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THE 2018 JOINT ECONOMIC REPORT
_______
REPORT
OF THE

JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ON THE

2018 ECONOMIC REPORT
OF THE PRESIDENT
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MARCH 13, 2018. ² Committed to the Committee of the Whole House on the state of the Union
and ordered to be printed

U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON: 2018

28-917

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[Created pursuant to Sec. 5 (a) of Public Law 304, 79 th Congress]
+286(2)5(35(6(17$7,9(6
Erik Paulsen, Minnesota, Chairman
David Schweikert, Arizona
Barbara Comstock, Virginia
Darin LaHood, Illinois
Francis Rooney, Florida
Karen Handel, Georgia
Carolyn B. Maloney, New York
John Delaney, Maryland
Alma S. Adams, Ph.D., North Carolina
Donald S. Beyer, Jr., Virginia

6(1$7(
Mike Lee, Utah, Vice Chairman
Tom Cotton, Arkansas
Ben Sasse, Nebraska
Rob Portman, Ohio
Ted Cruz, Texas
Bill Cassidy, M.D., Louisiana
Martin Heinrich, New Mexico, Ranking
Amy Klobuchar, Minnesota
Gary C. Peters, Michigan
Margaret Wood Hassan, New Hampshire

COLIN BRAINARD, Executive Director
KIMBERLY S. CORBIN, Democratic Staff Director

/(77(52)75$160,77$/
__________________
March 13, 2018
HON. PAUL RYAN
Speaker, U.S. House of Representatives
Washington, DC
DEAR MR. SPEAKER:
Pursuant to the requirements of the Employment Act of 1946, as
amended, I hereby transmit the 2018 Joint Economic Report. The
analyses and conclusions of this Report are to assist the several
Committees of the Congress and its Members as they deal with
economic issues and legislation pertaining thereto.
Sincerely,
Erik Paulsen
Chairman

III

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Introduction ........................................................................... 1
Accelerating Growth in the Near Term................................. 3
Impaired Market Function and Constrained Potential .......... 5
Tax and Regulatory Reform ................................................ 16
Long-term Potential ............................................................ 19
Conclusion .................................................................................. 23

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Introduction ................................................................................ 25
The Recovery.............................................................................. 29
Business Startups ................................................................ 30
Wages and Labor Force Participation ................................. 31
Productivity and Output Growth ......................................... 36
Increased Hurdles for Business Formation................................. 39
Expanding Regulation ......................................................... 40
High and Complex Tax Burden .......................................... 41
Fewer Workers Relocating.................................................. 44
Higher Education and Rising Student Debt ........................ 45
Other Contributing Factors ................................................. 48
Conclusion .................................................................................. 49
Recommendations ............................................................... 50

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Overview .................................................................................... 51
Demand-Side Constraints ........................................................... 52
Credit Policy, Not Monetary Policy.................................... 53
A Subtle Change to Fed Policy Implementation ................. 56
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Legislative Issues Related to IOER .................................... 62
Views Cautioning on Use of Unconventional Monetary
Tools.................................................................................... 63
Supply-Side Constraints ............................................................. 65
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in Capital Allocation ........................................................... 68

VI
Workforce Participation Adversely Affecting
Employment ........................................................................ 69
Capital Investment Stagnation and the Decline of the
Natural Rate of Interest ....................................................... 71
Meager Productivity Growth .............................................. 73
Significance of Supply-Side Constraints ............................ 76
The Economic Outlook............................................................... 76
Forward-Looking Indicators Improve ................................. 76
Real Economic Indicators Improve..................................... 77
The Outlook under Ideal Conditions................................... 82
Potential Risks to the Outlook ............................................ 85
Conclusions ................................................................................ 92
Recommendations ............................................................... 93
Appendix 2-1: Pre-2008 Impetus for IOER ............................... 94

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Potential ...................................................................................... 97
Features of the Tax Cuts and Jobs Act ....................................... 99
TCJA Provisions Affecting Individuals and Families ........ 99
Tax Fairness ...................................................................... 103
TCJA Provisions Affecting Small Businesses and PassThrough Companies .......................................................... 107
Faster Cost Recovery to Boost Investment ....................... 108
Increasing the Competitiveness of U.S. Corporations ...... 110
The Relationship between Corporate Taxes and Wages ... 115
Tax Simplification for Individuals .................................... 117
Tax Simplification for Businesses .................................... 118
The Impact of Economic Growth on Deficits ................... 120
Conclusion ................................................................................ 124
Recommendations ............................................................. 125

Chapter 4: Regulation««««««««««««««««
Regulation That Helps or Hinders The Economy .................... 126
Markets are the Engine of Economic Growth ................... 126
Markets Can Deal with Economic Challenges ................. 127
Containing Growth of Regulations Long-term ................. 131
Conclusion ................................................................................ 133
Recommendations ............................................................. 133

VII
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Introduction .............................................................................. 134
Elementary and Secondary Education ...................................... 136
Post-Secondary Education ........................................................ 140
Conclusion ................................................................................ 144
Recommendations ............................................................. 144

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Public vs. Private Infrastructure ............................................... 145
What is Infrastructure? ...................................................... 145
Infrastructure Provision Is by No Means an Exclusive
Government Function. ...................................................... 146
Different Reasons and Models for Government
Infrastructure Provision..................................................... 149
Which Levels of Government Should Deal with
Infrastructure? ................................................................... 151
Is Infrastructure a Tool to Manage the Business Cycle? .. 151
Problems with Regulation and Bureaucracy ..................... 152
Conclusion ................................................................................ 154
Recommendations ............................................................. 154

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Digital Transformation of the Economy................................... 156
Dynamic Gains from Digital Trade .......................................... 158
Economic Impact .............................................................. 159
Barriers to Digital Trade ................................................... 160
Rules for Digital Trading .................................................. 163
Digital Trade as Equalizer................................................. 164
Conclusion ................................................................................ 166
Recommendations ............................................................. 167

&KDSWHU Addressing Healthcare Challenges through
Innovation««««««««««««««««««««««««
The Health System after the Affordable Care Act ................... 169
A Failed Design ................................................................ 169
Rising Healthcare Costs .................................................... 172
The Tax Burden Imposed by the ACA ............................. 173
Economic Effects of the ACA .......................................... 179
Questionable Outcomes .................................................... 182
$PHULFD¶V2SLRLd Epidemic ..................................................... 182

VIII
Prelude to a Crisis: Demand.............................................. 185
Prelude to a Crisis: Supply ................................................ 187
Opioid Crisis and the Labor Market ................................. 189
Opioid Crisis and Future Generations ............................... 190
Economic Costs of the Opioid Crisis ................................ 191
Possible Solutions ............................................................. 192
Innovative Solutions for Improving the Healthcare System .... 193
Efforts to Repeal and Replace the ACA ........................... 193
Progress on Repairing Economic Damage........................ 194
Chronic Care Management ............................................... 196
The Promise of Medical Technology ................................ 197
Conclusion ................................................................................ 199
Recommendations ............................................................. 199

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Introduction .............................................................................. 201
The Year of Cryptocurrencies .................................................. 202
What are Cryptocurrencies and Blockchain? ........................... 205
Are Digital Currencies Actual Currencies? ...................... 207
Initial Coin Offerings ........................................................ 209
Blockchain Innovations..................................................... 212
Growing Pains and Misuses .............................................. 215
Regulatory Questions ............................................................... 218
Securities Regulation ........................................................ 219
Taxation ............................................................................ 221
Money Transmission ......................................................... 223
Future Regulatory Questions ............................................ 224
Conclusion ................................................................................ 225
Recommendations ............................................................. 225
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The tax law will overwhelmingly benefit the wealthy ............. 273
Working families will ultimately see a tax hike ....................... 275
The law wastes $1.5 trillion that could have been invested in
people and communities ........................................................... 276
The tax plan is unlikely to lead to large wage gains................. 277

IX
Complexity and loopholes abound in the new tax law ............. 279
Bipartisanship would have been a good place to start for tax reform
.................................................................................................. 280

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Progress from the ACA ............................................................ 282
Coverage gains improve lives .................................................. 283
Working to take insurance from millions ................................. 284
Sabotaging health care markets ................................................ 285
Sabotage of Medicaid ............................................................... 287
Attacks on women, children, and rural communities ............... 289
Lack of action on the opioid epidemic ..................................... 290
Failing to lower drug prices for everyday Americans .............. 291

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Need for federal investment is clear ......................................... 294
Benefits of investing in infrastructure ...................................... 295
Reduced transportation costs ............................................ 295
Good-paying jobs .............................................................. 296
Stimulating economic activity .......................................... 296
It is unrealistic to expect states and cities to foot the bill ......... 297
State and local governments are resource-constrained ..... 297
The Republican tax bill adds new fiscal pressures ........... 298
Federal investment is key to modernizing infrastructure .. 298
States and localities would underinvest because they do not
capture all infrastructure benefits ...................................... 299
States and local governments are already investing heavily
in infrastructure ................................................................. 299
Public-private partnerships ....................................................... 301
There has been limited P3 success in United States ......... 302
Many important projects would be ignored by the private
sector ................................................................................. 303
P3s are often anti-competitive........................................... 303
Roll back of environmental protections ............................ 304

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The administration is failing to enforce the law of the land ..... 307

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Increasing market concentration is a problem in need of real
solutions.................................................................................... 308
Robust and impartial cost-benefit analyses are key to smart
regulation .................................................................................. 309

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Introduction
America has always had great economic potential because of her
greatest resource: Americans. When Government steps back and
allows Americans to work hard and produce goods, the entire
world thrives. Just look at the U.S. economy today, which is off to
a strong start in 2018. It has added 550,000 new jobs during the
first two months. In 2017, the economy already grew much faster
than the year before (Figure 1), as it generated 2.2 million new
jobs. What could account for such a sea change? The answer is
simple: Government is once again allowing Americans to do what
they do best.

It is rare that improvements in policy show results so quickly, and
this validates the direction that the 115th Congress and the new
Administration have taken with the economy. The Tax Cuts and
Jobs Act (TCJA) and ongoing efforts to eliminate senseless and
wasteful job-choking regulations have gained traction and
demonstrated the robust benefits of pro-growth economic policies.
Our nation faces two challenges ahead. The first, on which we are
making progress, is to accelerate the lackluster recovery from the
2008 recession. The second is to make the economy’s potential for
growth stronger and longer lasting in the face of long-term trends
that tend to slow growth, particularly the aging of the population.
In addition to implementing better tax and regulatory policies
generally, the Government can play a constructive role in key
sectors of the economy, such as health care, education,
infrastructure, cybersecurity, and international trade, by removing
obstacles to better market performance. To each of these areas, the
Economic Report of the President and the Annual Report of the
Council of Economic Advisers (Report) devotes a chapter, and the
Joint Economic Committee Majority Response (Response) offers
recommendations in the chapters that follow.

1-!&

Accelerating Growth in the Near Term
Job growth is booming even as the unemployment rate has
declined to 4.1 percent—the lowest since the year 2000—and the
output gap from the last recession has closed relative to recent
Congressional Budget Office (CBO) estimates of what the
economy is capable of producing. The Committee Majority has
long held that the American people could have achieved greater
economic growth were it not for the constraints of the prior
Administration’s policy.
The Response of February 2017 to the outgoing Obama
Administration Report showed how slowly the United States
recovered from the last recession. It fell far short of past recoveries
and even of the Obama Administration’s own expectations. It also
showed that the Congressional Budget Office (CBO) downgraded
the economy’s potential output in each of the eight years that
President Obama was in office, as shown in Figure 2.1

1-!&

Since then, the JEC has investigated the particulars of what has
restrained the economy. Our hearing witnesses and research have
provided keen insights to how the current state of the economy
compares with its potential.
If the economy were inescapably stuck in low gear, then policy
actions that increase Federal deficits, as well as accommodative
monetary policy, would be inappropriate. However, if the
economy’s potential were raised again – for example, to where
CBO’s 2013 projection predicted it would be in 2018 (Figure 3) –
then there would be an appreciable output gap between actual and
potential GDP that would allow faster growth without
“overheating” the economy. Expansionary policies would be less
likely to lead to unwanted inflation, and the size of the deficit
would be of less immediate concern if economic growth
accelerates toward potential. A growing economy with a good
chance of rising potential means we are returning to normalcy, and
all efforts should go towards reinforcing this trend. Instead of
focusing efforts on needless precautionary measures that could

hamper this growth, lawmakers ought to embrace the change for
what it is: A restoration of America’s prosperity.
1-!&

Impaired Market Function and Constrained Potential
America needs headroom for faster economic growth, as
illustrated by Figure 3. While the aging of the population and other
factors may pose inevitable constraints, smarter policy choices can
improve the functionality of America’s entrepreneurial market
economy. Americans can do better if Government gets out of the
way.
This approach stands in contrast to the Obama Administration. It
reflexively resorted to Government interventions as it continually
emphasized market imperfections, externalities, inequality, and
“selfish” motives of businesses, while blaming challenging
fundamentals as reasons for slow growth beyond its control. Yet
the Obama Administration’s pro-Government orientation piled on
to challenges facing the market economy by attempting to increase
control over it. The previous Administration claimed that its fiscal
policy had averted a worse economic outcome in the short term
and promoted long-term Government programs to raise economic

potential. President Obama extolled the virtues of public service
in commencement speeches to college graduates and encouraged
them to choose Government careers.
Economists from Friedrich Hayek (1974 Nobel Prize), to Milton
Friedman (1976 Nobel Prize), to George Stigler (1982 Nobel
Prize) and James Buchanan (1986 Nobel Prize), among many
others, presented reasons and evidence that challenge faith in
Government to correct market imperfections and improve the
economy. Government institutions are not wise and dispassionate;
on the contrary, they lack critical knowledge (Hayek), are slow to
react (Friedman), are prone to capture by special interests
(Stigler), and are disposed to pursue political and bureaucratic
self-interest over the public interest (Buchanan and the school of
public choice). For these reasons, one must carefully focus
Government market intervention so that its benefits truly exceed
its costs.
The U.S. economy used to deliver much higher GDP per capita
than other developed economies because the private sector had
more freedom to operate and faced fewer Government mandates.
Figure 4 is based on The Index of Economic Freedom by the
Heritage Foundation and depicts the relationship between per
capita GDP growth and economic freedom across the 35 countries
in the Organization of Economic Cooperation and Development
(OECD) for the year 2000.2

1-!& 9

As it became clearer that an economic resurgence was not
forthcoming, the Obama Administration progressively tempered
its economic outlook, but it refused to concede that its policies had
failed (see 2017 Response). Instead, it claimed that the financial
origin of the recession, and its severity, had made recovery more
difficult than anticipated,3 and it emphasized the aging of the
population and reduced productivity as reasons why the economy
was settling into a meager annual growth rate about a third less
than the postwar average of more than 3 percent.4
Testimony at the JEC’s “Dynamism” hearing confirms that aging
populations are less entrepreneurial, innovative, and adaptable to
changing economic conditions. Aging shifts entrepreneurship
down as measured by new business startups.

