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Union Calendar No. 209
1st Session









DECEMBER 11, 2013.— Committed to the Committee of the Whole House on the state of the
Union and ordered to be printed


[Created pursuant to Sec. 5 (a) of Public Law 304, 79th Congress]
Kevin Brady, Texas, Chairman
John Campbell, California
Sean P. Duffy, Wisconsin
Justin Amash, Michigan
Erik Paulsen, Minnesota
Richard L. Hanna, New York
Carolyn B. Maloney, New York
Loretta Sanchez, California
Elijah E. Cummings, Maryland
John Delaney, Maryland

Amy Klobuchar, Minnesota, Vice Chair
Robert P. Casey, Jr., Pennsylvania
Mark R. Warner, Virginia
Bernard Sanders, Vermont
Christopher Murphy, Connecticut
Martin Heinrich, New Mexico
Dan Coats, Indiana
Mike Lee, Utah
Roger F. Wicker, Mississippi
Pat Toomey, Pennsylvania

ROBERT O’QUINN, Executive Director
NILES GODES, Democratic Staff Director



December 11, 2013
Speaker, U.S. House of Representatives
Washington, DC
Pursuant to the requirements of the Employment Act of 1946, as
amended, I hereby transmit the 2013 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.

Kevin Brady


CHAIRMAN’S VIEW ...................................................................... 1
Tracking the Recovery ........................................................... 2
Jobs, Workers and Skills ...................................................... 22
International Trade and Competitiveness ............................. 28
Climate Change and the Path Toward Sustainable Energy
Sources ................................................................................. 30
Reducing Costs and Improving the Quality Of Health Care.. 40
Additional Comments on the Affordable Care Act: The Flaw
Is the Law .......................................................................... 43
Final Comments...................................................................... 51
VICE CHAIR’S VIEW .................................................................. 60
Overview ................................................................................ 60
Recent U.S. Macroeconomic Performance and Policy .......... 60
Recent U.S. Macroeconomic Performance .......................... 60
Prospects for Near-Term U.S. Economic Growth................ 68
Macroeconomic Policy......................................................... 73


113th CONGRESS
1st Session







DECEMBER 11, 2013. – Committed to the Committee of the Whole House on the
state of the Union and ordered to be printed


MR. BRADY, from the Joint Economic Committee,
submitted the following

Report of the Joint Economic Committee on the 2013 Economic Report of the

The National Bureau of Economic Research’s (NBER’s)
business cycle dating committee pegs June 2009 as the end of the
“Great Recession.” In his letter transmitting the 2013 Economic
Report of the President (ERP) 1, President Obama stated “Our top
priority must be to do everything we can to grow our economy
and create good, middle-class jobs.” It is true that the economy
has expanded in each of the last 17 quarters and added slightly
less than 8.1 million private sector jobs over 45 consecutive

months. More than four years after the end of the recession,
much of the nation has yet to experience anything resembling a
normal economic recovery. Unfortunately, compared to other
post-1960 recoveries, this recovery continues to scrape bottom
on virtually every economic metric. The jobs have not fully
returned, growth has been anemic, and incomes on Main Street
have languished.
In the next section of our report, we examine the depth and
breadth of the current recovery based upon data available as of
December 6, 2013. After this general discussion, we review four
chapters from the ERP: (1) “Jobs, Workers, and Skills;” (2)
“Reducing Costs and Improving the Quality of Health Care;” (3)
“Climate Change and the Path Toward Sustainable Energy
Sources;” and (4) “International Trade and Competitiveness.”
We also include a discussion of the still unfolding implosion of
the Affordable Care Act (ACA). Among the many issues
Republicans on the Joint Economic Committee raised during
debate over the ACA were the unsustainable funding scheme, its
likely damaging effects on existing private insurance coverage
and the quality of health care, its attempt to abolish the law of
supply and demand, and its future negative economic

In this section of our report, we examine the strength and breadth
of the economic recovery based on several economic metrics.
Among the factors we examine are employment, unemployment,
job creation, personal income, private business investment, and
the effect of limited fiscal consolidation.
In general, we discuss the performance of the economy since the
end of the “Great Recession” in June 2009. However, in many
instances we examine the performance as measured by particular
metrics from the low point for that metric during the current
business cycle. For example, when discussing private sector job

creation, we compare recoveries from the cycle low point. We
do this in part because this is the metric most frequently cited by
the Obama Administration when touting the success of its
economic policies.
Economic Growth
Since the recession ended in the 2nd-quarter 2009, real GDP has
grown by a total of 10.2% over the four-year period, equivalent
to an annualized growth rate of 2.3%. This compares with total
growth of 18.7%, equivalent to an annualized rate of 4.1%, in the
average post-1960 recovery. And the comparison with the
Reagan Recovery is even more startling when real GDP
increased by 23.1%, equivalent to an annualized rate of 5.0%,
over the comparable period. This places the growth gap for this
recovery at $1.2 trillion (2009$) compared to the average post1960 recovery and $1.9 trillion (2009$) when compared to the
Reagan Recovery (see Figure 1).

Figure 2 shows the total post-recession growth in real GDP for
all post-1960 recoveries.


Private Sector Payroll Job Gains
The Obama Administration likes to tout its private sector job
creation record, noting that there have been 45 consecutive
months of private sector payroll job gains with slightly less than
8.1 million private sector payroll jobs added over that period,
representing a gain of 7.5%. What the Obama Administration
doesn’t advertise is that the economy still has nearly one million
fewer private sector payroll jobs than in January 2008 when
private sector payroll employment peaked. The White House
chooses February 2010 as its starting point for calculating its
private sector “job creation” record which represents the recent
low point for private sector employment.
Compared to other post-1960 recoveries, the Obama recovery
continues to scrape bottom when it comes to private sector job
creation even when using the Obama Administration’s starting
point. Private sector payroll employment grew an average 11.7%
over the comparable period in other post-1960 recoveries. That

difference puts the private sector jobs gap for the Obama
recovery at 4.4 million compared to other post-1960 recoveries.
The gap is even more pronounced compared to the Reagan
recovery when private sector payroll employment grew by 14.0%
over the comparable period. A Reagan-type private sector
payroll jobs gain would have produced an additional 7.0 million
private sector jobs (see Figure 3).

Figure 4 shows the percentage gain in private sector payroll
employment for each recovery measured using the Obama
Administration’s metric that uses the cycle low point as a base.


The reality is that the current recovery would have needed to
produce roughly 100,000 additional private sector jobs each
month in order to have simply been average (see Figure 5).

The private sector job creation record of this recovery fares
poorly not only when measuring from the cycle low point, but
when comparing to end of recession or prior peak levels as well.
Figure 6 illustrates the comparison for all three base points.

The fact that the economy has added roughly 8.1 million private
sector payroll jobs is positive news. The fact that it has taken
more than 4 ½ years to add those jobs is discouraging. The
simple reality is that the Obama Recovery continues to add too
few jobs at too slow a pace.
Employment as Measured by the Household Survey
While the Current Establishment Survey (CES) that measures
payroll employment tends to get more attention, the household
survey that also measures employment provides some insight
into the dismal nature of the current recovery. If one adopts the
same convention of measuring off the cycle low that the Obama
Administration uses when discussing private sector job creation
in the CES, this leaves the Obama recovery dead last for
employment gains among post-1960 recoveries (see Figure 7).


Employment as measured by the household survey hit bottom in
December 2009. In the 47 months since, employment has risen
by 6.4 million or 4.6%.
Over the comparable 47 months, the average of other post-1960
recoveries saw employment rise at a more brisk pace than the
current recovery. On average, employment rose 9.7%, equivalent
to an employment gain of 13.4 million. That puts the
employment gap of the current recovery compared to the average
of other post-1960 recoveries at 7.0 million (see Figure 8).


This recovery’s employment gap is especially pronounced when
compared to the strong Reagan recovery of the 1980s. Measured
off the cycle low over a comparable 47 months, employment in
that recovery grew by 11.6% or the equivalent of 15.9 million.
In other words, a Reagan-style recovery would have produced an
employment gain 9.6 million greater than the current recovery.
To be fair, population growth has slowed significantly in recent
years. Yet even if one adjusts for different population growth
rates, the current recovery lags the average employment growth
of other post-1960 recoveries by more than 5.7 million.
The Unemployment Rate and Related Measures
The unemployment rate peaked at 10.0% in October 2009. Since
that time, the rate has declined to its present level of 7.0%. This
gives the impression of significant improvement. While the
unemployment rate has declined, the percentage of adult
Americans that are employed has not increased. Figure 12 shows

that the percentage of adult Americans who are employed, as
measured by the employment-to-population ratio, has actually
declined since the recession ended in June 2009.

The employment-to-population ratio is more than four
percentage points lower than in January 2008 when private sector
payrolls peaked. It stands two full percentage points below the
January 2009 level when President Obama took office. While the
official unemployment rate has declined by three full percentage
points since unemployment peaked at 10.0% in October 2009,
the employment-to-population ratio has increased by a meager
four one-hundredths of a percentage point over the same time
Figure 13 shows the very different progress on the employmentto-population ratio during this recovery and during the Reagan
recovery. Since the end of the recession, the employment-topopulation ratio has actually declined by 0.9 percentage point. 2
In other words, a smaller percentage of adult Americans are
employed today than when the recession ended.


Over the comparable number of months during the Reagan
recovery, the employment-to-population ratio rose by 4.0
percentage points. This 4.9 percentage point gap 3 is just another
indication of how poorly this recovery stacks up against a strong
The current recovery also fares poorly against the average of
other post-1960 recoveries.
The average change in the
employment-to-population ratio over a comparable period was a
positive 1.5 percentage points (Figure 14). The lack of positive
movement of the employment-to-population ratio suggests a
population-adjusted employment gap of 5.7 million compared to
the average recovery and more than 12 million compared to the
Reagan Recovery.


