserve jobs, 
and provide needed assistance to struggling families.
    The proposals outlined above will go a long way to help the 
families and communities hardest hit by unemployment and prevent an 
even more serious recession. We urge their prompt adoption.
            Respectfully submitted,

AFL-CIO, Kelly Ross, Legislative Representative, (202) 637-5075
American Federation of State, County and Municipal Employees
Coalition on Human Needs
Economic Policy Institute
International Association of Bridge, Structural, Ornamental and 
    Reinforcing Iron Workers (Ironworkers)
International Association of Machinists
The International Brotherhood of Teamsters, Leslie Miller, 
    Communications Department, (202) 624-8734
International Union, United Automobile, Aerospace & Agricultural 
    Workers of America (UAW)
Leadership Conference on Civil Rights
National Employment Law Project, Christine Owens, Executive Director, 
    (212) 285-3025 x 304
 National Women's Law Center, Joan Entmacher, Vice President for Family 
    Economic Security, (202) 588-5180
OMB Watch
Service Employees International Union
The United Association of Journeymen and Apprentices of the Plumbing 
    and Pipe Fitting Industry (Plumbers)


   Prepared Statement of William W. Beach, Director, Center for Data 
           Analysis, The Heritage Foundation, Washington, DC
    Senator Schumer, Congresswoman Maloney, Senator Brownback, 
Congressman Saxton, and members of the Joint Economic Committee of the 
U.S. Congress, I am William Beach, Director of the Center for Data 
Analysis at The Heritage Foundation. It is an exceptional pleasure to 
testify before you today on the state of the economy and potential 
efforts by Congress to alleviate financial and economic stresses. The 
views I express in this testimony are my own, and should not be 
construed as representing any official position of The Heritage 
    There is an increasingly held view that the U.S. economy is 
slipping into a sustained period of slow economic growth, perhaps even 
recession. The root of the worsening economic news is believed to be 
the collapsing housing sector and the financial institutions and 
practices that surround residential construction and mortgages. 
Further, it is beginning to look as though declines in housing sales, 
construction, and the mortgage credit industry will continue in 2008 as 
the mortgage default rate (principally on adjustable rate mortgages) 
increase. It is estimated that something above two million sub-prime 
adjustable rate mortgages will reset to a higher interest rate during 
the first few months of 2008.
    The specter of further declines in home prices, more turmoil in 
credit markets, and the emergence of secondary, adverse effects in 
other parts of the economy stemming from these price and credit events 
has raised concern about the general economy's near-term outlook. Many 
analysts believe that evidence of widening economic difficulties could 
be seen in last month's employment report, which contained a much 
reduced increase in non-farm payrolls from months prior. Others see 
evidence of emerging macroeconomic difficulties in a relatively poor 
Christmas retail season and in the increasingly poor revenue results of 
many major state governments.
    As everyone on this Committee must know, comparatively definitive 
evidence of a recession ``near miss'' or an actual recession will not 
be available for a long time, perhaps over a year. This slow 
accumulation of data renders the policymakers job particularly hard. Do 
policymakers rally behind an economic stimulus package that aims at 
avoiding a recession when we may not be heading into one at all, or do 
we frame a recession stimulus package that assumes we entered a period 
of negative growth sometime in November? Or, do we operate from the 
wise counsel of former CBO Director Douglas Holtz-Eakin that economic 
growth of positive or negative .4 percent is hardly a difference that a 
struggling family will appreciate.
    So, just what should Congress do? As I will argue later in my 
testimony, Congress obviously should do nothing to harm the economy, it 
should let the Federal Reserve lead the effort to stabilize economic 
activity, and it should keep its focus on crafting long-term, pro-
growth economic policy. Congress should take this moment of slow growth 
to do what it does best: set broad economic policy. In this instance, 
Congress should concentrate on signaling to investors and workers alike 
that its principal focus will be on improving pro-growth economic 
policy, mainly in the areas of tax, regulatory and pending policies. 
Serious work by the Congress in these areas will create greater 
predictability for investors and business owners and assure workers 
that they will have a better chance of improving their wages through 
increased productivity. Efforts to enhance the long-run may very well 
have immediate, short-run benefits as economic decisionmakers reduce 
the risk premium they place on starting new businesses or expanding 
existing enterprises.
            what do we know about the state of the economy?
    While economic data generally is collected well after the fact of 
economic activity, current, admittedly incomplete data indicate that 
the economy entered a period of significantly slower growth during the 
fourth quarter of last year. Indeed, the data may support the argument 
that problems in the housing sector and related credit markets have now 
affected a wider array of economic sectors and interests.
