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Union Calendar No. 310
111TH CONGRESS
1
/
ES
S
}HOUSE OF REPRESENTATIVES
THE 2010 JOINT ECONOMIC
REPORT
REPORT
OF THE
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ON THE
2010 ECONOMIC REPORT
OF THE PRESIDENT
TocIER
WITH
MINORITY
AND
ADDITIONAL VIEWS
US. GOVERNMENT PRINTING OFFICE
WASHING ION: 210
UEPOI4I'
JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
HOUSE OF REPRESENTATIVES
SENATE
CAROLYN B. MALONEY, New York,
. Chair
MAURICE D. HINCHEY, New York
CHARLES E. SCHUMER, New York,
Vice Chairman
BARON P. HILL, Indiana
LORETTA SANCHEZ, California
ELIJAH E. CUMMINGS, Maryland
VIC SNYDER, Arkansas
KEVIN BRADY, Texas
RON PAUL, Texas
MICHAEL B. BURGESS, M.D., Texas
JOHN CAMPBELL, California
JEFF BINGAMAN, New Mexico
AMY KLOBUCHAR, Minnesota
ROBERT P. CASEY, JR., Pennsylvania
JIM WEBB, Virginia
MARK R. WARNER, Virginia
SAM BROWNBACK, Kansas
JIM DEMINT, South Carolina
JAMES E. RISCH, Idaho
ROBERT F. BENNETT, Utah
ANDREA CAMP, Executive Director
JEFF SCHLAGENHAUF, Minority StaffDirector
LETTER OF TRANSMITTAL
CONGRESS OF THE UNITED STATFS,
JOINT ECONOMIC COMMITTEE,
Washington, DC, July 15, 2010.
HON. NANCY PELOSI,
Speaker of the House, House of Representatives,
Washington, DC.
DEAR MADAM SPEAKER: Pursuant to the requirements of the
Employment Act of 1946, as amended, I hereby transmit the 2010 Joint
Economic Report. The analyses and conclusions of this Report are to
assist the several Committees of the Congress and its Members as they
deal with economic issues and legislation pertaining thereto.
Sincerely,
Carolyn B. Maloney,
Chair.
CONTENTS
OPPORTUNITIES FOR JOB CREATION IN THE AFTERMATH OF THE
GREAT RECESSION: OVERVIEW.....
........................
MAJORITY VIEWS........................
Signs of Recovery in 2010....................7............7
....................
1
5
Unemployment and Job Loss during the Great Recession......13
Congressional and Administration Actions to Help the Labor
Market...............................
36
Need for Further Action.............................
52
Conclusion.......................................70
MINORITY AND ADDITIONAL VIEWS.......................83
11ITH
CONGRESS
HOUSE OF REPRESENTATIVES
2d Session
RFPORT
111-545
THE 2010 JOINT ECONOMIC REPORT
July 15, 2010.-Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
MRS. MALONEY, from the Joint Economic Committee,
submitted the following
REPORT
together with
MINORITY AND ADDITIONAL VIEWS
Report of the Joint Economic Committee on the 2010 Economic Report of the
President
CHALLENGES AND OPPORTUNITIES FOR JOR CREATION IN THE
AFTERMATH OF THE GREAT RECESSION
OVERVIEW
America is slowly climbing out of the longest, deepest recession since
the Great Depression. Output has risen since the middle of 2009 and
the labor market has improved consistently since February 2009. In the
first half of 2010, the private sector added nearly 600,000 jobs. The
performance of the economy in the first half of 2010 is consistent with
the Council of Economic Advisers' projected employment growth of
about 100,000 jobs per month, as reported in the 2010 Economic
Report of the President (ERP). Despite signs of recovery, the economy
remains fragile with sluggish hiring by small businesses, stagnant sales
of new and existing homes, and significant budget gaps facing state
and local governments. The budget problems of state and local
governments are particularly troublesome since they may lead to
additional employment losses and service cuts at a time when these
services are in greater demand.
While the labor market has stabilized and unemployment is down
slightly from its October 2009 peak of 10.1 percent, it will take
significant, sustained job creation to regain the nearly eight and a half
million jobs lost from the start of the recession in December 2007 to
December 2009. Policymakers face the additional dilemmas of record
long-term unemployment and high rates of underemployment.
The Administration and Congress enacted a number of successful
policies since early 2009 that have created jobs, supported those
without jobs, and laid the groundwork for economic expansion.
However, taking additional action to sustain economic recovery is
particularly challenging because of concerns over the deficit. While
cutting wasteful spending to lower the deficit is always appropriate,
cutting targeted government spending - especially spending focused
on creating jobs and ensuring that the economy does not slip back into
recession - could have the opposite effect on the deficit and actually
slow economic recovery and thereby increase the deficit in the short
term. These views were clearly articulated in the 2010 ERP, which
stated that "[a] moderate period of large deficits in a weak economy
will speed recovery in the short run and leave the government with
only modestly higher deficits in the long run." The need to continue
short-term fiscal stimulus has been echoed by many other economists
as well.
A focus on the short-term deficit today ignores the long-term returns
on investments from government spending. Moreover, while the deficit
grew in 2010 because of these investments, the vast majority of our
nation's projected shortfalls stem from policies that pre-date the
Obama administration: unfunded war spending, massive tax cuts, and
the economic downturn itself. Thi's Bush-era spending and the deficit it
created hampered the nation's ability to overcome the perfect storm of
a housing market collapse and a financial crisis that led to the Great
Recession.
Policies that pre-date the Obana administration and the 1 l"' Congress
are responsible for nearly the entire projected federal budget deficit
over the next ten years. Bush-era tax cuts and the wars in Iraq and
Afghanistan account for almost $7 trillion in projected deficits between
2009 and 2019. In contrast, the recovery policies put in place by the
Obama administration in response to the nation's worst economic crisis
since the Great Depression account for $1.1 trillion in projected
deficits over the 2009 to 2019 period. Moreover, the recession itself
has caused a sharp deterioration in the budget outlook. Indeed, the
impact of the recession on the nation's deficit projections would likely
have been far more severe had Congress and the Administration not
acted swiftly with recovery spending to stem further economic losses.
A long-term strategy to reduce the nation's deficit is essential to a
strong economy for generations to come. Efforts to translate this need
into cuts in spending in the near term, however, would imperil the
growth of our fragile economy. Policymakers need to resist the
political siren call of short-term cuts and instead heed the economic
imperative of job creation, the core component of a robust economic
recovery.
Targeted Congressional actions improved the health of the labor
market in 2010, and the economy has added private-sector jobs in each
of the first six months of 2010. To ensure that the economic climate
continues to improve and benefit all workers requires additional
actions. Temporary funding to help cash-strapped state and local
governments may prevent layoffs. Programs to spur lending to small
businesses may also help boost job creation. New approaches are
needed to fuel hiring, link job training to the sectors of the economy
that offer the best growth opportunities, scale training programs that
deliver the best results, and target skill-enhancing initiatives to those
communities with stubbornly high rates of unemployment.
The Joint Economic Committee (JEC) has focused on creating jobs and
reducing unemployment through the first half of 2010, holding a series
of hearings and issuing a number of reports on these topics. These
hearings and reports have highlighted the most cost-effective job
creation strategies and have examined how innovation will fuel growth
in emerging sectors of the economy. The Committee has also shed light
on the segments of the population hit hardest by the Great Recession
and identified targeted policy actions that could benefit these workers.
In addition, the JEC has analyzed possible barriers-to future growth,
including rising oil prices, tighter credit standards, and inadequate
investment in basic research. As the economy recovers from recession,
the JEC continues to focus on fiscally responsible policies that will
help strengthen the economy and ensure that the employment and
income gains from the next economic expansion will reach all workers.
The following Majority Staff report examines the employment
challenges stemming from the Great Recession and describes the
recovery now underway. It explores how the recovery varies by region,
sector and demographic group. The report also discusses the major
pieces of legislation passed in 2009 and 2010 that have led to increases
in employment and output. Finally, the report identifies the ongoing
obstacles to sustained growth, steps needed to overcome them and
areas where more action is needed.
REPRESENTATIVE CAROLYN
B. MALONEY
Chair
SENATOR CHARLES E. SCHUMER
Vice Chairman
5
MAJORITY VIEWS
CHALLENGES AND OPPORTUNITIES FOR JOB CREATION IN THE
AFTERMATH OF THE GREAT RECESSION
SIGNS OF RECOVERY IN 2010
While the National Bureau of Economic Research has yet to announce
the official end-date of the Great Recession, the broad economy began
showing signs of stabilization and recovery during the second half of
2009. Following four consecutive quarters of contraction, the economy
finally grew in the third quarter of 2009; gross domestic product (GDP)
has expanded in each of the past three quarters. (See Figure 1) That
positive economic growth has coincided with job growth. The labor
market stabili7ed in the late months of 2009 as job losses petered out,
and employment finally grew in January 2010. However, total nonfarm
job creation in 2010 has been mixed with temporary hiring for the 2010
Census. Total nonfarm payrolls expanded in the first five months of
2010 but fell in June due to the winding down of Census employment.
(See Figure 2)
Figure 1. Percentage Change in Real Gross Donestic Product
Q42007 to Ql 2010(Seasonalvo
Adjusted Annual Rate)
6-6
6%
4%
2
7%
2 2%
2 1%
.07%
-0.7%
I54%
Q42007
Q I200
Q22008
Q32008
Q42008
Q12009
022009
Sourc JEC MaJiorityStaffbased ondata
fmomtheBureau
of Economic
Aalysis.
032009
Q42009
012010
8
Figure 2. Monthly Change in Total Nonfarm Payrolls
January 2008- June2010(Seasonally Adjusted)
500
300
100
100
0.
-300
-500
Jan'08
Apr'08
Jul08
Oct'08
Jan'09
Apr'09
Jul'09
Oct'09
Jan'10
Apr'10
Survey.
Source:JECMajority Staff basedon datafrom theBureauof LaborStatistics, Establishment
Employment Growth across Industries
While Census 2010 hiring has significantly affected recent months' job
gains, the private sector added jobs in each of the first six months of
2010, which combined for a total of 593,000 private-sector jobs in the
first half of 2010.1 (See Figure 3) During the height of the economic
downturn, job losses in the private sector were widespread, though
uneven, across industries. (See Figure 4) Now that the economy has
turned the corner, the employment situation is gradually improving
across industries. In particular, job growth has been strongest in the
manufacturing, professional and business services, and leisure and
hospitality sectors. (See Figure 5)
Figure 3. Monthly Change in Private Payrolls
Janu.ry 2008 - June 2010 (Seasonlily Adjusted)
1000L
Jan 08
Apr 08
Source:JEC Majority Sinff hae
Jul 08
Oct 08
Jan 09
on daa from lheRureau
Apr 09
Jul OQ
Oct 09
Jan10
Apr10
of Lahor Startitics Esabishment Surey
Manufacturing. Since the start of 2010, manufacturers have added
136,000 jobs; it is the largest six-month employment gain in the sector
since 1998.2 Manufacturers reduced their payrolls by 16 percent (2.2
million jobs) between December 2007 and December 2009, with the
largest losses concentrated among manufacturers of durable goods.
Among all durable goods manufacturers, employment shrank by over
19 percent during that period; employment among manufacturers of
nondurable goods shrank by II percent. However, employment has
increased in 8 of the 10 major subsectors of durable goods since
January 2010.5 Employment has expanded most rapidly at primary
metal manufacturers. In addition, fabricated metal products,
machinery, transportation equipment, and electrical equipment and
appliance manufacturers have all added jobs since January.6
10
Figure 4. Employment Losses by Sector
Adjusted)
Sectors,December 2007- December2009(Seasonally
Percent Change in Nonfarm Payrolls in Selected
Construction
Manufacturing
Information Services
Professional & Business
Services
RetailTrade
0%
-5%
-7.8%
-10%
-9.1%
-8.7%
-15%
-16.0%
-20%
-25%
-24 0%
-30%
Source: JECMajority Staff calculations basedon data from the Bureau of Labor Statistics.
Figure 5. Employment Gains by Sector
PercentChange in Nonfarm Payrolls in SelectedSectors,
December2009- June 2010(Seasonally
Adjusted)
1.6%
1.4%
1.3%
1.2%
1.2%
1.0%/
0.9%
.0-9%
0.8%
0.6%
0.5%
0.4%
0.2%
0.0%
Total Private Sector
Manufacturing
Professional & Business
Services
Education & Health
Services
Sorce: JECMajority Staff calculations based on data from the Bureau of Labor Statistics.
Leisure & Hospitality
Employment in nondurable goods manufacturing has essentially held
flat since January 2010.' Small cmployment gains over the past five
months in manufacturing of plastics and rubber, petroleum and coal,
paper and textiles have been offset by continuing declines among
textiles and apparel, printing, chemical, leather and beverage and
tobacco manufacturers. 8 Much of the boost in manufacturing
employment to date may be due to manufacturers' need to restock
inventories. These inventory levels became low as manufacturers
satisfied demand with existing inventories during the recession.
Professional and Business Services. Employment in the professional
and business services sector, which includes the temporary services
sub-sector, has increased monthly since October 2009.9 Employment
growth in the temporary help sector can signal increased willingness
among employers to hire in the near term. Employment in the
temporary help sector began steadily contracting several months prior
to the start of the Great Recession and before job losses started
permeating throughout the economy. Now with the recovery underway,
employers who are hopeful, hut somewhat uncertain, about future
economic conditions may be boosting payrolls with temporary help
before hiring permanent employees. Temporary help employment
began growing in October 2009 and added 379,000 through June
2010.o Mr. Jeffrey Joerres, CEO of Manpower International, a global
temporary staffing company, notes that temporary employment
experienced "materially deeper contraction during the current recession
than [in] either of the prior two recessions."" According to Mr.
Joerres, prior experience shows that the low point in temporary
employment typically comes a month or two following the end of an
official recession, which would date the recovery to mid-2009.'
However, Mr. Joerres also predicts a "jobless recovery" because
"companies have become more sophisticated in their ability to assess
their workforce needs" and will wait for "clear signals of increased
demand before making permanent hiring decisions.""
Leisure and Hospitality. Employment in the leisure and hospitality
sector contracted by four percent (544,000 jobs) between December
2007 and December 2009, far less than in the hardest hit sectors of the
economy. However, in recent months the sector has started to rebound
as the overall level of confidence in the economy improves and people
return to spending money on more than necessities. In the first six
months of 2010, leisure and hospitality employment grew by 123,000
jobs, led by hiring in the food service and drinking places category.14
Other Sectors. Large, persistent job losses have subsided throughout
the economy, and employment has shown signs of improvement in
almost all industries. Natural resources and mining employment has
increased by 51,000 jobs since November 2009.15 Employment in the
wholesale trade sector has grown by 15,400 jobs over the past four
months. At the height of the recession, wholesale trade employment
fell by between 30,000 and 50,000 jobs each month.' 6 In the retail trade
sector, job losses topped 100,000 in November 2008. However,
employment in the retail trade sector has grown by 75,800 jobs since
January, with employers adding jobs in four of the last six months.' 7
Job losses also have slowed in the financial activities and information
sectors.' 8 Despite temporary improvement in the housing sector,
employment in the construction industry, which was devastated by the
collapse of the housing market, has continued to decline, with large
drops in May and June.' 9
Recovery at the State Level
As the economy recovers from the Great Recession, the pace of
recovery will vary across the states. States whose economies were
heavily reliant on those industries hit hardest by the recession have
suffered greatly. However, as job losses have given way to job gains,
states with large manufacturing, professional and business services,
and leisure and hospitality sectors stand to enter recovery sooner than
those reliant on industries yet to expand.
Several states already are experiencing consistent private-sector job
growth. The most current state data show that sixteen states added
private-sector jobs for three consecutive months (March, April and
May), and six states of those states added private-sector jobs in
February, March, April, and May. 2 0 Three states - Massachusetts,
Tennessee and Texas - experienced private-sector job creation for
each of the first five months of 2010. Massachusetts and Texas
experienced smaller private-sector job losses than many other states, so
a labor market rebound in these two states is not surprising.
13
Job growth in Tennessee, Texas, Massachusetts, Indiana, Kansas, and
Hawaii is closely tied to expanding sectors of the economy. The recent
job gains in Tennessee have been dominated by hiring in the
professional and business services sector, as well as in manufacturing.
Indiana and Texas also have registered job gains in the manufacturing
and professional and business services sectors in each of the first five
months of 2010, while hiring in education and health services, the only
sector that had employment growth over the recession, has driven
employment gains in Massachusetts. Hiring in leisure and hospitality
has fueled job gains in Hawaii; Kansas payrolls have increased due to
four months of hiring in the manufacturing sector coupled with recent
job gains in leisure and hospitality.
In addition to Texas and Tennessee, five states (Florida, Indiana,
Minnesota, New Hampshire, and Wisconsin) have experienced
employment gains in manufacturing employment in each of the first
five months of 2010. During that time, California and Indiana, in
addition to Texas and Tennessee, had five straight months of job gains
in professional and business services.
While a handful of states appear to be on the front end of the labor
market and economic recovery, employers are hiring, rather than firing,
throughout much of the country as well. Over half of all states (27) had
private-sector job gains in May 2010; twenty-three states had gains in
both April and May. As job creation in the private sector strengthens
through the second half of 2010, labor market conditions in all states
will continue to improve.
UNEMPLOYMENT AND JOB LOSS DURING THE GREAT RECESSION
While the nascent recovery led to improved labor market conditions in
2010, the Great Recession was characterized by near record-high levels
of joblessness.2 Deep problems endure in the labor market even as the
economy has begun to grow again. Understanding the depth -of the
difficulties in achieving a full labor market recovery requires extending
the lens of analysis beyond the current recession and into the "jobless
recovery" of the last recession and near-collapse of the financial
system, both presided over by the Bush administration.
14
From December 2007 through December 2009, 8.4 million payroll jobs
were lost. Even with robust growth in employment, the road to
recovery in the labor market will be prolonged and difficult. During the
recession, the job creation engine stalled at the same time that job
destruction was rising. The total number of jobs created fell
precipitously from the start of the recession during the last quarter of
2007 to the second quarter of 2009, when gross job creation bottomed
out at 5.7 million jobs. In contrast, the total number of jobs lost rose
from 7.4 million in the final quarter of 2007 before topping out at 8.5
million jobs lost in the final quarter of 2008. (See Figure 6)
Figure 6. Gross Job Flows
Gross Private SectorJob Gains andGross Private SectorJob Losses,Q3 1992-Q3 2009
9,000
8,500
Jobscreated
I
7,000
,**v
Jobslost
Jobcreation
rebounds
in the
secondquarterof
6,500
2009
6,000
5,500
Clinton
Administration
Bush
Administration
Ad8 ,i
nu
m
5,000
4,500
1992
1996
2000
2004
2008
Note:Greyshading
indicates NBER datedrecession periods.Lighter shadingreflectsthe returnto GDP growth in Q32009.
Source:JEC Majority Staff calculations
based
on quarterlydatafrom the Bureau
of Labor Statistics,Business
Enployrment
Dynanics.
Both the freefall in job creation and the jump in job losses turned a
corner in mid-2009, but the fallout left the labor market with longlasting scars. In order to return to pre-recession employment
conditions, the average increase in payrolls would have to be nearly
100,000 jobs greater than the average increase in monthly payroll
employment during the Clinton Administration (237,000 jobs). Given
the extraordinary level of net job creation that must occur every month,
and considering the large pool of long-term unemployed workers who
will have difficulty transitioning back to the labor force, job growth of
this magnitude is unlikely to occur. Conditions in the labor market may
not return to normal until well past January 2014. Indeed, by the end of
2012, the Federal Reserve projects that the unemployment rate will be
between 6.6 percent and 7.5 percent, while the Congressional Budget
Office (CBO) forecasts that the average annual unemployment rate
between 2012 and 2014 will be 6.5 percent.22 These unemployment
rates arc well above the 4.7 percent unemployment rate in November
2007, before the recession started.
Heading into Recession: An Unwanted Economic Inheritance
Understanding the depths of the labor market's current difficulties
requires a longer-term perspective. The new administration worked
quickly with Congress to pass legislation to stimulate the economy in
early 2009 as the economy teetered on the brink of depression. The
housing bubble had burst, and a financial crisis had rippled through
every part of the economy. Dr. Christina Romer, Chair of the Council
of Economic Advisers (CEA), stated in October 2009 that "the shocks
that hit the U.S. economy were, by almost any measure, larger than
Stock prices were more
those that precipitated the Great Depression.
volatile than they were during the onset of the Great Depression and
the yield spread between the least-risky (AAA rated) corporate bonds
and riskier, but investment-grade (BAA rated) bonds rose by much
more in Fall 2008 than during the panic just before the Great
Depression.
The near collapse of the financial system, by itself, caused a great deal
of economic hardship for American families. But years of economic
mismanagement by the Bush administration further diminished the
ability of American households, particularly lower- and middle-income
households, to weather an economic storm of epic proportions.
The once-vibrant labor market sputtered during the Bush
administration, as the job creation engine stalled out. While an average
of 8.1 million total jobs per quarter were created during the Clinton
Administration, only 7.6 million total jobs per quarter were created
during the Bush administration. (See Figure 6) Controlling for the
impact of the two recessions during the Bush administration does not
improve the private-sector job creation story. Even during the
expansion that followed the 2001 downturn, the Bush administration
created just 7.7 million jobs per quarter, leading most economists to
refer to the period immediately preceding the current Great Recession
as a "jobless recovery." Average annual employment rose only 0.2
percent during the Bush administration, the lowest of any
administration since the Hoover administration.24
Moreover, the private-sector job creation that did occur during the
Bush administration likely came at great cost to the American
economy. According to Nobel laureate Joseph Stiglitz, private-sector
job creation during the Bush-era expansion was fueled by a bubble in
housing prices and overleveraging by households, which artificially
inflated consumption and hiring.25 This flimsy foundation for job
creation may be a key cause of the precipitous job loss that has
characterized the Great Recession.
Among the unemployed, even those who put in tremendous effort to
find a job faced a labor market that was growing more strained by the
year. For each job opening, there was one unemployed worker at the
start of the Bush administration growing to four unemployed workers
by the end of his administration. 2 6
That the labor market has made significant steps toward recovery in the
first half of 2010 is all the more remarkable in light of the deeply
troubled state of the economy just a year and a half ago. However, the
positive developments in the labor market during the first half of this
year occurred in the shadow of an extraordinarily deep recession that,
in many ways, left the labor market weaker than it has ever been in the
post-war era. Several particularly troubling elements of the current
labor market will make this recovery all the more challenging,
specifically:
* The unprecedented rise in long-term unemployment;
* The paucity of job openings per unemployed worker;
* And, the historically low rate at which workers have exited
unemployment.
Jump in Long-Term Unemployment
Perhaps the defining feature of the current labor market is the
magnitude of long-term unemployment. There has been extraordinary
growth in the number of long-term unemployed workers - those
unemployed for 27 or more weeks - and the median duration of
unemployment. As Figure 7 shows, the long-term unemployment rate
jumped from 0.8 percent in December 2007 to 4.1 percent in June
17
2010, exceeding the previous post-war peak of 2.7 percent in March
1983. Moreover, the percentage of the labor force that has been
unemployed for over a year has risen six-fold, from 0.4 percent in
December 2007 to 2.8 percent in June 2010.