The failure of the employment-to-population ratio to rise
coincidently with a decline in the unemployment rate is the result
of declining labor force participation. The decline in the labor
force participation rate has been well documented. In November
2013, the labor force participation rate rebounded to 63.0% after
hitting 62.8% in October – the lowest level since March 1978.
While labor force participation has been projected to decline very
gradually due to the aging of the population, the recent declines
are troublesome and much greater than previously projected.
As mentioned earlier, the widely followed unemployment rate
has declined to 7.0% from its October 2009 peak of 10.0%. This
decline is largely a mirage that has been driven by the decline in
labor force participation. While you can perform this analysis
from any reference point, this analysis looks at the labor force
participation rate today compared to when President Obama took
office in January 2009. In contrast to the current labor force
participation rate of 63.0% in January 2009 the labor force
participation rate was 3.0 percentage points higher at 65.7%. At

the beginning of the recession, the rate was even higher, standing
at 66.0%.
Absent the decline in labor force participation since January
2009, the unemployment rate would stand at 10.9% rather than
the reported 7.0%, a 3.9 percentage point difference (see Figure

Both rates are significantly higher than the 5.0% rate that the
Obama administration said the massive stimulus legislation
passed in February 2009 would deliver.
While the headline unemployment rate is psychologically
important and still widely followed, the dynamics of labor force
participation make it increasingly less reliable as a meaningful
measure of labor market health.
Full-time vs. Part-time Employment
Recently, there has been a great deal of discussion regarding the
gains in full-time vs. part-time employment. It is important to

remember that data in the household survey tends to be very
volatile and needs to be evaluated with care. Comparisons with
past recoveries can be difficult because of changes in the
wording of the survey questions that are asked about full-time vs.
part-time employment status. Because of the volatility and
seasonal trends in the data, the time period selected for
comparison can create a misleading picture of the situation.
Figures 9 and 10 illustrate how the timeframe selected can
change the full-time vs. part-time story. The ratio of part-time
vs. full-time employment gains for 2013 looks significantly
different today than it did when the report for July was issued in

The July report showed part-time employment gains outstripping
full-time gains by a ratio of more than 3-to-1 in 2013 (See Figure
9). At present, the number of part-time employed has actually
declined during 2013.


The reality is that the current recovery has failed to create both
enough full-time and part-time employment opportunities.
As Figure 11 shows part-time employment gained in the Reagan
recovery, but has declined in the current recovery. Full-time
employment expanded at nearly four times the pace of the
current recovery.
It is also important to remember that a large majority of part-time
workers work part-time by choice. At present, there are 7.7
million part-time workers that are described as working part-time
for economic reasons. That includes those working part-time
because of slack work or business conditions as well as those
who say they could only find part-time work. By contrast, there
are some 18.9 million who say they are working part-time for
noneconomic reasons.


To summarize, it is probably unfair to criticize the Obama
Administration for an economy that has produced too many parttime jobs and not enough full-time jobs. A fairer criticism would
be to note the failure to produce sufficient gains in both full-time
and part-time employment.
Personal Income Growth
There are a number of different ways to look at how well
American families and households have fared economically.
This analysis looks at the change in real per capita disposable
income during the current recovery compared with other post1960 recoveries. While not perfect, this measure is useful
because it accounts for inflation and is not distorted by changes
in household or family structure over time.
In the 52 months since the recession ended through October
2013, real per capita disposable income has increased by only
3.7%. This is half the rate of increase in the second worst post1960 recovery (See Figures 16 and 17).

Real per capita disposable income increased an average of 11.9%
over a comparable period in the other post-1960 recoveries. If
real per capita disposable income had increased at that rate in this
recovery, it would have grown by $4,245 (2009$) instead of only
$1,332 (2009$) (see Figure 17).


Perhaps one of the most disturbing aspects of the “personal
income story” is the wide divergence between how the public at
large has fared compared to Wall Street. While real per capita
disposable personal income advanced a paltry 3.7% since the
recession ended through October 2013, adjusted for inflation the
S&P Total Return Index soared by nearly 95% over the same
period (see Figure 18).

While the Federal Reserve’s expansionist monetary policies may
have helped to boost profits on Wall Street, it is increasingly
clear that they have failed to deliver meaningful relief to families
on Main Street. Economic policies that discourage investment
and entrepreneurial risk taking on Main Street continue to
deprive the American people of the economic recovery they need
and deserve.
The Recovery Really is that Bad, but it isn’t because of the
Over the past year, there has been considerable discussion about
the effects of automatic spending reductions contained in the

Budget Control Act of 2011. Advocates for more spending
predicted economic and social calamity if the sequester was not
stopped. Some economic forecasters predicted that both real
economic growth and employment would suffer if spending
reductions were allowed to take place.
While sequestration has received the vast majority of “ink” in
this discussion, the tax increase component of fiscal tightening
should have received the bulk of the attention. In its June 2013
Economic Letter, the Federal Reserve Bank of San Francisco
noted: “Surprisingly, despite all the attention federal spending
cuts and sequestration have received, our calculations suggest
they are not the main contributors to this projected drag. The
excess fiscal drag on the horizon comes almost entirely from
rising taxes.” (Emphasis added.) 4
In reality, the total reduction in federal government spending did
not decline in fiscal year 2013. The Congressional Budget
Office (CBO) recently estimated that during the fiscal year, total
outlays declined by $84 billion or 2.4%. 5
However, that decline was more than accounted for by how
payments to and from government-sponsored enterprises (GSEs)
and the Troubled Asset Relief Program (TARP) are recorded.
During fiscal year 2012, payments to GSEs were on net
negligible. During fiscal year 2013, GSEs made net payments to
the federal government in the amount of $97 billion. Similarly,
outlays related to TARP were estimated at $24 billion during
fiscal year 2012, while the government received $9 billion in
TARP repayments during fiscal year 2013. These payments are
recorded as negative spending, not as revenues. Excluding
outlays for GSEs and TARP yields a spending increase of $46
billion, an increase of 1.3% of total outlays and 0.3% of 3rdquarter GDP.
An analysis of spending trends should be made in an appropriate
context. Nondefense spending was ramped up significantly

during the recession and defense spending was boosted by the
troop surge.
While all federal spending does not show up in the federal
government consumption and investment (FGC&I) component of
GDP, comparing current levels with pre-recession 4th-quarter
GDP levels helps put some perspective on the question. Real
GDP was 5.5% higher in the 3rd-quarter 2013 than its prerecession level. Real FGC&I was an even greater increase, 6.1%
higher than the 4th-quarter 2007.
Most telling, as Figure 19 illustrates, is the comparative levels of
federal nondefense consumption and investment and defense
consumption and investment.
In real terms, defense consumption and investment is 1.9%
higher than pre-recession levels, while real nondefense
consumption and investment is 13.6% higher.

Federal government spending remains elevated despite the
protestations that “austerity” is hurting the economy. In reality,

the only meaningful “austerity” that has been imposed is on
American families via tax increases, not by reductions in federal
In reality, exceptionally low interest rates are
masking the size of government spending on programs and
Only about one-third of federal government spending is included
in the federal government consumption and investment
components of GDP. Other spending affects other GDP
components. For example, Medicare reimbursements and food
stamp purchases are included in personal consumption
expenditures (Figure 20).

The Obama recovery ranks last or close to last on virtually every
indicator of economic health. And despite protests to the
contrary, the anemic nature of the recovery has little to do with
the modest amount of spending restraint imposed by the Budget
Control Act of 2011. Constant intervention and interference in

the marketplace by the federal government and Federal Reserve
are likely contributing to the slow recovery. The free market
engine of American growth and prosperity has been restricted to
first gear. The bottom line is that if we want to put America back
to work, we have to let America work.

In the release of the 2013 ERP, the Council of Economic
Advisers (CEA) highlighted: (1) the current demographic and
labor force trends; (2) government as a partner in human capital
and skill; and (3) immigration. The CEA notes that the aging
population and slowing population growth will present
challenges to America’s workforce in the coming decades. Paired
with the rising tuition costs and increasing levels of student debt,
this complicates the drive to create a highly-skilled and educated
workforce that meets the needs of America’s future. The CEA
believes that increasing the minimum wage incrementally to
$9.00 per hour by 2015 followed by indexing for inflation
thereafter will ensure decent pay from work to support a family.
The report also notes that commonsense immigration reform will
“boost the economy by adding workers and making our labor
force younger and more dynamic. (ERP, p. 159)”
The CEA notes the prime working-age population (ages 25-54) is
projected to decline to 37.9 percent by 2040 from 40.5 percent in
2012. The report provides a brief examination of the trends in the
labor force participation rate over the last several decades, noting
that the labor force participation rate growth has slowed in the
1990s and began to decline in the 2000s after peaking at 67.1
percent in 2000. Interestingly, women’s participation rate has
also slowed in recent years, a much newer trend in the 2000s
relative to the steady decline in the participation rate of men,
which began in the 1970s. Though the report admits that there
are plausible but not fully investigated explanations regarding the
decline in the labor force participation rate for 16-24 year olds

and an increase in the rate for those ages 55 and older, it remains
unclear why the labor force participation rate decline in the prime
working-age population has occurred, currently at levels not seen
since the early 1980s.
The depiction of a steep increase in returns to postgraduate
education was accurate. The CEA suggests that Federal policies
intended to reduce the price of education have helped to offset
the increase in the net cost of attending college, but this assertion
is unclear. The report details the current state of student loan
debt, highlighting the likely causes and the potential threat to
financial stability that such high debt could impose.
In the report, the CEA described the benefits of legal
immigration, such as increasing the size of the labor force and
customer base, yet the suggestions put forth to reform
immigration policy, while going in the right direction, fall short
on achieving the desired outcomes of boosting the economy and
reducing illegal immigration. The report notes that numerical
limits and backlogs have created long waiting times.
Additionally, caps remain on H1-B visas, which permit
temporary employment for skilled professionals sponsored by
U.S. employers, except for higher education institutions and
government research organizations that are exempt from such
While the population is indeed aging and the birth rate is in
decline, these trends do not wholly account for the decline in the
labor force participation rate and the employment-to populationratio. The labor force participation rate measures the share of
working-age population (age 16 and older) that is employed and
unemployed but looking for a job. The employment-to
population-ratio, which measures the share of the working-age
population that is employed, declined during and after the 2001
recession, but was on a path to recovery of pre-2001 recession
levels before the most recent recession occurred.