    The story in the mortgage industry is becoming well known and 
settled. Most analysts would agree that an excessive inventory of new 
housing faced declining demand for housing in 2006 as the Fed raised 
rates to reduce inflation risks. At roughly the same time, the 
delinquency rates for highly leveraged mortgages, principally sub-
prime, began to rise, largely because many borrowers had taken payments 
they could not afford. Some lenders did not follow traditional 
underwriting practices that have been crafted to assure that borrowers 
have enough income to service their mortgage.
    The decline in demand produced drops in new and existing home 
prices, which exacerbated the sub-prime delinquency rates: as home 
prices fell, the incentive for a sub-prime borrower to stay in a 
mortgage lost some of the allure that stemmed from the belief that the 
underlying house would continue to grow in value, thus justifying a 
loan that might be too great a financial burden otherwise. Further 
worsening the macroeconomic picture is the seemingly relentless upward 
trend in petroleum prices, which briefly touched $100 a barrel on 
futures markets this month.\1\
    \1\ A host of commentators have given their views on the economic 
future, but I would direct the reader first to a very recent speech by 
Ben S. Bernanke, Chairman of the Federal Reserve System, on the 
economic outlook and recent turmoil in financial markets. See Bernanke, 
``Financial Markets, the Economic Outlook, and Monetary Policy,'' 
speech before Women in Housing and Finance and the Exchequer Club, 
Washington, D.C., January 10, 2008: www.gederalreserve.gov/newsevents/
speech/bernanke2008110a.htm (January 11, 2008).
    All of these factors have combined to make a grumpy lot out of 
economic forecasters. Let me give you my views.
    While I continue to believe that the U.S. economy's strength and 
robustness are its principal characteristics, I, too, have concluded 
that near-term prospects are poor. For example, the probability of 
recession has risen in our models from 35 to 40 percent, and I could 
easily see little or zero growth in GDP when the fourth quarter 
estimates are published. The decline in residential construction will 
continue for some time, consumer and investment spending will slow, and 
growing inventories, principally in the automotive sector, will become 
a drag on the economy (where inventory buildup in the third quarter 
explains some of the large 4.9 percent growth rate).
    That said, we expect GDP growth in 2008 of around 2 percent, and 
monthly employment growth averaging 75,000 jobs. This is slow growth, 
but not a recession. The reason I believe we avoid recession in 2008 is 
due in large part to the substantial contributions to GDP from exports. 
While domestic demand is expected to grow by about .9 of a percent over 
the next two quarters, exports are forecasted to expand by 10 percent. 
Recent U.S. export growth is stems from the lengthening, above trend 
growth in world GDP, largely due to economic strength in Europe and the 
long-awaited emergence of China and India to the top tier of industrial 
    Economic policymakers need to focus on the economic trouble spots 
and the portions of the U.S. economy that are doing quite well. The 
temptation will be to see the glass as half empty. For example, now 
would be the wrong time to insulate the U.S. from global economic 
forces by restricting or regulating international trade. Moreover, now 
would be the wrong time (and one can't think of a right time) to 
Federalize private mortgage contracts or freeze contracted mortgage 
interest rates when the vast majority of such contracts are functioning 
well and when a key institutional factor to our current economic 
strength is the rule of law in the operation of contracts.
                        what should congress do?
    These cautions, however, should not discourage Congress from acting 
to support stronger economic growth. I recommend that Congress address 
economic policies in three interrelated areas, all of which affect near 
and long-term economic performance: 1) tax policy, 2) mortgage markets 
regulation, and 3) long-term spending.
    Nearly every significant, general slowdown in economic activity is 
a good time for congressional policymakers to ask, are we doing 
everything we can to support long-term economic growth? That is, 
slowdowns are good times to get back to policy fundamentals and make 
certain that everything Congress can do to allow the economy to grow 
has been done.
    I am convinced the Congress is not the best policymaking body for 
addressing the short run challenges of the economy. That role is better 
played by the Federal Reserve System. So much of what Congress does is 
tied to the budget and appropriation processes, which take time to 
reach legislative results. Moreover, the Members of Congress frequently 
do not have the time or background for keeping up with financial 
markets, the ebb and flow of economic data, and the actions of economic 
institutions the way the Fed does or even the economic agencies of 
Federal and state governments. These institutional factors explain why 
congressional action often occurs after the need for action has 
expired, and why the actions it takes often are not as targeted as they 
need to be.