1-!& 2

Figure 5, from a study that our witness, Stanford University
economics professor and former CEA chairman Edward Lazear
coauthored, shows that entrepreneurial activity shifts down across
all age groups when the population’s median age increases. To
counteract such a shift, an economy should be moving to the right
in Figure 4, which is precisely what many countries have done.
According to the Heritage Foundation, economic freedom
increased in 14 OECD countries since 2008 and declined in 19,
but in none as much as the United States (Figure 6). Figure 7
shows that by 2017 many countries had moved up and to the right
in per capita GDP and economic freedom, while the United States
moved to the left.

1-!& 6

We have lost ground relative to other countries that have made
their economies more business friendly in terms of taxation and
regulation.

1-!& :

Improvements in other countries. America’s postwar international
economic policy succeeded in substantially lowering barriers to
foreign trade and investment around the world. Technical
advances reduced shipping and communications costs, making it
easier to relocate production facilities and sell from abroad,
including back to the home country.
Recognizing the global scope of markets and the international
mobility of capital, other countries reduced both the tax rates of
companies doing business in their jurisdictions (Figure 8), and the
regulation of domestic product markets (Figure 9). The U.S.
Government, on the other hand, took the relative strength of the
American market economy for granted at a time when competition
was growing fierce. The Government failed to improve domestic
business conditions and, if anything, worsened them. The U.S.
corporate income tax rate, once among the lowest in the world,
became the highest in the OECD—that is, until TCJA became law.

1-!&

1-!& 5

Project delays in the United States have become notorious to the
point that it can take many times longer to refurbish a bridge, for
instance, than it once took to build it.5 The World Bank ranks the
United States 36th in the world for obtaining a construction permit.
Such a ranking suggests the U.S. Government, in its sluggish

approach to permitting, fails to prioritize the fast pace of its job
creators. This lens is useful when considering that the World Bank
also dropped the U.S. from 6th place in 2008 to 49th for ease of
starting a business (Figure 10).6 In other words, the entrepreneurial
market economy of the United States, teeming with job creators
and innovators seeking to meet the demands of families all over
the world, is busy filling out paperwork and waiting for permits.
1-!&

Self-imposed handicaps. Multinational companies cannot operate
as effectively or as profitably if they have to operate entirely in
high-tax jurisdictions. Imagine finding the U.S. tax system so
burdensome that a company’s optimal choice is resorting to
adjusting the prices at which they transfer intermediate goods
among their international subsidiaries to shift cost recognition;
borrowing among subsidiaries from different countries to claim
tax-deductible interest expense; and practicing tax inversion by
headquarter relocation through a U.S. company merging with or
acquiring a foreign company and changing its incorporation to the
foreign company’s country. There is nothing simple, or efficient,
about such a system.

Dozens of U.S. corporations have moved their headquarters
overseas. When U.S. companies establish production facilities
outside the country for tax reasons, they take with them productive
capacity, jobs, and economic growth. The American Government
should not be writing off these opportunities, given the vast
number of Americans who are clamoring for a shot at prosperity.
Additionally, corporate maneuvers to minimize U.S. tax liability
expend resources for little or no gain in output; they are wasteful,
and so too are the government’s efforts in response to plug
loopholes in the tax code, many of which result in unintended
consequences. Why would we stick with a system where we
demand that companies spend a significant portion of their time
jumping through regulatory hoops instead of creating value for
customers in our nation and throughout the world?
Before enactment of TCJA, U.S. multinationals held $2.6 trillion
overseas.7 This is because the United States imposed its corporate
rate of 35 percent when American companies brought overseas
earnings back to the United States—turning our country into a
special kind of vault that is resistant to the deposit of money.
Only a handful of OECD countries impose a home-country tax on
active overseas business income, and none of them do so at such a
high tax rate. In this circumstance, the U.S. Government’s “cando” spirit has been unfortunate. The Federal Government
essentially created a penalty for U.S. multinational companies to
invest overseas profits back in the United States; meanwhile,
foreign companies face no U.S. tax simply for bringing their
overseas profits here. Additionally, at least part of the $2.6 trillion
offshore represents value that U.S. corporations would have
created entirely within the United States had the high U.S. tax rate
not driven them away.
Additionally, the previous U.S. rate of 35 percent likely
discouraged foreign companies from investing and creating jobs
in the United States. Figure 11 contrasts foreign direct investment

since 2000 in Ireland, which has a 12.5 percent corporate tax rate,
with that of the United States before reform. Surely, foreign
companies would rather market American-made goods to
Americans, but they were discouraged from doing so by
misguided tax policy.
1-!&

Because of the new, lower corporate tax rate of 21% and the shift
to a territorial tax system on the international level, the U.S.
economy will benefit from inflows of corporate cash. However
this cash is used in the U.S. – whether to hire and raise the pay of
workers, reduce corporate debt, pay dividends, boost stock values
with buybacks,8 or finances domestic capital investment directly –
it will have the immediate benefit of boosting labor productivity,
employment, and wages. According to one survey, 35 percent of
foreign-earned income would go toward U.S. direct investment by
the companies repatriating foreign earnings, but investors
receiving cash from dividends or stock sales also can use it to
invest in other companies that want to expand. This is what a winwin policy looks like.

The Obama Administration imposed higher taxes as well on
businesses that are organized as pass-throughs (e.g., SCorporations) and therefore pay individual tax rates rather than the
corporate rate. The top pass-through rate went from 35 percent
when President Obama took office to effectively 44.6 percent in
2013.9 While this is only a small part of the overall picture of
Government interference in the marketplace, it is telling that the
Obama Administration pursued tax hikes on job creators at a time
when Americans were clamoring for jobs.
The 2008-2009 recession was a watershed event, during which the
U.S. business startup rate dropped precipitously and remained
depressed thereafter (Chapter 1, Figure 1-1). As each startup
creates an average of six jobs, and firms less than a year old are
responsible for nearly all net new job creation, fewer new jobs
were created.
The reasons for lower rates of entrepreneurship involve some
combination of population aging, taxes, and regulation.
Government officials can’t do much about the former, try as we
might, but the latter two fall well within our purview. While
Benjamin Franklin was correct in saying that the two certainties in
life are death and taxes, he wasn’t urging that we embrace more of
either.
Given that an aging population may be less inclined to start new
businesses, the Government should ease the burdens of doing so.
JEC’s October 2017 hearing on tax reform10 revealed that the
complexity of the tax code could be as great a deterrent to business
formation as the amount of taxes owed. The effort needed to
interpret and comply with complex tax provisions inhibits and
distracts entrepreneurs and imposes administrative costs on new
firms that delay the point at which they can break even. High
individual and corporate tax rates also send a signal to potential
entrepreneurs that may discourage them from starting or
continuing a business. We forget the ultimate purpose of taxation

is to provide revenue to the Government, not to cannibalize the
sources of that revenue.
Tax and Regulatory Reform
The lower marginal tax rates in TCJA on corporations and passthroughs, combined with a territorial system of international
taxation, will make American companies more globally
competitive, encourage companies to bring offshore profits back
to the United States, and make America a more attractive place to
invest. This will increase productivity and the demand for labor.
Lower marginal tax rates on individual income will allow
American families to keep more of what they earn, increase the
incentives to work, and increase labor force participation. The
CEA estimates that a reduction of the U.S. corporate rate from 35
percent to 21 percent will boost average annual household income
by about $4,000 annually over the long run.11 Together, lower
marginal tax rates on business and labor will boost the economy’s
potential output.
Further, during the Obama Administration, a surge of regulation
occurred at the absolute worst time—when the economy was
recovering from a steep recession. As the economy struggled to
grow, regulatory costs mounted. The supposed justification for the
ever-increasing cumulative regulatory burden was that the benefits
are even larger. In the Office of Information and Regulatory
Affairs (OIRA) annual reports to Congress on Federal regulation,
the benefits were always characterized as much larger than the
costs.12 Regulatory debates tend to focus on the validity and
completeness of the tallies and ways to improve them, but they
omit a crucial consideration, namely whether the claimed benefits
raise GDP.
All regulatory benefits do not equally boost GDP; some may do
so at more or less distant points in the future; some may do so
partially; and some not at all, whereas most costs of regulation
precede the benefits and are tangible. Benefits should materialize

at a sufficient pace to justify the rate of cost accumulation, and
during weak economic conditions, adding more costs should be
avoided.
So-called social regulation (environmental, workplace, consumer)
has dominated for decades, and is credited with benefits that often
are neither tangible nor tradable (although economists assign
dollar values to them for cost-benefit analyses) and do not raise
GDP appreciably. Regulatory costs face no budget constraint and
have been accumulating much faster than the economy has grown.
Congress and the current Administration are rolling back the surge
of regulation from the last Administration, but to prevent a repeat
in the future, regulatory cost increases should be limited to the rate
of economic growth, as recommended in Chapter 4.
Based on improved tax and regulatory policy, OMB projects that
over the next decade, the economy will reach a level consistent
with the Obama OMB’s 2013 forecast, which would be a
substantial improvement over what has been called the “new
normal” (Figure 12).
1-!&

A central problem with the debt buildup under the previous
Administration is that it nearly doubled public debt in relation to
the size of the economy, the debt-to-GDP ratio, and it slowed
economic growth. Tax reform, together with less burdensome
regulations, can accelerate economic growth and eventually help
to lower the debt-to-GDP ratio.
CBO’s most recent baseline forecast, which was made before
TCJA was enacted, projected the real economy would average a
meager 1.9 percent growth per year. From that baseline, which
projected a 2027 debt-to-GDP ratio of 91.2 percent, CBO
estimated that TCJA would increase the debt-to-GDP ratio to 97.5
percent by 2027, assuming no positive growth effects relative to
its 2027 baseline projection of 91.2 percent. However, if the
economy grows at an average annual rate of just 2.6 percent
instead, then the debt-to-GDP ratio would be unchanged from the
baseline (Figure 13), not even counting the dynamic effects of
more tax revenue from faster growth.
1-!&

Last June, CBO projected that Federal revenues will be above their
historical average over the next decade, while spending will

accelerate at a much faster rate. The only two viable methods for
getting the debt under control are to (1) increase the size of the
economy, and (2) reform entitlement programs, which are
currently projected to grow unsustainably as the population ages.
With TCJA and an improving regulatory environment, the
prospects have improved for increased business investment, the
return of U.S. corporate headquarters that left for foreign
locations, and repatriation of U.S. multinationals’ foreign earnings
held overseas for tax reasons. Yet more work lies ahead to
continue advancing from 49th place in the World Bank’s country
rankings for ease of starting a new business, among other things.13
Long-term Potential
For most of the postwar period, the U.S. economy was by far the
largest and freest in the world, but that has changed. The European
Union and Chinese economies are comparable in size to the U.S.
and many countries around the world have taken steps to increase
the international competitiveness of their businesses as the charts
above illustrate. Removing the major growth-inhibiting features of
the U.S. tax code and the Code of Federal Regulations became
pressing due to America’s changing position in the global
economy. Other governments may not necessarily liberalize their
internal markets fully but many realize that free international trade
and investment put their countries at risk of becoming economic
laggards if they do not free industry to compete internationally. (In
this regard, some countries also try to give their businesses a
competitive leg up.)
Trade. The needed response is not to resurrect barriers to trade and
investment in the United States. We are all deeply concerned about
unfair trade practices by bad actors in other countries. American
workers want to compete fairly, but it is wrong for the
Administration to move forward with new tariffs. Even with
temporary exemptions for Canada and Mexico, the tariffs put

allies on other continents in limbo and jeopardize international
supply chains.
International trade is our strength, especially given advancing
technology, as Chapter 7 explains. The United States has a
comparative advantage in bringing innovations to market, and
digital trade allows even small firms to do business internationally.
America has a substantial trade surplus in digital trade that
promises to increase as digitization spreads. What we still call
“digital” trade will encompass virtually all trade in the future if the
United States successfully leads the cause for seamless commerce
across borders, subject to harmonized national regulatory regimes
and without national market access requirements.
Energy. Technological developments in oil and gas production
provide an important perspective on U.S. ingenuity and openness
to the global economy. The United States pioneered the
technology that combines fracking with horizontal drilling to
upend the global order in oil and natural gas markets, as the 2016
Response explained. Not only are U.S. producers able to meet a
substantially increased portion of domestic oil and gas demand
(the country remains self-sufficient in natural gas on the strength
of fracking), but the end of the self-imposed crude oil export ban
enabled the United States to export increasing volumes of both oil
and natural gas overseas.14 A few years ago, no one would have
thought that the U.S. government would be in a position to
sanction Venezuela by refusing to import its oil.
Blockchain. In response to the Report’s study of cybersecurity,
Chapter 9 discusses blockchain technology at some length and
shows that the technology may develop to help secure transactions
and information transmissions. The technology has many possible
applications in addition to managing digital currencies, for which
it is most widely known. Blockchain technology has the potential
to help the economy function more efficiently and securely.
However, the new technology and the possibilities it creates—
including structural changes to and extensions of markets—

present regulatory and legislative challenges for the Federal
Government, including disparate treatment by the States. It is
important to proceed with prudence and provide proper guidance
to the market, as discussed in Chapter 4 on regulation, and not
prejudge and hinder technological developments. The new
technology also may be attractive for Government to use,
improving efficiency in its own operations.
Infrastructure. The fracking revolution was enabled by the fact
that most States respect private rights to develop natural resources
and regulation did not thwart expansion of supply. We must apply
this lesson to the rest of the economy and remove obstacles to
efficient domestic market function. Nowhere is this more obvious
than with infrastructure projects. Chapter 6 addresses how the
country has tied itself in knots with a permitting and regulatory
process that can cause renovations of existing structures to take far
longer than their original construction and can frustrate new
projects, even when a given administration favors them.
Education. Education is another case where Government policies
have created counterproductive incentives by enabling students to
overextend themselves with student loans and predisposing them
to choose college over possibly more rewarding alternative career
preparation. The July 2017 JEC hearing on the large number of
unfilled job openings documented the experience of many high
school and college graduates, namely an inability to market their
skills. College graduates are returning to community colleges in
order to acquire skills employers will pay for. Some other
countries prepare their students much better for the job market,
and for the sake of an internationally competitive workforce, a
rising standard of living, and reducing social problems, we should
do the same.
Health care. Through a number of releases in the course of last
year, the JEC documented the failure of the Affordable Care Act
(ACA)—also known Obamacare—to deliver the quality of care,
health service prices, and insurance enrollment promised. Others,

notably Casey Mulligan of the University of Chicago, have
analyzed the economic loss from burdens and distorting incentives
created by the ACA. His analysis and his testimony before the JEC
in June 201515 provide evidence that Obamacare contributed to
slow economic growth and reduced employment. Even CBO
acknowledged that the ACA will reduce employment by the
equivalent of two million full-time workers by 2025.16 The
American Health Care Act would have improved the system
Congress should continue pursuing replacement reforms.
In keeping with much of the theme of this Response, Congress and
the Administration should remove unnecessary regulatory barriers
to innovation. The JEC Majority looks forward to receiving more
details on the Administration’s plans to reduce prescription drug
costs. Medical technology is useful in saving and improving lives,
reducing long-term costs, and treating chronic conditions, which
among other considerations, are reasons not to apply burdensome
taxes such as the medical device tax. The medical device tax
operates as a tax on innovation and is particularly harmful to small
companies that are not yet profitable but are striving to launch
lifesaving devices. The JEC Majority recommends full repeal to
spur greater innovation, maintain the U.S. competitive edge in
medical technology,17 and preserve patients’ access to devices that
save and improve lives. Greater coordination and portability of
health records could also assist by reducing paperwork burdens
and preventing medical errors (one of the possible application of
blockchain technology).
Chapter 8 on health care also addresses the Nation’s opioid crisis,
an unprecedented epidemic of drug addiction so severe that it may
be registering in national labor force participation and productivity
data. The chapter discusses possible approaches, though solutions
are complex and may require multi-pronged and communitybased efforts. However, the Nation has coped with waves of
alcoholism, drug abuse, crime, drunk driving fatalities, and other
social challenges by raising public awareness and addressing them

from multiple sides. From an economic perspective, geographic
and occupational labor mobility and increased labor demand could
help deter people from turning to addiction. Faster economic
growth, better training and education, and removing hindrances to
working-age people moving to where employment opportunities
exist are important parts of the solution.
)%*

The JEC Majority is convinced that the U.S. economy has room to
grow faster and, belatedly, experience some of the normal bounceback from the recession (described in Chapter 2). Market-oriented
policies can release faster growth in the near term and better
position the economy to counteract adverse long-term trends—
particularly the aging population—so that it can reach a steady
growth rate, closer to the historical average of somewhat over 3
percent. We have taken the first major step in that direction with
tax reform, and we will continue to press on with other pro-growth
policies.