As noted in a report from the Bureau of Labor Statistics (BLS),
because the population is continually growing, a rise in
employment may not appear in the ratio, but a decrease in the
ratio will reflect as a decline of employment in the ratio.
Additionally, the overall participation rate is “difficult to
interpret during recessionary periods, because it demonstrates no
established cyclical pattern; the labor force can either expand or
contract in response to worsening economic conditions, as the
unemployment of one family member may spur another to look
for a job or may influence others to refrain from entering an
unpromising labor market.” 6 However, if the participation rate
among the prime working-age population continues to decline or
stagnate, it could have negative consequences on economic
expansion and quality of life going forward.
While the CEA accurately states that a family with two children
and one minimum wage income still lives below the poverty line,
it is unclear how they conclude that raising the minimum wage to
$9.00 per hour would raise the wages of roughly 15 million

workers. What the CEA fails to mention regarding the poverty
line is that in addition to tax credits, there has been a
proliferation of welfare programs and increase in benefits per
recipient, especially in response to the recession, that are not
counted in poverty statistics.
Most curious in this section of the report was the CEA’s
conviction that there has been a shift in the consensus view
among economists about the effects of increasing the minimum
wage on employment. This claim is unfounded and unsupported
given the large swath of studies over the span of the last five
decades and beyond that claim the opposite to be true, or that
minimum wage workers are significantly hurt in other ways if
not by reduced employment. 7 At best, it could be claimed that
the consensus view remains inconclusive as to the magnitude of
the negative effect of a minimum wage increase. Contrary to the
CEA’s assertion, there is still an overwhelming consensus that
increasing the minimum wage can have a notable negative
impact on employment for low-skilled labor. In response to the
increase to the mandated minimum in wages, businesses that
cannot afford to pay the higher wage for the same unskilled labor
react in a number of ways, as a Cato analysis notes, including but
not exclusively by: reducing hours, cutting benefits, decreasing
the number of persons employed, increasing the chance and
duration of being unemployed in economic downturns,
encouraging cuts to worker trainer programs, and increasing job
turnover, all of which reduce productivity and hamper economic
growth. 8 More importantly, the evidence that the CEA cites in
support of a minimum wage increase measured small increases in
the minimum wage, and the report fails to acknowledge that the
25 percent increase from $7.25 to $9.00 is by no means a small
Furthermore, as reported by BLS, while workers under age 25
represent only one-fifth of workers, they make up half of those
paid the Federal minimum wage or less. Furthermore, the coming
employer insurance mandates associated with the Patient
Protection and Affordable Care Act compound the problem

businesses face in the increasing cost of employing low-skill
workers. According to the Wall Street Journal, the cost of both
mandates together is expected to be at least $5,700, a 37 percent
increase to employers provided employers pay the penalty
instead of providing coverage. If an employer opts to pay for
coverage, then that combined cost could amount to as much as
$7,900 or more, a more than 50 percent increase. 9
The CEA notes that the President has taken significant steps
towards ensuring that post-secondary education remains
affordable to students, but fails to acknowledge that some of
those steps can have unintended consequences that can fuel the
problem of rising tuition costs. As noted in a recent Wells Fargo
Economic Group analysis, federal lending has dominated the
marketplace for loans, which presents a problem as in health
care, as prices and terms are set differently than in a private
market. The analysis notes that the Consumer Financial
Protection Bureau identifies only 15% of outstanding student
debt originating from the private market. While favoring the
social welfare benefits over the concern of students’ ability to
repay loans, the analysis states: “This presents a challenge to
price discovery and alters the risk-return tradeoff, with more risk
being shifted to taxpayers, the ultimate backers of federal debt
and who are, moreover, not involved in making the credit
decision to extend the loan.” 10
By all accounts, as a percent of household debt, disposable
personal income, and GDP, student loan debt is rapidly on the
rise, as shown in the figure above. Compounding the problems
associated with this trend, household income growth has lagged
behind tuition growth over the past decade. The cost of tuition
and fees for post-secondary education has notably increased as a
proportion of median household income, rising from 9.6 percent
in 1976-77 to 25.0 percent in 2009-10. Many recent studies have
pointed to federal aid as effectively increasing the price of tuition
proportionally to the amount of aid offered. According to data
from 1996 to 2008, Pell Grant recipients on average saw an
increase in tuition price of $17 to every $100 of Pell Grant aid

offered. For selective nonprofit colleges, this ratio was observed
to be as high as $66 in average tuition price increases for every
$100 of Pell Grant aid offered to students. 11 This issue points to
very dire circumstances for generations X and Y, who according
to a recent report from the Urban Institute, have accumulated less
wealth than their parents did at that age over 25 years ago. 12

Finally, though the ERP does not go into great detail over the
immigration policy changes that the Administration supports and
therefore makes it difficult to evaluate, the removal of numerical
limits and reduction in backlogs on legal immigration and visas,
especially for skilled labor, would significantly reduce the
incentive for illegal immigration and encourage skilled workers
and entrepreneurs to choose the United States as a place of
business and livelihood.

The ERP highlighted the President’s National Export Initiative
(NEI), which aims to double U.S. exports over five years in order
to support up to two million new American jobs (ERP, p. 220).
As a starting measure for this goal, the Administration chose a
low point of 2009, when exports sank to an estimated $1.57
trillion due to the recession. In order to meet the NEI objective,
exports would have to reach $3.14 trillion by the end of 2014. 13
Thus far, the Administration is falling far short of this goal,
which prompted private-sector economists to conclude that
doubling exports before 2015 is firmly out of reach. 14

The ERP blames weakness in the global economy for not making
greater progress on exports (ERP, p. 221). However, other action
and inaction by the Administration have contributed to the export
For example, the Government Accountability Office (GAO)
released a study critical of the Administration’s Trade Policy

Coordinating Committee, on which the Council of Economic
Advisers participated. GAO concluded the following:
In announcing the National Export Initiative, the
President not only reemphasized the importance of
exports to the U.S. economy, but specifically highlighted
the need to understand and coordinate federal resources
for export promotion. However, the TPCC does not
provide decision makers—including Congress and the
Export Promotion Cabinet—with information that
provides a clear understanding of how resources are
currently allocated across the country and around the
world among its member agencies or across federal
export promotion priorities. 15
More fundamentally, the President has not armed himself with
the tools necessary to pursue an aggressive, job-creating trade
The ERP correctly states that market-opening trade agreements
are “critical to the growth of trade-supported jobs (ERP, p. 221).”
During the previous administration, the number of countries with
which the United States had a reciprocal free trade agreement
expanded from three to 17. 16
In contrast, the current
administration has not concluded any free trade agreement that it
initiated. Further, the Administration delayed submitting for
congressional approval trade agreements with Korea, Colombia,
and Panama that were negotiated during the previous
administration. By the Administration’s own estimates, these
agreements translated into the creation of 250,000 jobs. 17 The
delay has cost American farmers and other exporters crucial
market share as competing trade agreements, such as the one
between Canada and Colombia, entered into force. 18

mentions that the Administration is currently
with several countries in the Trans-Pacific
(TPP) and the Transatlantic Trade and Investment
(TTIP) (ERP, p. 221). Trade Promotion Authority

(TPA) is a critical tool for negotiating trade agreements because
it assures our trading partners that the commitments made by the
Administration will not be undone by Congress. The
Administration now admits that it needs TPA in order to
conclude important agreements like the TPP and TTIP. 19
However, the Administration has not actively engaged with
Congress on the contours of TPA. In addition, the President
could have been granted TPA as early as 2011, when an
amendment was offered that would have given him this
authority. Instead, the President chose not to seek TPA, and
members of his own party overwhelmingly rejected it. 20



Failure to Analyze Effectiveness and Costs of Climate Policies
Chapter 6 of the 2013 ERP adds little to the understanding of
climate change and what to do about it from an economic
perspective. Most of the chapter invokes the threat of extreme
climate developments that it represents would occur in the
absence of Administration climate policies. The CEA repeatedly
refers to a scientific consensus that anthropogenic greenhouse
gas emissions are causing global warming 21 and devotes a large
part of the chapter to describing its harmful effects, conceding
uncertainty only in the degree to which they are harmful. It
thereby seeks to establish the necessity of the particular policies
the Administration has chosen without discussing their relative
effectiveness to date, 22 their expected progress toward a concrete
emissions objective, or their costs.
The CEA associates a “negative externality” with energy related
greenhouse gas emissions because they “impose costs on others
who are not involved in the transaction resulting in the emissions
(ERP, p. 186),” stating further: “This diagnosis of the market
failure underlying climate change clarifies the need for
government to protect future generations that will be affected by
today’s emissions (ERP, p. 196).” The CEA cites four estimated

present values for the future cost per ton of CO2 emitted, the
“social cost of carbon (SCC)” in 2011. 23 But the CEA does not
relate these values to emission reductions; one does not know
from the report what imposing them does to CO2 emissions. 24
(There are other greenhouse gases; CO2 is the major one and the
ERP focuses on it.)
Further, the Council does not explain how much SCC the various
Administration policy approaches already impose on emitters or
how much more it thinks should be imposed. The report lists
four methods to impose the SCC: (1) market-based solutions
(cap-and-trade), (2) technology-based emissions regulation, (3)
transitioning to more efficient energy technologies and use of
renewable sources, and (4) preparing for future impacts that are
by now unavoidable (ERP, pp. 196, 197). 25 But the report does
not say how much or the SCC that the industry faces from each
of them, especially from the predominant method the
government uses to impose it, namely regulations and mandates
with respect to (2) and (3).
Estimates of the Total SCC
The report also does not show total costs to the economy of
applying the SCCs, it only mentions costs per ton. The following
table shows total social cost of carbon estimates for the U.S. CO2
emission volumes depicted in the ERP’s Figure 6-2, which are
obtained from the Energy Information Administration (EIA).
The total costs are derived by applying the Interagency Working
Group’s latest SCC estimates (in 2013 dollars rather than 2007
dollars). 26 Though providing only 2011 figures, the Council
explains that the SCCs will rise over time because marginal
damages increase as atmospheric CO2 concentrations rise (ERP,
p. 191).




Billions* of Current Dollars

Metric Tons



Discount Rate




95 Percentile


68 $
203 $
320 $
71 $
223 $
341 $
72 $
256 $
387 $
84 $
289 $
421 $
97 $
314 $
459 $
116 $
349 $
496 $
131 $
386 $
541 $
$ 26/Ton $ 72/Ton $ 101/Ton $ 225/Ton
$ 30/Ton $ 77/Ton $ 107/Ton $ 242/Ton

Notes: SCCs are based on averages from different models and scenarios.
* Through 2040.