    However, there are areas of economic policy where congressional 
action can by timely and targeted, though it may not intend to be 
short-range in focus at all. Those areas involve the reduction of 
investment risk.
    Investors are driven, in general, by comparative rates of return 
when making investment decisions between various opportunities. If two 
business opportunities are possible, but one has a better rate of 
return than the other; then the investor will go with the superior 
opportunity . . . the one with the higher rate of return. Suppose, 
though, that outside factors intervene (a flood, war, regulatory 
changes) and this otherwise superior investment now carries more risk 
than the inferior one. The investor discounts the rates of return for 
the greater amount of risk and, if the rate of return on the first 
opportunity is still superior, the investor goes with that same 
opportunity. If, on the other hand, the risk is too great to go with 
the otherwise superior opportunity, the investor may take the more 
cautious approach of avoiding risk and placing funds in the opportunity 
with the otherwise lower rate of return.
    Tax Policy: What can increase risk? Many factors, of course, but 
public policy commonly looms large. Tax increases, especially if they 
land on capital, increase the cost of capital and lower investment 
returns. When investors are uncertain about whether taxes will go up or 
stay the same, they still can act as though taxes have risen if they 
judge the risk of an increase to be nearly equal to an actual increase. 
And, rising uncertainty can have the effect of driving down investments 
in riskier undertakings.
    Thus, among the first things Congress can do to address the current 
slowdown is to pronounce definitively on the tax increases scheduled 
for 2009 and 2011. There are projects, new businesses, and expansion of 
existing businesses that would be undertaken today if Congress signaled 
that taxes would be lower in 3 years. Since nearly all major capital 
undertakings last beyond this 3-year period, it is likely that making 
all or most of the Bush tax reductions permanent would stimulate 
economic activity today as well as in 2011.
    I am probably not the only one here today who knows of businesses 
that are preparing now for higher taxes in 2011. They are preparing 
themselves by reducing their riskier projects and providing for 
stronger cash-flows in 2010. It is altogether possible that there are 
projects being canceled today that would otherwise go forward if taxes 
were not scheduled to rise in 2011. At times like the present, the 
speech of policymakers is as important as the policy actions they take. 
The decisions makers in business and investment are watching Washington 
closely to discern the direction Congress will take in responding to 
this crisis. If that direction includes tax increases, then investors 
will find more favorable economies to support and business owners will, 
as much as they can, locate their expanded activities in places with 
more favorable tax regimes.
    Thus, Congress should signal today what it plans to do on taxes in 
2 or 3 years. For my part, I urge the Congress to make permanent the 
key provisions of the 2001 and 2003 tax law changes. Maintaining lower 
tax rates on labor and capital income will encourage both labor and 
capital to work harder now when we need that greater activity.
    In addition, we know from past experience that accelerating the tax 
depreciation of capital equipment and buildings or 1-year expensing of 
business purchases that otherwise would be depreciated over a longer 
period of time for tax purposes can help during periods of slow growth. 
This was certainly the record in the last slump.\2\
    \2\ Matthew Knittel, ``Corporate Response to Accelerated Tax 
Depreciation: Bonus Depreciation for Tax Years 2002-2004,'' OTA Working 
Paper 98 (May, 2007), Office of Tax Analysis, US Department of 
    Demand-side stimulus (tax rebates, child tax credit, and the 10 
percent tax bracket) did little to change the course of the sluggish 
economy. The tax rebates of 2001 did little to stimulate the economy or 
move it from a prolonged sluggish growth trend. Indeed, the contraction 
in investment and thus job creation did not begin to improve until 
after the 30 percent partial expensing in the 2002 act and the 50 
percent partial expensing in the 2003 act, which also cut the tax rates 
on dividend and capital gain income. Congress has enacted depreciation 
and expensing stimulus plans under Republican and Democrat majorities.
    Mortgage Market Regulation: Just as working on better, more pro-
growth tax policy for the long run can have immediate, short-run 
benefits; so too can supporting long-term recovery in the mortgage and 
credit markets. Well functioning financial markets are central to long-
term growth in jobs, incomes, and general output. Clearly, the current 
credit crunch points to the widespread difficulties that flow from 
extensive violation of traditional lending practices and excessive 
supplies of credit.\3\
    \3\ For more on what Congress should do, see David C. John and 
Alison Acosta Fraser, ``HOPE NOW: One Step to Resolve the Subprime 
Mortgage Crisis'', WebMemo no. 1742, The Heritage Foundation, December 
13, 2007; and Ronal D. Utt, ``H.R. 3915 Would Impose New Burdens and 
Limits on Moderate Income Borrowers,'' WebMemo no. 1703, The Heritage 
Foundation, November 14, 2007.