Figure 4 of the Chairman’s Views of last year.
Measuring economic freedom is an imprecise undertaking. A country’s
ranking in a given year may be a matter of index design, but Heritage has been
doing this for 23 years, and changes in a county’s ranking over time thus give
a meaningful quantification of policy. Similar indices by other organizations,
such as the Cato and Fraser Institutes, show similar declines for the United
States.
3
Other explanations included economic weakness in other countries.
4
The Obama administration initially predicted a swift recovery based on the
Keynesian belief that its stimulus package would accelerate consumption and
thereby private investment and hiring. Since the 1970s, academia had largely
abandoned Keynesianism, still teaching it (IS-LM) to undergraduate but not
graduate students. Additional explanations for slow growth included economic
weakness in other countries.
5
Larry Summers, former National Economic Council director in the Obama
White House, complained about the repair of a bridge connecting Boston and
Harvard Square that began in 2012 and took five times longer than to build it a
century ago. Lipson, Rachel and Lawrence H. Summers, “A Lesson on
Infrastructure from the Anderson Bridge Fiasco,” The Boston Globe, May 25,
2

2016.
See Also: Howard, Phillip K., “The Rule of Nobody,” Norton, 2014.
6
“Doing Business 2018,” The World Bank, October 31, 2017.
http://www.doingbusiness.org/reports/global-reports/doing-business-2018
7
Rubin, Richard, “Talking Taxes: How to Bring Offshore Profits Home,”
Wall Street Journal, August 10, 2017. https://www.wsj.com/articles/talkingtaxes-how-to-bring-offshore-profits-home-1502359201
8
Cox, Jeff, “Companies have big plans for trillions in overseas cash – if tax
reform ever happens,” CNBC, July 13, 2017.
https://www.cnbc.com/2017/07/13/companies-have-big-plans-foroverseascash--if-tax-reform-ever-happens.html
9
Due to an increase in the top rate to 39.6 percent combined with the
Affordable Care Act’s 3.8 percent tax on investment income and an additional
1.2 percent from the effect of limiting itemized deductions.
10
“The Startup Slump: Can Tax Reform Help Revive American
Entrepreneurship?” Hearing before the Joint Economic Committee, October 3,
2017. https://www.jec.senate.gov/public/index.cfm/hearingscalendar?ID=D47F4892-7AAF-47CA-AC0E-6ECFB04A5B96
11
“Economic Report of the President (ERP) 2018,” Council of Economic
Advisers, p. 33, February 2018. https://www.whitehouse.gov/wpcontent/uploads/2018/02/ERP_2018_Final-FINAL.pdf
12
The Obama Administration’s last report remained a draft, “2016 Draft
Report to Congress on the Benefits and Costs of Federal Regulations and
Agency Compliance with the Unfunded Mandates Reform Act,” December
23, 2016.
13
“Tracking Tax Runaways,” Bloomberg, September 18, 2014.
https://www.bloomberg.com/graphics/tax-inversion-tracker/
See Also: “Doing Business 2018,” The World Bank, October 31, 2017.
http://www.doingbusiness.org/reports/global-reports/doing-business-2018
14
Oil exported is of lighter grades while imported oil s of heavier grades.
15
“Examining the Employment Effects of the Affordable Care Act,” Hearing
before the Joint Economic Committee, June 3, 2015.
https://www.jec.senate.gov/public/index.cfm/hearingscalendar?ID=DA8245C3-8B5C-4DEE-BD89-C4C7F187C43B
16
Harris, Edward and Shannon Mok, “How CBO Estimates the Effects of the
Affordable Care Act on the Labor Market: Working Paper 2015-09,”
Congressional Budget Office, December 7, 2015.
https://www.cbo.gov/publication/51065
17
For discussion of medical technology export opportunities, see “2016 Top
Markets Report, Medical Devices,” International Trade Administration,
Department of Commerce, May 2016.
https://www.trade.gov/topmarkets/pdf/Medical_Devices_Top_Markets_Repor
t.pdf

;

%**

1 <

Economic dynamism—including business formation and
labor market “churn” (job turnover and relocations)—
declined sharply after the recession.

Many U.S. multinational corporations moved their
headquarters and earnings to more favorable overseas tax
jurisdictions.

Weak domestic wage growth and government policies
discouraged labor force participation.

The aging of the population naturally slowed economic
growth, which previous polices failed to counteract.

INTRODUCTION
The 2008-2009 recession was followed by the weakest economic
recovery since World War II. In 2017, the Committee held a series
of hearings to better understand the causes behind the anemic
recovery. It obtained government experts including Federal
Reserve Chair, Janet Yellen and Council of Economic Advisers
(CEA) Chairman, Kevin Hassett, as well as, academicians Nobel
laureate and Princeton University Professor, Sir Angus Deaton
and Stanford University Professor, the Honorable Edward Lazear,
and many others. The Committee concluded that in addition to
exogenous factors—such as an aging population—more
consequential factors were at play, such as poorly designed tax and
regulatory policies, which have been contributing to the decline in
America’s business formation and relative international
competitiveness, stifling market efficiency and hindering
economic growth. While some issues predate the Obama
Administration, the dramatic decline in business startups and

subdued economic activity from 2009-2016 suggests that postcrisis policies constrained the economy, preventing a typical
robust American recovery.
For decades, dynamism—the rate and scale of reallocating an
economy’s resources to their most productive use—has been
declining.1 John Lettieri, of the Economic Innovation Group,
explained the implications of declining dynamism for America at
the Committee’s April 2017 hearing, The Decline of Economic
Opportunity in the United States: Causes and Consequences:
…[A] less dynamic economy is one likely to offer
fewer pathways to achieving the American Dream.
For workers, declining dynamism means fewer
labor market opportunities and less upward
mobility. For markets, it has corresponded with an
era of diminished competition and greater rewards
to entrenched incumbents. For regions, it means
shrinking industrial bases and more profound
geographic disparities.2
Princeton University’s Angus Deaton testified at the Committee’s
June 2017 hearing, Economic Aspects of the Opioid Crisis, about
the long-term changing labor market for workers without a college
degree:
Workers who entered the labor market before the
early 70s, even without a college degree, could find
good jobs in manufacturing, jobs that came with
benefits and on the job training, and could be
expected to last, and that brought annual increases
in earnings, and a road to middle class prosperity.
Such jobs have become steadily less prevalent over
time”3

Internationally, America’s high corporate tax rate weakened our
competitive stance, driving capital abroad. Additionally, scores of
recent corporate inversions have occurred as firms seek a
friendlier tax environment.4 Dr. Kevin Hassett noted at the
October 2017 hearing, The Economic Outlook with CEA
Chairman Kevin Hassett, that many nations recognized the
presence of international tax competition and addressed the issue
with lower tax rates:
Countries around the world…have responded to
the international outflow of capital by cutting their
corporate tax rates to attract capital back.5
Further, Chairman Hassett testified that the cost of corporate taxes
falls partly on workers. Referencing international studies, he
succinctly stated, “…high corporate tax countries have low wage
growth; low corporate tax countries have high wage growth.”6
During the Obama Administration, what was a long-term slowing
of America’s economic engine abruptly decelerated to the weakest
economic recovery in generations. Low wages and expanded
Government benefits that disappear as income rises drove many
Americans out of the labor force. From 2008-2016, Americans age
15-64 left the labor force at a greater rate than all other
Organization for Economic Cooperation and Development
(OECD) countries.7 Further, annual real GDP growth failed to
reach even three percent during the entirety of the Obama
Administration—a threshold met by every previous
Administration dating back to at least Franklin D. Roosevelt.8 The
JEC Majority believes that had pro-growth policies been
implemented during the previous Administration, America would
have bounced back, as it did in the 1980s when annual real GDP
growth averaged 4.4 percent (1983-1989), even topping 7 percent
in 1984.

During the Obama Administration, America experienced a decline
in both economic freedom and ease of business formation. In
2008, the Heritage Foundation and the Fraser Institute, among
others, ranked the United States 5th in the world in economic
freedom.9 However, according to the most recent Fraser Institute
ranking in 2015, the United States had slipped to 11th.10 The
Heritage Foundation’s 2017 ranking placed the United States even
further behind at 17th.11 The relative decline is due to a lower
American score and a rise in other countries’ scores.
Figures 8 and 9 of the Chairman’s Views illustrate the relative
change in the corporate tax rate and the regulatory burden of
businesses through product market regulations, two impediments
to a free economy. Countries around the world have been
increasing their economic freedom—becoming more competitive
and attractive to business—while America has stood still until
recently or, in some aspects, has moved in the opposite direction.
As U.S. regulation and taxes expanded, and the relative business
climate abroad improved, domestic business formation
plummeted, contributing to the weak recovery. In 2008, the World
Bank placed the United States 6th out of 181 countries in its
ranking of ease in starting a business,12 but by 2016—the Obama
Administration’s final year—it had fallen to 51st place out of 190
countries.13 This decline helps explain the recent record low in
business formation and the historically weak recovery.
The decline in business formation is a major reason for the weak
economic recovery. Outside of a few geographic regions, startup
rates have fallen,14 and with declining migration rates within the
United States, fewer Americans seek prosperous locations. When
entrepreneurial activity is stifled, it initiates a chain reaction
beginning with fewer new businesses and ending in constrained
economic growth that holds living standards below their potential.
Additionally, startups represent competition to established firms,

introduce more innovation, and account for most incremental
hiring.15
For years the Obama Administration argued that the weak
economic recovery was due to the severity of the recession.
However, this is inconsistent with the American experience. In
fact, it is well documented that the greater the severity of economic
contraction, the stronger the recovery.16 In July 2017, economists
John F. Cogan, Glenn Hubbard, John B. Taylor, and Kevin Warsh
wrote the following:
We do not share the view that the recent period of
weak economic growth was simply an inevitable
result of the financial crisis. Economic recoveries
tend to be stronger after deep recessions, and any
residual headwinds from the crisis should have
long been remedied had pro-growth policies been
adopted. Historically, some post-crisis periods are
marked by lower economic growth, but we believe
that the poor conduct of economic policy bears
much of that burden.17
THE RECOVERY
America’s recent decline in economic freedom and ease of
business formation corresponds with other troubling economic
trends since the onset of the Great Recession, most notably (and
alluded to earlier), a nearly 20 percent reduction in the number of
newly created firms. Fewer annual business startups result in
lower wages and labor force participation rates, which in turn
reduces productivity and output growth, and ultimately suppress
living standards. While briefly addressed in the Report, the
Committee’s Majority believes additional attention should be
brought to the issue.18

Business Startups
The number of annual startups dropped substantially from an
average of 498,000 (1977-2008) to 403,000 (2009-2015), which
greatly reduced job creation and worsened labor-market slack
(Figure 1-1). During the first six years of the Obama
Administration—covering the most updated data—startups never
reached the previous three-decade average. In fact, the
Administration’s best year—2015 with 414,000 startups—was
lower than the preceding three decades’ worst year—1983 with
434,000 startups.
1-!& 4

Some startups grow to employ hundreds of workers; however, the
majority will remain small. In 2014, nearly 90 percent of
employers had four or fewer employees, and only 1.8 percent of
employers had 100 or more workers (Figure 1-2). Thus, small
business formation and easy access to labor and product markets
is essential to foster a strong economy.

1-!& 4

The declining number of startups led to a weakening of the labor
market, resulting in low wages and low labor force participation.
Wages and Labor Force Participation
Firm formation tends to create more jobs, which increases labor
scarcity and bids up wages. New firms less than a year old, on
average, create six new jobs their first year, while existing firms
represent net job losses.19 A tighter labor market increases labor
market churn—the rates of hires and separations—ultimately
increasing productivity. High churn—from a tight labor market
and a strong economy—increases labor productivity by relocating
workers from less productive positions to more productive higherpaying positions. Conversely, low churn during hard times—from
firms not replacing workers who left their job and employed
workers reluctant to quit—prevent labor productivity and wage
growth.20

Higher labor productivity from startups further increases the
demand for workers, fueling additional wage growth and
economic expansion. Highly productive workers produce more
goods and services, generating higher sales revenue for their
employer. Consequently, employees’ value to firms rise;
employers therefore expand employment and are willing to pay
higher wages. Federal Reserve Chair Janet Yellen testified at the
Committee’s November 2017 hearing on the economic outlook
that the “dismally slow” recent productivity growth has weakened
the labor market, slowing real wage growth.21
The post-recession decline in job creation from the dramatic drop
in startups has been exacerbated by the gradual increase in older
firms’ share of employment. In 2015, a record number of jobs were
housed in firms at least 16 years old.22 These firms experience
little employment variation through business cycles. Thus, due to
their growing presence, job growth during the current recovery has
been somewhat muted compared to past recoveries. However,
while changing firm demographics contributed to the slow labor
market recovery, jobs foregone from fewer startups is
quantitatively the larger component.23
The recovery’s weak labor market caused an extended period of
low wages. Following the onset of the Great Recession, real
median personal income fell five consecutive years, the longest
period of decline since the dataset began in 1974. Additionally, it
took more than eight years for income to return to the prerecession high—the slowest income recovery since at least 1974
(Figure 1-3).

1-!& 4

Similarly, household income plummeted. CEA Chairman Hassett
testified, “Over the past 8 years, the real median household income
in the United States rose by an average of only six-tenths of a
percent per year.”24 In fact, real 2012 household income was so
low it matched the 1995 level.25 Chairman Hassett explained that
America’s uncompetitive corporate tax rate drove multinationals
to locate plants abroad, while a lower rate would incentivize
capital inflows, increasing labor demand and consequently wages.
The Report presents further evidence of low wage from 20092016.26
The weak recovery also saw the total labor force participation rate
decline; and while partly due to the aging population, the decline
accelerated in recent years. From the Great Recession’s December
2007 business-cycle peak to the June 2009 trough, labor force
participation rate fell only slightly, from 66 to 65.7 percent.27
However, once the recovery began, the rate fell an additional 3 full

percentage points, to 62.7 percent, in May 2017. This was far
lower than predicted in the immediate aftermath of the recession.28
The prime-age labor force participation rate—a measurement that
is little affected by the aging of the population—also dropped. It
averaged 83.4 percent from 1990-2008 yet only 81.5 percent from
2009-2016. Not until 2016—the year that real median personal
income returned to the pre-recession level—were workers drawn
back into the labor force, causing the participation rate for ages
25-54 to grow for the first time since 2009 (Figure 1-4).29
However, despite the uptick, the rate remains near a 30-year low.
1-!& 49

While America’s working-age labor force participation rate
collapsed, most other developed countries saw growing
participation rates. The OECD compiles international data on
labor force participation rates for workers age 15-64. The
aggregate participation rates of OECD countries increased 1.3
percent from 2008-2016. Over that same period, only eight of the

thirty-five countries saw their rates fall. Of those, America fell the
most with a -3.1 percent change (Figure 1-5).
1-!& 42

America’s weak labor market drove many workers out of the labor
force. In addition to low wages and labor force participation, the
weak labor market harms the economy through low productivity
and output growth.