The costs shown represent substantial economic burdens. It is
important to know how large a burden the economy already bears
and how much more the Administration wants to add with the
regulations the EPA has in the pipeline. The Council suggests
that a “robust” response to climate change should anticipate the
worst outcomes that models have projected (ERP, p. 193), which
indicates a preference for the costs in the column entitled “95th
Percentile,” referring to the present costs for the worst 5 percent
of modelled future climate outcomes. Yet, for all the certitude it
expresses in the incontrovertible need to arrest global warming,
the Council does not show any of these costs much less which
ones the Administration believes ought to be imposed. 27
The ERP Does Not Map a Path to the Administration’s Objective
The Administration had pledged at the United Nations Climate
Change Conferences in Copenhagen and Cancun to achieve
specific levels of greenhouse gas emissions for 2020 and 2050.
The ERP’s Figure 6-2, reproduced below, shows the 17%
reduction the Administration agreed to from the level of U.S.
emissions in 2005. But the report does not say what calculations
led the Administration to make this pledge. It is also remarkable
that the CEA shows a target without a path to meet it, especially
given the chapter’s title referring to “the path toward sustainable

energy sources.” The Council should have laid out what it would
take to achieve the 2020 target shown in the graph—now just
seven years away—and the longer term 2050 target of reducing
greenhouse gas emissions by 83% from their 2005 level, which is
not shown in the graph and far below the range selected for
ERP’s Figure 6-2.

There is a striking drop in emissions after 2008 that coincides in
large part with the Great Recession. The Council estimates the
contributions to the emission reductions that occurred since 2005
from various sources and, indeed, finds that more than half of the
emission reductions were due to slower economic growth, as
shown in ERP’s Figure 6-3.


It appears that it would take another “Great Recession” to
approach the U.S. target under the Copenhagen Accord. It would
have been appropriate for the Council to address the sacrifice of
economic growth required to reach the target, but instead, the
Council says it expects the economy to improve and that “the
weakness of the economy in 2007-2009 will no longer restrain
energy consumption (ERP, p. 195).” For recent reductions in
emissions to continue, it advises that “a greater share will need to
be borne by fuel switching into natural gas and into zeroemissions renewables, and by accelerating improvement in
economy-wide energy efficiency (ERP, p. 195)” but offers no
estimate of the extent or cost.
Current “Clean” Energy Technology is not Up to the Task
Germany, a country cited by the report as leading the United
States in energy efficiency due in part to more energy efficient
automobile and building codes (ERP, p. 199), has made a
determined effort to increase efficiency in energy use and to
adopt alternative energy sources; it now receives over 20% of its
electricity from renewables. But a leading German weekly news
magazine recently summarized the results this way: “Germany’s

aggressive and reckless expansion of wind and solar power has
come with a hefty pricetag (sic) for consumers, and the costs
often fall disproportionately on the poor. Government advisors
are calling for a completely new start.” 28 A recent Wall Street
Journal editorial put it another way: “A love affair with
renewables brings high prices, potential blackouts and worries
about ‘deindustrialization.’” 29 Japan, another country similarly
cited in the ERP, just abandoned its emissions pledge for 2020
and set a new, much less ambitious target. 30
There is a debate going on in the United States among climate
policy advocates over whether existing low carbon technology is
good enough to continue pushing its general adoption with
mandates and subsidies.
Some claim that we have all the
“clean” energy technologies we need and that they should be
deployed through regulatory mandates and subsidies and taxes on
“dirty” energy. But as practical problems of implementation
have mounted, such as the “blend wall” for ethanol in the
gasoline supply and insufficient supply of cellulosic ethanol to
meet mandated levels of usage, objections to this approach are
The Information Technology and Innovation
Foundation (ITIF), for example, argues that technological
breakthroughs are needed, not the dissemination of
fundamentally flawed “clean” energy technologies that are
uncompetitive with fossil fuels outside of niche markets and
must be imposed through mandates, subsidies and taxes that have
no chance of being adopted globally. 31
Government subsidies and mandates can force an expansion of
renewables that is initially affordable because it starts from a low
base. Advocates of widespread deployment had hoped that
economies of scale would bring down unit costs as volume
increases, but it is ever more evident that with current
technologies scale economies are not sufficiently pronounced
and some long-run supply curves may even slope upward.
Increasing volume does not make renewables competitive with
fossil fuels but increases the burden on the economy. The
Administration wants to lead the world to clean energy, but

emerging economies, whose CO2 emissions are increasing, will
not follow a path that leads to an impasse. The Council lauds the
government’s investments in technology and R&D “aimed at
driving costs down to the point where renewable energy is
competitive with traditional fossil-fuel energy (ERP, p. 204)” but
is silent on the technology deployment debate and the
implications for its prescription of fuel switching and efficiency.
Positive Externalities
By inducing economic development and technological progress,
current energy production can bring benefits that also are not part
of decisions made in market transactions. These could be
considered a positive externality of energy use. For example,
increased production, investment and hiring in the oil and gas
industry drive business expansion beyond the industry itself
through a well-established U.S. supply chain, and, as incomes
rise for wage earners, landowners, and governments spend more,
inducing further economic expansion. A large number of studies
have estimated the indirect and induced effects on GDP and
employment of the oil and gas shale revolution with substantial
positive value-added and employment multipliers. 32
The federal government invokes such multipliers for its own
spending, which it claims generates benefits in excess of costs by
stimulating production and hiring. Indeed, the ERP proclaims its
commitments to “economic and job growth” and “energy
security” in the energy chapter’s first sentence ahead of “clean
energy” and “climate change.” It points to the “economic
benefits of low-cost energy (ERP, p. 185)” specifically and
points out the resulting “competitive advantage to the U.S.
industrial sector (ERP, p. 202)” as well as induced growth in
“agriculture, petrochemical manufacturing, and other industries
(ERP, p. 204).”
The U.S. economy is operating below capacity and while it has
been growing, the rate of growth lags far behind that of previous
recoveries from recession, leaving a large share of the population

unemployed. Among the reasons are federal mandates and
regulations that force the cost of efforts to manage the climate
onto current production. Hence, there is a tension between
advocating stimulus measures to raise production while at the
same time adding cost that puts downward pressure on
production. The ERP does not mention them, but negative
multipliers attached to the social carbon costs are estimated in the
hundreds of billions of dollars, as much as $769 billion in 2020
alone, the year of the Administration’s initial emissions target
(see prior table).
The tension shows in various Administration policy stances, such
as in its ambivalence toward hydraulic fracturing, for which it
professes support indirectly by claiming an “all of the above”
(ERP, p. 202) energy strategy, while at the same time seeking to
take on a traditional state function and regulate it. Tensions
abound also in the Administration’s proud citing of increased
domestic oil and gas production (ERP, p. 202) while refusing to
allow more offshore drilling and indefinitely delaying
construction of the Keystone pipeline, a project that would
reduce U.S. oil imports from unreliable sources and create jobs in
the United States. Beyond citing the general challenge of finding
a responsible, balanced path, the ERP offers nothing concrete.
Economic Resiliency
Among the long-term positive externalities of economic growth
are higher incomes, increasing productivity, technological
progress, and introduction of new capabilities. A larger, more
advanced economy can deal more readily with adversity
whatever its nature. The tradeoff of negative for positive growth
effects is on vivid display in many countries, such as China, that
cope with immediate and tangible pollution problems in order to
industrialize because it lifts their people from poverty and
introduces advanced technologies. The more advanced their
economies, the more able they are to overcome natural disasters
and other hardships.
Indeed, the concept of “negative
externality” hardly applies in many countries because the state

has direct control over industrial activity and has to deal with the
associated effects of pollution.
When the externality is
internalized it does not mean, as the report suggests (ERP, p.
186), that emissions necessarily will be reduced or eliminated. A
government may choose not to cut emissions and accept the
trade-off of negative for positive effects from energy use in what
it views as its nation’s long-term interest. This explains why
some governments, rather than raise fossil fuel prices with taxes,
push down their domestic gasoline and diesel prices below their
import cost with subsidies and price controls.
Policies to Protect Us from the Elements
A good case could be made for policies that confer benefits
regardless of whether particular predictions of the rate and
direction of climate change come true. Beyond technological
advancement and economic growth, protection from the natural
elements that can wreak havoc whether or not the globe warms
has value. In the section entitled “Preparing for Climate
Change,” the report advocates measures such as improving
building codes, making structures more storm- and floodresistant, investing in community planning and response,
revisiting federal crop and flood insurance subsidies with a view
toward encouraging drought-resistant varietals, and building
away from flood plains. It also lists investments in maintaining
existing infrastructure such as levees and enhancing the electrical
power grid. These are sound suggestions in principle. It would
have been instructive for the report to discuss their costs and
benefits and compare them with other policies.
The Council treats Administration policies as self-justified by
their professed intent to counteract global warming and says as
much in the conclusion of chapter 6. It provides no basis for
determining what policies are more or less effective among those
adopted or for deciding what other policies may be better.

The chapter promoting the massive undertaking of managing the
global climate does not address the impact on the economy of
doing so. The Council cites different values for the social cost of
carbon without quantifying the effect on emissions and economic
output of imposing them. Its general appeal to fuel switching
and efficiency improvements gives no measure of scale or cost
and ignores the debate over forcing dissemination of alternative
technologies as they exist versus developing superior ones. In
particular, the Council’s report does not show the path to the
Administration’s 2020 emission target—the point marked ‘x’ in
the ERP’s Figure 6-2.
Much of the report dwells on aspects of the climate that are
outside the Council’s purview. Having done so, the Council
seems remiss in not mentioning that while greenhouse gas
emissions have been increasing globally, the average global
temperature has not risen in the last decade and a half. The crux
of the anthropogenic global warming theory is that increasing
greenhouse gas emissions cause the global temperature to rise.
The Council delves into some detail on the subject of warming
and states that “The Arctic has warmed … in part because
warming melts snow and ice, leading to less reflected sunlight,
which causes yet more warming (ERP, p. 186).” But in
September it was reported that the area of Arctic sea ice was
almost 30% greater in August than a year ago, the main
significance of which is that “the narrative of the ‘spiral of death’
for the sea ice has been broken.” 33 This finding was reported
after the ERP’s release but suggests that the subject of climate
change is better left to experts in that field. The CEA should
have focused instead on the economic aspects of the
Administration’s emission objectives and what it would take to
achieve them; that could have been very instructive.