Figure 7. Lung-Tern Unemployed as Percent of Labor Force
eple
fr27W
ndOer
n.d 52 Weks
andOver (Not Seaona1hv Adjusted)
3 0%
9 7
8
193
1986
1989
1992
195 1
99
2001
20(4
2007
2010
e
m toGDP grth n Q3 2009
Note Greyshdin ndites NBER datdcdrecsso penods Lightershadg r
n'.sba.d on,
- dta
af frm the Rre.u Labor Statisics,.Houshold Snsy
StAvfekd
Some JVC Maj
The overall pool of unemployed workers is heavily concentrated with
the long-term unemployed. In June 2010, workers unemployed 27 or
more weeks constituted 43 percent of all unemployed workers, and
workers unemployed for 52 or more weeks comprised 29 percent of all
unemployed workers. (See Figure 8)
Figure 8. Unemployed Workers byDuration of Unemployment
June2010(Not Seasonally
Adjusted)
27 weeksandover
43%
Source:
JECMajority
Staff based
ondatafrorn the Bureau
of Labor Statistics, Household Survey.
Accompanying the record rise in the long-term unemployment rate is
the substantial increase in the length of the typical unemployment
spell, which rose from 8.4 weeks in December 2007 to 25.5 weeks in
June 2010. In other words, the typical unemployed worker has spent
close to half a year searching for work.
Few Job Openingsper Unemployed Worker
The tightness of the labor market is reflected in data on the number of
unemployed workers relative to the number of job openings. As Figure
9 depicts, there were 1.76 unemployed workers per job opening in
December 2007, but that ratio more than tripled in the third and fourth
quarters of 2009, when there were six or more unemployed workers for
every opening. In the first half of 2010, that ratio fell and by May
2010, there were fewer than five unemployed workers per job opening.
Despite the lower ratio, unemployed workers are still facing substantial
competition for jobs. The scarcity of jobs can explain part of the surge
in long-term unemployment and median duration of unemployment.
19
Figure 9. Unemployed Workers per Job Opening
D-4mber 2000- %.y 2010 (Sensonall Adjued)
7
6
4
2000
20
2002
2003
2004
2005
2006
2007
2008
2009
in
Q3 2009
,fleco
t GrDPgrwh
Note Grey hding ind;cate N4LR dared ,ccesio n p riod. Lighter shadvng r-e
rthe Bureauof LaborStIatsics, Iouehold Survey andJobOpenings
Soume J EC Maictily Staffcalculations based ondat from
andLaborTurnor SurveY
HistoricallyLow Rate of Exitfrom Unemployment
Another distinguishing feature of current labor market dynamics is the
dramatic fall in the rate at which unemployed workers exit, or flow out
of, unemployment. Changes in the number of unemployed workers
reflect the difference between the number of workers flowing into
unemployment and the number of workers flowing out of
unemployment. Although the unemployment inflow rate is similar to
that seen in previous severe recessions, the unemployment outflow rate
plunged to an historic low of 24 percent in the third quarter of 2 0 0 9 .28
(See Figure 10) The historically low unemployment outflow rate
suggests that workers are having a harder time finding jobs than in the
past and that unemployed workers are jobless for longer stretches of
time.
Figure 10. Unemployment Inflow and Outflow Rates
Estimated Quarterly Averages, QI 1948 .Q4 2009
0.06
0.05
Inflows
0.0
- 1.20
1.00
0
0.03
0.60
0-0
Z 0.02
Outflows
0.0!
0.40
0.20
0.00
'
0.00
1968
1973
1978 1983
1988
1993 1998 2003
2008
Inflow Rate (Left Axis)
- Outflow Rate (Right Axis)
Note: Grey shading indicates NBER dated recession periods. Lighter shading reflects the retum to GDP growth in Q3 2009.
Some: JECMajority Staff based oncalculations from Elsby, Hobtjn, and Sahin (2010) using data from the Buteau of Labor Statistics.
1948
_
1953
____
1958
1963
Part of the reason for the increase in the unemployment rate, especially
the long-term unemployment rate, is due to the sizeable number of
laid-off workers among the unemployed.2 9 Workers who lose their jobs
traditionally find work much more slowly than workers who quit their
jobs, who are new entrants or who are re-entrants to the labor market.
Consequences of the Great Recession on the Labor Market Recovery
The three challenges highlighted above - long-term unemployment,
the imbalance between job openings and job seekers, and the
historically low rate of exit from unemployment - combine to make
labor market recovery a heavy lift. In particular, the high rate of longterm unemployment that characterizes the labor market in the
aftermath of the Great Recession poses a serious hurdle moving back
to full employment.
The 6.8 million workers who have been unemployed for 27 weeks or
more, as of June 2010, will suffer from far more than their immediate
drop in income. Dr. Till von Wachter, an economist at Columbia
University who has written extensively on the short- and long-term
consequences of layoffs and unemployment, has detailed the myriad
economic and human costs of job displacement. 30
other economists have conducted research focusing
consequences of losing a job and becoming
emphasized that "these costs are likely to be greater
unemployed." 3 These costs include:
Although he and
on the long-term
unemployed, he
for the long-term
*
Long-Term Drop in Eanings. Following job displacement,
workers are derailed from the long-term earnings trajectory
they were following and suffer significant declines in lifetime
income. Dr. von Wachter and co-authors found that even 15 to
20 years after job loss, displaced workers earned 20 percent
less than a similar group of workers who did not lose their
jobs.32 No demographic group is immune to the long-term drop
in earnings. According to Dr. von Wachter, "reductions
occurred for job losers in all age ranges, in all industries, for
men and women, and throughout the earnings distributions"
and were "not limited to particular regions of the country.""
As he pointed out, these earnings reductions are probably even
more severe for the long-term unemployed.
*
Deterioration in Health. Accompanying the drop in long-term
earnings is a decline in health status. Job and earnings
instability can place a heavy psychological and physical toll on
workers. Economists have found that, in the short term,
"layoffs and unemployment are associated with an increasing
incidence of stress-related health problems, such as strokes or
heart attacks."3 4 Indeed, Dr. von Wachter and co-authors
estimates that in severe economic downturns, job losers may
experience "significant reductions in life expectancy of I to 1.5
"35.
years.
*
Costs to Workers' Families. Unemployment spells among
household heads can also have negative intergenerational
effects. For example, Dr. von Wachter discusses how "in the
short-run parental job loss reduces schooling achievement of
children," and in the long run, "it appears that a lasting
reduction in the earnings of fathers also reduces the earnings
prospects of their sons."" The incidence of divorce may also
rise after a worker is laid off. 7 The intergenerational effect of
unemployment on children's schooling and future earnings, as
well as on family structure, will weaken the workforce of the
future. Longer spells of unemployment will likely intensify
these effects.
The unemployment rate may remain stubbornly high if long-term
unemployed workers face difficulty finding work even when job
creation picks up. Long-term unemployed workers face a variety of
problems in the labor market that may make them unattractive to
employers. For example, the skills - including technical and
interviewing skills - of these workers may have deteriorated, and
employers may prefer to hire workers with shorter gaps in their
resumes. As would be expected, the chances that an unemployed
worker finds a new job declines as his unemployment spell stretches,
and this would slow the rate at which unemployment falls.38
Future economic growth may also suffer if the productivity of the longterm unemployed has fallen due to skill deterioration. Unemployed
workers are an untapped resource, and the longer they take to find a
job, the longer it will take for the economy to operate at its full
potential.
Impact of the GreatRecession on State and Local Governments
States and local governments are facing serious budget problems. The
Great Recession translated into the steepest decline in state tax receipts
on record, and, even after making deep spending cuts over the last two
years, state governments continue to face severe budget gaps. At least
46 states face or have faced shortfalls in the coming fiscal year, while
48 are contending with shortfalls in their current budgets.3 9 Because
every state (except Vermont) has some form of a balanced-budget law,
states must offset budget shortfalls with a combination of spending
cuts, withdrawals from reserve funds, revenue increases, and the use of
federal stimulus dollars. As states continue to struggle to find the
revenue needed to support public services, hundreds of thousands of
government jobs remain at risk, and government hiring is. likely to
remain sluggish in the coming years.
The depth of the labor market problems suggests that state budgets will
remain in trouble for some time, which in turn bodes poorly for state
government hiring. Continued high unemployment will keep state
income tax receipts at low levels, and increase demand for essential
services provided by states (c.g. Medicaid). High unemployment and
continued economic uncertainty depress consumption, which translates
into low sales tax receipts for states. As a result, at precisely the time
that demand for state services is rising, state budgets remain under
continued duress. Stressed budgets make hiring unlikely, which makes
it doubtful that state government hiring will be a major factor in jumpstarting employment.
Since the bulk of funding for public education comes from states and
not the federal government, it will be difficult for the federal
government to fill in the funding gap for education. This is a
worrisome development since the strength, resilience, and dynamism
of the U.S. economy, and its labor market, rests on a well-educated
workforce. However, short-term budget problems are hampering the
ability of states to invest in the future through education, which will
leave workers more vulnerable to employment and income instability.
K-12 Education. Many states - at least 30 - have already slashed
funding for K-12 education due to budgetary pressure. 40 Michigan, one
of the states that suffered most during this recession, reduced its fiscal
year 2010 budget by $382 million through reductions in its school aid
budget. 41 Early childhood education programs, which support children
during the most critical stage of their intellectual development, have
also faced finding cuts. Illinois, for example, lowered funding for early
42'
childhood education by 10 percent. At a time when U.S. students, as
a whole, are lagging behind many European and Asian countries in the
crucial areas of math and science, Maryland has instituted cuts in math
and science programs as well as professional development programs
for principals and educators.4 3
Higher Education. The recession has particularly hurt funding for
higher education. California's multi-tiered higher education system,
which is the most extensive in the nation, has suffered extraordinary
slashes in funding. The University of California - the nation's
premier public university - increased tuition by 32 percent and
reduced the incoming class of freshman by 2,300 students." The
California State University system - where a large fraction of
California students receive their bachelor's degrees - plans to
decrease enrollment by 40,000 students, and the governor has proposed
cutting funding for K-12 and community colleges by $1.5 billion.45
Florida, one of the states most devastated by the housing market
collapse, has reduced funding for universities and community colleges
and imposed a 15 percent tuition increase for the 2009-10 school year
at its 11 public universities.4 6 In addition, Georgia has slashed
education funding by $151 million, which will raise undergraduate
tuition at its public research universities by 16 percent and increase
tuition at community colleges by $50 per semester. 4 7
Higher levels of education reduce, but do not eliminate, a worker's
probability of becoming unemployed. Cuts in funding not only reduce
the quality of education, but also decrease the number of students able
to access education. This is occurring at the exact moment when many
economists are looking to the education system to facilitate recovery in
the labor market, especially for young or displaced workers. As Dr.
Lawrence Katz, a Harvard economist, explains, "The economic returns
to further education and training at community colleges that lead to
degrees and certificates are.. .high for dislocated workers."" Moreover,
he points out, "The economic returns to post-secondary education
remain extremely high for young workers...."49 Similarly, Dr. Harry J.
Holzer, an economist at Georgetown University, argues that for young
people in college, "a range of curricula improvements and support
services could improve completion rates in both certificate and degree
programs.""
Funding cuts in education will not only harm the long-term path of the
U.S. economy, but they will also slow down the pace of recovery in the
labor market by removing opportunities for young or displaced
workers to develop the skills necessary to find a quality job.
LaborMarket Harm Is Spread Unevenly Among Demographic Groups
Although the recession hurt the labor market prospects of workers
across the demographic spectrum, the impact was not uniform. In
particular, workers in the African American, Hispanic, and youth (ages
16 to 24) communities suffered serious setbacks.
African American workers. African American or black workers are
faring worse than the overall labor force along nearly all dimensions.
For example, as Figure 11 illustrates, even though African Americans
comprised 11.6 percent of the labor force in June 2010, they accounted
for 18.8 percent of the unemployed and 20.8 percent of the long-term
unemployed .
Figure I1. Labor Force, Unemployed, and Long-Term Unemployed
Distrib0tio
h Race, Jtn 2010 (N.t1easonali
Other7.1%
Other7.4%
Labor force
Unciploycd
Sorce JEC bMjoriy Staffcakulations basedon unpublihed
Adj.std)
Otherl.8%
Other 7.8%
Unempoed for I/; waks Unemployed for524 weeks
data from the
Buceauof
La
AeS1
i
. Ckren; Populion Survy.
African American workers have higher unemployment rates among all
age groups. It is particularly worrisome that the unemployment rate
among African American teenagers (ages 16 to 19) stood at a troubling
39.9 percent in June 2010."
African American men and women also have significantly higher
unemployment rates than males and females in the overall labor force.
While the unemployment rate among men has risen 5.4 percentage
points since December 2007, African American men saw their rate -which has always been much higher than the overall male rate - jump
8.5 percentage points by June 2010.5
The same story holds for African American women, who had an
unemployment rate of 12.6 percent in June 2010, 4.5 percentage points
higher than the unemployment rate for all women in the labor force."
Particularly troubling is that African American women heads of
household, who often bear the sole financial responsibility for their
families, had an even higher unemployment rate of 15.6 percent. (See
Figure 12) The loss of income and financial security may have longterm consequences for the educational attainment and behavioral
stability of their children.57 Women heads of households also face
obstacles when they try to find employment. They may have to find
child care when they go on a job interview, and even if they do find a
job, the costs of child care could eat a substantial chunk of their
earnings.58 If they need to take part-time jobs because of family
obligations - one-in-four employed women worked part-time in 2009
- they will face a variety of problems. 59 Longer durations of part-time
work can contribute to lower hourly earnings in the long run, and many
part-time workers do not receive the same health benefits, paid timeoff for vacation or sick leave, or pension benefits that full-time workers
receive.60
Figure 12. Unemployment of Women Heads of Household
RatesbyRaceandMarital Statusfor Selected
Groups,
June2010(Not Seasonally
Adjusted)
20%
15.6%
15%
12.1%
10%
8.8%
5%
0%
AllWomen
All WomenHeadsofHousehold BlackWomen
Heads
of Household
Source:JECMajorityStaff basedonunpublisheddatafromtheBureau of LaborStatistics,
Current
Population
Survey.
Moreover, a college education offers African American workers less
protection than it does for the overall labor force. In June 2007, just
before the start of the recession, 3.1 percent of college-educated
African Americans were unemployed, compared to an unemployment
rate of 2.0 percent for the overall college-educated labor force. (See
Figure 13) However, as the economic downturn progressed, the
unemployment rate for college-educated African Americans rose much
more rapidly than for the overall college-educated labor force. By June
2009, 8.2 percent of college-educated African American workers were
unemployed, while 4.8 percent of the overall college-educated labor
force was unemployed. (See Figure 13) Thus, in a span of two years,
the gap in unemployment rates between college-educated African
Americans and the overall college-educated labor force jumped from
1.1 percentage points to 3.4 percentage points. As the labor market
begins to heal, it remains to be seen how African Americans workers
will fare relative to other workers. Most recently, black collegeeducated workers faced an unemployment rate of 7.6 percent,
compared to an overall rate of 4.5 percent for all college graduates.
Figure 13. Unemployment Among College Graduates
Unemply ment Rates by Race (Not Seasanally Adjusted)
0%
8.2%
6a.
7_6%
6%
Or
WNhc
salack
4%
4.4 %45
4%
3 4%
0%
IL40%
June2008
k0 c 2007
Sour,
JC
Maoly Staffba-d
ndal
fm
June 2009
June 2!00
thc Buau ofLbor Statistics
Hispanic workers. The unemployment rate for Hispanic workers rose
more quickly than the overall unemployment rate during the recession.
(See Figure 14) In June 2010, Hispanic workers had an unemployment
rate of 12.4 percent, much higher than the overall unemployment rate
of 9.5 percent.
Figure 14: Unemployment Rate by ispanic Ethnicity
March 1973- June 2010(Seasonally
Adjusted)
16%
-Total
14%
-Hispanic
12%
10%
6%
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
Note:Greyareas
represent
recessions asclassifiedbyNBER.
Source:JEC Majority Staff basedon datafromtheBureauof Labor Statistics.
Much of the increase in the Hispanic unemployment rate could be due
to the crumbling of the housing market and the associated contraction
in the construction industry. Prior to the recession, Hispanic workers
were heavily concentrated in the construction industry, which was one
of the industries whose fortunes were closely tied to positive
developments in the housing sector and which shed millions of jobs
during the recession. In 2007, 14.7 percent of Hispanic workers were
employed in the construction industry, compared to 8.1 percent for the
overall labor force. 6 1 This disproportionate representation made the
Hispanic workforce particularly vulnerable to the severe contraction in
the construction industry that occurred through the course of the
recession. Employment in the construction sector reached a peak of 7.7
million workers in August 2006, but plunged to 5.6 million by
February 2010, before employment declines slowed.62 In 2007,
Hispanic workers were also concentrated in other industries that
contracted during the recession - such as leisure and hospitality
services - and less concentrated in industries that expanded, such as
education and health services. (See Figure 15)
Figure 15. Distribution of Hispanic Employed Persons and
Total Employed Persons in Selected Industries
2007 Annal A-ergaes
(Indusry
Contracion/'Expasion
Over he Recession)
C o
0
e%
%
20%
14.7%
i.Peren
E
324%)
1%
25%
if iipanic Worker.
oyedin the industry
Perent or AII Workers
Employed i ihe lindusty
II6%
(-16%.
W
Lecre andIosiioYt
8>
(-4%)
210%
(.4%)
te
over
Note Numbers in pareiihese reprie'.enti
r
ichge in employme
i
nwithin lhe ius!ry
the lecesmion(December 2007
Decriber 2009)
Source: Join: Economic Coirmmiinoie
Majony Saticaculiins based on data roo the Bureauof Labor Satistics
to
Additional evidence of the link between the rise in Hispanic
unemployment and the bursting of the housing bubble comes from the
geographic differences in job loss for Hispanic workers. Hispanic
workers were heavily represented in the states most devastated by the
collapse of the housing market - Nevada, Arizona. Florida. and
California - where home prices plunged dramatically. (See Figure
16) However, another state with a large Hispanic workforce - Texas
- experienced a much more modest drop in home prices and has a
much lower unemployment rate than Nevada, Arizona, Florida, and
California.
Figure 16. Decline in House Prices of Selected States
Change in House Price Index, March 2006 - December 2009
Percent
-60%
Mar'06
Jul'06
Nov'06
Mar'07
Jul'07
Nov'07
Mar'08
Jul'08
Nov'08
Mar'09
Jul'09
Nov'09
Note: Grey shading indicates NBER dated recession periods. Lighter shading reflects the retun to GDP growth in Q3 2009.
Source: JECMajority Staff calculations based on data from the Loan Perfortance House Price Index (Seasonally Adjusted by
Haver Analytics).
Youth. Young workers (ages 16 to 24) have also encountered particular
difficulty during the course of the recession. Young workers make up a
disproportionate share of the unemployed: In June 2010, they
comprised 14 percent of the- labor force but made up 30 percent of the
unemployed and 19 percent of the long-term unemployed (numbers not
seasonally adjusted). (See Figure 17)
Figure 17. Labor Force, Unemployed, and Long-Term Unemployed
Okaribution by Ag,
Jun 2010 (No Seony
55, '
Adjustd)
,
19o
i
Labor
force
Sourtc.JE Mj
d
fnemployd
LCng-Tnn
iUnemployed
rit tafased onda'a from theBureau of Labor Statstcs, Household
Survey
Differences also exist within those categorized as young workers, with
younger workers faring worse than older workers in that category. (See
Figure 18)
Figure 18. Unemployment Rates Among Young Workers
Unemployment Rate by Age, 1974 to 2010 (Seasonally Adjusted)
35%
30%
25%
16-17years
20%
15%
18-19years
10%
10%
20-24 yeas
5%
0%
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
indicate recessions asclassifiedbyNBER.
Note: Grey areas
Survey.
Household
Source:JECMajority Staff basedondatafrom theBureauof Labor Statistics,
Young teen workers (ages 16 and 17) had an unemployment rate of
29.2 percent in June, with the vast majority (93 percent) lacking a high
school diploma.6 4 For older teens (ages 18 and 19), the unemployment
rate was 24.0 percent.65 Young adults (ages 20 to 24) had the lowest
unemployment rate among workers between the ages of 16 and 24;
their unemployment rate was 15.3 percent. 66
A combination of work experience and education may account for
much of the difference in unemployment rates among those classified
as young workers, since the older workers tend to be more educated
and experienced than the younger workers. Unemployment rates for
young workers fall dramatically as their education level rises.67
Graduating high school seems especially important: Among workers
16 to 24 who are not currently enrolled in school, the unemployment
rate gap between those without a high school diploma and those with
only a high school diploma has widened over time, from a gap of 7.1
percent in June 2007 to 9.2 percent in June 2010.68
For example, young workers without a high school diploma had an
unemployment rate of 30.9 percent in June 2010, significantly higher
than the 13.0 percent rate of unemployment among workers 25 years
and older without a high school diploma. Even the well-educated are
facing labor market difficulties, however. The unemployment rate for
young workers with at least a bachelor's degree was 11.2 percent in
June, compared to an unemployment rate of 4.5 percent for similarly
educated workers who are 25 years or older. 9 While much of the
discrepancy is due to the lower levels of work experience among
young workers compared to workers older than them, young workers
entering the labor market are facing particular difficulty in finding
jobs.
Policymakers should be especially concerned about this because the
lifetime earnings trajectories of youth depends heavily on their first
experience in the labor market, which may be particularly negative
given the weak labor market. The ramifications can be dramatic. Dr.
von Wachter argues, "The consequences of entering the labor market
in a recession are severe in both the short and the long run."'o In fact,
when young workers enter the labor market during a large recession, it
may take them between 10 and 15 years for them to finally earn what
they would have made had they entered the labor market when
economic conditions were better.7 Moreover, even if the labor market
improves following their entry in the labor force, young workers still
suffer from significant long-term effects of entering the labor market
during a scvcrc recession.n This arises partly because many youths
entering the labor market accept wage offers that are more depressed
than they would have been during an economic boom, which would
start them off at a lower point on their earnings trajectory. 3 Moreover,
workers need to make adjustments to get their earnings back to normal
- such as "obtaining outside job offers, changing jobs, or moving to
different regions" - but "many face obstacles to such adjustment,
often due to family commitments."
Young workers may also detach from the labor force altogether when
faced with the difficulty of finding a job during a severe recession. Dr.