Productivity and Output Growth
An economy abundant with business startups and a strong labor
market is more dynamic, tends to raise labor productivity—output
per hour worked—and consequently output (GDP) growth. High
economic growth translates into more goods and services, lower
prices, and more and varied job opportunities for all Americans.
Alternatively, a less dynamic and low-growth economy trends
toward stagnation, offering fewer choices to consumers and fewer
prospects for workers.30 Diminished business startups and a weak
labor market during the Obama Administration have contributed
to low labor productivity growth and an anemic economic
recovery. The current cycle’s level of labor productivity and GDP
growth falls far short of past business cycles (Figure 1-6).31 Not
only is the recovery the slowest since World War II, but America
“…is experiencing the worst five years of productivity ever
measured outside of a recession.”32 In fact, 2016 saw negative
annual productivity growth for the first time in more than three
decades.33
1-!& 46

Federal Reserve Chair Yellen testified about America’s declining
dynamism and recent low level of productivity growth:
We are also seeing signs of less dynamism. The
process of creative destruction of new firms,
innovative firms expanding at the expense of those
that are less innovative, that process seems to have
slowed, and I think some productivity growth is
associated with that.34
Similarly, Stanford University economist John Cochrane explains
how new companies that displace older ones typically increase
productivity:
…[P]roductivity comes from new ways of doing
things: New ideas, at heart; new inventions, new
products, new processes, new technologies; new
ways of organizing companies; new and better
skills among workers.35
By the end of the Obama Administration, GDP growth projections
were far below traditional American levels. In mid-2017, both the
Congressional Budget Office (CBO) and the Federal Reserve
(Fed) projected that GDP growth will remain significantly below
the post-World War II average of 3.4 percent in the coming years.
Following small fluctuations around two percent through 2021,
CBO and the Fed projected annual growth to level off at 1.9
percent.36 The effect of lower GDP growth on American
households is lower living standards.
Living Standards
Higher productivity growth, wages, and GDP growth from more
business startups improve Americans’ material well-being
through financially stronger consumers and the availability of

more goods and services. Since 2009, material well-being—as
measured by real per capita GDP—has been growing at a meager
0.7 percent, which is less than half the two percent rate of the
preceding three decades. Additionally, during the entirety of the
Obama Administration, real per capita GDP growth failed to reach
the three-decade average growth rate of two percent (Figure 1-7).
1-!& 4:

Business dynamism has been gradually declining for decades37,
but a dramatic weakening began at the onset of the current
recovery, from which it failed to rebound. The Obama
Administration attributed this failure to the severity of the Great
Recession and its origin in the financial sector—rather than
Obama Administration policies, but this blame shift is
unconvincing. The following excerpts from the paper cited above
by Cogan, Hubbard, Taylor, and Warsh summarize the reasons:

Focused primarily on “stimulus” in the short-term,
the conduct of economic policy in the post-crisis
years did little to reset expectations higher for
long-term growth. That policy failure restrained
those
expectations,
adversely
affecting
consumption and, especially, investment spending.
Economic theory and historical experience
indicate economic policies are the primary cause
of both the productivity slowdown and the poorly
performing labor market. High marginal tax rates,
especially those on capital formation and business
enterprises, costly new labor market and other
regulations, high debt-financed government
spending (largely to fund income transfer
payments), and the lack of a clear monetary
strategy have discouraged real business
investment and reduced both the supply of—and
the demand for—labor.38
INCREASED HURDLES FOR BUSINESS FORMATION
The private sector has been facing headwinds for years, which has
reduced business startups and slowed the economic recovery.
Several contributing factors to declining business formation and
the weak recovery include: expanding regulation; high and
complex taxes; fewer workers able and willing to relocate—either
to start a businesses or for better job opportunities; and rising
student debt. An aging population is a factor, as may be the opioid
crisis, but so is the design of social safety net programs that
discourage gainful employment.

Expanding Regulation
Regulations are imposed by all levels of government, creating a
complex web of business rules. Most rules are formulated without
cost-benefit analysis and over time have accumulated to a massive
aggregate burden on the economy. The legacy of the Obama
Administration is substantial new Federal regulations added to the
existing behemoth of accumulated Federal, State, and local rules
that discourage business formation and expansion; hinder market
efficiency; and slow economic growth.
At the State and local level, anti-business policies deter business
startups and expansions. Local land-use regulations such as stormwater management, parking requirements, and mandatory
setbacks, among others, add costs and delays to new business
development projects and are known to reduce startups.39
Similarly, Stanford University Economics Professor Edward
Lazear’s testimony submitted for the Committee’s April 2017
hearing, The Decline of Economic Opportunity in the United
States: Causes and Consequences, explained the importance of
business-friendly State labor policies on economic wellbeing.40
The former CEA chairman’s testimony pointed out that from
2000-2015, States with the most positive business climate grew
fastest, specifically those with low minimum wages and right-towork laws; further, employment grows twice as fast in States with
market-oriented labor policies. Also, occupational licensing
requirements, which have grown from 5 percent of American
workers in 1950 to about 29 percent in 2008, act as an entry barrier
to many industries.41 For some occupations, States without license
requirements experience a 20 percent faster employment growth
than in states requiring licenses.42
White Castle System’s Jamie Richardson testified in 2016 that
restaurants throughout the country have experienced

“…unchecked growth of regulatory barriers and burdens while
facing unprecedented economic challenges.” He also cited several
Federal regulations including the Affordable Care Act, overtime
regulations, American with Disabilities Act liability, Occupational
Safety and Health Administration rules, and Environmental
Protection Agency restrictions as specific examples of recent
regulatory overreach.43
The Council of Economic Advisers pointed to an example of
deregulation’s effectiveness on the level of business formation in
Europe.44 In 2005, Portugal implemented its “On-the-Spot-Firm”
program that reduced incorporation fees and the incorporation
time delay from months to as little as one hour. The program saw
business startups and new-firm job formation increase by 17 and
22 percent—a “…statistically significant, economically
meaningful…” increase; the affected firms were typically small,
owned by less-educated entrepreneurs, and in low-tech sectors
(agriculture, construction, retail trade).45 Municipalities that
opened On-the-Spot-Firm shops saw an annual average increase
of 4.3 more firms created within each industry.46
Through Executive Orders and legislation, the Trump
Administration and Congress have reduced the Federal regulatory
burden. The JEC Majority believes that these reductions revive
economic activity, benefitting all Americans. U.S. States wishing
to encourage entrepreneurship may similarly benefit from
streamlining and shortening their firm formation process. See
Chapter 4 of the Response for more on regulation.
High and Complex Tax Burden
High tax rates and compliance costs reduce after tax-profits, which
discourages entrepreneurship. During the Obama Administration,
some States had marginal individual tax rates in excess of 50

percent.47 Further, Americans spent 8.9 billion hours filling out tax
forms in 2016, costing the economy $409 billion in lost
productivity.48 Tax Foundation President, Scott A. Hodge’s
testimony at the Committee’s October 2017 hearing, The Startup
Slump: Can Tax Reform Help Revive American Entrepreneurship,
included the following recommendation:
…[Y]ou should aim to get the tax code out of the
way of entrepreneurs by making it simpler, less
burdensome, and eliminating its anti-growth
biases. Get rid of the success taxes and fix the
quirks in the code that punish firms as they grow,
and then tax them in a normal fashion when they
succeed.”49
Prior to the Tax Cuts and Jobs Act, America’s Federal tax system
deterred business formation in several ways. Many small firms
that were structured as pass-through businesses paid the individual
income tax rate. That is, their business activity was reported on
their 1040 tax form as individual income. In 2013, the top marginal
income tax rate rose from 35 percent to 39.6 percent. The
Affordable Care Act added a 3.8 percent investment income tax
that affects owners who are not active in the business, and another
penalty for high earners added an effective 1.2 percent, bringing
the top effective marginal rate of small businesses to 44.6
percent.50 Additionally, business owners must pay the employer’s
portion of payroll taxes to fund Social Security and Medicare, as
well as pay any State income tax, which ranges by State from zero
to 13.3 percent.
Internationally, over the past few decades, U.S. businesses have
lost some competitive advantage. While America’s corporate tax
rate remained relatively constant, other countries lowered theirs.
Entrepreneurs from around the world must choose a country to

locate their business. The decision is based on a number of factors,
including the corporate tax rate. The United States had the highest
corporate tax rate of all industrialized countries in the world at 39
percent (including the 35 percent Federal rate and average State
taxes), and was an outlier among competing countries in that it
heavily taxes income earned outside its borders. 51 Multinational
firms often preferred to headquarter or earn profits in a country
such as Ireland instead of the United States because it has one of
the lowest corporate tax rates in the world at 12.5 percent; this was
previously roughly a third of the U.S. rate.52 CEA Chairman
Hassett testified:
…[I]t was not our actions on tax policy that
necessarily harmed us, it is our inaction…the rest
of the world cut their corporate taxes, and that
made their countries more attractive for the
location of multinational plants than our country,
and we saw the activity move overseas…53
Fortunately, the Tax Cut and Jobs Act lowers both individual and
corporate tax rates. Harvard University economist Robert J. Barro
wrote the following in a January 5, 2018, Wall Street Journal oped following the Act’s passage:
…[C]utting income taxes on individuals will power
economic growth in the short run, and reforming
them for businesses will do the same over the long
haul. Together they add up to more investment,
increased output and higher wages for millions of
Americans.54
While more work needs to be done, the JEC Majority sees the Tax
Cut and Jobs Act as an important step toward improving the
business environment for entrepreneurs. U.S. States should also

consider lowering and simplifying income taxes. See Chapter 3 of
the Response for more on taxes.
Fewer Workers Relocating
Americans have historically relocated for better opportunities by
moving to high labor-productivity and high nominal-wage
locations. However, in recent years, Americans have been
relocating at the lowest rate on record. From 1965-1971, an
average of 3.4 percent of the population annually migrated across
state lines; from 2010-2016, average interstate relocations fell to
1.6 percent (Figure 1-8).
1-!& 4

Scholars have identified several contributing factors to the decline
in interstate migration:
x Some cities have adopted land-use regulations that limit
housing supply, preventing in-migrants.55

Today, regional differences in income are to a greater
degree reflected in housing prices—due largely to tight
land-use regulation—reducing net-of-housing income and
relocation benefits.56
Since most occupational licenses do not transfer across
states lines, the relicensing cost of time and money acts as
a deterrent to those seeking to start businesses in other
states.57
Some homeowners have experienced so-called “house
lock” from underwater mortgages—mortgages that exceed
home market value—making it financially difficult to sell
their home to relocate.58
Interstate migration is inversely related to age; thus, as
Americans age, migration falls.59

There are many reasons Americans are unable to relocate at past
rates, including the unintended consequence of government
policies—also discussed in the Report.60 Yet whatever the reason,
immobility is a barrier to better employment opportunities for
workers and better markets for producers, which decreases labor
market churn and dynamism, constrains entrepreneurship, and
therefore reduces productivity and GDP growth. The JEC
Majority believes that Federal, State, and local government
policies that hinder relocation should be removed or reformed in
order to help America reach its full potential.
Higher Education and Rising Student Debt
Since the end of World War II, the government has promoted and
supported higher education. So-called white-collar work often
could benefit from a higher level of general education beyond high
school. A college degree also signaled desirable employee
characteristics to employers. Now that about one-third of

American adults have a bachelor’s degree, there are signs that
investment in a college education may be encountering
diminishing returns, as college graduates face difficulty finding
jobs in their field of study.61 Inducing even more students to attend
college may mean that fewer are well-suited or motivated to
perform and fewer will find careers whose earnings provide an
adequate return on a college investment. According to Dr.
Harrison, President of Columbus State Community College in
Columbus, Ohio, the demand for associate degree graduates grew
three times the rate of that for college graduates, and an
overwhelming majority of jobs will require technical skills or
associate degree level preparation, while only 33 percent of jobs
will require a bachelor’s degree.62 He testified at the JEC July
2017 hearing, A Record Six Million U.S. Job Vacancies: Reasons
and Remedies that some college graduates return to community
college to earn certifications in marketable skills.
For decades, college and university tuition has been rapidly rising,
and from 2007-2017 Federal student aid has increased 165 percent
(Figure 1-9). Purdue University President, Mitchell E. Daniels
testified in 2015 that tuition prices have increased by “…225
percent over the past 30 years, after inflation.”63 The 2017
Response explains that easy access of subsidized credit to nearly
all college students allows colleges and universities to easily raise
tuition.64 This phenomenon was famously presented in a 1987 New
York Times op-ed titled, “Our Greedy Colleges,” by William
Bennett, then-Secretary of Education.65 In the article he stated, “If
anything, increases in financial aid in recent years have enabled
colleges and universities blithely to raise their tuitions, confident
that Federal loan subsidies would help cushion the increase.”