Health Care Spending
Chapter 5 of the ERP, which is entitled “Reducing Costs and
Improving the Quality of Health Care,” discusses the rising cost
of health care which it attributes to a combination of changing
demographics, high labor-intensity of health care services, new
technology, and an inelastic demand for health care services.
First, rising costs reflect a growing population with a rising share
of elderly individuals. It costs more to treat more people; and it
costs more to treat the elderly than the young (ERP, p. 162).
Second, the ERP claims health care wages have outpaced
productivity growth (ERP, p. 163). Third, continued advances in
diagnosis and treatment have increased costs per capita (ERP, p.
164). Finally, the ERP claims health care is a “super-normal”
good which means the demand for health care rises faster than
income (ERP, p. 165).
Demographics account for a considerable share of rising health
care costs. But there are no empirical data to support the claim
that health care is excessively labor-intensive. High wages for
doctors and other medical specialists more likely reflect high
levels of human capital and the inability to accurately measure
their real output, thus understating productivity growth in the
health care sector. Most sectors of the economy rely on new
technology to reduce unit costs in order to increase demand for
their product.
But third-party payments and government
subsidies for health care distort these incentives. Rather than
consuming more because their incomes are rising, Americans are
consuming more because their out-of-pocket share is falling.
Medical Technology
Improvements in the quality of health care contribute to
decreased morbidity, increased survival, reduction in pain, and
less onerous treatment administration (ERP, p. 165).

Measurements of productivity growth should reflect these
improvements in outcome as well as their increased cost. But it
is difficult to accurately identify each cause and effect.
Moreover, morbidity and mortality are extremely poor metrics by
which to judge the quality of health care. Not all medical
conditions are life threatening, and not all medical care is
intended to be life extending.
Sources of Inefficiency in Health Care Spending
The ERP states that geographic variation in practice patterns and
health outcomes implies that a significant portion of health care
spending produces little health value (ERP, p. 167). The report
suggests various causes of poor health outcomes, including
fragmented delivery and poor coordination of care. The failure
to adopt “best practices” and payment fraud also contribute to
waste and inefficiency (ERP, p. 169).
The extent to which geographic variations in health care
spending are due to differences in socioeconomic factors (such as
income, insurance, smoking, obesity, etc.), rather than
differences in physician practice patterns is not clear. Spending
differences between Medicare Part A and Part B as well as
Medicaid and private insurance do not appear to vary in any
systematic way. Any effort to equalize payments would have
offsetting effects, thereby reducing any potential budgetary
savings or adversely affecting access to health care.
Health Insurance Coverage
The ERP states that health insurance coverage provides many
benefits, especially to those who with lower incomes (ERP, pp.
171, 172). The ERP states that the Affordable Care Act (ACA)
increased dependent coverage for those up to age 26 and is
expected to increase coverage among all age groups next year
(ERP, p. 172). The ACA will also prevent insurance plans from
denying coverage or charging premiums based on health status
(ERP, p. 174).

Like all other goods and services, health insurance provides a
benefit, but it also has a cost. Expanded coverage and increased
benefits will increase the demand for health care and result in
higher premiums and additional government spending.
Quality of Care and Payment Reform
The ERP states that the ACA will improve the quality of health
care (ERP, p. 174). It notes that reductions in Medicare provider
payments will extend the solvency of the Medicare trust fund
(ERP, p. 175). The ERP also notes that the ACA contained
several initiatives designed to reduce hospital readmissions,
improve coordination of care, and reduce fraud (ERP, p. 175).
The ACA payments reforms provide various incentives such as
shared savings and bundled payments with risk adjustments
(ERP, pp. 177, 178).
The projected improvement in Medicare solvency is based on the
assumption that the reductions in provider payments under the
ACA will occur as scheduled. Both CBO and Centers for
Medicare and Medicaid Services (CMS) actuaries have stated
that such reductions will likely prove to be unsustainable due
their adverse impact on beneficiaries’ access to health care. The
CBO also concluded that two decades of previous cost
containment demonstrations have not substantially reduced
federal spending on Medicare.
Is the Cost Curve Bending?
The ERP claims the real rate of health expenditure growth has
declined or remained constant every year between 2002 and 2011
(ERP, p. 179). It also claims that the projected growth of
Medicare spending per beneficiary will decline (ERP, p. 179).
According to CMS, national health expenditures have risen from
15.4% of GDP in 2002 to 17.9% in 2011. While that’s a slower
rate of growth than some previous decades, it’s not clear this is a

sustainable trend. Widespread adoption of managed care
techniques coincided with the slowdown in national health
expenditures during the 1990s. But as these techniques became
commonplace, they generated a consumer backlash, and their
cost restraining influence began to wane. Projections of future
Medicare growth rates are merely projections.
Introductory Comments
Much of America, including the media, seems surprised at the
“coal” that is being delivered to Christmas stockings across
America in the form of cancelled health insurance policies,
skyrocketing premiums, and diminished access to specific health
care providers.
We are not shocked by these developments. Joint Economic
Committee Republicans warned about these and other issues
during the Congressional debate on the ACA, popularly known
as ObamaCare. We provided a vivid graphical illustration of the
new health care system. It should surprise no one that the ACA
is beginning to implode. And the President’s extra-legal
executive actions will only delay, not prevent, the ACA’s
inevitable collapse.


In the remainder of this section, we will review several of the
warnings Joint Economic Committee Republicans issued
regarding the unsustainability and negative effects of the ACA.
“If You Like Your Plan, You Can Keep Your Plan”
While was experiencing a disastrous rollout,
policymakers, the media, and the public were beginning to focus
on the large number of cancellation notices that people in the
individual insurance market were receiving. We noted in the
2010 Joint Economic Report, that “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.’” 34
Investigative reporting revealed that for much of the time
President Obama was making this public assertion, the White
House knew the statement was false.
The fact that millions have received cancellation notices for their
existing individual market insurance plans seems to have caught

many off guard. Joint Economic Committee Republicans warned
of this eventuality during debate on the ACA in September 2009.
On March 30, 2010, shortly after passage of the ACA Joint
Economic Republicans made the point that under the ACA, the
individual insurance was essentially “being phased out.” 35

In the same 2010 Joint Economic Report, we noted that
premiums were likely to go up, not down and “[t]here 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.” 36
We were also highly critical of the ACA’s financing
mechanisms, some of which amounted to nothing more than
gimmicks and sophistry. Several elements of the deal to secure
votes for passage also accelerated the timing of when many
negative consequences of the ACA would hit the economy and
American citizens. At its core, we argued, the ACA contained all
the wrong incentives.
The ACA imposed a new tax on health insurers of $8.1 billion
beginning in 2014 and rising to $14.3 billion by 2018 (indexed
for medical inflation in later years). 37 At the time, CBO affirmed
the general consensus of economists that the new tax “would be
largely passed through to consumers in the form of higher
premiums for private coverage.” 38
Far from reducing family health care premiums by $2,500 a year,
as claimed by President Obama, the new tax will paradoxically
drive premiums upward for a typical family of four with jobbased 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.
Joint Economic Committee Republicans warned “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 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. 39
As the following chart (excerpted from the 2010 Joint Economic
Report), 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. 40 Thus, the insurance tax is not only costly
but disproportionately affects those workers who are employed
by small businesses.

Proponents of the ACA challenge the foregoing analysis on
grounds that it does not take into account the new small
employer 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. 41 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, the ACA 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 of 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.
Using Inflation to Hide the Cost of the ACA from Businesses and
Perhaps the most intellectually dishonest aspect of the ACA
funding mechanism is the use of inflation to expand the
application of various taxes imposed under the law.
For instance, the excise tax on high-cost plans (“Cadillac plans”)
will hit more and more health insurance plans. In passing final
legislation, the majority extolled the 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 date than in the Senate passed legislation. The changes
were represented as a “scaling back of the tax.” True, the
effective date of the tax 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” adjusts 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’ favorite
plan when the tax is initially applied. 42 The only plans that
benefit in the short term under the last minute 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.
The irony is that the last minute “fix” replaced 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 revenue under the excise tax on high-cost
plans was reduced during the ten-year budget window, over the
long-term the high-cost plans’ tax revenues will be greater than
under the enacted legislation unless the indexing level is adjusted
in the future to prevent average and modest plans from becoming
subject to the tax. In which case, much of the tax revenues that
are supposed to pay for new health care subsidies would not be
As noted, the thresholds at which the new “Medicare” taxes
contained in the legislation apply 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 damaging to
the economy because taxes on investment income discourage
business investment in new buildings, equipment, and
intellectual property.
The downsides of this tax are hard to overstate. Investment is the

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 slower economic
growth, fewer jobs, lower wages, and a nation less economically
prepared for the future.
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.
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.
During debate over the ACA, we discussed at length the damage
done to economic incentives by provisions that are included in
the law.
In addition to providing incentives to employers to pay a penalty
and drop employer provided health insurance for their
employees, we warned that the premium support scheme
contained in the ACA would undermine incentives to work by
imposing large effective marginal tax rates on certain earners.
Those hardest hit by these provisions will be families with
modest incomes. 43

Worry About the IRS and Catastrophic System Failure
We have witnessed not only a difficult roll out of,
but growing concern over the Internal Revenue Service’s role in
implementing the law. Concern has ranged from fear over the
use of personal data for improper purposes to questions about the
massive increases in personnel and budget needed to implement
the law.
We could discuss the warnings we issued regarding the
deleterious effects this law would have on the economy and our
citizens at even greater length, but we will end our discussion of
the ACA succinctly.
We reiterate our warning from 2010: “Policy makers should be
concerned that the complexity of the scheme creates significant
risks – even a potentially catastrophic system failure.” 44
The American economy has been the greatest engine of
prosperity in history. While not perfect, our historical reliance
on bedrock principles of free people and free markets has
brought more prosperity and freedom to more people than the
world has ever witnessed. That prosperity has enabled the
United States to become the strongest, most resilient nation on
Unfortunately, the trend to greater reliance on the federal
government and increasingly intrusive social and regulatory
policies emanating from Washington threaten to condemn our
nation to economic stagnation that will lower the standard of
living for all Americans. In fact, our overly burdensome
entitlement-program promises threaten to bankrupt the nation.
Indeed, in the Business Roundtable’s (BRT) 4th-quarter 2013
CEO Economic Outlook Survey, CEOs cited regulatory costs as

“the top pressure facing their business over the next six
months.” 45 Labor and healthcare costs were also of significant

BRT’s Chairman, Jim McNerney, President and CEO of the
Boeing Company, summarized the executives’ outlook noting
that “In aggregate, our expectations are consistent with an
economy that will continue along the path of steady, modest
recovery into the first half of 2014. These soundings are also
consistent with an overall economy that, despite progress, is not
yet performing at its full potential.” 46
This is simply not good enough. Neither is the disturbing fact
that from the time President Obama took office in January 2009
through September 2013 47 more than 15.3 million Americans
were added to food stamp rolls while employment, as measured
in the household survey, rose by only 2.2 million. Adding nearly
7 people to food stamps for every person that gained employment
is not the way to grow a strong middle-class.
This is not an accomplishment to be proud of. We must reverse
this trend before it is too late.