Holzer argues that many disadvantaged and less-educated youth are
"'disconnecting' from both school and the labor market together."7 5
Mr. David R. Jones, President and CEO of the Community Service
Society, points out that "unemployment rates do not even show the
complete picture of this crisis, in that they only show those who are
actively seeking work. Far more young people have become
discouraged in this labor market, and are even further on the
sidelines." 76
The Impact of the Housing Bubble on Employment Across States
While the aggregate figures paint a picture of widespread economic
distress, the impact of the Great Recession has been quite varied. Some
sectors of the economy have been hit far harder than others. Likewise,
some states have been battered by the economic storm while others
remain relatively unscathed. For example, the unemployment rate in
Nevada nearly tripled, rising from 5.2. percent in December 2007- to
14.0 percent in May 2010 (8.8 percentage point increase). Other states
experiencing large unemployment rate increases since December 2007
include: Florida (7.0), Alabama (6.9), California (6.6), Michigan (6.5),
and Rhode Island (6.3). (See Figure 19) On the other hand, the
unemployment rate in North Dakota rose only 0.6 percentage points
from December 2007 to May 2010, in South Dakota 1.8 percentage
points and in Nebraska 2.0 percentage points.
Figure 19. Change in Unemployment Rate For States Experiencing Largest Increases
2007- May 2010
Percentage PointsIncrease, December
10
8
6
4
00s
--
-
-
of LaborStatistics.
theBacearu
basedandatafrotm
Staffcalcuations
SotuceJECMajority
Part of the reason for the rise in unemployment rates- in certain states
can be attributed to the collapse of the housing market, which spelled
serious trouble for employment in the housing sector of the economy.
However, in recent months, employment in this sector has stabilized
somewhat, especially relative to the dramatic declines during the first
two years of the recession. Construction employment fell by 2 percent
between December 2009 and June 2010, as compared to a 24 percent
drop between December 2007 and December 2009. Employment in
real estate, rental, and leasing finance fell by just over 1 percent
between December 2009 and June 2010, as compared to a 9 percent
drop between December 2007 and December 2009. Similarly,
employment in furniture manufacturing has fallen by less than 1
percent in the first half of 2010 as compared to a 29 percent decline
between December 2007 and December 2009.
The unemployment rate has tracked closely with mortgage delinquency
rates since January 2005, suggesting a relationship between the
housing bubble and the unemployment problem. (See Figure 20)
Moreover, states rattled by the housing crisis have seen declines in
employment. A negative relationship between employment levels and a
variety of indicators of housing market trouble may exist. For instance,
subprime foreclosures are negatively correlated with changes in
employment. 7
Figure 20. Unemployment Rate vs. Mortgage Delinquency Rate
Janura..
2005 -
M.y
2010
Mongagei)cinquency Rate
4 0%
Unemploymen Rate
05%
1
0%%
5.0%
0'
00'
401%
-------
ahn95
Jul 05
Jan 06
Ju106
Ja' 07
Ju 07
Jan 0
3J108
Ja, 09
Sourc ECrMajity Staff based
ondatafromFrdde Macandthe Bareauof LaborStatisics.
Jul09
J'a10
The aftermath of the housing bubble may slow the speed of recovery
by creating a geographic mismatch between workers and jobs. A
persistently weak housing market may make relocation more difficult,
as housing prices remain depressed and sales volume remains low. An
unemployed worker who sees new job opportunities in faster-growing
regions of the country may be unable to relocate because a weak
housing market makes it impossible to sell his home in a region with
high unemployment and few buyers. The resulting decrease in mobility
may reinforce high levels of unemployment in hard-hit regions of the
country as unemployed workers are tethered to their homes and unable
to move on to new opportunities."
CONGRESSIONAL AND ADMINISTRATION ACTIONS TO HELP THE
LABOR MARKET
The actions taken by Congress and the Administration in 2009 especially the passage of the American Recovery and Reinvestment
Act of 2009 (P.L. 111-5, referred to as the Recovery Act) - staved off
impending economic disaster, but policymakers headed into 2010 to
continue the follow-up task of working on economic recovery. One of
the major priorities of Congress in 2010 was to extend cost-effective
measures that supported unemployed workers and stimulated the
economy, as well as enacting new policies to deal with problems
afflicting the labor market. A summary of major legislation is
summarized in the table below.
Public Laws Passed in the Second Session of the 1 1 1 th Congress
Summary
Date
Bill Title
Public
Became
Law
Public
Number
Law
P.L. 111-
Statutory Pay-As-
February
Requires that direct
139
You-Go Act of 2010
12, 2010
spending and revenue
legislation enacted into
law not increase the
deficit and instructs the
Comptroller General to
conduct routine
investigations aimed at
eliminating duplicative
and wasteful spending.
P.L. Ill-
Temporary Extension
Act of 2010
March 2,
2010
P.L. Il1147
Hiring Incentives to
Restore Employment
Act
March
18. 2010
P.L. 111148
Patient Protection and
Affordable Care Act
March
23, 2010
P.L. Ill150
To permit the use of
previously
appropriated funds to
March
26, 2010
144
extend the Small
Extends various social
safety net provisions of
the Recovery Act that
were set to expire, such
as unemployment
insurance extensions
(April 5, 2010),
COBRA eligibility
(March 31, 2010), and
loan guarantees for
small businesses
(March 28, 2010).
Provides a payroll tax
credit of up to 6.2
percent for workers
unemployed 60 days or
longer, plus an
additional $1,000 if
employees are retained
for one year; and
doubles the amount
that small businesses
can write off for capital
investments, from
$125,000 to $250,000.
Reforms health care.
including expanded
Medicaid eligibility,
insurance premium
subsidies, providing
incentives for
businesses to provide
health care benefits,
prohibition of denial of
coverage based on preexisting conditions,
establishment of health
insurance exchanges,
and greater support for
medical research.
Makes up to $40
million of funds
appropriated for the
business loan program
of the Small Business
Administration (SBA)
under the Consolidated
Appropriations Act of
2010 available to
reduce or eliminate
fees on small business
loans or SBA-
Business Loan
Guarantee Program,
and for other purposes.
guaranteed loans , as
P.L. 111152
Health Care and
Education
Reconciliation Act of
2010
March
30, 2010
P.L. 111157
Continuing Extension
Act of 2010
April 15,
2010
authorized in the
Recovery Act.
Makes a number of
health-related
financing and revenue
changes to the Patient
Protection and
Affordable Care Act
and modifies higher
education assistance
provisions.
Extends various social
safety net provisions
that were set to expire
including
unemployment
insurance extensions
(June 2, 2010),
COBRA eligibility
(May 31, 2010), and
loan guarantees for
small businesses (May
31, 2010).
Bill
Legislation Passed by the House of Representatives
Date
Description
Bill Title
Passed
Number
H.R. 4849
Small Business and
Infrastructure Jobs
Tax Act of 2010
March
24, 2010
Allocates $20 billion
over a decade to extend
the Build America
Bonds program,
excludes investments
in small businesses
from capital gains,
increases the tax
deduction for start-up
H.R. 4899
Supplemental
Appropriations Act,
2010 (formerly the
Disaster Relief and
Summer Jobs Act)
March
24, 2010
II.R. 5019
Home Star Fnergy
Retrofit Act
May 6,
2010
H.R. 4213
American Jobs and
Closing Tax
Loopholes Act of
2010
May 28,
2010
H.R. 5116
America COMPETES
Reauthorization Act of
2010
May 28,
2010
H.R. 5486
Small Business Jobs
Tax Relief Act of
2010
June 15,
2010
expenditures, and
provides other
incentives for job
creation.
Provides emergency
supplemental
appropriations for
FEMA's disaster relief
fund and the SBA for
the business loans
program account. Also
provides funds for the
Department of Labor
for the Employment
and Training
Administration.
Establishes incentives
for consumers who
renovate their homes to
become more energyefficient.
Institutes incentives to
support business
innovation, provides
tax cuts for families
with college-bound
children, and provides
disaster relief for
states. Additionally,
the bill adds
approximately 350,000
summer jobs for young
people.
Establishes, revises,
and extends specified
science, technology,
education, and
mathematics (STEM)
programs., as well as
engineering, research,
and training programs.
Increases the capital
gains tax cut for those
who invest in small
H.R. 5297
Small Business
Lending Fund Act of
2010
June 17,
2010
businesses this year,
fixes a tax shelter
disclosure penalty
disproportionately
impacting small
businesses, and
increases to $20,000
(from $5,000 in current
law) the deduction for
start-up expenditures in
connection with
investigating the
creation of a business.
Delivers loans to small
business through a new
$30 billion lending
fund for small and
medium sized
community banks ($10
billion or under) that
could leverage up to
$300 billion in lending.
Bill
Number
H.R.
4213"
Legislation Passed by the Senate
Description
Date
Bill Title
Passed
Provides incentives to
March
America Jobs and
support business
10, 2010
Closing Tax
innovation, establishes
Loopholes Act of
tax cuts for families
2010
with college-bound
children, and provides
disaster relief for
states. Adds
approximately 35,000
summer jobs
opportunities for young
workers. Also extends
unemployment
insurance benefits
through December 31,
2010.
H.R. 4899
80
Supplemental
Appropriations Act,
May 26,
2010
Provides emergency
supplemental
2010
_
appropriations
FEMA's disaster relief
fund and the SBA for
the business loans
program account. Also
provides funds for the
Department of Labor
for the Employment
and 'raining
Administration.
The Recovery Act
In 2009, Congress and the Administration passed the largest
countercyclical fiscal stimulus in history, the Recovery Act, in order to
bring the economy back from the brink of depression. Because of this
overwhelming response, economic depression was averted in 2009, and
the economy, although still reeling from numerous problems, is now on
the path toward recovery.
Both the CBO and CEA have estimated that the Recovery Act has been
effective at raising GDP and boosting employment. The CBO, for
example, estimated that, in the first quarter of 2010, GDP was between
1.7 percent and 4.2 percent higher than it would have been without the
Recovery Act. 8 On the employment front, the CBO estimated that the
unemployment rate was between 0.7 percentage points, and 1.5
percentage points lower and employment was between 1.2 million and
2.8 million jobs greater than they otherwise would have been in the
first quarter of 2010 in the absence of the Recovery Act.12 In fact,
projections by the CBO indicate that the unemployment rate will be
between 0.8 percent and 2.0 percent lower and that employment will be
between 1.4 million and 3.7 million jobs higher in the third quarter of
2010 because of the Recovery Act.
The CEA's fourth quarterly report on the economic impact of the
Recovery Act also credits the Recovery Act with spurring economic
growth and raising employment. They estimate that GDP in the second
quarter of 2010 was between 2.7 percent and 3.2 percent higher than it
would have been without the Recovery Act." Likewise, the CEA
estimates that the Recovery Act contributed 0.7 percentage points to
GDP growth in the second quarter of 2009; 1.4 percentage points in the
third quarter of 2009; 2.5 percentage points in the fourth quarter of
42
2009; and 2.9 percentage points in Q1 2010.84 (See Figure 21)
Moreover, the CEA estimates that the Recovery Act raised
employment by between 2.5 and 3.6 million jobs during the second
quarter of 2010.85 As of June 30, 2010, $420 billion (53 percent) of the
$787 billion stimulus had either been spent on contracts, grants, and
loans; entitlements; and tax benefits.
Figure 21. Impact of Stimulus on Gross Domestic Product
Estimated GDP Growth With and Without theRecovery Act, Q3 2009 - Q2 2010
6%
5.6%
5%
4%
3.2%
3%
83%
2.7%
2.2%
S2/%
t.8%
1.2%
1.3%
1%
0%
-1%
-07%
Without
With
Stimulu sStimulus
-2%
Q3 2009
Q4 2009
Qi 2010
Q22010*
Q2 2010 GDP growth with stimulus is based on an estimate coming from Blue Chip Consensus asof July 10,2010.
Source: JECMajority Staff based on data from the Council of Economic Advisers, the Bureau of Economic Analysis.
According to the CEA, the tax relief and income support provisions of
the Recovery Act accounted for as much as half of its positive impact
on GDP and employment.87 Low- and middle-income households
benefited disproportionately from the Recovery Act's tax relief and
income support provisions. The CEA results suggest that government
support of these households can make significant contributions to
economic growth and employment, reinforcing the case for further
assistance. The sizeable impact. of these and other tax relief and income
support programs could be attributed to the immediate jolt to the
economy arising from increased spending by low- and middle-income
households. Since they are likely to be cash-strapped and creditconstrained, many of these households immediately spend funds
received from the government, which provides quick stimulus to the
economy as their spending trickles through the economy and creates a
cascade of further spending.
The public investment spending provisions of the Recovery Act raised
aggregate employment by more than 800,000 jobs as of the second
quarter of 2010, according to the CEA.' The largest impacts of public
investment spending on employment were in the clean energy, human
capital, and transportation infrastructure categories. A critical feature
of the public investment programs in the Recovery Act is that many of
them are leveraging outside private funds. The CEA estimates that
roughly $100 billion of the Recovery Act fund have leverage
provisions, and these funds will ultimately support $380 billion of total
investment spending. In other words, every $1 of Recovery Act funds
invested into leverage programs is partnered with about $3 of outside
investment spending." The majority of these co-investors are from the
private sector.o These leverage programs, many of which are directed
at public investment spending, are making government money go even
further toward rescuing today's and rebuilding tomorrow's economy.
Extensions of Unemployment Insurance and COBRA Subsidies
The Recovery Act contained a number of key provisions affecting
unemployment benefits. It temporarily increased benefits by $25 per
week, extended the availability of Emergency Unemployment
Compensation (EUC) through the end of 2009, and provided 100
percent federal financing for the Extended Benefits (EB) program. In
the intervening months, Congress and the Administration have taken
additional actions to ensure that unemployment benefits remain
available to jobless workers. The Temporary Extension Act of 2010
(P.L. 111-144) extended all of the unemployment insurance-related
provisions from the original stimulus bill through April 5, 2010. The
Continuing Extension Act of 2010 (P.L. 111-157) extended these
provisions through June 2, 2010. The House of Representatives passed
legislation that would extend these provisions through the end of 2010;
the Senate is still debating an extension.
Unemployment insurance benefits are crucial to helping millions of
American workers continue to put food on the table and pay the bills.
But unemployment benefits also have a significant impact on the
strength of the American economy as a whole. Workers receiving
unemployment benefits are typically cash-strapped and will spend their
benefits quickly. This spending generates a "multiplier" for the
economy as a whole, whereby every dollar of unemployment benefits
that a recipient spends sets off a cascade of spending by others,
providing a significant and immediate jolt to the nation's economy.
Indeed, the CBO estimates that increased aid to the unemployed is the
more cost-effective at boosting economic growth and employment than
a variety of other policy options under consideration.9 1
The extension of unemployment benefits also serves an important
purpose in keeping individuals attached to the labor market. Dr. von
Wachter argues that extensions in unemployment insurance benefits
"prevent some workers from applying to other government programs
not intended to smooth short-term economic shocks, such as Social
Security Disability Insurance or Old Age and Survivors Insurance. In
particular, benefits provided under disability insurance can be very
costly, especially if provided to younger or middle aged workers with
low-mortality impairment." 92 The extension of unemployment benefits
and COBRA support through the end of 2010 could save the federal
government $23.5 billion by avoiding a lifetime of Social Security
Disability Insurance for currently unemployed disabled workers. 93
The principal purpose of the unemployment insurance program is to
provide workers with a safety net in the event that they lose their job.
However, some worry that unemployment insurance benefits may
inhibit unemployed workers from vigorously looking for or accepting a
new job. Those fears are unfounded. The best evidence suggests that
during this current economic downturn both the unemployment rate
and duration of unemployment were minimally impacted by
unemployment insurance benefits and the extensions of benefits. One
recent study suggests that just 0.4 percentage points of the nearly 6
percentage point increase in the national unemployment rate over the
past few years is due to the extension of unemployment benefits. 9 4 This
small uptick in the unemployment rate attributable to the extension of
unemployment insurance benefits may reflect a positive consequence
of an extension of benefits: Unemployment insurance may be
providing an enormous social benefit by preventing people from
dropping out of the labor force altogether (and often permanently),
relying instead on more costly programs like disability benefits.
Job loss can also mean the loss of health insurance coverage. Without
health insurance coverage, many jobless workers may incur large
medical bills that add to their financial distress. The II lh Congress has
passed legislation that temporarily addresses this problem by providing
a 65 percent subsidy for the purchase of COBRA health benefits for
unemployed workers. COBRA benefits allow laid-off workers to
continue to purchase health insurance through the group insurance
offered by their former employer, but the cost of buy-in is often
prohibitively high for laid-off workers. Indeed, the average family
COBRA premium costs $1,137 a month, about 83 percent of the
average monthly unemployment insurance benefit.95 The COBRA
benefit subsidy included in the Recovery Act was designed to help
make this purchase more affordable for financially-stressed
unemployed workers. Congress has extended the expiration date on
this subsidy several times since the initial enactment, most recently via
the Continuing Extension Act (P.L. 111-157), which made the COBRA
subsidy available through May 31, 2010. Congress is currently
debating bills that would extend these provisions through the end of
2010.
According to the CBO, the extension of the COBRA benefit subsidy
results in an increased demand for health care services, and increases
the income available to purchase other goods and services. This
increased demand for goods and services translates into a cost-effective
mechanism for bolstering economic growth and employment,
according to the CBO.
Tax IncentivesJbr Hiring
Heading into 2010, the creation of private-sector jobs - which
accounted for 82.5 percent of all payroll jobs in June 2010 -- was one
of the most important challenges facing policymakers.97 One proposal
advocated by the Administration was an employer tax credit to provide
tax incentives for businesses to hire workers. The employer tax credit
also received an endorsement from Princeton University economist
Alan Blinder, who is the Co-Director and Founder of Princeton's
Center for Economic Policy Studies.98 Dr. Douglas W. Elmendorf,
Director of the CBO, reports that of the various policies to spur job
creation and economic growth, the CBO considers an employer tax
credit for firms that increased their payroll to be among the most cost-
effective ways of boosting job creation and growth.99 In addition,
instituting an employer tax credit was one of many recommendations
that came from a survey that asked Fortune 100 companies for
suggestions on what Congress and the Administration could do to
create jobs and spur hiring.' 00
Congress and the Administration established an employer tax credit
with the enactment of the Hiring Incentives to Restore Employment
Act (P.L. 111-147, referred to as the HIRE Act) on March 18, 2010.101
The HIRE Act exempts employers from paying the 6.2 percent payroll
tax for any worker who had been unemployed for at least 60 days (and
met other qualifications).10 2
Education andJob Training
Government policies that encourage businesses to hire more workers
are most effective when job applicants have the skills employers are
looking for. Unfortunately, features of the labor market documented
previously suggest that skill erosion and mismatch may be worse now
than in previous economic downturns, which leaves scarce job
openings unfilled because employers can't find workers with the right
skill set. 0 3 If skill deterioration is left unchecked, even more job
openings will remain unfilled, hurting both workers and employers.
The mismatch problem makes greater investment in worker skill
development and job training programs more urgent now than ever
before.
Traditional job training programs will likely be insufficient to prepare
workers for new jobs and new employment opportunities, however.
Innovative approaches are needed to strengthen job training programs
and to ensure that these programs reach those who need them.
Economists and leaders from the private, non-profit and public sectors
agree that there is no magic bullet. To make significant progress,
multiple, targeted programs and initiatives are required to provide
workers with the education, skills and experience needed to compete in
today's global economy. Rigorous evaluation based on comprehensive
and reliable data will be critical. Those programs that boost the longterm employment prospects and earnings of participants should be
expanded while those unable to show positive outcomes must be
improved or ended.
As noted previously, educational attainment helps reduce the
probability of being unemployed. In June 2010, the unemployment rate
for those with a college degree was 4.4 percent, compared to 14.1
percent for those without a high school diploma."' (See Figure 22)
However, the benefits of a college degree are not uniform. For
example, the unemployment rate for black college graduates 25 and
older was 7.6 percent in June 2010; the unemployment rate was even
higher among young black college graduates.
Figure22. Unenploynent Rates by EducationalAttainment
Jana.y 2000-June2010(Sonany Adjusted)
I8%
16%
14%
10%
Lstha
a hgh scoo d
Ilmi
8%
6".
4%
2000
2002
2004
2006
2000
2010
Note:Gryshadingidicates NBERdatedrecesso penods iAghtershading
reflectsthe
retumoGDP gmwth in Q3 2009.
Soure: Joint Ec=on c CoumtteeMajoeorty based
andatafr Bureau
of LaborSattics. Household
Surve
During the recession, as job prospects worsened, an increasing share of
Americans pursued higher education. The Bureau of Labor Statistics
recently reported that the country has attained a record rate of college
enrollment among 2009 high school graduates - 70.1 percent.'0 5 In
2010, Congress and the Administration made the largest investment in
student aid in the nation's history, an investment which may enable
additional future gains in college enrollment.' 06 The Health Care and
Education Affordability Reconciliation Act of 2010 increases the
maximum annual Pell Grant to $5,550 in 2010 and, beginning in 2013,
indexes the Pell scholarship to the Consumer Price Index, so that it
keeps pace with inflation; channels all new federal lending to the
Direct Loan program, saving taxpayers money; invests more than $2.5
billion in historically black colleges and universities; and invests $2
billion in community colleges through a competitive grant program
that will help strengthen career training programs.107
Community colleges are important parts of pathways to training and
employment opportunities and community college enrollment has
increased significantly in recent years. 08 These two-year institutions
are often very close to local employers, understand their hiring needs,
and have developed degree and certification programs that build skills
which are in demand in their community. 109
The recent expansion of financial aid programs makes higher education
more accessible to all young people, opening important doors of
opportunity. But the need for educational investment and reform is
needed at the high school level as well. Career academies combine
strong academics with workforce training, targeting a particular sector
of the economy which offers solid labor market opportunities, such as
information technology, health, financial services or renewable energy.
Students learn skills that prepare them to work in these fields while
also taking academic courses that prepare them to continue their
studies at the post-secondary level, if they choose to do so. Dr. Holzer
argues, "So we have to rebuild, not old-fashioned voc-ed, but highquality career technical education linked to strong sectors of the
economy." 1 o
Education, as important as it is, is not enough. Young college graduates
who entered the workforce after December 2007 began their work lives
in the worst recession since the Great Depression. It will take, on
average, 10-15 years for these graduates to reach the earnings level of
peers who entered the workforce during an economic expansion."' To
regain the lost ground, these young workers will need to be mobile
across occupation and region. Policies targeted at these recent college
graduates could help them gain employment and build their skills. Dr.
Richard Berner, Chief Economist for Morgan Stanley, proposed a Job
Training Corps that would put to work recent college graduates along
with unemployed teachers to help build core skills for other
unemployed- workers. 112 It would both develop new skills and reduce
unemployment. Additionally, a Job Training Corps would provide
those just out of college and unemployed teachers with ways to engage
meaningfully during their unemployment and provide an opportunity to
build new - or refine existing - skills of their own. 11
Similarly, targeted training programs are needed to help workers,
across age groups, reattach to the workforce and regain their footing in
the challenging labor market. In many cases, unemployed workers will
be forced to.find new jobs outside of their previous industry and will
require assistance and training to make that transition.14 These workers
will need both new skills and help presenting old skills in ways that fit
a new industry.'
Additionally, they will need access to timely,
understandable information on labor market trends. With the record
long-term unemployment of the past two years, the need to help jobless
workers recast themselves has never been greater. CBO Director
Elmendorf observes that the gains in employment following the Great
Recession will "probably rely more than usual on the creation of new
jobs, possibly in new firms that are located in different places and
require workers with different skills than those needed in the jobs that
have disappeared."" 6
Effective job training must be targeted to those sectors of the economy
which offer future employment opportunities. Sectoral employment
programs are built on that exact premise. Sectoral programs identify
those sectors that offer strong growth opportunities in a community and
then work with intermediary organizations and private-sector
employers to craft programs that build skills that will be in demand.