1-!& 45

Additionally, some Federal student loans are structured such that
a substantial portion need not be repaid, incentivizing student debt
accumulation. Examples from the 2017 Response show that
Obama Administration loan policies cap monthly loan payments
at 10 or 15 percent of discretionary income; following 20 years of
payments, the borrowers outstanding debt is forgiven and the
balance due is transferred to taxpayers.66 These Obama
Administrations policies incentivize students to maximize debt—
borrowing irresponsibly and exacerbating the problem of high
student debt—leaving taxpayers responsible for a significant
portion of the debt.
The implication of a high student debt level at the time of
graduation is a decline in business formation. Research shows that
there is a “…significant and economically meaningful negative
correlation between changes in student loan debt and net business

formation…” The correlation is strongest for small firms—those
with one to four employees.67
The JEC Majority believes that higher education financing reform
will benefit students, taxpayers, and strengthen America’s
economy. See Chapter 5 of the Response for a more detailed
discussion of education policies.
Other Contributing Factors
The rapid expansion of drug abuse is also keeping some people
out of the labor force. Deteriorating labor market opportunities
that lead to worsening working and personal outcomes, as well as
the easy access to opioids, fuels drug abuse.68 More than a year
ago, the New York Times published “Hiring Hurdle: Finding
Workers Who Can Pass a Drug Test.” Employers across the
country are having difficulty finding applicants who can pass a
drug test.69 See Chapter 8 of the Response for a more detailed
discussion of the opioid crisis.
Artificial trade barriers also dampen growth. Digital trade has been
growing rapidly in recent years and America is leading the way.
See Chapter 9 of the Response for more on blockchain. However,
challenges to the smooth international flow of goods and funds
may prevent trade from reaching its most efficient level. George
Mason University’s Daniel Griswold stated at the Committee’s
September 2017 hearing, The Dynamic Gains from Free Digital
Trade:
Now despite the dynamic growth and benefits of
digital trade, significant barriers remain to prevent
Americans from reaping its full advantages.70
America’s generous social safety net may also be keeping some
people out of the workforce. University of Chicago economist

Casey Mulligan writes in The Redistribution Recession that
subsidies to low-income households almost tripled after 2007,
reducing the reward to work by about $5,600 from 2007-2009.71
Manhattan Institute’s, Diana Furchtgott-Roth testified at the
Committee’s July 2017 hearing, A Record Six Million U.S. Job
Vacancies: Reasons and Remedies that America’s labor force
participation rate has been falling in part due to the expansion of
Government benefits, including expanded eligibility for disability
insurance and food stamps.72 Hoover Institute’s Timothy Kane
testified at the Committee’s April 2017 hearing, The Decline of
Economic Opportunity in the United States: Causes and
Consequences that “…maybe the safety net is a little bit too safe,
the paternalism is too comfortable.”73
Dr. Lazear’s submitted testimony refers to research showing that
an aging population decreases the employment rate and business
formation across countries.74 Obama Administration economists
invoke the retirement of the Baby Boom generation as a major
reason for the weak economic recovery, but policies of the Obama
Administration did nothing to counteract the economic growth
effects of less favorable demographics. That challenge should be
an impetus to tax and regulate less rather than more.
CONCLUSION
Established entrepreneurs like Bill Gates (Microsoft) or Jeff Bezos
(Amazon) may not be deterred by Government regulations and
taxes, but many who would like to open a restaurant, barbershop,
or lawn care company are. Similarly, professionals such as
doctors, dentists, and lawyers may opt to work for hospitals or
corporations rather than start their own practice if government
policies makes doing so too onerous. These are the types of firms
that employ four or fewer people, and for them, regulation, taxes,
relocation costs, high student debt, and other mundane obstacles

matter very much. When their owners give up, the economy
forgoes value and job creation.
Efforts by the Trump Administration and Congress to reduce
burdensome regulation and reform the Federal tax code are
important steps toward reviving business startups, fueling
economic growth, and lifting living standards for hard-working
Americans.
Recommendations
The Committee’s Majority encourages the Trump Administration
and the Congress to continue working together to expand the
economic liberty that fuels America’s growth engine at the Federal
level, and encourages State and local governments to follow suit:
¾ Reestablish America as the premier place for private
investment and entrepreneurship;
¾ Raise the labor force participation rate of the prime
working-age population;
¾ Focus the education system on developing marketable
skills and reform the financing higher education; and
¾ Recognize the aging population as a challenge to economic
growth and remove unnecessary hindrances to labor force
growth and business expansion

;

The Report provides a thorough assessment of the state of
the economy and an analysis of the Administration’s
projected growth effects.

The Administration anticipates three percent average
annual growth for the next ten years with its agenda
implemented, compared to a much more subdued 2.2
without its reforms.

This Response chapter reviews alternative explanations to
the common narratives about the slow economic recovery,
and provides an encouraging assessment of America’s
short- and long-terms economic growth prospects.

OVERVIEW
From 2008-2016, inflation adjusted (real) GDP growth averaged
only 1.3 percent compared to 2.9 percent from 1990-2007. The
inflation rate slowed to a 1.5 percent average from 2008-2016,
down from 2.3 percent from 1990-2007.75 Slow growth and
unusually low inflation have been described as the “new normal.”
Supporters of this view argue that lower productivity growth and
labor force participation rates are inevitable, and they believe tax
and regulatory policies cannot improve the slump. Further, many
of them point to a low headline unemployment rate and an output
gap some estimate has closed to assert that the recently enacted
Tax Cut and Jobs Act (TCJA) could cause the economy to
“overheat” by overstimulating demand.
Conversely, the Majority members of the Committee contend that
government policies artificially constrained economic potential
after the 2008-2009 recession, and concur with CEA’s

endorsement of “an agenda for returning the American economy
to its full growth potential.”76
The first section of this chapter explores factors that constrained
the demand side of the economy, and the second section examines
factors that constrained the supply side. The former discusses
unusually low inflation rates and the latter below-average
economic growth rates—suggesting that the U.S. economy has
room to grow faster. The next section assesses recent economic
developments, and the outlook for 2018 and beyond. The final
section contains a summary, conclusions, and recommendations
for policymakers going forward.
Because monetary policy plays an important role in affecting the
economic outlook, the Committee holds an annual hearing with
the Federal Reserve Chair. Therefore, the Response discusses
monetary policy issues at greater length than the Report. The
Response does not opine on the efficacy of the Fed’s two percent
inflation target but offers some alternative views for why inflation
has chronically fallen short of the target and how this might affect
the economic outlook.
DEMAND-SIDE CONSTRAINTS
Since 2008, inflation has consistently undershot the Fed’s two
percent symmetric inflation target as Figure 2-1 shows.
“Symmetric” signifies that two percent is an average and not a
ceiling; thus the Fed will tolerate inflation above and below its two
percent target. In what follows, it is important to distinguish
between the Fed’s inflation target and its Federal (fed) funds rate
target. Changing the latter (an instrument) is a means to achieving
the former (an objective).
As the Report notes, “Inflation is below or barely at target levels
in most advanced economies, despite a decade’s worth of
accommodative, unconventional monetary policy measures.”77

The Report78 and Federal Reserve officials79 find low inflation
rates “puzzling,” especially given the low unemployment rates.
The “Phillips Curve” theory of price inflation posits that low
unemployment rates drive up wages, which leads firms to raise
prices to offset rising costs. The Committee Majority explores
alternative explanations for below-target inflation. Notably,
monetary policy may not have been as “accommodative” as
commonly perceived.
1-!& 4

Credit Policy, Not Monetary Policy
“Monetary policy easing” is conventionally characterized by Fed
reductions in its interest rate target implemented by the purchase
of short-term Treasury securities with newly-created bank
reserves, colloquially known as “printing money.” If banks lend
more funds to consumers and businesses as a result, this will
stimulate nominal spending (i.e., “aggregate demand”),80 which
can increase employment, output, and inflation in the short run,
but only drives inflation higher in the long run.

While such an operation leaves the market and entities such as
Government-sponsored entities (GSEs) (e.g., Fannie Mae and
Freddie Mac) to determine where credit should be allocated,
unconventional “credit easing policies” channel credit toward
particular market segments and place financial assets other than
the traditional short-term Treasury bills on the Fed’s balance sheet.
In September 2007, subprime mortgage market stress and concern
over its implications for the economy compelled the Fed to lower
its target for the fed funds rate—the short-term interest rate at
which banks and a few other financial institutions lend funds
overnight—from 5.25 percent to 4.75 percent.81 The Fed further
lowered its fed funds rate target at varying intervals and degrees
until settling at two percent on April 30, 2008, where it remained
until October 8, 2008. The Fed also embarked on “credit easing
policy” when it introduced an emergency lending facility82
designed to support private financial intermediation (i.e.,
borrowing and lending). Federal Reserve Bank of Richmond
senior economist Robert Hetzel succinctly described the unusual
credit policy:
Policies to stimulate aggregate demand by
augmenting financial intermediation provided an
extraordinary experiment with credit policy as
opposed to monetary policy.83
The Fed bought financial instruments from particular credit
markets segments to direct liquidity toward them, which had the
effect of injecting reserves into the banking system. This action
alone would incidentally ease monetary conditions, but the Fed
then sold Treasury securities from its portfolio to withdraw those
reserves from the banking system (called “sterilization”), thereby
restricting nominal spending growth. Figure 2-2 shows that before
2008, the Fed’s balance sheet consisted predominantly of Treasury
securities (generally of shorter maturities) and Federal Reserve

Notes (i.e., paper money), and that bank reserves were a miniscule
part of the Fed’s liabilities.
1-!& 4

As Figure 2-2 shows, during the first three quarters of 2008 the
composition of Fed assets changed such that emergency lending
grew, while holdings of Treasury securities shrank, leaving the
size of the Fed’s balance sheet nearly unchanged.
Furthermore, despite the low level of the Fed’s fed funds rate
target, monetary policy arguably remained relatively tight, as
monetary economist Scott Sumner notes in the context of a 2003
Ben Bernanke speech:
Bernanke (2003) was also skeptical of the claim
that low interest rates represent easy money:
[Bernanke:] As emphasized by [Milton]
Friedman… nominal interest rates are not
good indicators of the stance of monetary
policy…The real short-term interest rate…

is also imperfect…Ultimately, it appears,
one can check to see if an economy has a
stable monetary background only by
looking at macroeconomic indicators such
as nominal GDP growth and inflation.
Ironically, by this criterion, monetary policy
during the 2008-13 was the tightest since Herbert
Hoover was President.84
A Subtle Change to Fed Policy Implementation
During the week of September 15, 2008, investment bank Lehman
Brothers failed, followed by a subsequent run on money market
mutual funds.85 The Fed’s emergency lending spiked with a
corresponding injection of reserves (Figure 2-3), for which the Fed
was unwilling to sell more of its Treasury security portfolio to
sterilize.
At the Fed’s behest, the Treasury Department sold “special
treasury bills” to the public and deposited the proceeds with the
Fed.86 As purchase of the treasury bills would require buyers to
transfer funds from their banks to the Treasury Department, this
drained reserves from the banking system. The Treasury
Department, by depositing the proceeds with the Fed, was
effectively removing dollars from circulation, sterilizing the Fed’s
burgeoning emergency lending programs and helping to keep the
fed funds rate from trading below the Fed’s target. The Fed was
attempting to keep interest rates from falling out of greater concern
for inflation rising than for the deteriorating economic outlook.87
Despite these efforts the fed funds rate still fell below the Fed’s
target. The Treasury Department, approaching the debt ceiling,
grew reluctant to increase its deposits with the Fed. This prompted
the Fed to ask Congress for authority88 to pay interest on excess

reserves (IOER)89 to incentivize banks to deposit reserves at the
Fed and prevent the fed funds rate from falling below the Fed’s
target (see Appendix 2-1 for the original impetus behind IOER).
As then Federal Reserve Chairman Ben Bernanke wrote in his
memoirs:
When banks have lots of reserves, they have less
need to borrow from each other, which pushes
down the interest rate on that borrowing—the
federal funds rate.
Until this point we had been selling Treasury
securities we owned to offset the effect of our
[emergency] lending on reserves (the process
called sterilization). But as our lending increased,
that stopgap response would at some point no
longer be possible because we would run out of
Treasuries to sell. At that point, without legislative
action, we would be forced to either limit the size
of our interventions… or lose the ability to control
the federal funds rate, the main instrument of
monetary policy… [By] setting the interest rate we
paid on reserves high enough, we could prevent the
federal funds rate from falling too low, no matter
how much [emergency] lending we did.90
Thus, by paying IOER at rates above the fed funds rate, the Federal
Reserve could expand its balance sheet size to ease credit
conditions for selected market segments. At the same time, it could
keep broader monetary conditions from easing by encouraging
banks to hold newly created funds as excess reserves through the
payment of IOER.

Why Emergency Lending Programs and “Quantitative Easing”
Were Not Inflationary
To help overcome the recession and the ensuing weak recovery,
the Fed undertook three large-scale asset purchase (LSAP)
programs, more commonly known as “quantitative easing” or
“QE,” between November 2008 and October 2014, which
involved the Fed purchasing longer-term Treasury securities and
GSE-issued mortgage-backed securities (MBS) rather than its
normal purchases of short-term Treasury securities.91 This led to a
substantial increases in bank reserves, which is shown in Figure 23, along with the “money multiplier.” The latter measures how
increases in reserves and currency by the Fed multiply into broader
forms of money (e.g., checking and savings accounts), which
propel nominal spending.
1-!& 4

Had the money multiplier remained equal to its pre-recession
level, then given the Fed’s increases in reserves from its LSAPs,
nominal spending would have been nearly $50 trillion at the end

of 2017 instead of just under $20 trillion, and most certainly would
have been inflationary. However, LSAPs did not even result in
nominal spending returning to its pre-2008 trend, as shown in
Figure 2-4.
Given that inflation remained below the Fed’s two percent
inflation target, monetary conditions have been relatively tight
compared to the period preceding the 2008-2009 recession when
measured by outcomes rather than instruments (the low fed funds
rate target and an enlarged balance sheet).
1-!& 49

The Fed was clear from the outset that it would undo its LSAPs
eventually92 (i.e., remove from circulation the money it created in
the future). The temporary nature of the policy discouraged banks
from issuing more long-term loans. Alternatively, as economist
Tim Duy pointed out during the inception of the Fed’s first LSAP
program:

Pay close attention to Bernanke’s insistence that
the Fed's liquidity programs are intended to be
unwound. If policymakers truly intend a policy of
quantitative easing to boost inflation expectations,
these are exactly the wrong words to say. Any
successful policy of quantitative easing would
depend upon a credible commitment to a
permanent increase in the money supply. Bernanke
is making the opposite commitment—a
commitment to contract the money supply in the
future.93
Sumner (2010),94 Beckworth (2017),95 and Krugman (2018)96
observe similar issues.
Furthermore as Sumner (2010),97 Feldstein (2013),98 Beckworth
(2017),99 Selgin (2017),100 and Ireland (2018)101 note, payment of
IOER at rates competitive with market rates led banks to hoard the
reserve, which contributed at least partially to the collapse of the
money multiplier (Figure 2-3).
Regarding IOER, former Federal Reserve Vice Chairman Alan
Blinder advised in 2012:
I've been urging on the Fed for more than two
years: Lower the interest rate paid on excess
reserves. The basic idea is simple. If the Fed
reduces the reward for holding excess reserves,
banks will hold less of them—which means they
will have to find something else to do with the
money, such as lending it out or putting it in the
capital markets.102
He later observed in 2013:

If the Fed charged banks rather than paid them,
wouldn't bankers shun excess reserves? Yes, and
that's precisely the point. Excess reserves sitting
idle in banks' accounts at the Fed do nothing to
boost the economy. We want banks to use the
money.103
In the same article, he elaborated:
The financial crisis short-circuited this process. As
greed gave way to fear, bankers decided to store
trillions of dollars safely at the Fed rather than
lend them out. High-powered money [reserves and
currency] became powerless money.
The Fed compounded the problem in October 2008
by starting to pay interest on reserves. And these
days, the 25-basis-point IOER looks pretty good
compared with most short-term money rates. If
banks were charged rather than paid 25 basis
points, they would find holding excess reserves a
lot less attractive. As some of this excess centralbank money became ‘high-powered’ [i.e.,
propelled nominal spending growth through the
money multiplier] again, the Fed would want less
of it. So its balance sheet could shrink.
The payment of IOER and the transitory nature of LSAPs acting
to neutralize the monetary policy transmission mechanism
explains, at least partially, the consistent undershooting of the
Fed’s two percent inflation target. The Fed was effectively
pushing the gas pedal and the brake pedal at the same time.