We must return to our bedrock principles and recognize that the
best hopes for America’s economic future are free people and
free markets. We must curtail unnecessary intrusions by the
federal government into the lives of our citizens and the
The choice we face is simply stated. Do we trust America’s
future to the benevolence and competence of big government?
Or do we place our trust in free people and free markets?
Joint Economic Committee Republicans will choose the proven
path of free people and free markets.


2013 Economic Report of the President (ERP), p. 3. The entire report can be
accessed online at:
Calculated numbers are used here to account for rounding rather than using
the single decimal numbers reported by BLS. This number is rounded up to
the nearest tenth of a percentage point; the calculated decline is actually 0.852
percentage point.
Rounded up from a calculated difference of 4.89 percentage points.
Brian Lucking and Daniel Wilson, “Fiscal Headwinds: Is the Other Shoe
About to Drop,” Federal Reserve Bank of San Francisco Economic Letter,
June 3, 2013. Accessed at:
Congressional Budget Office, “Monthly Budget Review – Summary for
Fiscal Year 2013,” November 7, 2013.
Note: While the employment to population ratio includes members of the
Armed Forces unlike the labor force participation rate, only the civilian
population figure experience significant change. See: Carol Boyd Leon, “The
employment-population ratio: its value in labor force analysis,” Monthly
Labor Review, Bureau of Labor Statistics, February 1981,
David Henderson, “Christina Romer on the Minimum Wage,” EconLog,
March 4th, 2013,; Walter
E. Williams, “A Minority View: Higher Minimum Wage,” Townhall,
February 27th, 2013,; Veronique
de Rugy, “Raising the Minimum Wage: A Tired, Bad Proposal,” National
Review Online, February 13th, 2013,; Steven Landsburg, “Thoughts on the
Minimum Wage,” The Big Questions, February 18th, 2013,; Mark J. Perry, “Even if minimum wage hikes don’t reduce
employment, they still make many unskilled workers worse off,” AEI,
February 18th, 2013,, “Let’s review the adverse effects of raising the minimum
wage on teenagers when it increased 41% between 2007 and 2009,” AEI,
February 16th, 2013,, “The real tragedy is that many

Americans earn $0.00 per hour and live in poverty, because of the minimum
wage law,” AEI, February 13th, 2013,
Mark Wilson, “The Negative Effects of Minimum Wage Laws,” Policy
Analysis 701, Cato Institute, June 21st, 2012,
Merrill Matthews, “It’s Not Just the Minimum Wage, It’s Also the Health
Insurance Mandate,” Forbes, February 19th, 2013,
John E. Silvia and Sarah Watt, “Student Loans: A Different Financial
Market,” Wells Fargo Economics Group, February 11th, 2013.
Jack Hough, “Why College Aid Makes College More Expensive,”
SmartMoney, February 24, 2012,
Eugene Steuerle, Singe-Mary McKernan, Caroline Ratcliffe, and Sisi
Zhang, “Lost Generations? Wealth Building among Young Americans,”
Urban Institute, March 2013,
“Report to the President on the National Export Initiative: The Export
Promotion Cabinet’s Plan for
Doubling U.S. Exports in Five Years,” Washington, D.C., September 2010, p.
1, accessed at on November 18, 2013.
Jay H. Bryson, “Can America Achieve Stronger Export Growth?” Special
Commentary by the Economics Group of Wells Fargo Securities, October 21,
2013, accessed at on
November 18, 2013.
Government Accountability Office, “Export Promotion: Better Information
Needed about Federal Resources,” July 2013, p. 17, accessed at on November 18, 2013.
The United States Trade Representative’s listing of free trade agreements
and their entry into force can be found at
Committee on Ways and Means, “Trade Agreements Create Jobs and
Economic Opportunities for U.S. Workers,” accessed at on
November 18, 2013.
United States Department of Agriculture Foreign Agricultural Service,
Global Agricultural Information Network Report on Colombia, March 15,
2011, accessed at

Feed%20Annual_Bogota_Colombia_3-10-2011.pdf on November 18, 2013.
Doug Palmer, “USTR Nominee Froman Promises Push for Trade
Promotion Authority,” Reuters, June 6, 2013, accessed at on November 18, 2013.
United States Senate, 112th Congress, 1st Session, Record Vote #141,
accessed at
ongress=112&session=1&vote=00141 on November 18, 2013.
It cites the 2009 assessment by the U.S. Global Change Research Program
(USGCRP) on behalf of the National Science and Technology Council and the
International Panel on Climate Change (IPCC 2012).
The closest it comes is to estimate the effects on CO2 emissions of energy
efficiency and fuel switching overall.
$5, $22, $36, and $67 per ton, in 2007 dollars. The SCC covers “health,
property damage, agricultural impacts, the value of ecosystem services, and
other welfare costs of climate change (ERP, p. 188).” The CEA relies on the
Interagency Working Group on Social Cost of Carbon (led by it and the Office
of Management and Budget) that issued a document in February 2010
monetizing the future cost of emitting an additional or marginal ton of CO2.
Three of the present values it cites differ in the discount rate applied, 5
percent, 3 percent, and 2.5 percent, and the fourth is based only on the worst 5
percent of modeled climate outcomes, discounted at 3 percent.
The closest it comes to addressing the question is to say that the new fuel
economy standards “are projected to reduce annual CO2 emissions by over 6
billion metric tons over the life of the program….” (ERP, p. 198.)
Despite its statement that “Appropriate policies to address this negative
externality would internalize the externality, so that the price of emissions
reflects their true cost …,” (ERP at 186) the CEA does not discuss carbon
The Interagency Working Group has already increased its estimated SCCs
from the levels the CEA cites, with increases of 80-140 percent by 2020 and
172-146 percent by 2050 (Technical Support Document: Technical Update of
the Social Cost of Carbon for Regulatory Impact Analysis Under Executive
Order 12866, May 2013). For example, the new SCCs/ton in 2007$ for 2010
are: $11, $33, $52, and $90; multiplying them by 1.093 yields SSCs/ton in
2013$ and by 5.63 billion tons yields total SCCs in billions of $68, $203,
$320, and $554 (rounded).
“President Obama has set a goal of once again doubling generation from
wind, solar, and geothermal sources by 2020 … (ERP, p. 205),” but the
closest the CEA comes to talking about cost numbers is to cite the President’s
Better Buildings Challenge with $2 billion in private-sector commitment, a
2011 investment of $14 billion in wind generating capacity, the
Administration’s support for solar energy exceeding $13 billion since

September 2009 through DOE programs, including loan guarantees, $6 billion
in clean coal technology with $10 billion private funds, and $4.5 billion
through the Recovery Act for smart grid investment, matched by $5.5 billion
private funds.
“Germany’s Energy Poverty: How Electricity Became a Luxury Good,” Der
Spiegel, 9/2/13. For the English translation see, SpiegelOnline International.
Accessed at
“Germany Reinvents the Energy Crisis,” Holman W. Jenkins, Jr., The Wall
Street Journal, 11/9-10/13.
“Japan in greenhouse gas emissions U-turn,” Jonathan Soble and Jan
Cienski, Financial Times, 11/15/13.
“Challenging the Clean Energy Deployment Consensus,” Megan Nicholson
and Matthew Stepp, ITIF, 10/23/13.
See, for example, the JEC Commentary on North American Energy of July
24, 2013, which, along with a June 5th Commentary, also discusses the
benefits at greater length.
Quote from the Wall Street Journal of a climatologist at the Georgia
Institute of Technology in “Arctic Ice Grows Almost 30% After Record Melt
in 2012,” by Gautam Naik, September 11, 2013.
Joint Economic Committee, 2010 Joint Economic Report, p. 98. Accessed
AS …, March 30, 2010, Available at:
2010 Joint Economic Report, p. 101.
§ 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 $60.1b will
actually be collected. JCT, JCX-17-10, 3/20/10.
CBO, Letter to Senator Evan Bayn, November 30, 2009, pp. 15-16.
Accessed at:
National Federation of Independent Business, “The ‘Health Insurance Fee’:
A Tax on Small Business and the Self-Employed,” (accessed
Employee 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.


§ 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.
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
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.
Joint Economic Committee Republicans, “All the Wrong Incentives: How
Democrats’ Health Care Reform Proposals Would Harm Workers and
Families,” December 9, 2009. Accessed at:
2010 Joint Economic Report, p. 112.
Business Roundtable, see
September 2013 is the last month for which both employment and SNAP
data are available.

The Economic Report of the President, published early in the
year, provided a preview of the economy in 2013 along with
economic justifications for key aspects of the Administration’s
policies. This annual report of the Joint Economic Committee
reviews the state of the U.S. economy so far this year and
highlights prospects and challenges that lay ahead.
The economy in 2013 has continued to grow at a moderate pace,
the unemployment rate has edged down and inflation has
remained low. As in recent years, the private sector continued to
lead the economic expansion.
Challenges this year included the ongoing sequestration, the
expiration of reduced payroll tax rates at the start of the year and
another round of Congressional brinksmanship over the United
States paying its bills. A disruptive and unnecessary government
shutdown in October provided a further drag on the economy.
Prospects for near-term U.S. growth are brighter now than they
were at the start of this year, largely because consumers and
businesses are in better economic positions than they were a year
ago. The outlook for economic growth has also brightened
outside of the United States, improving expectations for U.S.
exports in the near term.
Recent U.S. Macroeconomic Performance
Overall Economic Growth. U.S. production of goods and
services grew at a modest rate of 2.0 percent over the course of
2012, and it appears likely that production will have grown at
about the same pace in 2013. 48 Economic growth for the year

seems likely to end up fairly close to what forecasters had
expected at the start of the year.
Real (inflation-adjusted) gross domestic product (GDP) stalled in
late 2012, largely reflecting a sharp deceleration in privatebusiness inventories and a substantial decline in federal
purchases (see Figure 1). 49 While inventory accumulation
accelerated at the start of 2013, federal government purchases
continued to decline and, together with declines in business
investment, worked to slow GDP growth in early 2013.
Economic activity accelerated throughout the year: GDP grew at
a 1.1 percent annual rate in the first quarter of this year before
picking up the pace to 2.5 percent in the second quarter and 3.6
percent in the third quarter.