Successful programs have been undertaken in manufacturing, allied
health, and information technology.
Sectoral programs have shown positive outcomes, with participants
more likely to get and retain employment than those who have not
received such training.'" 7 Employers are closely involved in the design
and implementation and participants receive industry-specific skills as
well as general job readiness training. A potential barrier to scaling
these industry-focused programs is that they require up-front
investment in understanding the employment opportunities in a
particular area in order to create programs that align with these
opportunities. The partnerships that work in one community are not
easily replicated in another. Yet, these sectoral employment programs
are getting the highest rates of return today among job training
programs and figuring out how to effectively scale them could pay
significant future dividends. Explains Dr. Katz, "But we do know with
creativity and the combination of employers having the incentive of
getting good workers, local communities working with them, and
workers really getting the support to go through training that leads
somewhere, the best evaluations show things like 20 percent, 30
percent persistent earnings increases from such programs."' 8
Labor market information on sectors and industries that guides the
development of sectoral training programs should also be widely
shared with those entering or considering a broad range of job training
programs. Trainees currently receive too little guidance about the skills
that are needed, the courses they should take, and the opportunities that
are likely to exist when they complete the training program. While the
Bureau of Labor Statistics and Census Department provide information
that indicates growing sectors and regions, it is not well-organized, can
be difficult to find, and is not easily used by people unfamiliar with
labor market terminology. This information could be pulled together -in
one area and simplified for broader consumption."
Better connecting job training to placement in a job is an area for
improvement. The hand-off between job training and job placement is
difficult to execute well. Ensuring that training is tied to occupations in
growing industry sectors, where jobs are immediately available, would
ensure that training would not take place in a vacuum. Using strategies
such as customized training, on-the-job training or transitional job
programs would ensure that an employer has a specific need for the
employee being trained, and that the training is specific to the needs of
the job.120 Put another way, the training would lead to a specific job
with a specific corporation.
While virtually all groups of workers have been hit hard during the
Great Recession, young adults and teens have been hit especially hard,
facing record unemployment in the spring of 2010 and unemployment
rates far higher than the national average throughout the recession.
Congress has taken recent action to address the high rate of joblessness
among the youngest workers. At the time of publication, the House of
Representatives had passed legislation supporting 350,000 summer
jobs for young people.121
There is a broad consensus that summer youth employment programs
offer an important introduction to the world of*work for many
teenagers, while also providing needed money during the summer
months. But there is also recognition that more year-round work
opportunities are needed, especially for young people who are no
longer connected to school or work. Similarly, more rigor is needed in
the summer employment programs to help young people build skills,
and to better understand on-the-job expectations. Young people should
have to come to work on time and they should be evaluated at the end
of the summer, argues Mr. Jones, who earlier in his career ran New
York City's summer youth employment program. Summer
employment can be transformed so that it is a step to additional
employment and to future skill-building. 122
Unlike the job training policies previously mentioned, which
concentrate on preparing a worker for a new job, work-share seeks to
provide employers and employees with additional flexibility during
periods of reduced demand to prevent an employee from losing his or
her job in the first place. With work-share, an employee works fewer
hours and receives less compensation from the employer during
periods of weak demand. Unemployment insurance, or a form of it,
makes up for the cut in the employee's hours. Such a work-share
program could retain employment at higher levels than they would
otherwise be during recessions. For example, instead of firing 20
percent of its workers, the employer could reduce hours for all of its
workers by 20 percent. Because research shows that periods of
unemployment significantly reduce earnings, even 15 to 20 years later,
policies such as work-share could reduce the number of people
impacted by unemployment, thereby reducing the negative impact on
future income and output. Seventeen states have adopted some form of
work-sharing policies.1 23
Unemployment solutions must also address the needs of older workers,
who may face different training and employment challenges than those
of younger workers. Longtime employed older workers may have felt
secure in their careers, only to be laid off during the height of the
recession. Furthermore, the severe decline in household wealth forced
many workers nearing retirement to remain in the labor force, and drew
some retirees back to the workforce. With stiff competition for each
job opening, older workers may have difficulty finding new
employment opportunities if their current skills are not well-matched to
jobs in an ever-changing labor market. Such workers could benefit
from work-share programs, allowing them to receive on-the-job
training, acquire new skills, and refine their existing skill set, while
keeping them attached to the labor force until full-time work
opportunities increase. Such work-share programs would also give
older workers much needed flexibility in order to juggle employment
with their dual-caregiving duties of caring for elderly parents while
simultaneously providing for their own families. The Joint Economic
Committee will examine the employment challenges facing older
workers in a forthcoming Majority Staff report.
NEED FOR FURTHER ACTION
The fragile state of the current economic recovery means that an
overemphasis on trimming the nation's deficit is seriously misguided.
In tenuous economic times, deficit spending is a necessary, positive
step toward revving the economic engine back into high gear. Federal
spending fuels job growth, and provides critical services that both
prevent hardship for families and saves the government additional
spending down the line. Cutting off this necessary lifeline in order to
"trim the deficit," as some argue is a necessary step, would have
devastating results on the economy and American families would
suffer. Moreover, the vast share of the looming debt problem facing the
federal government stems from the combination of the aging Baby
Boom generation and the financing of Social Security and Medicare.
As a result, critiques of deficit spending directed at efforts to prime the
economic pump during and in the aftermath of the Great Recession are
largely misdirected.
Rather than focusing on the deficit, the most important priority in the
wake of the Great Recession is to firm up the foundations of the
economy. In particular, because this recession was characterized by
high degrees of long-term unemployment, the labor market is likely to
remain fragile for quite some time. Long-term unemployment is a
vexing problem that requires patience and perseverance to fix, which
means that a shift away from job creation and toward deficit reduction
is not only likely to leave many Americans to fend for themselves in
the weak economy, but may very well suppress economic growth.
Rather, policymakers should instead focus on devising targeted
stimulus to help energize the pace of the recovery.
An effective, targeted stimulus would include a portfolio of policies.
First, extending unemployment insurance would have ripple effects
across the entire economy, triggering broad-based economic growth in
addition to providing a critical lifeline to struggling jobless Americans.
Second, federal investment in small businesses would help jumpstart
job creation. One option includes providing federal funds to help solve
small businesses' credit problems, because limited access to credit in
the aftermath of the financial crisis has crimped small business hiring.
A second option is to implement targeted tax cuts to help small
businesses. Finally, federal funds for innovation and basic research
play a key role in economic recovery.
Concerns about the FederalDeficit are Misplaced
Federal budget deficit projections over the next ten years are nearly
entirely due to policies that pre-date the Obama administration and the
II 1 th Congress. While investments in economic recovery policies have
had an impact on the deficit, the lion's share of projected federal
deficits were created by the Bush administration's actions. Bush-era
tax cuts and the wars in Iraq and Afghanistan account for almost $7
trillion in projected deficits between 2009 and 2019. In contrast, the
recovery policies put in place by the Obama administration in response
to the nation's worst economic crisis since the Great Depression
account for $1.1 trillion in projected deficits over the 2009 to 2019
period.
Moreover, the recession itself has caused a sharp
deterioration in the budget outlook. Indeed, the impact of the recession
on the nation's deficit projections would likely have been far more
severe had Congress and the Administration not acted swiftly with
recovery spending to stem further economic losses.
Given the gravity of the economic downturn facing the country,
Congress and the Administration have enacted a series of spending
measures -
the most prominent of which was the Recovery Act -
to
stimulate and support the economy. As shown above, these policies
have had a significantly positive impact on the economy.
Despite the success of fiscal stimulus, there are legitimate concerns
over the impact such spending has had on the federal budget deficit.
However, Congress and the Administration have placed a priority on
imposing fiscal discipline in both the short- and long-term through a
variety of approaches. For example, Congress and the Administration
enacted statutory Pay-As-You-Go legislation in February 2010
requiring lawmakers to fully offset the cost of a wide range of
proposed spending increases and tax cuts with savings elsewhere in the
budget.125 In addition, President Obama established the bipartisan
National Commission on Fiscal Responsibility and Reform to develop
recommendations to "balance the budget, excluding interest payment
on the debt, by 2015" as well as "meaningfully improve the long-run
fiscal outlook, including changes to address the growth of entitlement
spending and the gap between projected revenues and expenditures of
the Federal Government. "126 The Commission will submit its
recommendations to the President by December 1, 2010.
Still, fully enacting the President's budget proposal for fiscal year 2011
will lead to deficits of $1.5 trillion in 2010 (10.3 percent of GDP) and
$1.3 trillion in 2011 (8.9 percent of GDP), according to CBO
projections.12 7 These deficits are unsustainable in the long run.
However, they are unavoidable in the short run because substantial
levels of fiscal stimulus are necessary to create jobs and get the
economy back on track as quickly as possible. Indeed cutting back on
fiscal stimulus while the economy is recuperating would likely prolong
the economic downturn and increase deficits in the medium- and longrun.
By pursuing a variety of targeted, cost-effective strategies, Congress
and the Administration can spur job creation and speed economic
recovery, which will yield long-run benefits for unemployed workers
as well as the government's fiscal position. When unemployed workers
find jobs, the deficit falls because the government reduces spending on
social assistance and receives more in tax revenues. Moreover,
unemployed workers are an untapped but productive resource, and as
they find jobs, economic output, personal income, and business profits
can increase and thereby raise government revenue. In short, the longterm budget outlook improves as the labor market continues its
recovery.
The government can foster labor market recovery and job creation
from a variety of directions. One way is to stimulate job creation
through direct spending or tax incentives. Dr. Katz contends, "Both the
continued fragility of the economy and the possibility of a sustained
jobless recovery represent calls to action for immediate policy steps to
expand employment and incentivize job creation."2 He suggests
passing a job creation package that includes aid to states, a net job
creation tax credit, and "incentives for facilitating investment with high
long-run payoffs in energy efficiency.. and infrastructure.1l 2 9 The
recently enacted HIRE Act implemented some of these
recommendations and established an employer tax credit. In addition,
the House of Representatives passed the Home Star Retrofit Energy
Act of 2010, which would provide rebates to households that invest in
energy-efficient home upgrades. Encouraging these investments would
help support employment in the struggling residential construction
sector.
The extension of unemployment benefits is another form of fiscal
stimulus that could improve the long-run budget outlook. And, a
package to promote lending to small businesses - the backbone of the
American economy - could also stimulate job creation and help lower
the deficit. If small businesses can access credit more easily, they will
be in a better position to expand, create jobs, and hasten economic
recovery.
Policies to encourage government investment in research and
development - and especially basic research - can improve the longterm budget outlook by promoting economic growth and job creation.
Basic research may not yield tangible fruits in the short-run, but in the
long-run basic research drives innovation, start-up creation, and the
formation of new job-creating industries. This will improve the budget
outlook, because as Mr. Zachary J. Shulman, Managing Partner of
Cayuga Venture Fund, explains, "Startup companies mean more jobs,
more payroll, more revenue, a higher tax base, and more dollars
invested."'
In other words, investment in basic research could
increase government revenues and drive down budget deficits in the
long run.
The dramatic economic downturn required an equally dramatic fiscal
response from the government to stem the hemorrhaging of jobs, and
support and spur economic recovery. Budget deficits have increased
substantially as a result, but not without good reason. As Federal
Reserve Chairman Ben Bernanke observes, "To an important extent,
these extremely large deficits are the result of the effects of the weak
economy on revenues and outlays, along with the necessary actions
that were taken to counter the recession and restore financial
stability."' 3 1 One implication is that a slow, modest economic recovery
could be the main threat to the long-term budget outlook. Short-run
fiscal stimulus can help minimize the threat by speeding the pace of
recovery. Pulling the plug on fiscal stimulus at a time when the
economy remains vulnerable could prolong - and potentially derail economic recovery and ultimately darken the long-term budget
outlook.
It is wiser to focus on the long-run fiscal health of the nation than to
focus on reducing short-term deficits. In fact, Chairman Bernanke
emphasized that what is important is for the government to establish a
"credible plan for fiscal sustainability."1 32 This is exactly the goal of
the National Commission on Fiscal Responsibility and Reform: It will
develop a comprehensive plan to maintain fiscal sustainability. In this
way, a long-term plan to improve the government's fiscal health will
accompany the short-run fiscal stimulus that is paving the way for
economic recovery.
A targeted dose of fiscal stimulus in the short-run, directed toward
creating jobs and supporting the nascent economic recovery, is not
incompatible with charting a strategy to rein in the federal budget
deficit in the long run and restore fiscal balance. Indeed, short-run
fiscal stimulus may be a necessary component of the strategy.
Extensions to Unemployment InsuranceBenefits andAid to the States
Joblessness is likely to remain a persistent problem, even as the pace of
growth picks up in the coming months. Unemployment typically lags
broader economic growth, for several reasons. First, hiring is
expensive, and firms want to be certain they are on firm ground before
they expand the workforce. Second, recessions have become
increasingly structural, rather than cyclical. In other words, downturns
result in fundamental, permanent changes to the distribution of workers
throughout the economy ("structural change"), rather than reversible
responses to changes in demand ("cyclical change").13 3 Following the
recession of the early 1990s, the unemployment rate continued to climb
for 15 months after the recession officially ended, and did not recover
its pre-recession rate for over five years. (See Figure 23) During the
aftermath of the 2001 recession, unemployment continued to climb for
19 months following the official end of the recession. The "jobless
recovery" of the Bush administration meant that unemployment
remained persistently high - the unemployment rate never recovered
to its pre-recession level so the economy began the 2007 recession with
elevated unemployment.
Figure23. Unemployment Rates During Recessions and Recoveries
12%
Unemploysent
Rate Imneline, January
Ile unemployment rate
cntinued toctmbfor
mtthsafter the end ofthe
1990s
1990- June 2010(Scaonally Adjusted)
,
Theunemployment
rate
contued :oclimb for 19
nths after the endof the
2001reession.
6%
4%
Dutigthe 1990srecoery, the
unemrploymenratererined
levl or
above itspm reecss;on
er 5yea
During thejobless
recovetyfrm
the
i the7001
unemplyme n ret er rertumed
ts preecession level
reession.
1990 1991 1992 1993 1994 1995 1996 1997 1998 19992000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Note:Grey shading
tdicate NBER datetd e-eion petted, Lghter nhading
reflecs
Sorce. JECMajority
Staff based on datafrm theB-rea of tbor Statsics
thereur n to G
grDP
wlh i Q3 2009
Five unemployed Americans exist for every job opening today, which
means that individuals are simply unlikely to find a new job with case.
The labor market's recovery from the current recession is likely to be
slow and difficult. In order to return to normal labor market conditions
(the employment rate of late 2007) by January 2014, the economy
would have to add a net of 14.9 million jobs to make up for the current
10.6 million jobs deficit and to absorb the 0.8 percent per year normal
labor force growth projected by the Bureau of Labor Statistics. In other
words, we need over 332,000 net new jobs per month sustained for 45
months (or 2.9 percent per year employment growth) to make up for
two years of severe job losses during the Great Recession. That would
require even stronger employment growth (2.4 percent per year) than
during the robust 1993 to 2000 recovery and expansion.1 34
Persistent unemployment, particularly long-term unemployment,
means that further action is necessary in order to provide economic
support to the millions.of individuals who are struggling to reclaim
their place in the labor market and may also provide fiscal stimulus that
could improve the long-run budget outlook. The CBO reported that
increasing aid to the unemployed is more cost-effective in terms of
boosting economic growth and employment than a variety of other
policies under consideration; unemployment insurance recipients are
cash-strapped and will spend their benefits - and stimulate the
quickly.s35 In addition, extending unemployment
economy insurance benefits can actually save the government money by
reducing expenditures on disability insurance. Moreover, despite fears
articulated by some Members of Congress, the best evidence suggests
that extension of unemployment insurance does not inhibit workers
from vigorously looking for or accepting a new job. 136
Additional aid to the states is another form of fiscal stimulus that could
improve the long-run budget outlook. Both unemployment benefits and
aid to the states are effective forms of fiscal stimulus, efficiently
encouraging economic growth. Aid to the states is a direct source of
job creation, as cash-strapped states can use the additional funds to hire
new public servants. Without federal aid, many states will be forced to
further trim already bare-bones public services further, resulting in
more jobs lost. Both unemployment benefits and aid to the states serve
as lifelines for strapped families. Unemployment.benefits help jobless
workers cover the bills while they seek new employment, while aid to
the states helps fund critical safety net programs such as Medicaid.
In simple terms, those who remain jobless and without unemployment
benefits will need some form of social assistance in order to avoid
complete destitution. In the absence of further action, they are likely to
turn to alternative social programs at a significant cost to the federal
government.
Small Businesses HiringLags As Larger Businesses Begin To Recover
Small business establishments are the backbone of -the U.S. labor
market. Seventy-five percent of working Americans are employed at
establishments with fewer than 250 employees, and they account for
nearly 80 percent of all new hires.1 37 However, the tough credit
standards that banks are imposing on small businesses have hamstrung
their ability to expand, create jobs and even remain in business. Dr.
Alan Krueger, Assistant Secretary for Economic Policy and Chief
Economist at the Treasury Department, asserts that while large
companies have seen their access to credit improve as financial
markets have stabilized (See Figure 24), "[s]mall businesses, which
are more dependent on bank financing... are still facing severe
challenges."' 3 8 The problem even faces some strong small businesses.
Federal Reserve Chairman Bernanke observes that "it seems clear that
some creditworthy businesses...have had difficulty obtaining the credit
they need to expand, and in some cases, even to continue operating."'
Figure 24. The TED Spread
Difference Reteen 3-MonthLondoo IaterhankRorrownng
Rate (I IROR) and
3-MonthTreasuryBill Yield,February2007-Present
50%
4.5%
Spiein TEDspread
indiuatesareluct ace
4.0%
3.5%
3.0%a
2 5%
2 0%
o
Decline in TED spred
indicaan impoeeti
cmditmarkct functining1.
0.5%
Feb'07
Jun07
Sep'07 Dec07
Apr 08
Jul 08
Oct08
JanOt May 09 Aug'09
Nov09
Mar 10
shading
Not: Gtcy shading
indicutesNBRRdated r ,ecson
peridc L ghter
rflects thetetumtoGDPgrowth in Q32009.
Snc .JrC MajorityStaffcalculations basedon data frmihe U. S. Dpan et ofthe Treasury and the Financial Times
Indeed, the percentage of small business owners holding a business
loan or credit line each fell almost 20 percent within the last year.14 0
Banks may have stopped tightening their lending standards to small
businesses, but they have not loosened them, which is why small
businesses are still suffering. 14 As a consequence, Dr. Krueger says
that may explain why "the segment of employers that are lagging most
behind now in hiring is small businesses." 4 2 (See Figure 25)
Elaborating on the link, he says that small companies have been
60
"unable to access credit to maintain employment when demand for
their products collapsed in 2008."l43
Figure 25. Monthly Hiring at Firms Since the Start of the Recession
Jnuary2008- Febrary 2010
4,000
500
1,000
3,500
3,000
z
2,500
0.
Jan,08
.
Jul 08
Jan'09
.
Jul 09
Jan'l0
2,000
Jan08
Jul08
Jan'09
Jul'O9
Jan'l0
JEC MajorityStaffbasedondatafromtheBureauof LaborStatistics,JobOpeningsandLaborTurnoverSarey.
Soorce:
The slowdown in hiring by small businesses has dramatic implications
for the recovery of the labor market. Figure 26 depicts the steady
decline in hiring by small businesses even as the economy has shown
signs of recovery. From 2001 to 2007, small businesses averaged 44.4
million new hires per year. In 2008 small businesses hired 40.7 million
workers and by 2009 small businesses hired only 35.5 million people,
20 percent below its 2001-2007 average.
Figure 26. Small Business Hiring
Numberef Hireat Busineses With Less b.
250 Emploees
60,000
On aveae small businesses
made 444 milion. hires per year
between2001 and 2007.
45000
5,000
0
----
200
Soure
JEC
----
Majority Sinffba-d
-
--
200
2003
enda
o,
a-
-
'004
2005
t 02he Bueau of Labor SIaI.ic.
-----
2007
2006
!,b Open.gs
a-d L. bor
2008
200Q
Tumor Survey.
In contrast, large businesses have fared better and "increase[d]
employment in 5 of the 6 months since September 2009."144 According
to Dr. Krueger, "Larger companies, which also faced frozen credit
markets and declining product and market demand in the fall of 2008,
eventually had access to corporate debt markets, which enabled them
to reduce layoffs and expand employment as the financial markets
improved in 2009."l45 Their expansion, however, has not offset the
large declines in job creation by small businesses, further highlighting
the tight link between the health of small businesses and the health of
the labor market. The contraction in small business hiring meant that
the economy generated over 8 million fewer jobs in 2009 than in 2007
(See Figure 26).
Limited access to credit for new small businesses
-
startups -
poses
a threat to short-term job creation as well as long-term job creation and
economic growth. Dr. Krueger notes that he is "particularly worried
about startup companies... .Another set of problems revolve around
startups, and trying to support new businesses to form, because
ultimately, will be the source of job growth in the future."' 6 Based on
Census data that has tracked businesses from 1977 to 2005, one paper
concluded that "without startups, there would be no net job growth in
the United States economy."1 4 7 Moreover, the economy relies heavily
on startups to translate the most innovative ideas coming from basic
research into the tangible products that enhance productivity and
improve quality of life - such as. the Internet, new forms of
telecommunications, and medical breakthroughs. The particularly tight
credit conditions facing small businesses have inhibited the emergence
and growth of startups, which depresses job creation, entrepreneurship,
and innovation in the economy. Many innovative ideas that have
commercial promise are therefore being left on the table.
The credit conditions facing small businesses have dire implications
for small businesses and their ability to create jobs, and Congress is
considering a number of proposals to ease the flow of funding to small
businesses to help them expand and create jobs.
In the 11 1 th Congress, the House of Representatives passed legislation
aimed at increasing the supply of available credit from banks. For
example, the Small Business Lending Fund Act of 2010 (H.R. 5297),
which recently passed the House of Representatives, would authorize
the Secretary of the Treasury to establish a $30 billion lending fund
especially geared toward expanding small business credit access. This
Fund would provide additional funds to community banks at interest
rates tied to the amount of lending they provide to small businesses.
Community banks would be charged a lower interest rate that will
depend on the amount of lending community banks extend to small
businesses. H.R. 5297 would also fund a $2 billion State Small
Business Credit Initiative Program administered by the Department of
the Treasury. The State Small Business Credit Initiative Program
would provide funding to state programs designed to aid small
businesses. Recognizing the importance of startups as a source of job
creation, H.R. 5297 would also help promising small business start-ups
by channeling investment capital through public-private partnerships.
These public-private partnerships should help small businesses secure
financing by expanding the assets accepted from small businesses in
exchange for financing.