Legislative Issues Related to IOER
The law specifies that IOER be paid at “rates not to exceed the
general level of short-term interest rates.”104 However, from 20092017, the IOER rate exceeded the effective fed funds rate 100
percent of the time, the yield on the 3-month Treasury bills 97.2
percent of the time, and the yield on 3-month nonfinancial
commercial paper 82.1 percent of the time (Figure 2-5). The Fed
is including its own discount rate (the primary credit rate) in the
general level of short-term interest rates to demonstrate
compliance with the law.105
In connection to IOER, Representative Jeb Hensarling, Chairman
of the House Financial Services Committee, stated:
[It] is critical that the Fed stays in their lane.
Interest on reserves – especially excess reserves –
is not only fueling a much more improvisational
monetary policy, but it has fueled a distortionary
balance sheet that has clearly allowed the Fed into
credit allocation policy where it does not have
business.
Credit policies are the purview of Congress, not the
Fed. When Congress granted the Fed the power to
pay interest on reserves, it was never contemplated
or articulated that IOER might be used to supplant
FOMC. If the Fed continues to do so, I fear its
independence could be eroded.106

1-!& 42

Views Cautioning on Use of Unconventional Monetary Tools
Noting that the large quantity of reserves produced by the Fed
contributed to the fed funds rate trading at or below the IOER rate,
John Taylor of Stanford University’s Hoover Institution said:
[W]e would be better off with a corridor or band
with a lower interest rate on deposits [IOER] at the
bottom of the band, a higher interest rate on
borrowing from the Fed [the discount rate] at the
top of the band, and most important, a marketdetermined interest rate above the floor and below
the ceiling… We want to create a connect, not a
disconnect, between the interest rate that the Fed
sets and the amount of reserves or the amount of
money that’s in the system. Because the Fed is
responsible for the reserves and money, that
connection is important. Without that connection,

you raise the chances of the Fed being a
multipurpose institution.107
The preceding observations and alternative views merit
consideration. In particular, Hetzel (2009) states:
Restrictive monetary policy rather than the
deleveraging in financial markets that had begun
in August 2007 offers a more direct explanation of
the intensification of the recession that began in the
summer of 2008.108
Furthermore, the Fed’s new operating procedures (a large balance
sheet and IOER) may not be conducive to maintaining full
employment and price stability, as Taylor (2009) noted:
[P]aying interest on excess reserves gives the Fed
an additional tool. However, this tool enables the
Fed to be more like a discretionary multipurpose
institution rather than the rule-like limited purpose
institution that has delivered good policy in the
past and that can deliver good policy in the
future.109
Also, future Fed policy may be constrained in some ways by past
policy actions, which may not be conducive toward maintaining
full employment and price stability. As Bill Nelson, former deputy
director of the Federal Reserve Board’s Division of Monetary
Affairs and an attendee of FOMC meetings, noted of the Fed’s
internal debate over its third LSAP program:
It is worth keeping in mind that the Fed didn’t make
an explicit decision to keep its balance sheet so
large for so long because doing so would support
efficient monetary policy [e.g., the one that
maintains full employment and price stability].

Instead, the Fed fell into its current situation
because the original plan to drain excess reserves
and sell assets became untenable once people
realised selling such a large portfolio so quickly
would generate large losses.110
SUPPLY-SIDE CONSTRAINTS
Reasons for the U.S. Economy’s Sluggish Growth
Larry Summers, former National Economic Council Chairman
during the Obama Administration, succinctly described the
economy’s performance since the 2008-2009 recession:
[E]ssentially all of the convergence between the
economy’s level of output and its potential has been
achieved not through the economy’s growth, but
through downward revisions in its potential.111
Figure 2-6 shows how real GDP has performed relative to
projections of potential real GDP over time. In August 2007, CBO
projected that potential real GDP—the maximum sustainable level
of output an economy can produce—would be nearly $2.6 trillion
more than it actually was by 2017’s end.

1-!& 46

The severity of the 2008-2009 recession has been offered as an
excuse for the U.S. economy’s failure to recover. However, as
Chapter 1 of this Response and the Report points out, this claim
does not square with experience.112
Research by Nobel laureate economist Milton Friedman
concluded that the more severe an economic contraction was, the
sharper the recovery would be (Friedman 1988).113 Economists
Robert Barro and Tao Jin examined 185 distinct macroeconomic
crises (including ones associated with severe financial crises, such
as during the Great Depression).114 Barro succinctly summarized
their findings in a 2016 Wall Street Journal op-ed:
On average, during a recovery, an economy
recoups about half the GDP lost during the
downturn. The recovery is typically quick, with an
average duration around two years. For example,
a 4% decline in per capita GDP during a
contraction predicts subsequent recovery of 2%,

implying 1% per year higher growth than normal
during the recovery. Hence, the growth rate of U.S.
per capita GDP from 2009 to 2011 should have
been around 3% per year, rather than the 1.5%
that materialized.
Arguing that the recovery has been weak because
the downturn was severe or coincided with a major
financial crisis conflicts with the evidence, which
shows that a larger decline predicts a stronger
recovery. Moreover, many of the biggest
downturns featured financial crises. For example,
the U.S. per capita GDP growth rate from 1933-40
was 6.5% per year, the highest of any peacetime
interval of several years, despite the 1937
recession. This strong recovery followed the
cumulative decline in the level of per capita GDP
by around 29% from 1929-33 during the Great
Depression.115
In the post-World War II era, the second most severe U.S.
recession was the double-dip recession of 1980 and 1981-82, in
which the unemployment rate reached a record high of 10.8
percent. The Reagan Administration’s response was to streamline
regulation, reform the tax code, and advocate sound monetary
policy. In the four quarters after the recession’s trough in the
fourth quarter of 1982, real GDP growth registered annualized
growth rates of 5.3, 9.4, 8.1, and 8.5 percent.116
President Obama’s Office of Management and Budget (OMB)
initially also expected a strong recovery from the recession (Figure
2-7), consistent with the empirical research cited above. But a
robust recovery never materialized, and its expectations were
gradually revised downward.

1-!& 4:

The subsequent sections show that abrupt breaks from trend
occurred in key determinants of economic growth such as labor
force participation rates, capital investment, and labor
productivity. This suggest a failure of policy to promote recovery.
“Quantitative Easing” Increased the Government’s Footprint in
Capital Allocation
Prior to 2008, nearly every dollar of deposits translated into a
dollar of private bank loans and leases. Although lending did
rebound in 2008’s aftermath, a sizeable portion of bank deposits
remained in reserve at the Fed as shown in Figure 2-8. As these
reserves emerged from the large-scale Fed purchases of Treasury
securities and GSE-issued MBS, the Fed became responsible for
allocating a more sizeable portion of private savings (as measured
by deposits banks accepted from their customers). Private banks
have an incentive to allocate savings to their most productive uses.
The shift in responsibility for this allocation toward the less

efficient Government sector may have led to reduced economic
potential117 as well as financial imbalances (i.e. asset price
bubbles).118
1-!& 4

Workforce Participation Adversely Affecting Employment
CBO’s January 2007 projection of potential real GDP for 20072017 had accounted for the aging of the population. CBO reported
that the average growth rate of the potential labor force would slow
from its 2002-2006 average of 1.1 percent growth per year to 0.8
percent for 2007-2012 and 0.5 percent for 2013-2017.119 Thus, an
aging population does not explain CBO’s continual downward
adjustment of potential GDP since that was foreseeable in 2007.
Figure 2-9 illustrates that the decline in labor force participation
rates was substantially more than what the Bureau of Labor
Statistics (BLS) had anticipated.120 Furthermore, a notable decline
occurred among the prime working-age population (those ages 25
to 54).

1-!& 45

1-!& 4

Additionally, the United States was alone in experiencing a
decline in prime-age labor force participation rates among the G7
member nations, as Figure 2-10 shows.
Capital Investment Stagnation and the Decline of the Natural Rate
of Interest
Capital intensity, also known as “capital deepening,” measures the
quantity of tools, equipment, and machinery available per hour of
labor worked. As of 2016, it was over 15 percent lower than what
CBO had projected in 2007 (Figure 2-11). It also indicates that
workers have slightly less capital at their disposal in 2017 than
they did in 2009. Capital deepening has been the worst in the
series’ history, which extends back to 1948.
1-!& 4

The reduction of capital intensity corresponds with a sharp decline
in business capital investment in proportion to GDP after the 20082009 recession. Figure 2-12 shows private-sector fixed investment
(“fixed” investment excludes changes in business inventories).

1-!& 4

The reduction in business investment contributed to a reduced
“demand for loanable funds” to finance capital accumulation, and
a lower natural rate of interest (i.e., the rate consistent with a
closed output gap, full employment, and stable prices). A
frequently cited methodology for estimating the natural rate of
interest by Laubach and Williams (2003)121 shows a downward
trend for some time, which has been interpreted as secular
stagnation, beginning to set in well before the recession. However,
a sharp break occurred during the 2008-2009 recession as Figure
2-13 illustrates, and its failure to revert to trend implies a cause
other than long-developing “secular stagnation.”

1-!& 4

Meager Productivity Growth
Between 1994-2004 labor productivity growth averaged 2.6
percent per year. From 2005-2008 its average fell to 1.3 percent
and remained low. The slowdown in labor productivity since 2004
might suggest that a “new normal” had begun years before the
2008-2009 recession (Figure 2-14).

1-!& 49

However, research by Guvenen et al (2017)122 finds profit shifting
by firms—a consequence of the U.S. business tax system
becoming increasingly less competitive internationally as
discussed in Chapter 3—caused measurement issues for labor
productivity growth. Adjusting for the mismeasurement, they find
that labor productivity growth averaged 2.7, 1.6, and 1.3 percent
in the 1994-2004, 2005-2008, and 2009-2017 periods, compared
with unadjusted values of 2.6, 1.3, and 1.3 percent, respectively
(top three rows of Table 2-1).
Accounting for the mismeasurement reveals a break in the average
between the 2005-2008 and 2009-2017 periods. Furthermore,
when the volatile values during the recession from 2008 to 2010
are excluded, an even sharper break in labor productivity growth
appears, namely from an unadjusted 0.8 between 2005-2008 and
2009-2017 to an adjusted 1.1 percentage point decline (bottom
three rows of Table 2-1). Such an abrupt break suggests policy

choices after the 2008-2009 recession kept the U.S. economy from
recovering its full potential.
$' 4

1-!& 42

Figure 2-15 illustrates that that an abrupt break occurred in labor
productivity growth after the 2008-2009 recession, leading to a
nearly 15 percent shortfall below the 2007 CBO projections for
2017. As in the case of the aforementioned break in the natural
rate of interest, the break in the productivity trend was not
reversed.

Significance of Supply-Side Constraints
A low headline unemployment rate and closed output gap based
on CBO’s most recent estimate of potential GDP tell us little about
the effects on economic performance of tax and regulatory reform.
Subpar performance of the proximate determinants of economic
growth—employment, capital, and productivity growth—
suggests that the economy has substantial untapped potential.
Given better policies, accelerating economic growth in the near
term and a higher long-term growth rate seem entirely possible.
THE ECONOMIC OUTLOOK
Forward-Looking Indicators Improve
The economic outlook improved immediately after the last
election as shown by the forward-looking indicators in Figure 216, which were little changed over the 12 months before the
election.123 Over the 12 months that followed the election, the
stock market’s value increased nearly 30 percent, consumer
sentiment by 25 percent, and small business sentiment by 10
percent.

1-!& 46

The marked upswing of forward-looking indicators reflects the
expectation that removing growth-constraining policies can help
recover the U.S. economy’s lost potential.
Real Economic Indicators Improve
There was notable improvement in real GDP growth in 2017
compared to 2016, as growth in each quarter exceeded its
corresponding quarter from the previous year (Figure 2-17). An
important contributor to the acceleration in real GDP growth was
private-sector non-residential fixed investment, which measures
business spending on structures, equipment, and intellectual
property (software, research and development, and entertainment,
literary and artistic originals) (Figure 2-18).

1-!& 4:

1-!& 4

Industrial production, which is a comprehensive measure of the
production of tangible goods in the United States, also expanded

robustly in 2017 (Figure 2-19). In addition, the industrial capacity
utilization rate has trended upward. In December 2017, it
registered 77.7 percent, the highest since March 2015, yet still
below the pre-recovery average of 81.4 percent—further evidence
that the U.S. economy is not operating at its full potential.
1-!& 45

1-!& 4

Since January 2017, the headline unemployment rate (U-3) fell 0.7
percentage point to 4.1 percent in February 2018. More notable
was the faster decline in the “real” unemployment rate of 1.2
percentage points over the same period (Figure 2-20). This
measure also includes those who searched for work in the past
twelve months, and those among the employed who can only find
part-time work for economic reasons. Its sharp decline suggests
that those more adversely affected by the economy’s slow growth
were able to find better employment opportunities given an
improved economic environment.

1-!& 4

Despite notable improvements and a low headline unemployment
rate, labor market slack remains. Private-sector job creation,
averaging 180,000 per month in 2017, continues to exceed what is
necessary to accommodate the population’s growth rate. Annual
hourly wage growth for production and nonsupervisory workers is
only averaging 2.2 percent in the current expansion, compared
with 3 percent in previous expansions (Figure 2-21). Furthermore,
although the employment-to-population ratio, overall labor force
participation rate, and the prime-age labor force participation rate
have trended upward, they remain considerably lower than their
pre-recession rates (Figure 2-22).

1-!& 4

The Outlook under Ideal Conditions
The level of real GDP, which would be realized from the Trump
Administration’s forecast of 3.0 percent average growth over
2018-2028, matches what the previous Administration’s OMB had
projected as recently as 2013. Moreover, it is very close to CBO’s
2012 estimate of potential real GDP for 2028 (Figure 2-23).

1-!& 4

Tax and regulatory reforms are intended to help unleash the U.S.
economy’s full potential. Figure 2-24 uses CBO’s 2012 estimates
for potential GDP to illustrate that an output gap would open,
allowing economic growth to accelerate as policy constraints on
capital and employment are lifted.

1-!& 49

It is difficult to ascertain the U.S. economy’s true potential after it
was constrained for so long, Table 2-2 illustrates average annual
real GDP growth rates that would be necessary to catchup to the
different CBO projections for potential real GDP by a given
year.124 For example, column D, row 8 indicates the economy
would need to grow at an average rate of 3.4 percent per year to
catch up to CBO’s 2012 projection for potential real GDP by 2025.