Employment and Unemployment. The labor market continued to
strengthen in 2013: over the first 11 months of the year, nonfarm
payroll employment increased by 2.1 million jobs, slightly ahead
of the pace through the first 11 months of 2012. 50 In addition, the
number of unemployed workers per job opening continued to fall

during 2013, and there are now fewer than three unemployed
workers for every job opening, nearly down to the pre-recession
level of two unemployed workers per job opening. 51 The private
sector has added jobs for 45 consecutive months, and over that
period, private-sector employment has increased by 8.1 million
jobs, regaining over 90 percent of the 8.8 million jobs lost during
the downturn (see Figure 2). Most of that growth during the
recovery reflects gains in the payrolls of service-sector industries
which, in September 2012, surpassed the level that prevailed just
prior to the recession. The service sector has now added about
2.5 million jobs beyond the pre-recession level.

Manufacturing and construction were especially hard hit by the
downturn but both sectors improved in 2013. Factory payrolls
had already been falling prior to the recession, and the downturn
accelerated the pace of those declines. Since February 2010,
manufacturing employment in the United States has increased by
554,000 jobs. The value of manufacturing exports has also
increased significantly, growing by 38 percent since 2009, and
productivity gains in manufacturing have outpaced productivity
increases in other sectors over the course of the recovery. 52

Construction payrolls began declining when the housing bubble
burst in 2006. By the end of 2007, construction had lost more
than 200,000 jobs, and during the downturn, the sector lost an
additional 2.0 million jobs. Since hitting bottom in 2010,
construction establishments have added 329,000 jobs.
Government payrolls fell substantially in the aftermath of the
recession. Because most state governments are required by their
constitutions to keep operating budgets balanced, those
governments are often pressed to reduce spending during
recessions just when increased spending would be helpful in
blunting the force of the downturn. That pressure was
particularly acute during the most recent recession. After
achieving a peak level of employment in August 2008, state and
local government payrolls began to shrink, and by January 2013,
737,000 jobs had been lost. Since then, state and local
governments have increased their payrolls, with 87,000 jobs
added through November. However, federal government payrolls
have continued to decline this year: after shrinking by 31,000
jobs over the course of 2011, and by 42,000 jobs last year,
federal payrolls have declined by 93,000 jobs over the first 11
months of this year.
The employment recovery has been accompanied by a decline in
the unemployment rate. After reaching a peak at 10.0 percent of
the civilian labor force in October 2009, the unemployment rate
declined by three percentage points to 7.0 percent in November
2013, the lowest level since November 2008. The unemployment
rate declined 0.8 percentage point over the first 11 months of
Some of the decline in the unemployment rate over the past four
years has reflected declining rates of labor force participation.
Through the first 11 months of the year, the fraction of the
population with a job has averaged 58.6 percent, the same
fraction as at the end of each of the previous two years. Since the
start of the recession in late 2007, labor force participation has
declined by three percentage points (see Figure 3). The sharp

decline in labor force participation reflects a combination of two
distinct forces. First, demographic forces that are unrelated to the
business cycle (such as the retiring of the baby boomers) appear
to explain much of the declining rates of labor force participation
in recent years. 53 Second, some workers have dropped out of the
labor force as a result of the slow recovery in employment.

Long-term unemployment remains a concern. While the shortterm unemployment rate has already declined to less than half a
percentage point above its level just prior to the recession, the
long-term unemployment rate has declined more slowly and
remains well above its pre-recession level (see Figure 4).
Considerable research has shown that protracted bouts of
joblessness erode the skills of the unemployed, making it harder
for such workers to find the kind of jobs they had prior to the
downturn. Long-term unemployment has also been shown to
undermine social structures, leading to declines in the health and
welfare of unemployed workers and their families. 54


Inflation. Inflationary pressures have remained low during the
past year (see Figure 5). Over the 12 months through October,
the “core” rate of consumer price inflation, as measured by the
consumer price index excluding food and energy, rose 1.7
percent. An alternative measure of underlying inflation in
consumer prices, the price index for personal consumption
expenditures excluding food and energy, rose by only 1.1 percent
over the 12 months through October. Recent inflation readings
are well below the two percent rate of core inflation that the
Federal Reserve considers sustainable over the longer term.


Wage growth has remained low but relatively stable throughout
the recovery. For much of last year, wage growth approximately
paralleled changes in the cost of living (see Figure 6). But so far
this year, consumer price inflation has declined somewhat, partly
reflecting slower rates of growth in food prices and declines in
energy prices over the first half of the year. At the same time that
price inflation slowed, wage growth held steady. The result is
that real (inflation-adjusted) wages have begun to rise somewhat.
Even with those recent increases, real wages are little changed
from the first quarter of 2010, when the recovery in employment


Interest Rates. The combination of relatively weak overall
demand, relatively low inflation expectations, and, most
importantly, aggressive quantitative easing by the Federal
Reserve has kept short-term yields on U.S. Treasury debt at or
near record lows for much of the past five years (see Figure 7).
In recent years, large-scale asset purchases by the Federal
Reserve and generally weak demand have worked to keep
longer-term interest rates relatively low as well. Longer-term
interest rates began to rise in May 2013, reflecting, among other
things, shifting market perceptions that the Federal Reserve
would soon slow the pace of its asset purchases. By historical
standards, longer-term rates remain low.


Prospects for Near-Term U.S. Economic Growth
Since the recovery officially began in mid-2009, the economy
has grown at an average annual rate of 2.3 percent, a relatively
modest pace when compared with previous U.S. recoveries. 55
Over the course of 2012, the U.S. economy grew by 2.0 percent,
the same rate of increase as in 2011. As 2013 nears a close, it
appears that the economy will have grown at about the same pace
as in the previous two years. 56 But current forecasts now call for
economic conditions to improve over the near term. Assuming
that Congress avoids the gridlock and brinksmanship that led to
the federal shutdown in October and that foreign economies
continue to strengthen, many leading forecasters expect a pickup
in U.S. growth over the coming year. 57
Improvements in the outlook for income and wealth bode well
for household spending over the near term. Household spending
turned out to be surprisingly resilient this year, as consumers
maintained the pace of their spending even as they endured
volatility in their disposable income related to the “fiscal cliff” at
the start of 2013 (see Figure 8). The expiration of the temporary

payroll-tax reduction and the end of the Bush-era tax cuts on the
wealthy, beginning in January, are estimated to have raised about
$200 billion in revenue. Expecting income taxes to rise in 2013,
some companies shifted dividend payments and other income to
the end of 2012. 58 That led to a temporary increase in disposable
income at the end of 2012 and contributed to the decline in
income at the start of 2013. Despite such dramatic shifts in
income growth around the turn of the year, consumer spending
grew at a fairly steady rate through most of this year. While that
pace of growth was relatively slow, consumer spending was
generally stronger than most forecasters had anticipated at the
start of the year.

Households have also made significant progress in improving
their balance sheets (reducing debt and increasing wealth) during
the recovery. Those improvements together with firmer income
growth will bolster household spending over the near term.
Business investment in 2013 was not as strong as some expected,
although forecasters expect a pickup in 2014. Analysts believe

that businesses were more reluctant to invest this year than they
had been in earlier years due to heightened uncertainty as to how
consumer demand would hold up in the face of the tax increases
early in the year. At the same time, corporate profits have
remained near historical highs as a share of national income (see
Figure 9) and credit availability continued to improve through
the year. 59

Housing has continued to rebound in 2013. Residential
investment grew at an average annual rate of 13.2 percent over
the first three quarters. Home sales have risen, inventories of
unsold homes have fallen and the pace at which builders start
construction of new single-family homes is the highest it has
been since 2008. As the housing market has improved,
foreclosure rates have declined and home prices have risen
steadily, improving the financial position of homeowners (see
Figure 10). As was the case in 2012, housing investment has
contributed about 0.4 percentage point to annual economic
growth this year.


In the second and third quarters of 2013, real U.S. exports of
goods and services picked up as economic conditions abroad
brightened (see Figure 11). The outlook for world economic
growth has improved since last year, with the eurozone
beginning to emerge from recession and the Japanese economy
appearing to pick up as well. The near-term outlook for emerging
economies is also improved and activity is expected to accelerate
next year. 60 A pickup in world growth would bolster growth in
U.S. exports.


Exports of manufactured and agricultural products have
increased recently. In current dollar terms, manufacturing exports
over the past year totaled $1.2 trillion, up 38 percent since
2009. 61 Agricultural exports totaled $141.3 billion in 2012, up 37
percent since 2009. 62 The United States has posted a trade
surplus in agriculture since 1960. In 2012, that surplus totaled
$38.5 billion. 63
As has been the case for a number of years, government
purchases of goods and services declined this year and acted as a
drag on overall U.S. economic growth. State and local
governments appear to be growing again for the first time in
years: over the first three quarters of 2013, state and local
government purchases rose at an average annual rate of 0.3
percent. In contrast, purchases by the federal government
continued to decline over the first three quarters of this year (see
Figure 12).