Additionally, the House of Representatives passed the Small Business
Jobs Tax Relief Act of 2010 (H.R. 5486) in order to stimulating credit
demand. H.R. 5486 would increase both the capital gains tax cut for
those who purchase equity in small businesses and the deduction for
startup expenditures in connection with investigating the creation of a
business. Congress has also acted to encourage lending to small
businesses by raising the loan guarantee limits on SBA loans. As Dr.
Krueger emphasizes, "[R]aising the cap [on 7(a) loans] to $5 million
...will open up kind of a new segment for SBA lobes with potential
beneficial consequences for job growth."'14 Additionally, legislation
passed in 2009 by the House of Representatives, the Small Business
Financing Investment Act of 2009 (HR. 3854) would increase the
SBA's loan guarantec limits for 7(a) loans, which are designed to fund
general business activities , from $2 million to $3 million. It would also
increase the SBA's loan guarantee limits for 504/CDC loans, which are
designed to help small business finance the acquisition of fixed assets
such as a building, from $2 million to $3 million for standard
borrowers. The Senate has not yet acted on this legislation.
FederalSpending on R&D May "Prime the Pump" For Growth
The immediate problems facing the U.S. economy and labor market
requires urgent attention from policymakers. At the same time,
however, policymakers should not neglect the importance of
strengthening the economy and creating jobs in the long-term. In
particular, federal support for innovation right now will plant the seeds
for the emergence of new small businesses formed by entrepreneurs,
new industries, and a more dynamic and resilient economy.
Investments in research and development (R&D) yield large economic
returns. For example, the founders of Google - Sergey Brin and Larry
Page
used funding from the National Science Foundation to conduct
their research on the innovative search engine that led to the
establishment Google, which now employs close to 20,000 workers.149
FederalFunding of Basic Research is Crucial
Basic research is perhaps the most important element of the R&D
chain, However, society cannot rely solely on the private sector to fund
basic research. Businesses underinvest in basic research because they
cannot capture, and hence ignore, the full economy-wide returns from
basic research, since the results - such as the discovery of the
structure of DNA - cannot usually be patented and are free for
everyone to use.o50 The federal government, however, focuses on
economy-wide returns and thus has a pivotal role in helping to fill the
64
funding gap for basic research. The federal government's role is
highlighted in Figure 27 which shows that the federal government
funded over half of all basic research in 2008."' Both society and the
economy have benefited tremendously from this federal investment. As
Dr. Samuel L. Stanley, President of Stony Brook University, explains,
"[F]ederal investment in basic research makes the innovation frontier
endless. Precisely because basic research is inquiry-driven, not
objectives-driven, we can't tell in advance what the results will be. But
sixty years of federal investment has proven its value, from lasers to
the MRI to the Internet. It is the inexhaustible fountain of youth that
"152
will keep our economy ever green.
Figure 27. Sources of Funding for R&D
2008
Federal
Government
26%
Business
67%
OtherNonprofit
3%
andColleges
Universities
4%
2008Data
Foundation,
Naional PatternsofR&D Resources:
JECMajorityStaff based
ontheNationalScience
Source:
Update,
Figure4-2.
FederalSupportfor University Research Can Spark Regional
Economic Growth and Job Creation
The federal government channeled approximately 60 percent of its
basic research funds to universities in 2008, and universities have
helped commercialize federally-funded research to transform local
economies through the formation of "innovation clusters," typically
53
areas with a large concentration of businesses in high-tech industries.1
Across the country, innovation hubs have spurred productivity, job
creation, and growth at both the local and national level. Federal
support for university research has driven the emergence of innovation
clusters because the cutting-edge ideas coming from universities are
central to the startup companies that create these clusters.
However, the research findings by themselves have not spurred the
proliferation of innovation clusters. A crucial ingredient has been
efforts by universities to make those ideas commercially attractive;
universities have emerged as both producers of ideas and active players
in the innovation chain. These startups are among the most successful
small businesses. They have emerged as sparkplugs for
entrepreneurship that have fueled the emergence and growth of
innovation clusters. Many universities have adopted novel approaches
to enable faculty and students to become entrepreneurs who form local
startups that develop commercially viable products arising from their
research. The university-propelled startups spark the virtuous cycle of
startup formation, job creation, and knowledge generation that
characterizes innovation hubs. And these startups may even be more
successful than startups driven by the private sector. One proponent of
this view is Dr. Stanley, who suggests, "Companies spun out of
research universities tend to perform better than typical startups, hav[e]
better success rates and becom[e] public
companies at a greater rate
15 4
businesses."
new
for
average
the
than
These university-propelled innovation hubs generate numerous
economic benefits for local economies. They create jobs and enhance
growth in the communities that surround universities. Dr. Stanley
explains, "The companies universities help to create often locate close
by, creating local jobs, attracting other research-intensive businesses
and stimulating growth of supporting industries. Good jobs beget other
good jobs."' Along these lines, "job multipliers" may exist: One
paper estimated that an additional job created in a city's high-tech
sector created an additional 4.9 jobs in the city's nontradable sector. 56
(The nontradable sector produces goods and services that can't be
traded, such as housing.) The startups that proliferate in innovation
clusters generate jobs themselves but also drive job creation elsewhere.
Innovation ecosystems not only stimulate local economies, but they
also provide significant economic benefits to the nation as a whole.
Substantial research suggests that companies and even workers can
perform better within an innovation cluster than outside of one, partly
due to spillovers of knowledge and skills: Workers and firms can learn
from each other. Therefore, the nation can benefit when firms, as well
as workers, in high-tech industries are located closely to each another.
These benefits create incentives for other companies, startups, and
highly-skilled workers to locate themselves in university-driven
innovation clusters. For example, operating within an innovation hub
can result in:
Higher Firm Productivity. Firms can benefit by being close to other
firms in the same industry. Research has suggested that the number of
firms within a particular high-tech industry is positively associated
with firm productivity. 15 7 Another paper provided evidence that the
arrival of a new company in a region can actually increase the
productivity of companies within similar industries.15 8
Lower Input Costs. The businesses that innovation hubs attract need
not be in the industry that is most prominent there. Specifically, there is
evidence that suppliers of inputs to the main firms in the hubs (such as
the suppliers of equipment to biotechnology firms) may move there to
lower transport costs, which makes the supply chain more efficient and
further stimulates business formation and job creation in the region. 59
This would also lower costs for the main firms, which translates into
more profits to be used, for example, on R&D and hiring.
A Well-Educated Workforce. Many of the benefits for local economies
may also come from the labor market dynamics that arise from
innovation clusters. Highly-skilled workers are attracted to areas with a
large presence of innovative companies. This makes it easier for them
to find companies that are good matches for them and increases their
overall probability of finding a job. Moreover, the presence of a
highly-educated worker can actually influence another worker's
productivity through knowledge or skill spillovers. One paper
demonstrated how highly-skilled workers, especially those working in
the same industry, can increase each other's productivity (as reflected
in firm-level productivity).1 60 Building a large community of highlyskilled workers could increase the productivity of firms in the region
and benefit the workers themselves through enhanced, portable
knowledge or skills. These effects may even spill over to members of
the community as a whole.
Better Match Between Employee and Employer. Firms may prefer to
be in innovation clusters because they can more easily find workers
who are better matches for the firm as well as fill vacancies quickly.
Moreover, the students - particularly graduate students - coming
from the universities at the center of these ecosystems are crucial to
these employers, for they are in a unique position to understand the
research underlying high-tech commercial products and help develop
them further. Startup firms would be running blind if they lacked
workers unfamiliar with the research. By providing funding to students
who would otherwise be unable to pursue graduate studies, the
government is helping to create a workforce that has the expertise to
absorb and utilize findings from university research.
More Entrepreneurs. The presence of a highly-educated workforce not
only supports local businesses and the local economy as a whole, but
encourages other businesses to open up there and create jobs. Research
has shown that "areas that possess more skilled labor also possess
higher rates of self-employment and more skilled entrepreneurs."1
Thus, one way for the federal government to promote entrepreneurship
is to provide greater support for universities, which could enlarge the
pool of highly-skilled workers.
More Ideas, More Startups. Innovation hubs help bring together
individuals - including faculty and those working in the private-sector
- and promote the formation of social networks where cutting-edge
ideas are discussed or even generated. These ideas can eventually
become the seed of a successful startup. Federal funding is crucial
because they provide financial support for faculty and graduate
students, and increases in federal funding can expand the pool of
students and faculty working at the frontiers of knowledge. This
enhances the vitality of the social networks, the brainstorming that
could result in breakthrough ideas, and the emergence of successful
companies.
The federal government plays a key role in the formation of innovation
ecosystems and regional economic growth. By supporting university
research, the government expands the knowledge base that universities
tap into to foster startup creation and the emergence of innovation
hubs.
The Federal Government Can Do More to Support Innovation and
Entrepreneurship
Congress and the Administration could do more to support innovation
and small-business creation in local economies and drive the creation
of innovation clusters. Mr. Shulman suggests that the federal
government establish a program similar to New York's Qualified
Emerging Technology Companies Incentive Program, which provides
tax credits for small businesses that produce goods and services in
areas such as biotechnology and advanced materials.162 This could
encourage the expansion of startups and promote job creation and
innovation.
In addition, Congress and the Administration can enact policies that
make it easier for immigrants to stay in the U.S. and use their
knowledge and entrepreneurial skills to form startups and create jobs
for U.S. workers. Dr. Robert Litan, Vice President for Research and
Policy at the Kauffman Foundation, argues that "immigrants account
for a disproportionate share of startups of successful high-tech
companies, new enterprises generally, and patents. These immigrants
bring both skills (often acquired at U.S. universities) and
entrepreneurial drive to their efforts." 6 3 One policy reform he
suggested would be to grant "entrepreneurs' visas."1 Specifically,
immigrants who "establish enterprises here should receive an
immediate temporary visa, and then a time-limited visa, perhaps for
five years, once they hire at least one non-family member."' 6 s This
policy would expand the pool of entrepreneurs and the formation of
small businesses that are the engine of job creation.
Innovation in the Clean Energy Sector
The benefits of innovation typically come in the form of higher
productivity, enhanced job creation, and improvements in quality of
life. However, innovation can also strengthen the economy by making
it less vulnerable to recessions. The clean energy sector is one area
where federal support for innovation can help the U.S. avoid economic
downturns.
The lack of a clean energy policy in the U.S. sustained the nation's
dependence on oil and contributed to the Great Recession by making
consumers more vulnerable to the spikes in oil and gasoline prices that
occurred in 2007-2008. Rising oil and gasoline prices forced
consumers to cut back spending on other goods and services, which
hurt businesses and their employees. Moreover, many businesses such as retail establishments - had to pay more to transport their
products to stores, which lowered their profits and ability to expand
and create jobs.167
The nation's dependence on petroleum consumption may make the
country more susceptible to recessions in the future. Looking at the
relationship between oil prices and past recessions, it appears that
when oil expenditures reach 4 percent of U.S. GDP, the U.S. is at risk
of falling into a recession.' 6 8 (See Figure 28) Reducing the nation's
dependence on petroleum consumption will lower overall oil
expenditures, help prevent oil expenditures from reaching 4 percent of
U.S. GDP, and make the economy less vulnerable to a recession.
Figure 28: Oil Expenditures
Monthly Oil Expenditue as a Percentage
of GDP.January 1965to May 2010
2%
Oilspendingabove
4%iscie
'S6%
4%
2%
1965
1970
197
190
I990s
198
100
200
IW5
2010
Not. Greyshading
indicate NBERdatedrecessio periodsLightershading reflectsthe retum toGDP growh i Q32009.
Source .ames Harnion. MAore
on Oil Pces and t EconomicRcover. April 15. 2010. www ecobrowercent
To lower the risk of falling into another recession, policymakers should
adopt a two-pronged strategy that both increases funding for research
on clean energy and promotes investment in new transportation
choices. These are complementary, mutually reinforcing approaches to
reducing the nation's reliance on petroleum. Increasing R&D funding
for the development of affordable and accessible sources of clean
energy is a necessary step to develop sources of energy that makes the
country less dependent on petroleum. To complement R&D funding
for clean energy, policymakers should also devote significant levels of
funding toward developing new transportation choices that will further
reduce the country's reliance on petroleum. For example, expanding
mass transit and making cities more accessible to pedestrians and
cyclists lowers the nation's overall consumption of gas and less
susceptible to fluctuations in oil prices.
If petroleum maintains its prominence as an energy source, oil price
increases will continue to hurt the economy in many ways. They will
reduce consumer confidence and spending on other goods and services;
lower the prices of homes located in exurbs; shrink the demand for
automobiles; and raise the cost of transporting goods. These potential
developments will lower overall spending in the economy, decrease
household wealth, and increase income insecurity. Ominously, these
were the same developments that contributed to the Great Recession,
and policymakers can prevent them from occurring, and build a more
robust economy, by supporting the development of alternative fuels
and promoting new transportation choices. Policies that lower the
nation's reliance on petroleum will reduce the economy's vulnerability
to volatile oil prices and yield long-run returns in the form of greater
economic stability. 6 9
CONCLUSION
At the start of 2009, the economy was on the brink of disaster.
However, by the start .of 2010, the economy was growing, and the
private sector created 600,000 jobs in the first half of the year. In just
one year, then, the real possibility of economic calamity gave way to
confidence that the fragile economy was slowly recovering. Swift and
sensible policies enacted by both Congress and the Administration,
including the Recovery Act and continued extensions of
unemployment insurance benefits, bolstered the economy and
supported struggling American workers. Indeed, estimates by both the
CBO and CEA suggest that the Recovery Act has made a large,
positive impact on the economy. By many measures, fiscal stimulus
has succeeded at getting the economy back on track.
However, the severity of the Great Recession left long-lasting scars on
the economy that will take time to heal. Moreover, the labor market,
already weak due to the anemic job growth during the Bush
administration, was in no position to handle these blows. The Great
Recession left policymakers with the challenge of dealing with a record
level of long-term unemployment, a paucity of job openings per
unemployed worker, and an historically low rate at which workers
exited unemployment. Although the labor market is on the right
trajectory, it suffered from such severe trauma during the Great
Recession that it will take time before it returns back to good health.
Some groups will face a more difficult uphill climb than others,
however. In particular, African American and Hispanic workers, as
well as young workers, suffered disproportionately during this
recession. Moreover, workers residing in states particularly rattled by
the collapse of the housing market - such as
California, Florida, and Nevada -- are going to find it difficult to get
back to work while the economic climate in their states remains grim.
However, bright spots emerged in the first half of 2010. In the first half
of 2010, manufacturers which had reduced their payrolls
substantially during the Great Recession - registered the largest sixmonth gain in employment since 1998. The leisure and hospitality
sector has also started to rebound, with employment rising by 123,000
jobs in the sector in the first half of 2010.
This report has identified ways to sustain and speed economic
recovery: extending unemployment insurance benefits, alleviating the
tight credit conditions facing small businesses, improving job training
programs, and investing in basic research. These are all federal
investments that will yield dividends in both the short run and the long
run.
However, there has been growing concern that short-term deficits will
imperil the future of the country. True, policymakers should avoid
enacting policies that will substantially raise the budget deficit
whenever it is prudent. However, cutting back on emergency measures
targeted toward sustaining the economic recovery - such as increased
aid to states or extended unemployment insurance benefits - is not
only imprudent, but fiscally irresponsible. The recession is responsible
for much of the increase in short-run deficits. As economic recovery
moves forward, fiscal stimulus will become less necessary.
The gravest threat to America's fiscal balance sheet is a premature end
to the recovery. Fiscal stimulus has been effective at boosting
economic growth and employment, but calls to end further fiscal
stimulus while the economic climate remains in trouble, if followed,
could short-circuit the nascent economic recovery, plunge the economy
back into recession, and darken the long-term budget outlook.
It is the long-term budget outlook, not the short-term outlook, that
policymakers should focus on. A long-term plan to rein in budget
deficits and put the nation on a fiscally sustainable path is what is
required today. Congress and the Administration have focused on this
problem by passing Pay-As-You-Go legislation to manage short-term
deficits, and the Administration established the National Commission
on Fiscal Responsibility and Reform to devise a plan to make the
country's long-term fiscal trajectory sustainable.
The economy has a long road to tread before it fully heals. However,
continuing to enact targeted, cost-effective policies will push the
economy along and reduce the likelihood that it falls into an abyss.
' Bureau of Labor Statistics (BLS). Current Establishment Survey, Table B-1.
Employees on nonfarm payrolls by industry sector and selected industry
detail; see BLS, "The Employment Situation - June 2010," Press Release for
current data; and BLS, "Census 2010 temporary and intermittent workers and
Federal government employment" for details on Census hiring, available at
http://www.bls.gov/ces/cescensusworkers.pdf.
2 BLS. Current Establishment Survey, Table B-1. Employees on nonfarm
payrolls by industry sector and selected industry detail.
Ibid.
4Ibid.
6
Ibid.
6lbid.
'Ibid.
9 Ibid.
1o Ibid.
" Jeffrey Joerres. Testimony before the Joint Economic Committee hearing on
"Prospects for Jobs and Growth." February 26, 2010. All testimony before the
JEC referenced in this report can be found at
http://jec.senate.gov/public/index.cfi?p-HearingsCalendar.
I2ibid.
ibid.
l3
14BLS. Current Establishment Survey, Table B-1.
" Ibid.
16 Ibid.
" Ibid.
" Ibid.
'9 Ibid.
Joint Economic Committee. "Understanding the Economy: State-By-State
Snapshots, June 2010". The report is available at
http://iec.senate.cov/public/index.cfm?p=Reports l&ContentRecord id=e515b
Icf-ba35-4611-8014-a74d9b8ac209
21 The unemployment rate today is even higher than the 10.8 percent postwar
peak during the 1982-83 recession after controlling for population
demographic changes. See Elsby, Michael W., Bart Hobijn, and Aysegul
Sahin. "The Labor Market in the Great Recession," Papers on Economic
Activity, forthcoming. The paper is currently available as NBER Working
Paper 15979. May 2010, cited in Testimony of Dr. Lawrence Katz for the
Joint Economic Committee hearing on "Long-Term Unemployment: Causes,
Consequences, and Solutions." April 29, 2010.
22 Congressional Budget Office. "The Budget and Economic Outlook: Fiscal
Years 2010 to 2020." January 2010. Also, Board of Governors of the Federal
Reserve System. "Monetary Policy Report to Congress." February 2010.
23 Christina D. Romer, Chair, Council of Economic Advisers. "From
Recession to Recovery: The Economic Crisis, the Policy Response, and the
Challenges We Face Going Forward." Testimony before the Joint Economic
Committee hearing on "The Economic Outlook." October 22, 2009.
24 For more detail, see the 2009 Joint Economic Committee Annual Report. In
see Figures 1-3.
particular,
s For more information, see the transcript from the Joint Economic
Committee hearing on "The Challenge of Creating Jobs in the Aftermath of
the 'Great Recession."' December 10, 2009.
BLS. Job Opening and Labor Turnover Survey (JOLTS) at
http://data.bis.gov/PDQ/servlet/SurveyOutputSerylet?data-tool=latestnumbe
rs&series id=JTSOOOOOOOOJOL.
2' Although workers can exit unemployment by finding a new job, they can
also exit unemployment by leaving the labor force entirely. In other words, an
exit from unemployment need not imply that someone has been reemployed.
20
Moreover, unemployment inflows take into account both workers who have
lost their jobs and labor force reentrants who have not found ajob.
28 Elsby et al., p. 14.
29 Elsby et al.,
p. 30.
Dr. Till von Wachter (201 Oa). Testimony before the Joint Economic
Committee hearing on "Long-Term Unemployment: Causes, Consequences,
and Solutions." April 29, 2010.
30
32 Ibid.
3 Ibid.
34 Ibid.
34 Ibid
36 Ibid.
36
Ibid.
37
ibid.
38 Shimer, Robert. "The Probability ofFinding a Job," American Economic
Review: Papers & Proceedings. May 2008.
39 Center for Budget and Policy Priorities. (2010a). "Recession Continues to
Batter State Budgets; State Responses Could Slow Recovery." June 10, 2010.
40 Center of Budget and Policy Priorities. (201 Ob). "An Update on State
Budget Cuts." May 25, 2010.
41 Ibid., p. 10.
42 Ibid., p. 9.
43 Ibid., p. 9.
4 Ibid., p. 10.
45
Ibid., p.10-11.
46
Ibid., p.11.
47
Ibid.,p. 11.
48
Katz (2010).
49 Ibid.
soDr. Harry
J. Holzer. Testimony before the Joint Economic Committee
hearing on "Avoiding a Lost Generation: How to Minimize the Impact of the
Great Recession on Young Workers." May 26, 2010. .
s' BLS. Current Population Survey. For more information on the topic, see
Joint Economic Committee Majority Staff report. "Understanding the
Economy: Long-Term Unemployment in the African American Community."
February 2010. The report is available at
http://iec.senate.gov/public/index.cfim?a=Files.Serve&File id=f7a324ea4998-4a96-aeea-0265a3a68aae.
52 Ibid.
1 Ibid.
54
Ibid.
5 Ibid.
56 BLS. Current Population Survey, Table
12.
57
For information on the employment situation of women during the recession,
see Joint Economic Committee Majority Staff report. "Women in the
Recession: Working Mothers Face High Rates of Unemployment." May 2009.
5 For more details on this topic, see Joint Economic Committee Majority
Staff report. "The Earnings Penalty for Part-Time Work: An Obstacle to Equal
Pay." April 20, 2010. The report is available at
http://iec.senate.gov/public/'?a=Files.Serve&File id=c8242af9-a97b-4a979a9d-f7f799991 l ab.
" Ibid.
6 Ibid
61 Ibid.
62 BLS. Current Establishment
Survey.
6
3For more details on this topic, see Joint Economic Committee Majority Staff
report. "Understanding the Economy: Unemployment Among Young
Workers." May 2010. The report is available at
http://iec.senate.gov/public/index.cfm?a=Files.Serve&File id adaef80-dl f3479c-97e7-727f4c0d9ce6.
6 BLS. Current Population Survey.
65 Ibid.
Ibid.
67
Ibid.
6"
Ibid.
Ibid.
Dr. Till von Wachter (2010b). Testimony before the Joint Economic
Committee hearing on "Avoiding a Lost Generation: How to Minimize the
Impact of the Great Recession on Young Workers." May 26, 2010.
71 Ibid.
72 Ibid.
n Ibid.
69
70
74
Ibid.
Holzer (2010).
David R. Jones. Testimony before the Joint Economic Committee hearing
on "Avoiding a Lost Generation: How to Minimize the Impact of the Great
Recession on Young Workers." May 26. 2010.
" Joint Economic Committee Majority Staff report. "The Subprime Lending
Crisis: The Economic Impact on Wealth, Property Values, and Tax Revenues,
and How We Got There." October 2007. This report is available at
http://iec.senate.govipublic/index.cfm'?p=Reportsl&ContentRecord id-c6627
bb2-7e9c-9af9-7ac7-32b94d398d27&ContentTypc id=fc78dac-24bl-4196a730-d48568b9a5d7&Group id-cl20e658-3d60-470b-a8aI6d2d8fc30132&MonthDisplay=10&YearDisplay-2007
7
76
Katz (2010). According to Dr. Katz, economic distress in these states is
slowing "the labor mobility from declining to expanding regions that
ordinarily helps drive U.S. job recoveries."