$' 4

The economy’s potential is partly determined by factors over
which the government has little influence such as population
growth and age composition. The Report recognizes the effect of
an aging population,125 for example, which is among the long-term
factors that supporters of the previous Administration often cite as
a reason for the slow recovery. As the economy returns to a higher
output level, economic growth will moderate, but if policymakers
continue to pursue productivity-enhancing policies with regard to
taxes, regulation, education, infrastructure, trade, and health
outlined in the successive chapters of this Response, the longerrun average annual growth can be better than CBO’s most recent
projection of 1.9 percent.
Potential Risks to the Outlook
MONETARY POLICY RISKS. Tax reform, such as TCJA, and an
improved economic outlook, raise the value of capital and
workers, which in the longer run, will lead to increases in capital
and employment that then lead to increased production, which puts
downward pressure on inflation rates.126 To finance additional
capital investments business must seek more credit. This puts

upward pressure on interest rates, which may incidentally affect
the demand side of the economy.
In particular, higher market interest rates—relative to the Fed’s
IOER rate (or a given expected path for the Fed’s IOER rate)—
encourage banks to increase lending using their abundant supply
of excess reserves; this also encourages the non-banking public to
spend cash balances at a faster rate. Thus, price inflation can
accelerate somewhat in the near term before capital and
employment attain their new, higher steady states and increased
production then puts downward pressure on inflation. The risk is
that the Fed misinterprets a transitory acceleration in inflation
rates as the economy “overheating” and tightens monetary policy
too quickly.
1-!& 42

For example, on February 2, BLS reported an acceleration in wage
growth, which could portend inflationary pressures.127 Market
turbulence in February followed, which does not appear to have
arisen because the economy was “overheating” but out of fear the

Fed might think so and tighten monetary policy too quickly. As
evidence, in the wake of the aforementioned BLS report, the TIPS
spread, which is a market-based measure of the average expected
inflation rate over the next ten years, fell and the U.S. dollar
appreciated (Figure 2-26). (The “TIPS spread” is the difference in
yields between 10-year Treasury Notes and 10-year Treasury
Inflation Protected Securities; TIPS compensate holders for
inflation.) Both a lower TIPS spread and appreciating dollar signal
tighter monetary conditions ahead rather than an overheating
economy.
The risk that the Fed will tighten too much should be low as
forward-looking market-based measures of inflation expectations
do not indicate inflation will rise to the Fed’s two percent target in
the next 10 years. Furthermore, the Fed’s representation of the two
percent inflation target as “symmetric”—an average rather than a
ceiling—should afford it room to avoid tightening monetary
policy prematurely. Inflation has consistently undershot the Fed’s
two percent symmetric inflation target since its inception in 2012
(Figure 2-26), meaning that inflation somewhat above two percent
could be tolerated for a time.

1-!& 46

ASSET PRICE BUBBLE RISKS. Prominent economists, including
Martin Feldstein,128 have expressed concern that near-zero interest
rates have inflated some asset prices, and they warn that the longer
the Fed waits to normalize interest rates, the greater the risk of a
price collapse. Indeed, many corporations that can issue bonds at
low interest rates or obtain bank credit at low rates have taken on
debt to buy back their own stock.
To the extent current assets are overpriced, pro-growth policies
can help. The fundamental value of a firm is the present value of
its expected future cash flows. As tax and regulatory relief
improve future earnings potential, the expected return on new and
existing projects rises and the present value of an enterprise
increases. Given a currently underutilized workforce, accelerated
economic growth to underpin or raise asset valuations seems
possible. The sustained rise in stock indices since the last election
suggests improving investor confidence.

INTERNATIONAL FINANCIAL RISKS. The Committee Majority is
concerned about financial vulnerabilities abroad, as is the CEA.129
In particular, a foreign financial crisis can increase the demand for
safe assets, which includes the U.S. dollar. Monetary economist
Lars Christensen lays out the type of scenario that occurred in
2011 during the Fed’s second QE program:
…[I]imagine that a sovereign default in a euro
zone country shocks investors, who run for cover
and starts buying ‘safe assets’. Among other things
that would be the U.S. dollar. [If the Fed takes no
reaction to the increased demand for dollars] the
Fed is effective allowing external financial shocks
to become a tightening of U.S. monetary conditions
[which reduces U.S. aggregate demand]. The
consequence every time that this is happening is
not only a negative shock to U.S. economic activity,
but also increased financial distress.130
In addition to the factors outlined in the section discussing
demand-side constraints above, this may have further dampened
the effectiveness of QE. As Hetzel (2012) noted:
…QE2 had produced an increase in Fed securities
holdings of $416 billion. However, European
banks increased their holdings of dollar excess
reserves by more than that amount. They had good
reason to accumulate excess reserves in 2011.
First, the possibility was real that the troubled
peripheral countries in Europe like Greece would
at least partially default on their external debt and
impose losses on the European banks holding that
debt. Second, the European Banking Authority was
under pressure to make national regulatory

authorities subject to their banks to rigorous
‘stress tests.’131
INTERNATIONAL TRADE ISSUES. Presently, the Trump Administration
is renegotiating the terms of the North American Free Trade
Agreement (NAFTA), and attempting to change the international
terms of trade. Retaliatory trade barriers could disrupt global
supply chains, leading to a downturn in economic activity. The
stock market declined on the early March 2018 news that the
Trump Administration would impose tariffs on imported steel and
aluminum.
FEDERAL DEBT. Static scoring of TCJA—which does not allow for
GDP to rise as a result of tax cuts and therefore ignoring federal
revenue gains from GDP growth—suggests the debt-to-GDP ratio
will increase to 97.5 percent from a baseline of 91.2 percent in
2027.132 But TCJA makes the tax code more efficient and will
enhance the economy’s ability to grow. Figure 2-27 shows how
the debt-to-GDP ratio might change under different real GDP
growth rates. If the U.S. economy grows faster than CBO’s most
recent projected baseline of 1.9 percent, the debt-to-GDP ratio will
decline. If it grows at a still-modest 2.6 percent, the debt-to-GDP
ratio will remain unchanged without even including the additional
tax revenue gained from faster GDP growth.

1-!& 4:

In addition to tax reform, the Administration is implementing
other pro-growth reforms—such as reducing regulatory burdens—
which OMB projects will result in 3.0 percent average annual
GDP growth over the next 10 years. With 3 percent annual growth,
the debt-to-GDP ratio would fall to 87.7 percent (again, not
including additional Federal tax revenue from faster growth).
The risk to the economy does not derive from passage of the tax
legislation as some critics claim. On the contrary, TCJA mitigates
the risk with its pro-growth effects. CBO’s March 2017 LongTerm Budget Outlook133, which is based on the laws in effect at
the time, projected that the Federal debt is on an unsustainable
trajectory, wherein the debt-to-GDP ratio rises indefinitely. Tax,
regulatory, and other reforms that improve the economy’s
productive potential will improve, not worsen the situation, but
ultimately entitlement reform is necessary to reverse the
unsustainable trajectory.

CONCLUSIONS
There is an alternative explanation for the slow recovery following
the 2008-2009 recession, which differs from the common view
that a financial crisis and adverse long-term trends—an aging
population, low labor force participation, and low productivity
growth—are to blame and that the Obama Administration and the
Federal Reserve did all they could to lift the economy; the former
with an enormous debt-financed fiscal stimulus package, and the
latter with ultra-low interest rates and quantitative easing.
The alternative explanation is that the previous Administration’s
spending, tax, and regulatory policies progressively constrained
the economy’s productive potential, while the Fed held back bank
lending by paying interest on excess reserves, directing capital to
inefficient uses through quantitative easing.134
This chapter explores the economy’s performance from the 20082009 recession to the present, in the context of both supply and
demand. The Committee Majority concurs with the Report’s
findings that supply-side determinants of real economic growth—
labor, capital, and productivity—were artificially constrained by
government policies that hindered Americans from realizing their
full potential. Thus, the Committee Majority endorses policies that
will unleash the U.S. economy’s full potential. Subsequent
chapters in the Response offer further recommendations to this
end.
This chapter also offers an alternative view of factors that
constrained the demand side of the economy (i.e., the Federal
Reserve’s payment of interest on excess reserves at rates
competitive with market rates), and its credit policies, which
include quantitative easing. This alternative view helps to explain
the “puzzle” of persistent below-target inflation. It suggests that

monetary policy was not as “easy” during the 2008-2009 recession
and its aftermath as commonly perceived.
Payment of IOER and the slow unwinding of quantitative easing
programs raise complications for the demand side of the economy,
especially as the Fed remains “puzzled” by low inflation and still
does not appear to connect it to the IOER rate. There is some risk
that the Fed—out of fear the economy may be “overheating” and
inflation may suddenly accelerate—could tighten monetary policy
at too fast a pace.
As time passes, it is important that the study of economic policies
during and after the 2008 recession continue. The common
narrative of events deserves greater scrutiny, and it should not
simply become the “received wisdom” that automatically and
unquestioningly informs future policy.
Recommendations
¾ The closing of the output gap from the 2008-2009
recession, relative to estimates of potential GDP under the
constraints of past policies, should not be considered a
truly complete recovery. With the continuation of better
policies, the economy has room to grow faster.
¾ Unconventional monetary policy has not been fully
unwound, and it bears continued scrutiny. It is important
to establish clear goals with respect to the future use of
interest on excess reserves and the size of the Fed’s balance
sheet.
¾ While America’s tax regime after TCJA is now more
internationally competitive, reform of the country’s
regulatory regime, health care system, education system,
infrastructure, and cybersecurity must remain top
priorities. Positioning these systems so the economy can

grow faster again will help with many of the country’s
derivative social problems.
APPENDIX 2-1: PRE-2008 IMPETUS FOR IOER
A provision of the Financial Regulation Relief Act of 2006
authorized the Federal Reserve to begin paying banks interest on
their required reserves (IORR) and excess reserves (IOER) in
2011.135 (Because IORR does not have as significant ramifications
as IOER, this chapter focuses on the latter.) The impetus was
largely technical; it would enable the Fed to modernize its
antiquated required-reserve regime and reduce the magnitude of
Fed interventions through open market operations (buying and
selling of short-term Treasury securities to alter the supply of bank
reserves) that were needed to achieve its target for the fed funds
rate.
The IOER rate would create a floor for the fed funds rate,136 as it
would motivate banks to hold excess reserves, rather than lend
them to other banks at a lower fed funds rate, thus helping to limit
the amount of reserves the Fed has to drain through open market
operations to lift the fed funds rate toward its target. The Fed’s
discount rate—the rate at which banks can borrow reserves
directly from the Fed rather than borrow the excess reserves of
other banks at the fed funds rate—would serve as a ceiling.137
Within this “corridor” of administratively determined rates,
market forces as well as the typical (but reduced) Fed open market
operations would determine the fed funds rate. By raising or
lowering the fed funds rate in this “corridor system” relative to the
natural rate of interest—the market rate of interest consistent with
price stability and full-employment, the Fed could ease or tighten
monetary policy in a way that is consistent with its more reliable
and effective pre-2008 operating procedures.

95
; = 1 *

1 > 1

Chapter 1 of the Report discusses economic distortions
that were present in elements of the previous tax system
and the economic benefits of certain provisions in the Tax
Cuts and Jobs Act (TCJA).

CEA estimates that TCJA’s corporate tax rate reduction
and business expensing alone will significantly lower the
cost of capital, resulting in a two to four percent increase
in economic output and an average annual increase in
household incomes of $4,000 or more in the long run.

CEA also projects that reforms on the individual side of
the tax code will boost GDP by up to 1.6 percent by 2020.

This chapter of the JEC’s Response discusses why the
United States needed the reforms in TCJA to help unleash
our economic potential and boost competitiveness, as well
as how the changes will benefit American households and
businesses.

The JEC Majority also recommends additional reforms to
build on the progress achieved by TCJA.

SUBSTANTIAL PROGRESS SINCE THE JEC’S 2017 RESPONSE
Last year’s Response to the Obama Administration’s final Report
decried the lack of focus and progress on comprehensive tax
reform—despite mounting evidence that our overly complex and
outdated tax code was not only a disservice to individual taxpayers
but hindered economic growth and undermined America’s global
competitiveness.138

A year ago, America’s corporate tax rate was the highest in the
developed world. Additionally, the United States was one of only
a handful of developed economies with an uncompetitive
worldwide system of taxation that subjected companies to both a
host country and home country tax when overseas profits of
domestic companies were repatriated. Also last year, pass-through
businesses—many of which are small—were subject to a high top
individual tax rate that had increased dramatically under the
Obama Administration. Further, tax complexity was burdening
individuals, families, entrepreneurs and small businesses, and the
economy as a whole.
As mentioned in Chapter 1, in October 2017 the Committee held
a hearing to explore declining rates of entrepreneurship and
whether tax reform might help reverse this alarming trend.139
Startup businesses less than a year old are both responsible for
spurring innovation in the economy, and are the source of nearly
all net new job creation, adding urgency to the problem.140
Witnesses cited high individual and corporate tax rates,
complexity in the tax code, an uncompetitive worldwide system of
taxation, and the fact that companies cannot fully expense business
investments among the barriers to entrepreneurship. They urged
Congress to focus tax reform on boosting economic growth
because a growing economy and entrepreneurship become selfreinforcing; when employment opportunities are plentiful, more
potential entrepreneurs are willing to take the risk of starting a
business, which in turn creates more jobs.
Since that hearing, Congress and the Trump Administration have
transformed the U.S. tax code with the passage of Public Law 11593, known as the Tax Cuts and Jobs Act (TCJA). Notably, TCJA
either adopted or made substantial progress toward many of the
recommendations of the JEC Majority in the 2017 Response,
which were also echoed by JEC hearing witnesses. Those

recommendations included lowering both individual and
corporate tax rates, moving to a competitive territorial tax system,
allowing expensing of business investments, and simplifying the
tax code.
TAX REFORM: A NECESSITY FOR BOOSTING AMERICA’S
ECONOMIC POTENTIAL
To operate at full potential, an economy needs its working-age
population in the workforce (labor supply); businesses willing and
able to hire and equip workers with high-quality facilities,
equipment and know-how (capital investment); and technological
innovation that empowers workers to produce more per hour
(productivity). Tax policy can affect each of these factors either
positively or negatively.
The Joint Committee on Taxation (JCT) has explained several of
these economic effects. For example, lowering the tax rate paid by
individuals allows them to keep more of the money they earn, thus
increasing their incentive to work. Similarly, lowering tax rates
paid by businesses decreases the cost of capital, which encourages
more investment in their business and workers by purchasing
equipment or providing skills training, both of which make
employees more productive.141 Higher productivity generally
leads to higher wages for workers.142 Higher wages, in turn, may
entice more potential workers into the workforce, creating greater
prosperity, opportunity, and growth.
Conversely, tax policy can also hinder economic growth. High
marginal tax rates on individuals discourage them from working
and increasing their earnings. High tax rates on businesses can
drain resources that could otherwise be invested in their business
and workers. Additionally, slow cost recovery for equipment
purchases that require businesses to depreciate assets over many

years discourages companies from making the kind of investments
that raise productivity and wages.
In addition, tax policy can have a direct impact on the location of
investments. If the domestic tax climate makes it less profitable to
invest in the United States, businesses have a powerful incentive
to invest in and possibly even relocate to other countries with more
favorable tax systems. This diverts both capital and workforce
opportunities from the United States, further lowering our
Nation’s growth potential. A tax code that makes America the best
place in the world to work, invest, and start a business is a key
ingredient for strong economic growth.
Additionally, the time and resources spent by both individual
taxpayers and businesses complying with tax rules is a drain on
the economy. The Tax Foundation estimated that Americans spent
8.9 billion hours filling out tax forms in 2016 alone, costing the
economy $409 billion in lost productivity.143
As discussed earlier in this Response, the economy under the
Obama Administration experienced subdued levels of workforce
participation by people in their prime working years, depressed
levels of business investment, and relatedly, low levels of
productivity and wage growth. Yet, instead of pursuing progrowth tax policy, the previous Administration imposed over $1
trillion in new taxes through the Affordable Care Act (ACA),
many of which affected low- and middle-income taxpayers;
increased taxes on pass-through businesses by raising the top
individual tax rate; increased the cost of capital by raising capital
gains taxes; and let the United States fall ever further behind our
international competitors by leaving in place a high corporate tax
rate and worldwide tax system.144