Macroeconomic Policy
Continued high unemployment and low inflation suggest that
macroeconomic policy should be supporting growth. The Federal
Reserve has applied downward pressure to short- and long-term
interest rates, but those efforts are limited by the constraint that
interest rates cannot be below zero. By the end of 2008, the
Federal Reserve had lowered short-term rates as far as possible
and, since then, has had to take up new approaches to support
Monetary Policy. The Federal Open Market Committee (FOMC),
the body within the Federal Reserve that is charged with
decision-making authority over monetary policy, operates under
a dual mandate to maximize employment and maintain price
stability over the long run. In normal times, the FOMC does so
by easing monetary conditions (lowering short-term interest
rates) when unemployment is high and inflation is low and by
tightening monetary policy (raising short-term interest rates)
when unemployment is low and inflation is high. As part of its

aggressive response to the financial crisis the Federal Reserve
had, by the end of 2008, lowered short-term interest rates to
effectively zero. Since then, economic conditions have warranted
additional easing of monetary policy, and the FOMC has found it
necessary to use a combination of conventional and
unconventional policy measures to spur the economy. Those
measures include improvements in the way the FOMC
communicates its policy with respect to short-term interest rates
as well as unconventional direct efforts to keep longer-term
interest rates relatively low.
By providing “forward guidance” on interest rates, the FOMC
intends to reduce uncertainty about the future course of shortterm interest rates (and, thereby, longer-term rates) by
communicating how long it expects short-term rates to remain
exceptionally low. The FOMC’s forward guidance has evolved
in recent years from the calendar-based guidance (introduced in
August 2011) 64 which expressed the likely timeframe for shortterm rates to be kept low, to the conditions-based guidance the
FOMC now uses, which provides broad threshold levels for
economic conditions to warrant changes in short-term interest
rates (introduced in December 2012). 65 Currently, the FOMC
plans to keep its target interest rate on federal funds at
exceptionally low levels at least as long as:
(1) the unemployment rate remains above 6½ percent; and
(2) two-year ahead projections of inflation are no higher
than 2½ percent; and
(3) the inflation rate expected by households and businesses
remains anchored.
By the Federal Reserve’s economic projections, it appears
relatively unlikely that the FOMC will begin to raise short-term
interest rates before 2015. 66

The FOMC has also applied downward pressure to key longerterm interest rates by acquiring and maintaining large holdings of
assets. The central bank is currently in its third wave of largescale asset purchases (also known as “quantitative easing”). Its
purchases of longer-dated Treasury debt, agency debt and agency
mortgage-backed securities (MBS) have tended to keep longerterm interest rates below what they might otherwise have been,
thereby working to bolster economic growth. So far this year, the
FOMC has continued purchasing long-term assets at the $85
billion-per-month pace it announced in December 2012. 67 Those
purchases consist of $45 billion per month of longer-term
Treasury securities and $40 billion per month of agency MBS.
Additionally, the Federal Reserve has maintained a policy of
reinvesting principal payments from its holdings of agency debt
and MBS into agency MBS and of rolling over maturing
Treasury securities.
The FOMC’s program of large-scale asset purchases has always
been dependent on economic conditions, though less clearly than
the central bank’s forward guidance on short-term rates. At the
close of its meeting on May 1st, the FOMC noted for the first
time that it was prepared to adjust the pace of its asset purchases
(up or down) in response to changes in economic conditions. 68
That nuance, coupled with subsequent statements by senior
Federal Reserve officials, led to a shift in market perceptions that
the FOMC would soon begin to “taper” its asset purchases,
contributing to a fairly sharp rise in longer-term interest rates in
the spring. For example, the secondary-market yield on ten-year
Treasury notes rose from about 1.70 percent at the end of April
to about 2.90 percent in mid-August. The FOMC has not begun
to taper asset purchases as of its October 2013 meeting.
Fiscal Policy. According to the Congressional Budget Office
(CBO), fiscal policy is expected to continue to restrain economic
growth in 2014, but to a lesser degree than in 2013. 69 The
government shutdown in October triggered sharp declines in
consumer and business confidence as well as income losses to
workers and businesses dependent on federal activity, whether

directly or indirectly. Unemployment insurance claims spiked
and worker-reported instances of hiring also decreased. 70
Leading economists estimate that the October shutdown will
have reduced U.S. economic growth in the fourth quarter of 2013
by between ¼ and ½ percentage point at an annual rate. 71
The federal government shutdown and brinksmanship over the
United States paying its bills raised uncertainty and undermined
the confidence of households, businesses and investors, leading
some to delay economic activity. Those altered decisions
represent real resource costs to the U.S. economy and, if those
impasses are repeated in January, growth will be further slowed
in 2014. 72
Most observers agree that a balanced approach to gradual
reduction in the deficit is desirable. The substantial fiscal
tightening in recent years, implemented largely through
indiscriminate spending cuts, has done little to address the
nation’s longer-term budget. A return to fiscal responsibility can
be achieved through gradual and balanced reductions in the
federal deficit without sacrificing near- and long-term economic
Senator Amy Klobuchar
Vice Chair


This report reflects developments in economic data available through early
December 2013. In particular, the national income and product accounts were
available through the second estimate for the third quarter by the Bureau of
Economic Analysis, U.S. Department of Commerce.


Economists estimate that Hurricane Sandy reduced U.S. economic growth
by up to 0.5 percentage point in the fourth quarter of 2012. See, for example,
Council of Economic Advisers, Economic Report of the President (March
2013), p. 46.


JEC Democratic staff calculations based on data from the Bureau of Labor
Statistics, Current Employment Statistics.

Data on job vacancies were available through September 2013 as published
by the Bureau of Labor Statistics, U.S. Department of Labor.


JEC Democratic staff calculations based on data for productivity and costs
from the Bureau of Labor Statistics, U.S. Department of Labor.


The Council of Economic Advisers estimated that just under half of the
decline in the labor force participation rate between 2007 and 2012 reflects
cyclical factors. See Council of Economic Advisers, Economic Report of the
President (March 2013), pp. 52-56.

For more details on the problem of long-term unemployment and its
economic and social costs, see Congressional Budget Office, Understanding
and Responding to Persistently High Unemployment (February 2012),
especially pages 1-8.

Considerable economic research has focused on the reasons for the slow
recovery. An overview of those reasons and some of the economic literature
underlying that research was provided in the JEC’s 2012 Joint Economic
e2-563d-4498-b206-eb2aa644b5d4), especially pages 11-12. An important
contribution to this ongoing research was recently published by senior
researchers at the Federal Reserve: Dave Reifschneider, William Wachser and
David Wilcox, “Aggregate Supply in the United States: Recent Developments
and Implications for the Conduct of Monetary Policy,” Federal Reserve
Board, Finance and Economics Discussion Series, 2013-77 (November 2013)
Those authors find that the financial crisis and associated economic downturn
lowered both the level and the growth rate of potential output (i.e., the level of

total production of goods and services that is consistent with full utilization of
labor and capital as well as stable and low price inflation).

A surprising uptick in inventory accumulation by private businesses added
about 1.7 percentage points to overall economic growth in the third quarter of
2013, and most economic forecasters expect that to be reversed somewhat in
the fourth quarter. At this writing, leading forecasters expect that economic
activity will have decelerated sharply in the fourth quarter, largely due to an
expected decline in inventory accumulation and further declines in federal
purchases, partly reflecting the federal shutdown. The Blue Chip consensus
average of leading private-sector forecasts has the economy growing at only a
1.6 percent annual rate in the fourth quarter of 2013 and 2.2 percent over the
four quarters through the fourth quarter (Blue Chip Economic Indicators,
December 10, 2013, Aspen Publishers).

The latest Blue Chip consensus average for U.S. growth over the four
quarters of 2014 is 2.8 percent (Blue Chip Economic Indicators, December 10,
2013, Aspen Publishers), but a number of private sector forecasters are even a
bit more optimistic than that.


Those policy issues were not resolved until January 2013 of this year.


For example, the Federal Reserve’s Senior Loan Officer Survey has
indicated that standards on bank lending to businesses have continued to ease
in 2013, with particular improvements in loans supplied to smaller businesses.
Banks also report increases in the demand for loans by businesses.


International Monetary Fund, World Economic Outlook: Transitions and
Tensions (October 2013), Table 1.1, p. 2.


JEC Democratic staff calculations based on data from the Census Bureau.
Annual export values are the sum of exports over the four quarters ending in a
given quarter. Most recent data are for Q3-2013. Dollar amounts are adjusted
using the GDP Implicit Price Deflator.

JEC Democratic staff calculations based on data from the U.S. Department
of Agriculture, Economic Research Service, U.S. Agricultural Trade, Calendar
Year, and Value of U.S. Trade--Agricultural and Total--and Trade Balance,
Calendar Year. Dollar amounts are adjusted using the GDP Implicit Price


JEC Democratic staff calculations based on data from the U.S. Department
of Agriculture, Economic Research Service, U.S. Agricultural Trade, Calendar


Federal Reserve press release. August 9, 2011.


Federal Reserve press release. December 12, 2012.


The Federal Reserve’s latest available economic projections are from
September: see

This report was completed prior to the FOMC’s monetary policy
announcement of December 18 and does not include any developments
therein in this summary. The most recent FOMC statement available as of this
writing is the October 30th announcement.

Federal Reserve press release, May 1, 2013.


CBO’s latest estimates of the federal budget deficit adjusted for the effects
of automatic stabilizers suggest that, under current law, fiscal policy will
tighten further in 2014 and 2015, but to a lesser degree than was the case in
2013. See, Congressional Budget Office, The Effects of Automatic Stabilizers
on the Federal Budget as of 2013 (March 2013)

Jason Furman, Prepared Testimony before the Joint Economic Committee,
November 13, 2013.

An Administration study that examined the movements in key highfrequency economic indicators in early October concluded that the shutdown
reduced U.S. economic growth by at least 0.25 percentage point (annualized)
in the fourth-quarter; see, Council of Economic Advisers, Economic Activity
During the Government Shutdown and Debt Limit Brinksmanship (October
final.pdf. Studies that estimate the impacts of the shutdown by extrapolating

from the economic impacts of the 1995-96 shutdowns typically report larger
impacts in the fourth quarter of 2013. For example, Macroeconomic
Advisers, LLC, “The Cost of Crisis-Driven Fiscal Policy,” Report prepared
for the Peter G. Peterson Foundation (October 2013) estimates that the
shutdown reduced growth by 0.3 percentage point; see Other analyses published after
the shutdown was over, report that growth was reduced by 0.5 percentage
point in the fourth quarter. See Michael Feroli, “This is why we can’t have
nice things,” J. P. Morgan, North America Economic Research (17 October
2013); and, Mark Zandi, “A Budget Battle Postmortem,” Moody’s Analytics,
Economic & Consumer Credit Analytics (October 2013)

Because the increase in uncertainty is impossible to observe directly, it is
very difficult to quantify the cumulative efficiency cost to the U.S. economy
of congressional budget gridlock. For a recent attempt to assess the costs of
the impasses to the U.S. economy since 2009, see Macroeconomic Advisers,
“The Cost of Recent Fiscal Policy Uncertainty,” Macro Focus (November 6,