7 H.R. 4213 was amended on the floor of the Senate and passed on March 10,
2010. The House added additional amendments during their reconsideration
of the bill and passed the amended version of H.R. 4213 on May 28, 2010.
The Senate is currently considering the bill on the floor after adding an
amendment to extend unemployment insurance.
80 The Senate-passed bill amended the House bill to include funding for the
wars in Afghanistan and Iraq, and humanitarian aid to Haiti. In July, the
House passed an amended version of this legislation, which includes
additional domestic spending.
81 Congressional Budget Office. "Estimated Impact of the American Recovery
and Reinvestment Act on Employment and Economic Output from January
2010 Through March 2010." May 2010, p. 2.
78
82 Ibid.
83 Council
of Economic Advisers (CEA 2010a). "The Economic Impact of the
American Recovery and Reinvestment Act of 2009: Fourth Quarterly Report,"
first page of Executive Summary.
84
Ibid., p. 12.
85
Ibid., first page of Executive Summary.
86
From www.recovery.gov.
87 Council of Economic Advisers. (2010b). "The Economic Impact of the
American Recovery and Reinvestment Act of 2009: Third Quarterly Report,"
second page of Executive Summary.
88 Council of Economic Advisers. (2010a).
p. 29.
89
Ibid., second page of Executive Summary.
90
Ibid., p.36.
9' Douglas W. Elmendorf, Director of the Congressional Budget Office.
Testimony before the Joint Economic Committee hearing on "The Road to
Economic Recovery: Policies to Foster Job Creation and Continued Growth."
February 23, 2010.
92 von Wachter (20 1Oa)..
93 Joint Economic Committee Majority Staff report. "Extending
Unemployment Insurance Benefits: The Cost of Inaction for Disabled
Workers." May 2010. The report is available at
(http://jec.senate.gov/public/?a-Files.Serve&File id=d5003466-eb78-4a91b5bl-eb99c2982166).
94 Valletta, Rob and Katherine Kuang. April 19, 2010. "Extended
Unemployment and UI Benefits." Federal Reserve Bank of San Francisco.
(http://www.frbsf.org/publications/economics/letter/201 0/el2010-12.html).
9 Kaiser Family Foundation (http://www.kffor/uninsured/upload/7875A.dl) and FamiliesUSA (http://www.familiesusa.ore/assets/pdfs/cobra2009.df).
" Statement of Douglas W. Elmendorf, Director of the Congressional Budget
Office, to the Joint Economic Committee. February, 2010.
9 Bureau of Labor Statistics. "The Employment Situation: June 2010."
Released June 4, 2010.
98 Blinder, Alan S. "Getting the Biggest Bang for Job-Creation Bucks." The
Washington Post, February 19, 2010.
99 Elmendorf (2010).
100 Joint Economic Committee Majority Staff 2010 Jobs Questionnaire.
01 In a recent report entitled "Estimates of Newly Hired Employees Eligible
for the HIRE Act Tax Exemption," the Treasury Department estimated that,
from February to March 2010, "4.5 million workers who had been
unemployed for eight weeks or longer were hired by employers who are
eligible for the HIRE Act payroll tax exemption." The report can be found at
http://www.treas.gov/ress/releases/docs/lIIIREAct-Analysis-7-11-2010FINAL.pdf.
102
The employee must have begun employment with a qualified employer
after February 3, 2010 and before January 1, 2011. Moreover, they must have
been unemployed or employed for up to 40 hours during the 60-day period
prior to when they were hired; could not replace an employee at the qualified
employer unless that employee quit or was fired for cause; and who were not
family members of the qualified employer or related to the qualified in other
ways specified by the legislation. Details can be found at
ittp://www.irs.uov/businesses/small/articlc/0,,id=220745.00.html.
"'3 Dr. Richard Berner, Managing Director, Co-Head of Global Economics
and Chief U.S. Economist at Morgan Stanley. Testimony before the Joint
Economic Committee hearing on "The Road to Economic Recovery:
Prospects for Job Growth." February 26, 2010. According to Dr. Richard
Berner, "For years, employers have complained that they don't find the skills
they need in today's workforce. Worker skills have greatly lagged technical
change and tectonic shifts in the structure of our economy.... massive
dislocations in several industries in recession have magnified that mismatch as
workers who have been trained for one occupation lose their jobs."
'" Bureau of Labor Statistics, Current Population Survey, June 2010.
105 Bureau of Labor Statistics, "College Enrollment and Work Activity of
2009 High School Graduates," April 27, 2010.
httD://www.bls.cov/news.release/hsgec.nrO.htm
06 Community-college students are much less likely to apply for financial aid
than students at four-year colleges and universities. In the 2005-2006
academic year, for example, 34.1 percent of students at public two-year
colleges applied for aid compared to 59.2 percent of students at public fouryear colleges and universities.
107 Beyond investing in financial aid for students, Congress passed the College
Cost Reduction and Access Act (H.R. 2669) in 2007 which allowed for
income-based repayment of student loans for borrowers experiencing "partial
financial hardship." Beginning July 1, 2009, loan repayment for eligible
borrowers is capped at 15 percent of their discretionary income, which is
reassessed each year. Any outstanding balance would be forgiven after 25
years. As part of the newly-signed health care legislation, Congress and the
Obama administration lowered the threshold and maximum payments to 10
percent of a borrower's discretionary income, and shortened the period of
repayment before any outstanding balance is forgiven to 20 years. Those
changes will apply to new borrowers after July 1, 2014. Additionally,
borrowers facing unemployment or other extreme economic hardship can also
qualify for a deferment for up to three consecutive years.
los Community college enrollment increased from 3.1 million young adults in
Fall of 2007 to 3.4 million in Fall, 2008, an 11.8 percent increase, according to
data from the Census Bureau analyzed by the Pew Research Center. "College
Enrollment Hits All-Time High, Fueled by Community College Surge,"
Richard Fry, Pew Research Center, October 29, 2009.
109
Katz (2010).
Joint Economic Committee Hearing on Youth Unemployment, May 29,
2010. Similarly, Dr. Berner testified that "Long-term solutions include
policies that keep students in schools and improve access to education,
reorientation of our higher educational system towards specialized and
vocational training and community colleges, and immigration reform."
Berner (2010).
" von Wachter (2010a).
112 For more information on the Job Training Corps., please see Berner (2010).
1 13
Ibid.
114 These workers who need to migrate from one sector to a new sector
have
been characterized as "industry migrants" by Manpower, Inc., a leading
temporary help services company. See Joerres (2010).
1.. Katz (2010). In his testimony, Dr. Katz explained the challenge this way:
"Many job losers from sectors such as construction and manufacturing may
face difficulties in making the psychological and financial adjustments as well
as gaining the training and education required for the new jobs available in the
(primarily service) sectors."
growing
116
Elmendorf (20 10).
117 For more information, see "Job Training That Works: Findings from the
Sectoral Employment Impact Study," Public/Private Ventures, By Sheila
Maguire, Joshua Freely, Carol Clymer and Maureen Conway, May 2009.
110
Testimony of Dr. Lawrence Katz before the Joint Economic Committee,
A ril 29, 2010.
von Wachter (201 Ob).
20 Joerres (2010).
121American Jobs and Closing Tax Loopholes Act
(H.R, 4213), passed by the
House of Representatives on May 28, 2010. included funding for 350,000
summer jobs for youth in 2010.
122 Jones (2010). "... I think just the notion of 'here's your check, come here,'
but at the end there is no connection to another employer, whether private or
public, there is no real definition of whether you did a good job or a bad job, I
think is a wasted opportunity with scarce money."
von Wachter (201 Oa), and Dr. Kevin Hassett. Testimony before the Joint
Economic Committee hearing on "The Road to Economic Recovery:
Prospects for Job Growth." February 26, 2010.
124 Ruffing, Kathy and James R. Homey. June 28, 2010. "Critics Still Wrong
on What's Driving Deficits in Coming Years." Center on Budget and Policy
Priorities. (http://www.cbpp.org/cms/index.cfi?fa-view&id=3036).
25 Exceptions are made for discretionary spending
and emergency spending.
ht.//www.fiscalcommission. ov/charter/
21 Congressional Budget Office. "An Analysis of
the President's Budgetary
Proposals for Fiscal Year 2011," March 2010. Note that the analysis reflects
legislation enacted through March 12, 2010. In particular, it does not account
for the effects of the Patient Protection and Affordable Care Act.
128Katz (2010).
Ibid.
Zachary J. Shulman, Managing Partner of Cayuga Venture Fund.
Testimony before the Joint Economic Committee hearing on "Fueling Local
Economies: Research, Innovation, and Jobs." June 29, 2010.
13 Honorable Dr. Ben Bernanke, Chairman of the
Board of Governors of the
Federal Reserve System. Testimony before the Joint Economic Committee
hearing on "The Economic Outlook."April 14, 2010.
132 Ibid.
133Groshen, Erica and Simon Potter. August 2003.
"Has Structural Change
Contributed to a Jobless Recovery?" Federal Reserve Bank of New York.
Current Issues in Economics and Finance. August 2003 (9): 8.
http://www.newyorkfed.org/research/current issues/ci9-8/ci9-8.htmi.
'3 Katz (2010).
"' Congressional Budget Office, "Policies for Increasing Economic Growth
and Employment in 2010 and 2011," January 2010.
Joint Economic Committee Majority Staff report. "Does Unemployment
Insurance Inhibit Job Search?" July 2010.
13n Ibid. See also unpublished data from BLS, Job Openings and Labor
Turnover Survey submitted in*Dr. Alan Krueger, Assistant Secretary for
129
30
Economic Policy and Chief Economist at the Treasury Department. (Krueger
2010). Testimony before the Joint Economic Committee hearing on
"Avoiding Another Lost Decade: How to Promote Job Creation." May 5,
2010.
138 Krueger (2010).
139 Bernanke. "Restoring the Flow of Credit to Small Business." July 12, 2010.
140 Dennis Jr., William J. "Small Business Credit in a Deep Recession". NFIB
Research Foundation, February 2010.
141Joint Economic Committee Majority Staff report. "Small Business
Employment: Tight Credit Standards Slow Hiring." May 2010.
142 Krueger (2010).
143 Ibid.
144 Ibid.
145
Ibid.
Ibid.
147Kane, Tim. "The Importance of Startups in Job Creation and
Job
Destruction." Kaufmann Foundation, July 2010, p. 1.
148 Krueger (2010).
149 The Science Coalition. "Sparking Economic Growth." April 2010, p. 109.
15o Joint Economic Committee Majority Staff report. "The Pivotal Role of
Government Investment in Basic Research." May 2010. This report is
available at http://iec.senate.gov/public/?a=Files.Serve&File id=29aac456fce3-4d69-956f-4add06fl I Icl..
151 Ibid.
152 Dr. Samuel L. Stanley Jr., President of Stony Brook University. Testimony
before the Joint Economic Committee hearing on "Fueling Local Economies:
Research, Innovation, and Jobs." June 29, 2010.
153National Science Foundation, National Patterns of R&D Resources: 2008
Data Update, Table 6.
154 Stanley (2010).
155 Ibid.
156 Moretti, Enrico. "Local Multipliers." American Economic Review Papers
and Proceedings(May 2010).
157Henderson, J. Vernon. "Marshall's Scale Economies." Journalof Urban
Economics (January 2003).
158Greenstone, Michael, Richard Hornbeck, and Enrico Moretti. "Identifying
Agglomeration Spillovers: Evidence from Winners and Losers of Large Plant
Openings." JournalofPoliticalEconomy (June 2010), pp. 536-598. This
paper also found that wages tended to increase as well, which cut into the
profits of firms.
159 Ellison, Glenn, Edward L. Glaeser, and William R. Kerr. "What Causes
Industry Agglomeration? Evidence from Coagglomeration Patterns."
American Economic Review (June 2010).
146
16o Moretti, Enrico. "Workers' Education, Spillovers and Productivity:
Evidence from Plant-Level Production Functions." American Economic
Review (June 2004). This paper also found that the productivity gains from the
knowledge spillovers are largely offset by real wage increases.
161 Doms, Mark, Ethan Lewis, and Alicia Robb. "Local Labor Market
Endowments: New Business Characteristics and Performance." Working
paper. October 2008.
62 Shulman (2010).
163 Dr. Robert Litan. Testimony before the Joint Economic
Committee
hearing on "Fueling Local Economies: Research, Innovation, and Jobs." June
29, 2010. Dr. Litan was unable to attend and Kauffman Foundation researcher
Dane Stangler delivered testimony on his behalf.
164
Ibid.
65Ibid. Note
that legislation has been introduced to make it easier for
immigrant entrepreneurs to stay in the U.S. Congresswoman Carolyn B.
Maloney, Chair of the Joint Economic Committee, introduced the StarUp Visa
Act of 2010 (H.R. 5193), which would provide visas for immigrant
entrepreneurs who have $250,000 in financial backing to launch a firm and
create jobs.
166Joint Economic Committee Majority Staff report. "Rising Oil Prices: A
Potential Threat to Economic Recovery and Energy-Efficiency Policies."
April 2010.
67
6
Ibid.
Ibid.
For more on this topic, see Peter Ogden, John Podesta,
and John Deutch,
"Ending the Inertia on Energy Policy: A New Strategy to Spur Energy
Innovation", Issues in Science and Technology,Winter 2008.
169
MINORITY
AND
ADDITIONAL VIEWS
MINORITY AND ADDITIONAL VIEWS OF SENATOR SAM
BROWINBACK AND REPRESENTATIVE KEVIN BRADY
INTRODUCTORY COMMENTS AND OBSERVATIONS
We submit these views without the benefit of reviewing the majority's
contribution. It is likely, however, that the bulk of the majority's
contribution will be a predictable assignment of blame for all the
nation's economic ills to past Administrations and Congresses as well
as an ideological "fairy tale" based on defense of stimulus, financial
services, and health care legislation. We will endeavor to present a
fact based review of both current economic data and the risks presented
by the continued pursuit of discredited tax and spend policies
advocated by the majority.
REVIEW OF SELECTED ECONOMIC DATA AND CONDITIONS
The economy entered into a recession in December of 2007, according
to the Business Cycle Dating Committee of the private, nonpartisan
National Bureau of Economic Research.
Total non-farm payroll employment in June 2010 stood at a level of
130.47 million, 7.48 million below the December 2007 peak in total
non-farm payrolls. Total non-farm payroll employment reached its
nadir in December 2009 at a level of 129.59 million, 8.36 million
below the December 2007 peak.
Private sector payrolls peaked at 115.57 million in December 2007,
declined to a low of 107.11 million in December 2009, and presently
stand at a level of 107.70 million - or 7.87 million below the
December 2007 peak.
On the other hand, government payrolls have actually increased during
the present economic downturn by 393,000. Since December 1999,
government payrolls have increased by 2.23 million, while private
sector payrolls have declined by 2.29 million jobs.
The number of individuals classified as unemployed in June 2010 was
14.6 million, 6.9 million more than at the beginning of the recession,
but 989,000 less than the October 2009 peak of 15.6 million.
Payroll Employment Since 2000
(Chagn.1lneto
nt lnthousand.s
2001
2002
2003
Source: Bureau of Labor Statistics
2004
2005
2006
2007
2008
2009
2010
Total and Private Employment Since Recession
(Chage in ttal and rivate empgyment inth
" Total empoyment
usands
" Private employment
2008
Source: Bureau of Labor Statistics
2009
2010
In December 2007, the unemployment rate stood at 5.0%. In October
2009, the unemployment rate peaked at 10.1% before declining to the
June 2010 rate of 9.5%. The peak of 10.1% represented the highest
level for the unemployment rate since April 1983.
Civilian Unemployment Rate
9.s%
June
(Percent of civilian labor force unemployed)
12%
0%
1951
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: Bureau of Lbor Statistics; gmeybars
deoae recessions
However, the recent apparent improvement in the "official"
unemployment rate is. in some respects. misleading.
For twelve consecutive months, year-over-year growth in the nation's
labor force has been negative. Prior to the current streak, the last time
any month registered a year-over-year decline in the nation's labor
force was July 1962. The nation's labor forcc peaked at 154.96 million
in May 2009, 1.22 million higher than the level of 153.74 million in
June 2010. Prior to year-over-year labor force growth tumnmg negative
in July 2009, the average monthly year-over-year growth in the labor
force since January 1980 was 1.32%. If historical labor force growth
had continued at that rate, the June 2010 labor force would have been
156.81 million or 3.06 million higher than the level reported by the
Bureau of Labor Statistics (BLS).
Under this scenario, if employment remained as reported, but the labor
force had grown at historical levels, the reported unemployment rate
would stand at a dizzying 11.3%. Even if the labor force had simply
maintained its June 2009 level, the unemployment rate would stand at
10.1%. Clearly, the apparent decline in the official unemployment
rate has as much or more to do with individuals dropping out of the
labor force as it does with more people becoming employed.
Other labor force measures continue to point to a bleak labor market.
For instance, the average duration of unemployment stands at 35.2
weeks, an all-time higher for tihe data series that began in January
1948. Prior to the current recession, the prior high was 21.2 weeks in
The BLS began reporting median durations of
July 1983.
unemployment in 1967. The June 2010 median duration of 25.5 weeks
of unemployment represents a series high. The pre-recession high was
12.3 weeks in May 1983.
The percentage of long-term unemployed is of particular concern
because research shows that the longer an individual is unemployed the
more difficult it is for him or her to re-enter successfully the work
force. In June 2010, among the unemployed the percentage of those
unemployed for 27 weeks or longer was 45.5%, slightly below the
series record (dating back to January 1948) of 46% reached in May
2010. Also, in June 2010, the percentage of those unemployed for 15
weeks or more stood at 60.3%, near the series peak of 61.3% in April
2010. Prior to the current recession, the series high for unemployment
of 27 weeks or more was 26.0% in June 1983 and for unemployment of
15 weeks or more was 41.1% in May 1983.
The Current Population Survey (CPS) labor force flows also reveal a
continuing narrative of galvanizing unemployment. For instance, in
June 2010 flows into "not in labor force" from unemployed reached an
all-time series high of 3.1 million. The pre-recession high for the series
that dates to 1990 was 2.0 million.
While the labor market remains depressed, growth as measured by real
Gross Domestic Product (GDP) has been positive in each of the last
three quarters after declining in five of the prior six quarters.
Economic Growth Since 2000
(inflation-adjusted annualized GDP growth)
6%
-------------
---- ---------- i---- --
26%
Ble 2%
Forecast
-----------
4%
6%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Bureau of Economic Analysis; Blue Chip EconomicIndicators 7/10/2010
Personal Consumption Expenditures (PCE) is a key component of
GDP comprising roughly 70% of Real GDP. During the 1st quarter of
2010, they comprised 70.7% of GDP near the all-time high of 71.3%
reached in the 3 quarter 2009. Over time, PCE has become an
increasingly greater share of GDP. For instance, over the course of the
1990s, PCE accounted on average for 66.6% of GDP, while it
accounted for 65.9% during the 1980s.
Other important components of GDP growth are investment,
particularly private non-residential fixed investment, and exports.
The makeup of the nation's personal income points to a disturbing
trend.
In January 2000, transfer payments to individuals from
government represented 12.1% of the nation's personal income. In
January 2009, transfer payments represented 16.0% of personal
income. In the most recent month that data is available for (May
2010), transfer receipts represented 18.0% of personal income.
Transfer Payments to Individuals from Government as a Percent of Personal Income
J18
200m
16.0%
14.0%
-
12.0%
10D%
1959 1962 1965 196
1971 1974 1977 1980 1943 1986 1949 1992 1995 1998 2001 2004 2007 2010
Since January 2009, personal income has increased by $299.2 billion to
an annual rate of $12.338 trillion in May 2010 from $12.038 trillion in
January 2009. Of that $299.2 billion increase, $281.4 billion is the
result of increased government transfer payments.
In other words,
94% of all income gains are the result of government transfer
payments.
Unfortunately, the current administration and the majority in Congress
have chosen to address the current economic crisis by placing faith in a
government of ever increasing size and greater intrusion into the
private sector and the lives of the nation's citizens.
It is our belief that this represents a misguided approach that threatens
to harm irreparably the nation's economic future.
THE SKYROCKETING NATIONAL DEBT AND GOVERNMENT
SPENDING
In the short time, that the current administration has been in office
(through July 12, 2010), the total national debt has increased by
$2,567,645,965,465.20 (more than $2.5 trillion). That translates into
nearly $4.8 billion per day, $199 million per hour, $3.3 million per
minute and more than $55,000 per second.
Under the current administration, the national debt is increasing at an
annual rate of 15.8%. This compares with an annual rate of increase
under George W. Bush of 8.0%. It is important to look not only at
administrations, but congressional control as well. The following
charts illustrate the path of the national debt by administration and
partisan control.
Annualized Rate of Increase in National Debt (Percent)
14%
12.67%
12%
10%
8%
6%
S.04%
4%
2%
0%
Republican Congress (1995-2006)
Democrat Congress (2007 - Date)
Annualized Rate of Increase in National Debt (Percent)
16%
Obama Administration
Bush Administration
Annualized Rate of Increase in National Debt (Percent)
12.67%
504%
Republican Congress (1995-2006)
Democrat Congress (2007.- Date)
Annual Rate of increase in National Debt by Session
N
1
N
%
N
N
NN
~
-.
1-.
.
N
1
Annualized Rate of Increase in National Debt (Percent)
18%
16%
14%
12%
10%
8%
18%
7%
16%
16%
7%
4%
2%
U0
I
I
Bill Clinton
with Dem
Congress
Bill Clinton
With Rep
Congress
George Bush
with Rep
Congress
George Bush
with Dem
Congress
Obama and
Dem Congress
The current administration and the majority are quick to point the finger of blame for the current fiscal situation. They resort to
assertions that when President Bush took office there were surpluses as.
far as the eye could see and that tax cuts "for the rich" plunged us into
massive deficits as far as the eye can see.
Those types of statements make for nice rhetoric, but lack any
foundation in reality.
The harsh reality of our current fiscal crisis is that the government
simply spends too much. And the budget submitted by the President in
February only exacerbates the situation by taking us further down an
unsustainable path. Perhaps in recognition of this folly, the majority
party has chosen not to bring a budget resolution to the floor of either
chamber. Having already voted to increase permanently the statutory
debt limit to over $14 trillion, it is understandable that they would not
want to be on record supporting a budget that does nothing to restrain
the growth of government spending and would reflect a deficit of more
than $1 trillion for the second year in a row.
As to the charge that tax cuts are the reason for our current fiscal
dilemma, a look at the hard data suggests that such a charge is, at best,
disingenuous. The Congressional Budget Office (CBO) recently noted
in a letter to Representative Maurice Hinchey that it was not possible to
estimate the actual revenue impact of the "Bush Tax Cuts."'
1Available at http://www.cbo.gov/ftpdocs/l l4xx/doc 1l492/HincheyLtr.pdf.
First, as to the assertion that President Clinton left the Bush
Administration "surpluses as far as the eye can see" one need look no
further than CBO's baseline estimates from January 2001 to recognize
that spending is the culprit.2 In January 2001, CBO's baseline for total
outlays from Fiscal Year 2001 through Fiscal Year 2009 totaled $19.1
trillion. For the same time period, the government spent $22.7 trillion - $3.6 trillion more than the January 2001 baseline.