    So, what should Congress do? Four principles should be in 
policymakers minds when framing a policy response to this crisis.
    1. Any action should respect private property. When lenders are 
faced with a high frequency of defaults, they commonly negotiate new 
terms with borrowers rather than face extensive defaults or 
delinquencies. We see these negotiations going forward now. Congress 
should not act in a fashion that arbitrarily abrogates or alters these 
contracts. It should not empower bankruptcy judges to negotiate new 
mortgages. It especially should not pass legislation or support 
administrative actions that freeze interest rates. Such actions would 
set a dangerous precedent of legislative interference in private 
contracts that could be more extensively utilized sometime in the 
    2. Congress should not extend new subsidies to the housing sector. 
An efficient mortgage credit industry is central to the country's 
economic future. Clearing out poorly run and unethical mortgage 
companies needs to happen swiftly and thoroughly, and this side of the 
market correction is visible everyday in the financial news. It also is 
important that the under- and non-performing loans be refinanced or 
restructured in a way that serves the long-term interests of borrowers 
and lenders alike. Federal subsidies to lender or borrowers would only 
lengthen the correction and distort the costs that the market needs to 
absorb and discount.
    3. Lightly reform mortgage credit regulations. If Congress and the 
administration encourage the private renegotiation of at-risk, sub-
prime mortgages, then the sector with the most to gain (or lose) will 
be resolving the sub-prime problem. Congress should review existing 
regulations to determine the contribution of either ambiguity in law or 
failure of enforcement to the turmoil in mortgage markets. It might 
also be good to review the administration's proposed regulations of 
Freddie Mac and Fannie Mae.
    4. Congressional actions should be temporary and limited. Whatever 
Congress does on the regulatory side, those actions should be targeted 
to the problem, temporary in duration, and supportive of private 
resolution of the non-performing portion of the nation's mortgage 
    Increase confidence in the U.S. economy by addressing long-term 
spending challenges. While the attention of most policymakers will be 
on immediate responses to the current slowdown, everyone should attend 
to a factor that's increasingly important to confidence in the U.S. 
economy: the seeming unwillingness of Congress to seriously address the 
enormous financial challenges from entitlement spending. Many investors 
and organizations that play key roles in the future of the U.S. economy 
are worried about long-term growth given the fiscal challenges posed by 
Social Security's and Medicare's unfunded liabilities. The Financial 
Times recently reported that the lead analyst for the US at Moody's 
warned that the credit rating agency would downgrade U.S. treasury 
government debt if action was not soon taken to fix entitlements.
    Thus, at a time when the economy is slowing and the speech as well 
as the actions of Congress can affect economic activity, policymakers 
should take concrete steps to that will announce their intention to 
address unfunded liabilities in these important programs. While reforms 
in these programs may be beyond what this Congress's can do, it is 
possible to signal change by reforming the budget rules.
    Currently, the Federal budget functions as a pay-as-you-go system, 
with a very limited forecast of obligations and supporting revenues. We 
just do not see in the official budget what may happen over the next 30 
years. The 5 and 10-year budget windows do not permit Members or the 
general public to sense the obligations that are coming beyond that 10-
year time horizon.
    A good first step in addressing the long-term entitlement 
obligations of the United States would be to show these obligations in 
the annual budget. This could be done by amending the budget process 
rules to include a present-value measure of long-term entitlements. 
Such a measure would express in the annual budget the current dollar 
amount needed today to fund future obligations. Such a measure has been 
endorsed by a number of accounting professionals, including the Federal 
Accounting Standards Advisory Board.
    A solid second step would be to convert retirement entitlements 
into 30-year budgeted discretionary programs. Such a move recognizes 
that mandatory retirement funding programs for millionaires that crowd 
out discretionary spending programs for homeless war veterans make no 
sense at all. If we are to contain entitlement spending and reform the 
programs driving those outlays, then a paradigm shift likely will be 
required. Recognizing Social Security and Medicare as discretionary 
programs helps force attention on changes that will assure their 
survival well into the 21st Century.\4\
    \4\ See Stuart Butler, ``Solutions to Our Long-Term Fiscal 
Challenges,'' Testimony before the Committee on the Budget of the U.S. 
Senate, January 31, 2007.
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