CBO's total projected surplus in the January 2001 baseline for that
time period was $4.2 trillion. However, their projected on-budget
surplus was $2.2 trillion, while the off-budget surplus was estimated at
$2.0 trillion.
Roughly 48% of the projected surpluses were off-budget surpluses, for
example, money flowing into the Social Security and Medicare Trust
Funds.
To further illustrate the point, federal spending as a percentage of
GDP declined to 18.2% in Fiscal Years 2000 and 2001. In January
2001, CBO's baseline projection was for spending as a percent of GDP
to decline to 15.6% in Fiscal Year 2009. Instead, spending amounted
to 24.7% of GDP - a level last seen in Fiscal Year 1946 as World War
II was drawing to a close.
Even in the unified budget surplus years, revenues only exceeded 20%
of GDP only once. In Fiscal Year 2000, total receipts amounted to
20.6%. On only two other occasions have receipts exceeded 20% of
GDP. In 1944, receipts were 20.9% of GDP; in 1945, they were 20.4%
of GDP.
The historical data alone should make it clear that our economy has
never been able to sustain growth and government revenue takes in
excess of 20% of GDP. The notion that spending in excess of 23.5%
and higher of GDP is sustainable ignores economic reality, yet that is
exactly what the Administration has proposed.
We are at a crossroad. We simply cannot continue to spend our nation
deeper and deeper into debt. "The sharp run-up in public sector debt
will likely prove one of the most enduring legacies of the 2007-2009
financial crisis in the United States and elsewhere," concludes a recent
paper presented at the American Economic Association.
This important study reveals some compelling data and findings on the
relationship between significant buildups in government debt and
2
Available at http://www.cbo.gov/ftpdocs/27xx/doc2727/entire-report.pdf.
declines in economic growth. In their paper, titled "Growth in a Time
of Debt," economists Carmen Reinhart (University of Maryland) and
Kenneth Rogoff (Harvard University) utilize a comprehensive new
dataset to analyze the impact of government debt on GDP growth and
inflation. The study is particularly timely in light of the recent financial
crisis and ensuing buildup of government debt across the globe.
Although the authors do not distinguish between the causes of debt
buildups, they do note that peace-time debt buildups are more
problematic than those in war-time. Peace-time debts have no natural
end and can indicate unstable underlying political economy dynamics
which may endure for a long time. Because of the more harmful nature
of peace-time debt accumulation, the negative impact of the recent debt
buildup in the U.S. and across the globe may be more severe than what
these longer-term results, incorporating both peace- and war-time debt
buildups, would imply.
When comparing 20 advanced economies in the post- World War II
time period (1946-2009), Reinhart and Rogoff found a distinct debt
threshold-equal to 90 percent or more of gross domestic product
(GDP)-at which point debt level had a significantly negative impact
4
on GDP growth (see figure to below from the study). For countries
with debt levels greater than or equal to 90 percent of GDP (classified
as very high debt), median GDP growth was 1 percentage point below
that of countries with lower debt levels. Average growth levels
revealed an even greater impact: average GDP growth in countries with
very high debt was a full 4 percentage points below that of countries
with lower debt.
3 Reinhart, Carmen M. and Kenneth S. Rogoff, "Growth in a Time of Debt,"
December 31, 2009 draft, prepared for the American Economic Review
Papers and Proceedings.
4 The authors classified debt levels, by country and year, according to the
following four classifications: low (below 30 percent of GDP); medium (30 to
60 percent); high (60 to 90 percent); and very high (above 90 percent).
0-
30 to60%
6
60 to90%
30
5
2.0
.. 4
10
.3
DetlGDP
/
00-;2
Average
-10
-20
Median
Y
Av
ge
Median
Average
Medan
A
e
- 1-
.. _ . _ .
After growing substantially as a percent of GDP over the past decade,
gross federal debt in the U.S. exploded during the recent financial
crisis and is predicted to continue growing for the foreseeable future
due to rising spending levels and growing entitlement burdens.
Between 2008 and 2009. gross federal debt in the U.S. rose from 70%
of GDP to 84%, and is projected to reach 92% in 2010. The
Congressional Budget Office predicts the U.S. debt level will approach
100% of GDP by the end of the decade and will continue to rise
beyond that point due to growing entitlement burdens.s The findings
of this study reveal that the recent buildup in debt in the U.S.,
combined with proposed government spending increases over the
5 These are CBO's "baseline" budget projections, which assume that, among
other things, all expiring tax provisions, including EGTRRA and JGTRRA,
are not extended, and that the AMT is not patched or indexed for inflation.
following decade and impending budgetary pressure from entitlements,
could cause a significant and prolonged decline in American economic
growth.
For those who expect or hope that the U.S. can "grow" itself out of its
fiscal difficulties, Reinhart and Rogoff caution that, "seldom do
countries simply 'grow' their way out of deep debt burdens." Rather,
countries that have accumulated large federal debts must take
comprehensive action to reduce their debt levels. Before debt can be
reduced, however, it must stop accumulating. To allow our economy to
meet its long-run growth potential, current and future spending must be
brought into balance with revenues. If this is not done, the U.S. and
other countries that face similar fiscal situations risk rising interest
rates on debt burdens and the inability to finance current spending. As
Reinhart and Rogoff note, "Even countries that are committed to fully
repaying their debts are forced to dramatically tighten fiscal policy in
order to appear credible to investors and thereby reduce risk premia."
U.S. Gross Federal Debt as a Percent of GDP
The U.S. srpasses the "verybighldebt level threshold In2010
--Bbaseline projection
-- yery high~debt threshold
In addition to examining public debt levels, Reinhart and Rogoff
observed the effect of financial crisis on private debt. In contrast to
public debt, private debt tends to contract sharply for some time
following a financial crisis. The deleveraging of private debt tends to
exacerbate the post-crisis downturn by causing lower growth and
higher unemployment. In the U.S., in particular, the authors note that
private deleveraging is typically accompanied by very slow growth and
deflation. In relation to previous financial crises, the authors observe
that "the magnitude of the current deleveraging episode in the United
States has no counterpart in the post-war period."
This study serves as a warning to the United States and other countries
that have accumulated significant levels of government debt in
response to the financial crisis. While "outsized deficits and epic bank
bailouts" may be useful in combating a recession, higher government
debt levels- -particularly at a time of aging populations and rising
social insurance costs-pose a serious threat to long run economic
growth and well-being.
INCREASED UNCERTAINTY HAMPERS ECONOMIC RECOVERY
As the Chamber of Commerce of the United States noted in its open
letter to the President, Congress and the American People,
"Uncertainty is the enemy of growth, investment, and job creation.
Through their legislative and regulatory proposals-some passed,
some pending, and others .simply talked about-the congressional
majority and the administrationhave injected tremendous uncertainty
into economic decision making and business planning. This is why
banks are reluctant to lend and why American corporationsare sitting
on well over a trillion dollars. It is why America's small businesses
and entrepreneurs, the engines of innovation and job creation, are
starving for capital and are either struggling to survive or unable to
expand."
We have consistently warned that the current administration and the
majority in Congress were pursuing policies that threatened the future
economic health and well-being of our nation. The letter goes on to
provide several examples of wrong-headed policies or desirable
actions.
The letter notes that "There must be a recognition by the
administration and Congress that the regulatory burden they have
imposed on the U.S. economy has reached a tipping point. Unless the
cumulative impact of existing regulations, newly mandated regulations,
and proposed regulations is seriously addressed, the economy will not
create the jobs Americans need. We will lose even morejobs. They will
simply disappearor be sent offshore.
In recent months, the House passed a climate change bill that would
create nearly 1,500 new regulationsand mandates and carry a price
tag of well over a trillion dollars. The Senate is considering similar
legislation. The Environmental Protection Agency is moving forward
. with 29 major economic rules and 173 major policy rules, an
unprecedented level of regulatory action. The Labor Department is
considering dozens of new, restrictive workplace policies while the
newly appointed National Labor Relations Board is expected to make
sweeping changes governing every facet of union-management
relations.
The soon-to-be-finalizedfinancial regulatory reform legislation creates
over 350 regulatory rulemakings, 47 studies, and 74 reports-dwarfing
anything in Sarbanes-Oxley. The massive health care bill, with its
unprecedented and confusing employer mandate and hundreds of
billions of dollars in business taxes, will require thousands of pages of
new regulations to be followed by individuals, businesses, health care
industryproviders, and the states."
It is time for the majority and the current administration to recognize
that far from stimulating the economy, their policies have put the U.S.
economy in a vapor lock of uncertainty. Higher taxes, job and
innovation killing regulatory policies, and reckless federal spending
have brought us to the brink. The time to reverse course is now.
HEALTH CARE REFORM
In March, President Obama signed into law the Patient Protection and
Affordable Care Act (PPACA) which supporters assert will extend
health insurance coverage to an additional 32 million U.S. residents by
the end of the decade. Supporters, including the President, have
asserted that the health care reform legislation represents a major
deficit reduction package and will bend the health care cost curve.
Despite concerns raised over the impact the reform package will have
on existing health insurance coverage, President Obama has continued
to assert that "If you like your doctor, you can keep your doctor. If you
like your health care plan, you can keep your health care plan."
Again, many of the majority and administration's assertions are either
factually untrue, speculative, or at worst based on sleight of hand.
For instance, on July 22, 2009, President Obama asserted that "If we
don't act, 14,000 Americans will continue to lose their health insurance
every single day." That number was used frequently in the debate over
health care reform. It's a striking number, but a number that is subject
to significant debate and interpretation. The statement implied that
there would have been 14,000 fewer Americans with health insurance
each and every day. Nice sound bite, but misleading.
If accurate, the statement implied that more than 5 million Americans
woud lose coverage every year. By that reasoning, the projection of the
Congressional Budget Office (CBO) that the number of uninsured
would increase by 4 million over the 2010 - 2019 period under prior
law would be off by a factor of nine. Instead of 54 million uninsured,
CBO would have projected 95 million residents without health
insurance. The CBO estimates that the number of uninsured will rise
under prior law from 50 million in 2010 to 54 million in 2019. Putting
aside the question of whether the president's statement is correct, even
CBO's projected increase did not, on its face, yield a complete picture.
Who are the uninsured'?, who will be eligible for subsidies?, and how
much will those subsidies cost were critical questions in the health care
debate?
Contrary to general conception, CBO's estimate for the number of
uninsured is not based directly on data from any current survey. Rather
it is the output of a micro-simulation model.
"CBO's estimate of the number of uninsured people originates with a
point-in-time, SIPP-based estimate in 2002. Some demographic
groups, among them Hispanics, have lower rates of health insurance
participation than the general population does. The number.of people
in those groups is expected to increase faster than the general
population. Thus, the adjustments to the SIPP weights to match the
changing demographics of the U.S. population result in an increase in
the number of uninsured individuals (as a percentage of the U.S.
population) over the period between 2008 and 2017. "
CBO makes other adjustments to correct for "survey inaccuracies,'"
including such items as the "Medicaid undercount" that exists in many
surveys. CBO's estimate of the baseline number of the uninsured is
based on a "point-in-time" estimate that is adjusted to reflect changes
over time in the demographic makeup of the population. In other
words, a basic profile is developed for a point in time then the overall
CBO's Health Insurance Simulation Model: A Technical
Description,
Congressional Budget Office, October 2007, page 13. Available online at:
6
http://www.cbo.gov/ftpdocs/87xx/doc8712/10-31 -HealthlnsurModel.pdf.
7
Ibid.
estimate for future years is reached by adjusting for changes in the
makeup of the population.
On top of this, CBO makes adjustments for changes in various
programs already scheduled under current law. Ironically, as the chart
to the right depicts, at a top level, the increase in the number of
uninsured from 50 to 54 million - 4 million - was more than accounted
for by the projected decrease in Medicaid/CHIP enrollment from 40
million to 35 million.
15
Ernpla-y6r
SponsofW
God
No"Group
+ 15 fffilfion
age
')'j
10
5
(~
'f
-0
MedicaidtCHIP
-5
Chmne in Uninswed
Change in imployer
Omnge in Mudaid/CHIP
Sponseed an
Som-
n Group
CrypemnniudgmtOffeeermk IBC RepuakenSw-stColu&rnam
Much of this increase was related to the scheduled expiration of the
CHIP program's current authorization in 2013. As the table shows, if
the percentage of the non-elderly population covered by
Medicaid/CHIP remained at the 2010 projected level of roughly 15%8
(not an unreasonable assumption), the number of individuals with
Medicaid/CHIP coverage would rise to 42 million, and the overall
number of uninsured would shrink by 2-3 million over the period
despite the fact that the non-elderly population grows by 15 million
8 Ibid,
p. 15. CBO's 2008 baseline estimate of Medicaid/SCHIP coverage was
16.1% or 42.1 million. CBO's estimate of 40 million (15% of the non-elderly
population) as a baseline in 2010 represents a decline of more than 2 million
from the 2008 baseline.
during the same time period. In short, we would see a swing of 7
million in the number of uninsured. What does this mean?
In terms of those with health insurance coverage, CBO estimated that
the number of non-elderly individuals with non-Medicaid/CHIP health
insurance would have increased from 177 million in 2010 to 191
million in 2015 and 192 million in 2019. If the percentage of the
population covered by Medicaid/CHIP remained at the level of 15% of
the population estimated for 2010, the percentage of the non-elderly
population without health insurance coverage would decline from 19%
to 17% rather than remain at 19%.
Percentage
Coverage
and
Remained
Number
of
at
15%
Uninsured
of
Non-Elderly
Would
Decline
if
MedicaidCHIP
Population
CRO Baseline
2010
Percentage Lninsured
Number Uninswred (MillionS
Number Isured (Mllion
19%
501
217'
Medicald/Chip
Covers 15%
2019
2019
19%
54
228,
17%
47
235
It is clear that the primary factor behind the baseline increase in the
number of uninsured non-elderly residents is the decreasing number
and percentage of individuals enrolled in government sponsored health
insurance, not the loss of private coverage. To the contrary, CBO's
scoring of the various versions of health care reform legislation
indicated that without government action private coverage would
increase over the next decade, not decrease. Under CBO's baseline,
from 2010 to 2014, CBO data suggests private coverage will be
increasing at a rate of more than 8,000 people per day.
There are a significant number of provisions of the health care reform
law that create perverse incentives and increase the likelihood that
employers will choose to drop health care coverage for employees.
For decades, the small business community has been petitioning
Congress for relief from the high and rising costs of the health benefits
they provide to their workers. In 2008, presidential candidate Barack
Obama promised that his health care reform plan would lower a typical
family's health care premiums by $2,500 a year.9
But in November 2009, the Congressional Budget Office estimated
that, if the Democrats' Patient Protection and Affordable Care Act
(PPACA) were enacted, premiums in the group insurance market
10
would keep rising by $1,000 a year, as if the bill had not passed.
CBO's analysis, however, did not highlight the disproportionate
upward pressure on premiums paid by workers in small businesses,
thanks to a new and inequitable excise tax.
PPACA imposes a new tax on health insurers of $8.1 billion annually
beginning in 2014 and rising to $14.3 billion by 2018 (and indexed for
The Congressional Budget Office
medical inflation thereafter)."
that the new tax "would
of
economists
affirms the general consensus
be largely passed through to consumers in the form of higher premiums
for private coverage. 12" An October 2009 analysis, by the respected
tax policy expert, Kenneth J. Kies, suggests the insurance tax could
cost the typical family of four with employment-based coverage as
much as $1,000 a year in higher health premiums.
But the impact of the tax would not be equally shared across the board
by those who ultimately pay it; rather, small businesses and their
employees would bear a disproportionate burden. This is because the
9 Sen.
Barack Obama, "APolitics of Conscience," speech, Hartford, CT.,
10/23/07.
10 CBO found that premiums might drop slightly in the large group insurance
market (50+ lives) by up to 3%and in the small group market (2-50 lives) by
up to 2% in 2016, compared with where they might have been without
PPACA. For the nongroup market, CBO found a 10-13% increase. CBO,
letter to Sen. Evan Bayh, 11/30/09; attachment, p. 5, table 1.
" § 9010 of PPACA. Tax is based on net premiums written. Each year, each
health insurance company is to pay a share of a total amount specified in the
law, equal to the company's share of the market. Tax is not deductible as a
business expense. Joint Committee on Taxation, JCX-18-10, 3/21/10. The
yearly amounts total $73b over 2014-19, but JCT estimates only $60.lb will
actually be collected. JCT, JCX-17-10, 3/20/10.
12 CBO, op. cit., pp. 15-16.
13 Kenneth J. Kies, Federal Policy Group, "Study on $6.7 billion Annual
Insurer Fee," 10/15/09, www.fpgdc.com. See also New York Post, "Insure
fee-hike alert: Tax will wallop families," by Carl Campanile, 10/16/09. Kies's
actual figure was $500 a year, but was based on an early version of the tax that
raised only half the amount of the one enacted: $6. lb a year (JCT, JCX-36-09,
9/22/009) versus $12. 1b (JCX- 17-10, 3/20/10).
103
tax applies only to fully insured health benefits coverage. Self-funded
plans, which are the most common type of plan for employers with 200
or more employees, are exempt from the tax. Self-funded plans require
the employer to retain the risk of insured employees, which is typically
something small employers and the self-employed cannot afford to do
because their risk pool is too small. 14
As the chart below shows, 88% of workers in businesses with 3-199
employees are in fully insured plans and would be subject to the tax,
while only 14% of workers in companies with 5,000 or more
employees would be subject to it.15 Thus, the insurance tax is not only
costly but also unfair to those workers who are employed
disproportionately in small businesses.
Fully Inue
adSl-u
a Self-funded
(60m lives)
e
Pns2007
U Fully Insured (73m lives)
-
-
100%
--
__
Taxed
_-
. .
-
on90%
70%
Tax00
*
0
Exempt
3-199
-
20099
1,000-,999
Number of Workers
- ... 0%
5,000 or more
Source: Katser HUETSurvey
of Empoy_e-Sponsored
Health.
org
Some proponents of Obamacare may challenge the foregoing analysis
on grounds that it does not take into account the new small employer
Federation of Independent Business, "The 'Health Insurance Fee':
A Tax on Small Business and the Self- Employed," www.nfib.com (accessed
1National
4/9/10).
1Employee
Benefits Research Inst., EBRI Fast Facts 114, 2/11/09. Of the
132.8m persons covered in 2006 by employer health benefits under ERISA,
55% (73m) were in fully insured plans, 45% (60m) were in self-funded plans.
EBRI Issue Brief 10/07.
health care tax credit that became available when the bill was enacted.
This credit subsidizes a portion of the employer's premium
contribution but is only available for a few years and only to very small
firms with relatively low average wages.16 While the credit could
potentially offset some of the ultimate premium burden placed on small
businesses, its existence does not alter the economic effects of the
insurance tax. That tax will tend to drive up overall premium costs,
regardless of any government transfer payments attempting to make
the burden less onerous.
In addition to the new tax on insurers, PPACA also levies
approximately $5 billion a year in combined taxes and fees on
manufacturers and importers of medical devices and brand-name
prescription drugs. Since most such therapies are paid for through
insurance, public as well as private, these new taxes too will ultimately
be passed on to consumers in the form of higher medical costs and
insurance premiums. They may also negatively affect medical research
and innovation.
Far from reducing family health care premiums by $2,500 a year, as
promised by candidate Obama, the bill signed by President Obama
contains a new tax that will paradoxically drive premiums upward-by
as much as $1,000 a year for a typical family of four with job-based
coverage, separate and apart from the bill's other premium-increasing
provisions. Unfairly, the costs of this new tax will be passed through to
employees of small firms, the very firms that find it hardest to afford
and offer coverage today.
During the health care reform debate, the majority and the
administration hailed the legislation as reducing the deficit.
Republicans generally responded with charges that the legislation had
ten years of taxes and six years of benefits and pointed to other
questionable aspects of the majority's claim.
16
§ 1421 of PPACA establishes a small business tax credit. The full credit is
available to firms with fewer than 10 employees and whose workers' average
annual wages do not exceed $25,000; partial credits are available on a sliding
scale for firms up to 25 workers and wages up to $50,000. The credit is not
available to sole proprietorships. In 2010-13, the credit equals 35% of the
employer's contribution toward the employee's health insurance premium, if
the employer contributes at least 50% of the total premium cost or 50% of a
benchmark premium. After 2013, the credit amount rises to 50%, but becomes
available only for coverage purchased through a health benefits exchange and
for no more than two consecutive years. JCT, JCX-18-10, 3/21/10.
The legislation signed into law was replete with budget gimmicks that
needed to be utilized in order to achieve a non-deficit increasing score
from CBO and JCT. We will highlight a couple of those "gimmicks"
and the implications for future policy.
The legislation as signed into law contemplates hundreds of billions of
dollars in Medicare cost savings. Those cost savings were scored as
offsetting new health care spending instead of being used to improve
the Medicare system's actuarial imbalance that, in present value terms,
amounts to tens of trillions of dollars.
Perhaps the most clever scheme in the new law is the so-called
"CLASS Act" buried deep within the Patient Protection and Affordable
Care Act. This new program will provide a cash benefit for certain
disabled persons to help them with their long-term care needs--and
will directly compete with existing private-market insurance offerings.
Unlike other federal entitlements, CLASS is supposed to be voluntary
and self-financing, with no federal subsidies. However, the program as
currently designed is unsound and appears doomed to add to the
federal deficit within the next 15 to 20 years. Taxpayer intervention
will likely be needed.
This so alarmed Senator Kent Conrad (D-ND), chairman of the Senate
Budget Committee, that he has publicly denounced CLASS as "a Ponzi
scheme of the first order, the kind of thing that Bernie Madoff would
have been proud of."' 7
While Mr. Madoff's views on the CLASS Act are unknown (he is
currently serving a 150-year sentence in federal prison for investment
fraud), Sen. Conrad's concerns are justified.
CLASS, which stands for Community Living Assistance Services and
Supports, will provide a cash benefit to disabled or memory-impaired
adults who need help with such activities of daily living as eating,
dressing, and bathing. Among other things, this money can be used for
nursing care in the home or in a skilled nursing facility. Certain key
program details have been left to the Secretary of Health and Human
Services to decide, including its start date (presumably around 2013)
and, more importantly, the exact premium and benefit amounts. Other
details are known. Most workers will be auto-enrolled, with a right to
opt out, and premiums will be collected primarily via payroll
Washington Post, "Proposed long-term insurance program raises questions,"
10/27/09.
withholding. Eligibility for benefits is limited to enrollees who have
paid premiums for at least five years and have worked at least part-time
for three of those five years. Premiums, which may vary only by age at
enrollment, must remain level over time and will be capped at a
nominal $5 for the poor and full-time college students. There is a
benefit floor of $50 a day. The Congressional Budget Office assumes
average benefits will be about $75 a day. 18
By comparison, most private offerings pay benefits of $120 to $400 a
day, with the average being $165.'9
Although CLASS involves no federal subsidies, it is a federal program,
administered by the Secretaries of HHS and Treasury. All of its
financial operations will be included in the federal budget. Since no
benefits will be paid during its first five years, CLASS will initially
improve the federal balance sheet by an estimated $70.2 billion over its
first decade. 2 0 That, of course, is why congressional Democrats
included it in their bill-to help make Obamacare seem less costly than
it is. However, these "savings" will later have to be paid out again as
cash benefits. As the chart shows, CLASS's positive effect on the
budget will decline after 2015, when benefits start. By 2030, projected
costs will exceed premium revenues, causing the CLASS trust fund to
add to federal deficits. Although the law requires the HHS Secretary to
raise premiums each year as necessary to keep the trust fund solvent
over the subsequent 75 years, Medicare's Chief Actuary, Richard S.
Foster, believes "there is a very serious risk that the problem of adverse
selection will make the CLASS program unsustainable"-a view
shared by the nation's leading actuarial societies.21
CLASS practically invites adverse selection, the bane of poorly
designed insurance schemes, because it is voluntary, open to all, and
yet permits premiums to vary only by age. This differs from how
things work in the private market, where although anyone may buy
long-term care insurance, applicants who are more apt to need care due
to age, health history, or current medical conditions are charged a
higher premium to reflect their relatively higher risk level. When
'8CBO, Letter to Speaker Pelosi, 3/20/10.
19 American Academy of Actuaries and Society of Actuaries, Joint letter on
CLASS Act, 7/22/09, http://www.actuary.org/pdf/health/class july09.pdf.
20 CBO, op. cit. The Medicare Agency, CMS, projects a much lower $38b in
savings. CMS, "Estimated Financial Effects of [PPACA]," 4/22/10.
21 AAA and SOA, op. cit.
premiums can vary only by age, relatively healthy, low-risk people will
not buy the insurance, and the cost of insuring the remaining, higherrisk population will rise. If CLASS is truly self-financing, the Secretary
will have to keep raising the premiums, because only high-risk
individuals will choose to be insured. This will be sustainable only so
long as the premiums remain lower than those of private-market
alternatives for persons with the same risk level. Congress has made
the Secretary's job difficult here, however, by capping premiums for
poor people and undergraduates and exempting certain retirees from
premium hikes; which means the Secretary must set higher premiums
for all other enrollees. Even high-risk participants who might prefer to
remain in CLASS will opt out once they realize they can obtain similar
coverage for a lower cost in the private market. CBO estimates only
3.5% of the adult population, or roughly 10 million people, will enroll
by 2019. The current participation rate for private long-term care
insurance offered through eniployers, with no auto-enrollment, is 4%*2
CLASS Act's Impact
on Federal
Boost
Turns
Budget:
Bust
billions
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Sources! CBO, Letter to Speaker Pelosi, 3/20/10 and Letter to Sen. Harkin, 11/25/09
Dotted line: trendline based on CBO published description
If the Secretary fails to raise premiums sufficiently, Congress will be
forced to step in. It could raise premiums further, reduce benefits, or
restrict eligibility--or even make participation mandatory. The latter
CBO, Letter to Sen. Harkin, 11/25/09. CMS's Foster projects enrollment of
only 2% of the eligible population by 2013. CMS, op. cit.
22
option is not altogether improbable, given how adamant congressional
Democrats have been that Obamacare must be mandatory-to avert
adverse selection. Should Congress fail to reform the program, its only
way to avert insolvency will be a taxpayer bailout. CLASS cannot be
voluntary, self-sustaining, and a good deal for workers and taxpayers,
all at once. Something, or rather someone, will have to give.
As currently designed, CLASS will not be able to sustain itself without
subsidies from taxpayers or from all workers in the form of mandatory
enrollment. In addition to being unsound, the program is unnecessary.
Americans already have an array of private long-term care insurance
options to choose from: many are more economical than CLASS, most
offer richer benefits. The best remedy for the unsustainable,
unaffordable CLASS program is to repeal it.
And then there is, perhaps, the most intellectually dishonest aspect of
the new health care law - the use of inflation to expand the application
of various taxes imposed under the law.
For instance, the high cost plans excise ("Cadillac plans") will
increasingly hit more and more health insurance plans. In passing final
legislation, the majority reveled in a deal that delayed the
implementation of the Cadillac plans tax. In reality, the majority
engaged in a "Cadillac Shuffle" by delaying implementation but doing
so in a way that insures the tax will apply to more plans at an earlier
The changes were
date than in the Senate passed legislation.
represented as a "scaling back of the tax." True, the effective date that
the tax begins was delayed for five years, but beyond the ten-year
budget window, the allegedly scaled back version of the tax will
actually hit even more plans and generate more tax revenue than the
original tax.
Instead of adjusting by the Consumer Price Index for All Urban
Consumers (CPI-U) plus 1%, the so-called "fix" would adjust those
thresholds in the out years by just the CPI-U. In addition, a special
provision to adjust the initial thresholds if premiums grow faster than
the Congressional Budget Office (CBO) projects will ensure that the
tax will not hit federal employees,' including Members of Congress',
favorite plan when the tax is initially applied.2 3
HR 4872 contains a provision to change the initial thresholds in 2018 based
on increases in the Blue Cross Standard Option offered under the Federal
Employee Health Benefits Program. If the increase in premiums under that
plan, the favorite of federal employees and Members of Congress, is greater
23
The new thresholds provided in the fix ($10,200 for individual plans
and $27,500 for family plans) are essentially the same as the thresholds
provided by the enacted legislation after indexing at CPI-U plus 1%for
five years. The only plans that benefit in the short term under the
reconciliation fix are plans that would have been subject to the tax
under the enacted legislation between 2013 and 2017. In fact, for more
modest plans, the tax bite will hit sooner and harder.
120,000
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The irony is that the reconciliation legislation replaces the high cost
plans excise tax revenue with revenue from a new Medicare tax on job
and growth producing investment income. In reality, while the short
term revenues under the high cost plans tax are reduced during the
budget window, over the long-term the high cost plans tax revenues
will be greater than under the enacted legislation. That is, unless the
indexing level is adjusted in the future to prevent average and modest
than 55% between 2010 and 2018, the thresholds would be adjusted upwards
to compensate for the excess cost growth. The 55% factor implies that
premiums for that plan will only grow by 5.6% a year. If they grow faster, the
thresholds will be higher. Over the last ten years the annualized growth rate
for the Blue Cross Standard Option Plan has been 8.6% for self only plans and
8.7% for family plans, significantly higher than the 5.6% annual cost growth
factor contained in the reconciliation bill.
plans from becoming subject to the tax, in which case many of the
revenues that are supposed to pay for new health care subsidies will no
longer exist.
As noted, the thresholds at which the new "Medicare" taxes contained
in the legislation are not indexed for inflation meaning that taxes will
hit taxpayers at progressively lower income levels.
Beginning in 2013, so-called "unearned" income (that is, investment
income) such as capital gains, dividends, and interest will be subject to
this tax for individuals making over $200,000 in 2010 dollars and
families making over $250,000. But because the tax threshold is not
indexed for inflation, it will increasingly hit individuals and families
with lower incomes as time passes.
The new 3.8% investment tax will be particularly devastating because
taxes on investment income discourage a key source of technological
advancement and rising productivity-essential foundations of
economic growth.
When combined with President Obama's plans to allow existing-law
tax rates for upper earners to jump up in 2011, the top marginal tax rate
on capital gains will increase from 15% to 23.8% (a 59% increase) and
the top rate on dividends will increase from 15% to 43.4% (a
staggering 189% increase). Such massive increases in taxes on savings
and investments will tend to discourage individuals and families from
bettering both themselves and the economy through saving and
investing. When prices rise, people respond by reducing their
consumption. Just imagine if the cost of a gallon of milk were to jump
from $3.50 to $5.57 or to $10.12 beginning in 2013; if that were to
happen, economists would expect a significant decline in the amount of
milk consumed from that point forward. We can expect a similarly
significant decline in investment-in favor of current consumptionfor individuals and families hit with a significant tax increase on their
investments.
The downsides of this tax are hard to overstate. Investment is the
foundation for increased productivity, technological advancements,
income growth, and overall economic prosperity. Reduced investment
will lead to lower incomes and lower GDP, which will further
exacerbate the impending fiscal disaster facing the United States as a
result of the massive deficits and debt that President Obama and
Washington Democrats have been piling up at a breathtaking rate.
The result will be lower economic output and growth, lower wages,
and a nation less economically prepared for the future. It is hard to
imagine a worse time to discourage the most productive and growthgenerating sectors of our economy.
Opposition to the new 3.8% investment tax was undoubtedly muted by
the fact that it was billed as a tax on the "unearned" income of wealthy
individuals and families. People of modest incomes and those not
currently receiving any "unearned" income might reasonably believe
they are immune from the tax. However, failure to index this tax to
inflation means that it will eventually hit middle-class individuals and
families. In fact, in the very first year that it takes effect-2013-the
tax will hit individuals making less than $200,000 in today's dollars
and families making less than $250,000; an undeniable violation of the
President's pledge.
Although Democrats recognized their failure to index the investment
tax as a serious problem similar to that of the existing Alternative
Minimum Tax, they nevertheless did not index it because doing so
would have deprived them of the necessary revenues to help pay for
their massive new health care entitlement.
Finance Committee
Chairman Max Baucus (D-MT) said during the debate over the health
care bill: "We don't want to get into an AMT situation.
. .
. It is very
possible that if this level [the $200,000/$250,000 threshold] is not
indexed, we may be paying the price later on, in several years' time,
but this is not the time or place."24
The Democrats' imprudent
approach of pushing through with legislation that they recognize as
fiscally unsound is only one example of their recent haste to
accomplish their partisan agenda without regard to cost or economic
effect. This recklessness has contributed significantly to our nation's
deteriorating fiscal outlook and will have a damaging effect on our
economy in both the near-term and long-run.
An often overlooked issue is the various incentives the legislation
creates for employers to drop employee health coverage in favor of
paying a fine and sending their employees to the public exchanges.
Should this occur on any kind of scale, the cost of subsidies under the
legislation will soar and even the gimmicks used to "pay for" the
legislation will not sustain the illusion that the legislation is deficit
neutral.
Sen. Baucus (MT). "Health Care and Education Reconciliation Act of
2010," Congressional Record Vol. 156, No. 48 (25 March 2010) p. S2074.
24
Significant concerns also exist about the Internal Revenue Service's
ability to implement the new law even with a massive increase in
personnel and budgets. Policy makers should be concerned that the
complexity of the "scheme" itself creates significant risks - even a
potentially catastrophic system failure.
TAx POLICY CONCERNS
Significant concerns also exist over the majority and President's desire
to allow automatic tax increases to go into effect at the end of this
calendar year. We will not discuss this at great length, but will note
that the uncertainty over tax policy are creating significant
disincentives for investment that is badly needed if we are to jump start
Historical evidence
the economy - particularly labor markets.
factor in generating
important
an
is
suggests that private investment
payroll job growth.
The increase in capital gains rates and taxes on dividends will deter
investment and hamper growth in the future. The expiration of those
tax rate reductions may also create a false picture of economic activity
in late 2010 as taxpayers shift income into the current year to avoid
higher taxes in 2011.
There is serious risk that should not be overlooked regarding the
adverse economic impact of higher tax rates in 2011. Those higher
rates and the lower levels of investment could result in another
economic downturn.
FINANCIAL SERVICES REGULATION
The Senate and House have both passed the conference report on
financial services regulation reform legislation. The Dodd-Frank
legislation has some positive components, but on balance may well act
as a drag on economic growth. The new legislation will require over
350 regulatory rulemakings, 47 studies, and 74 reports. The legislation
is a lobbyists' and litigators' dream. We can only hope it does not turn
into the American economy's nightmare.
However, the legislation's failure as a piece of "reform" legislation has
as much to do with the issues the legislation ignores as what -it
contains.
The most glaring failures of the Dodd-Frank financial reform
legislation are its failures to resolve the insolvencies of Fannie Mae
and Freddie Mac currently under conservatorships administered by the
Federal Housing Finance Agency and to place housing finance on a
sound basis.
Alex Pollock, former President of the Federal Home Loan Bank of
Chicago and a resident scholar at the American Enterprise Institute,
observed that one cause underlies all financial crises - poor loan
underwriting standards. The recent global financial crisis is no
different.
A number of well-intentioned, but ultimately destructive federal
policies encouraged the widespread deterioration in residential
mortgage loans underwriting standards.
Enacted in 1977, the
Community Reinvestment Act (CRA) requires commercial banks and
savings institutions to meet the credit needs of borrowers in all of
communities, including low- and moderate-income neighborhoods.
Federal regulators must consider the CRA record of a commercial bank
or savings when considering applications for acquisitions and mergers.
So-called community organizations such as ACORN learned to use the
CRA to protest bank acquisitions and mergers until the surviving
institutions agreed to increase their lending in low- and moderate
income neighborhoods, especially for residential mortgage loans.
Both President Bill Clinton and President George W. Bush sought to
increase the home ownership rate among low-income and minority
households. For more than a decade, federal regulators encouraged
commercial banks and savings institutions to weaken traditional credit
underwriting standards for residential mortgage loans to make it easier
for low- to moderate-income households to buy a home. As home
prices rose, federal regulators even promoted exotic residential
mortgage loan products such as interest-only and negatively amortizing
loans to households that could not make a standard down payment or
qualify for a fully amortizing residential mortgage loan to shoehorn
them into buying a home that they could not really afford. Many of
these unfortunate households defaulted on their exotic residential
mortgage loans after the housing bubble burst.
The Federal Housing Enterprises Financial Safety and Soundness Act
of 1992 directed the Secretary of Housing and Urban Development to
establish affordable housing goals for Fannie Mae and Freddie Mac in
each presidential election year for the following four years. At first,
Fannie and Freddie could meet their goals through their normal course
of buying conforming residential mortgage loans from commercial
banks, savings institutions, and mortgage bankers, placing them in
agency residential mortgage-backed securities (RMBSs), and then
selling these agency RMBSs to the public. After Secretary Andrew
Cuomo significantly increased the affordable housing goals for Fannie
and Freddie during 2001 to 2004 in October 2000, Fannie and Freddie
could no longer meet their goals through their normal course of
business. So Fannie and Freddie decided to meet these higher
affordable housing goals by purchasing private label RMBSs
containing subprime and Alt-A residential mortgage loans.
Federal policy contributed to the explosive growth of subprime and
Alt-A residential mortgage lending from 2001 to 2006. Commercial
banks, savings institutions, and mortgage banks willingly underwrote
subprime and Alt-A residential mortgage loans knowing that these
risky loans would not remain on their books but would be sold to
investment banks to be placed into private label RMBSs. With a
regulatory-induced demand, investment banks worked overtime to
issue private label subprime RMBSs for Fannie and Freddie to buy to
satisfy their affordable housing goals.
During the last two decades, Fannie Mae and Freddie Mac exploited
their status as government-sponsored housing finance enterprises.
Despite official denials, financial market participants assumed
(correctly, as it turned out) that the federal government would protect
the creditors of Fannie and Freddie if they were to fail. Consequently,
Fannie and Freddie were able to borrow virtually unlimited amounts
from credit markets at very low interest rates regardless of the riskiness
of their investment portfolios. Essentially, Fannie and Freddie could
socialize any losses, but keep any profits for their senior management
and shareholders. This encouraged senior management of Fannie and
Freddie to balloon the size of their balance sheets in part through the
purchase of risky private label subprime and Alt-A RMBSs after 2000.
Once the housing bubble collapsed, the losses at Fannie and Freddie
mounted. On September 6, 2008, the Federal Housing Finance
Administration declared Fannie and Freddie to be insolvent and placed
them into conservatorships. So far, taxpayers have lost $147 billion in
Treasury subsidies to Fannie and Fannie. Financial expert Peter
Wallison estimated that taxpayers will eventually lose more than $400
billion on Fannie and Freddie. Moreover, both Fannie and Freddie
admit in the filings with Securities and Exchange Commission that can
never return to profitability under their current structure.
Fannie and Freddie are the proverbial "800 pound gorillas" of housing
finance. Until their future is resolved, private investors and institutions
are unlikely to reenter housing finance in any significant way.
Ironically, housing finance is more dependent than ever on Fannie,
Freddie, and the Federal Home Loan Banks. Thus, determining the
final resolution of Fannie and Freddie is necessary step to place
housing finance on a sound long-term basis, yet the Obama
Administration and Congress put off this issue until 2011. Nor does
the Dodd-Frank legislation repeal the CRA or the requirement of
affordable housing goals for Fannie and Freddie that encouraged
lenders to weaken the underwriting standards for residential mortgage
loans. Incredibly, the Dodd-Frank legislation leaves the failed
structure of housing finance in place.
TRADE POLICY
International trade continues to be a lifeline for the U.S. economy.
U.S. two-way trade of goods and services fell from a peak of 28.5
percent of GDP in second quarter of 2008 to a trough of 24.6 percent
of GDP in second quarter of 2009 due to the global recession, before
rebounding to 27.0 percent of GDP in the first quarter of 2010.
While the progressive liberalization of international trade continues
around the world, the United States has largely been inactive due to the
lack of leadership from President Obama. As a result, the United
States has forfeited leadership opportunities on international trade
issues, sacrificed potential market share of U.S. exports in foreign
markets, and jeopardized the international competitiveness of
American companies in certain regions.
A recent report issued by the Republicans on the Agriculture
Committee and Ways and Means Committee in the U.S. House of
Representatives shows that our delay in the implementing a free trade
agreement with Colombia caused a 48 percent decline in U.S.
agriculture exports to that country in 2009. American farmers lost
market share to Argentina and Brazil in such key sectors as corn,
wheat, soybeans and soybean oil. Moreover, key U.S. agricultural
sectors could see reductions in exports of nearly $57 million if Canada
and Colombia implement their agreement ahead of the U.S. agreement.
116
Because of the phase-in schedules of tariff reductions, countries with
free trade agreements that enter into force with U.S. trading partners
prior to similar agreements with the United States are likely to benefit
from comparative lower tariffs for up to 15 years.
The United States has undertaken several "protectionist" measures
during the first two years of the Obama Administration. President
Obama has yet to find a successful solution to lift the ban on Mexican
trucks from U.S. highways. This ban causes the U.S. to be in direct
violation of North American Free Trade Agreement (NAFTA)
obligations and costs U.S. businesses, farmers and ranchers $2.4 billion
in punitive tariffs annually. The "Buy American" provisions in the
American Recovery and Reinvestment Act of 2009 delayed stimulus
projects, increased costs to local and state governments, and invited
retaliation by foreign governments that could impair the ability of
American companies to sell their products and services overseas.
In his State of the Union address earlier this year, President Obama
proposed a "National Export Initiative" with the goal of doubling U.S.
exports within five years. This is a welcome announcement. It
demonstrates the President's recognition that international trade is an
important engine for economic growth. To increase exports by this
amount, the President will need to open foreign markets to
competitions from U.S. exports and U.S. multinational firms, including
through passage of the pending free trade agreements with Colombia,
Panama, and South Korea.
Recently, President Obama announced that the U.S. is on track to
achieve the goal of doubling exports within five years as exports have
increased significantly in 2010 relative to 2009. However, it is
important to note that in 2009 U.S. exports suffered the steepest
decline since 1932, dropping from $1.83 trillion to $1.55 trillion, which
means that U.S. exports will need to increase to $3.1 trillion by 2015.
Thus, some of the growth in U.S. exports attributed to this initiative
will merely reflect the normal rebound in trade volume as the global
economy recovers from a severe recession. Further market-opening
policy initiatives are necessary to supplement continued U.S. export
growth.
A bright spot for U.S. trade policy is the announcement of the Obama
Administration that the United States will move forward with talks to
join the Trans-Pacific Partnership (TPP). These negotiations build on
an existing agreement that initially included Brunei, Chile, New
Zealand, and Singapore, and have already expanded to include
Australia, Peru, and Vietnam. The TPP could become a state-of-the-art
regional free trade agreement that would access 163.6 million
customers for American manufacturing, technology, services and
agriculture.
The Asia-Pacific region is an increasingly important market for U.S.
exports. It accounts for 60 percent of the world's GDP and almost half
of global trade. The United States must have a foot in the door and a
level playing field in the fastest growing market in the world.
Together, TPP partner countries represent the United States' sixth
largest trading partner, with two-way goods trade of nearly $132
billion in 2008. If the United States moves forward, the TPP could
boost U.S. competitiveness and strategic presence in the vitally
important Asia-Pacific region and strengthen U.S. ties with key allies,
increase market access for U.S. workers and industries, and spur muchneeded domestic growth.
CONCLUSION
We could address several other aspects of the administration and
majority's agenda that pose a serious threat to the economic well-being
of the nation and future prospects for growth, including the pursuit of
an extremist environmental agenda that will drive energy costs through
the roof and employment in many industries into the basement.
The fact remains that too many American families have experienced
job losses, declines in housing wealth, and declines in values of their
retirement accounts and stock holdings. The economy faces significant
challenges in the months and years ahead. In facing these challenges,
there are a number of noteworthy points to consider, including:
* We need to keep taxes low. In the current environment, it is
important that taxes not be raised on American individuals,
families, and businesses. It is equally important to preserve,
extend, and build upon pro-growth tax changes that have been
implemented in recent years, including lowering tax rates on
capital gains, dividends, and income.
Economic policy
decisions that have lowered taxes on American households and
allowed American families to keep more of their hard-earned
incomes have paid dividends for the Nation's citizens.
* We need to promote the expansion of international trade. It is
important, especially in light of the robust contributions to
domestic growth from U.S. exports over the past several years,
to resist the disturbing trend toward protectionist sentiments
and policy recommendation.
* We must leave a small footprint in crafting regulations. It is
important, in considering how best to reform regulation and
oversight of our Nation's financial system, not to implement
Consumers and other
excessively onerous regulations.
financial market participants deserve protections that
ultimately flow from transparency and judicious oversight.
Nonetheless, regulations that are too restrictive and onerous
only serve to inhibit free enterprise and often hurt those who
benefit from financial innovations, including the needy and
low-income Americans.
* We must focus on the distinction between economic stimulus
measures and measures designed to implement increased
government spending and expanded government. Measures
to expand the size of government through long-term spending
projects are not stimulus measures, even when implemented
under the guise of stimulus. We need to focus on increasing
investment in the private sector that will create permanent and
sustainable growth in output and employment.
* We need to avoid the temptation to implement social and
industrial planning under the guise of stimulus. Government
has not historically done an efficient job of picking winners
and losers in industry.
Despite the daunting challenges facing our nation and recent steps by
the majority in the wrong direction, we remain confident that the
entrepreneurial spirit and drive of America will survive and prosper. It
will emerge-not with the interference of an expansive government,
but with the hard work, thrift, and determination of its people.
Harnessing that work, thrift, and determination requires that
government help provide a transparent and fair playing field, but also
requires that government let its working families and productive
enterprises flourish by allowing them to reap the benefits of their
activities.
119
Higher taxes and expanded government serves to diminish rewards to
entrepreneurial efforts, however well intentioned policymakers that
seek to serve as social and economic planners may be.
Senator Sam Brownback
Ranking Minority Member
Representative Kevin Brady
Senior House Republican
@FedFRASER