FEATURES OF THE TAX CUTS AND JOBS ACT
TCJA is a dramatic departure from the anti-growth tax policies of
the previous Administration. It lowers taxes on labor and capital,
incentivizes business investments that boost productivity and
wages, increases America’s global competitiveness, and makes
taxes easier and more comprehensible for millions of taxpayers.
TCJA Provisions Affecting Individuals and Families
TCJA lowered individual tax rates (Figure 3-1) and applied the
lower rates to broader swaths of income beginning in 2018.
Additionally, taxpayers in the 10 percent bracket will have an
effective tax rate of zero percent under TCJA due to the increased
standard deduction described later.
1-!& 4

Figure 3-2 shows the tax rate reductions for low- and middleincome taxpayers who are married and file joint tax returns. The
Joint Committee on Taxation estimated that in 2019 TCJA will
result in an average tax cut of eight percent, with the largest
percentage reductions experienced by taxpayers with incomes

100

between $20,000 and $50,000.145 These lower rates boost takehome pay of workers, which not only improves their standard of
living but increases the incentive to work and earn more. Workers
began seeing fewer taxes withheld from their paychecks in
February 2018.146
1-!& 4

TCJA also provided taxpayers with additional tax relief and
greater simplicity through a larger standard deduction. Taxpayers
have the option of taking a simple standard deduction or itemizing
a series of more complex deductions. By nearly doubling the
standard deduction, TCJA effectively offers a zero tax rate bracket
for a larger share of taxpayers’ income. As a result, an estimated
nine out of 10 tax filers will choose this simpler option.147 Even
those who itemize deductions will see a more streamlined form
that will not require them to track as many expenses and receipts.
Itemizers will still be able to deduct interest on mortgages of up to
$750,000, up to $10,000 in State and local taxes, and even more
of their donations to charity through a higher annual limit on the

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charitable deduction. Additionally, for 2017 and 2018 itemizers
with catastrophic health care costs will have relief from an ACA
tax hike, described later, affecting the medical expense deduction.
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Tax reform also provided significant tax relief for families with
children and other dependents. TCJA doubled the child tax credit
from $1,000 to $2,000 per child and allowed up to $1,400 of each
credit to be refundable, meaning that those without tax liability can
still claim the credit. (The refundable portion will grow with
inflation up to the full $2,000 value of the underlying credit.)
TCJA also includes a nonrefundable $500 tax credit for
dependents who do not qualify for the child credit. Additionally,
TCJA maintained the adoption tax credit and the credit for child
and dependent care expenses. The combination of lower tax rates,
a larger standard deduction, and expanded tax credits for children
produces substantial tax relief for a family of four, as illustrated
by the following chart. Of note, the chart does not include the
effects of the Earned Income Tax Credit, which was maintained in

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TCJA and provides an additional refundable credit to working
taxpayers with low income.
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In its macroeconomic analysis of TCJA, JCT described how these
tax provisions combine to encourage potential workers on the
sidelines to join the workforce:
The significant reduction in marginal tax rates on
labor (resulting primarily from the additional tax
rate bracket, lower statutory rates for most
brackets, and the increase in the child credit)
provide strong incentives for an increase in labor
supply.148
A previous study found small overall effects on labor supply
from high individual tax rates but significant effects on the
willingness of married women to work. The same study found
that high rates create other economic distortions, including
causing people to engage in or refrain from certain activities to

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avoid taxes, which is particularly prevalent among higherincome taxpayers.149 These tax avoidance techniques are part of
the excess burden of taxation that will be discussed later in this
chapter.
Harvard economist Robert Barro projects a strong short-run
response from TCJA’s individual tax rate reductions that will
boost GDP by a total of 1.6 percent through 2019.150 While Barro
expects the growth to level off beyond 2019, the higher level of
GDP that results from the market efficiency of lower rates will
endure. CEA came to a similar conclusion, projecting GDP to
increase by up to 1.6 percent by 2020.151
CEA also noted research indicating that older workers are more
responsive to changes in marginal tax rates than younger ones.152
This suggests that the tax rate reductions may encourage more of
those nearing retirement age to stay in the workforce.
Due to a lack of support from the Minority party in Congress,
TCJA could only be enacted under complex budget
reconciliation procedures, which allow for passage in the Senate
with a simple majority vote. Unfortunately, the strict rules for
this process led to the expiration of TCJA provisions affecting
individuals after 2025. The JEC Majority fully supports making
these provisions permanent. Essentially, JCT provided an
economic argument for doing so by explaining that without such
an action, some of the employment gains from TCJA could
otherwise be erased after 2025:
After the sunset of the individual tax provisions, the
increase in employment is expected to decline.153
Tax Fairness
The term “fair” is highly subjective, including in the context of
taxation. For example, a flat tax on all types of income might be

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considered a fair way to raise revenue because it would treat all
taxpayers equally, imposing the same tax rate on all taxpayers and
all types of activity. Others may view fair taxation as imposing
more than proportional taxes on higher-income taxpayers. In this
vein, the Federal tax code is “progressive” with higher marginal
income tax rates applied to incremental income. Notably, several
elements of TCJA address both notions of fairness.
TCJA is evenhanded by lowering taxes for all income groups, but
TCJA also increases the progressiveness of the tax code. During
the time that TCJA provisions affecting individuals are in effect,
the new and lower overall tax burden will be borne more heavily
by taxpayers with incomes greater than $1 million. For example,
JCT estimated that by 2019, taxpayers with incomes over $1
million will pay 19.8 percent of all Federal taxes, compared to 19.3
percent without TCJA. Conversely, under TCJA, taxpayers with
less than $50,000 in income will see their share of Federal taxes in
2019 decline from 4.4 percent to 4.1 percent.154
If a future Congress decided not to renew or make permanent the
individual tax provisions, JCT indicated that this increased
progressiveness of the tax code under TCJA would disappear,
providing yet another argument for extending them beyond 2025.
Further, TCJA reduces tax benefits that mainly benefit higherincome taxpayers and reduces or eliminates taxes that
disproportionately burden low- and middle-income Americans.
One such tax is the individual mandate penalty.
Before TCJA, Americans without health insurance not only dealt
with the vulnerability of being uninsured but also faced a tax
penalty under the ACA’s individual mandate, which requires
Americans to maintain Government-approved health insurance.
TCJA reduced the individual mandate tax to zero; consequently,
Americans will no longer be taxed simply for being uninsured.

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This penalty was a very regressive tax. For example, during the
2015 tax filing season, nearly 85 percent of those forced to pay it
had incomes less than $50,000.155
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TCJA provides temporary relief from another ACA tax increase
that disproportionately affects low- and middle-income taxpayers.
Before the ACA, Americans who itemize deductions could deduct
out-of-pocket medical expenses that exceeded 7.5 percent of their
adjusted gross income. The design of this deduction ensures that
only taxpayers with very high medical costs relative to their
income can obtain tax relief. The ACA made it more difficult to
afford catastrophic costs by raising the income threshold to 10
percent. (Seniors received a temporary exception that expired last
year.) According to the Internal Revenue Service (IRS), 83 percent
of taxpayers who used this deduction in 2016 had incomes less
than $100,000.156 TCJA reinstates the 7.5 percent threshold that
existed before ACA for the 2017 and 2018 tax years.

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In addition, TCJA limited an itemized deduction that mainly
benefits those with high incomes. TCJA placed a cap of $10,000
on the deduction for State and local taxes (SALT). As the table
below illustrates, this is only slightly less than the average SALT
deduction claimed in 2016. Further, the cap is larger than the
average deduction taken by taxpayers with incomes lower than
$200,000. CEA also noted that the benefits of an unlimited SALT
deduction skew heavily to high-income taxpayers.157
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Additionally, even with a full deduction under previous law, only
22 percent of tax return filers claimed the SALT deduction in
2016.158 Fewer still will take this deduction due to the much larger
standard deduction in TCJA, further shrinking the universe of
taxpayers who might be affected by the cap. Another benefit of the
cap is that a high SALT deduction tended to make taxpayers more
likely to pay the Alternative Minimum Tax (AMT), discussed later
in this chapter. In summary, relatively few taxpayers will be
affected by the limit on the SALT deduction, those who do are

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likely to have high incomes, and even the affected taxpayers will
have the side benefit of less exposure to AMT.
The cap on the SALT deduction also addresses a previous inequity
in the tax code that arose from the fact that the higher a State’s
taxes, the less Federal income tax the IRS collected from that
State. Taxpayers in States that set above-average tax rates obtain
a greater tax benefit from the Federal Government than those who
live in States with lower tax rates, which amounts to a crosssubsidy from low- to high-tax States.
TCJA Provisions Affecting Small Businesses and Pass-Through
Companies
Approximately 95 percent of businesses pay taxes at the individual
level rather than corporate level; these are known as pass-through
businesses.159 The vast majority of small businesses are organized
as pass-throughs, and a high top individual tax rate can drain
precious resources from the business.
When President Obama took office, the top Federal tax rate paid
by pass-through businesses was identical to the top rate paid by
large corporations at the time, 35 percent. However, the Obama
Administration insisted on raising the top statutory individual rate
to 39.6 percent. Other Obama-era tax increases—including a limit
on itemized deductions and the ACA’s 3.8 percent tax on
investment income—pushed the top effective rate paid by small
businesses to 44.6 percent.160 When State taxes are included, many
small businesses faced the prospect of more than 50 cents of every
additional dollar earned being consumed by Federal taxes alone.
TCJA reversed part of the Obama tax increase on pass-through
businesses by lowering the top individual rate from 39.6 percent
to 37 percent. Additionally, TCJA provided a new deduction equal
to 20 percent of pass-through business income. TCJA also

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contains safeguards against abuse by preventing taxpayers with
incomes greater than $315,000 from disguising their personal
income as business income. For example, pass-through businesses
with higher income will have to demonstrate that they are paying
a significant amount of wages or making large capital
expenditures in order to claim the deduction.
The combination of the lower statutory rate and the pass-through
deduction creates a top effective rate of 29.6 percent. This new rate
is much closer to the top 28 percent rate (represented by the top
bar in Figure 3-7) established by the bipartisan Tax Reform Act of
1986.161
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Additionally TCJA doubled the amount of equipment purchases
that small businesses can immediately deduct from taxes—known
as small business expensing—from $500,000 to $1 million.162
Faster Cost Recovery to Boost Investment

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Generally, instead of allowing an immediate tax deduction for the
full cost of purchasing an asset (expensing), the tax code requires
businesses to use complicated depreciation schedules to deduct the
cost gradually over many years.163 As a result, a business that
purchases new equipment but has not yet produced a profit will be
treated by the tax code as if it had profit to be taxed because the
equipment’s cost is only partially deductible in the first year. As a
result, it will take much longer for the business to break even and
become profitable, potentially discouraging the company from
making needed investments in the first place. As mentioned above,
small businesses have traditionally been able to expense a certain
amount of purchases, but the relief phases out once the company
makes high levels of investment and it still requires complicated
bookkeeping.164
Slow cost recovery discourages businesses—particularly those
that depend on cash flow—from purchasing new equipment and
upgrading facilities. These investments, in turn, allow workers to
produce more per hour, and this higher productivity tends to
increase wages.165 Allowing businesses to write off all costs when
they occur would recognize reality and encourage more growthproducing business investments.
In order to boost business investments and economic growth,
Congress has passed temporary extensions of bonus depreciation,
under which companies of all sizes can deduct a large portion of
the purchase price in the first tax year. However, before TCJA, the
extra portion of investments that could be deducted immediately
was scheduled to decline from 50 percent in 2017, to 40 percent in
2018, and to 30 percent in 2019, after which it would disappear
completely.
TCJA provides 100 percent bonus depreciation—which is
essentially expensing—for purchases made after Sept. 27, 2017,

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through the end of 2022. TCJA also allows used assets to be
eligible for bonus depreciation instead of just new property.
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The JEC Majority recommends that expensing be made a
permanent part of the tax code in order to maximize the economic
benefit. According to the Tax Foundation, expensing of all
business investments would create the equivalent of over one
million new full-time jobs, raise the incomes of low- and middleincome Americans by at least 4.9 percent, and boost long-run GDP
by 5.4 percent.166
Increasing the Competitiveness of U.S. Corporations
Before TCJA, the tax code imposed substantial burdens on
American corporations competing in global markets on two fronts.
First, among the 34 advanced economies in the OECD, the U.S.
corporate rate topped all others in 2017 at nearly 39 percent,
including both the 35 percent Federal rate and average State
taxes.167 In addition, U.S. businesses were faced with an

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uncompetitive worldwide tax system rather than a territorial
system. Territorial systems allow active business income earned
overseas to be brought back to the home country with little or no
tax. In contrast, America’s worldwide system subjected all income
to U.S. taxation, regardless of where it was earned. The tax was
triggered when profits are brought back to the United States,
giving companies a strong incentive to leave earnings overseas.
This created a lock-out effect, which resulted in reduced levels of
investment by American companies in the United States.
The United States was essentially losing ground by standing still
as other nations lowered their corporate rates and moved to
territorial systems to attract businesses, investment, and jobs. The
chart below shows the movement in OECD tax rates from 20002017.
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The next chart illustrates that as the corporate tax rates declined in
10 large economies in the OECD—all of which adopted territorial
tax systems—a larger share of the income of U.S. businesses was

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left offshore.168 Unsurprisingly, the dip in U.S. earnings that were
left overseas in 2005 occurred due to a temporary tax holiday that
allowed businesses to repatriate their profits to the United States
at a much lower tax rate.169
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Additionally, in September 2017, CBO noted that America’s high
corporate rate and worldwide tax system encouraged U.S.
businesses to convert their tax headquarters to foreign nations—a
practice known as a corporate inversion—or engage in other
methods of shifting income away from the United States so that it
can be taxed at the lower rates of other nations.170 A corporate
inversion can be accomplished through a U.S. company’s merger
with or acquisition of a foreign company, after which the foreign
company’s home country with a more favorable tax system
becomes the place of incorporation.
CBO noted that the net tax savings of inverted companies translate
into an even greater loss for the U.S. Treasury, as more tax
payments go to the low-taxing foreign jurisdiction and

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significantly less go to the U.S. CBO estimated that though the
average tax savings of inverted companies was $47 million,
payments to the U.S. were on average $65 million—or 46
percent—lower than they would have been without the
inversion.171
At the time, CBO projected that unless America changed policy
direction, inversions and other profit shifting would grow over the
decade, reducing U.S. corporate tax revenue by $12 billion more
in 2027 than if profit-shifting activity remained constant at 2017
levels.172 CBO expected this growth in spite of strenuous efforts
by the Obama Administration to shut down inversion transactions
through regulation, further proving that treating the symptoms of
an uncompetitive tax system was an ineffective and incomplete
solution.
In order to prevent the loss of headquarters, jobs, and investment
to nations with more attractive tax systems, TCJA lowered
America’s Federal corporate rate from 35 percent to 21 percent
and moved to a competitive territorial system. The chart below,
which incorporates both national and average sub-national taxes
in OECD countries, illustrates how these two changes put America
on a much more competitive footing with other developed
economies.

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Additionally, TCJA includes several provisions to limit the
artificial shifting of U.S. profit to overseas locations. JCT analyzed
the full effect of these anti-abuse provisions, the corporate rate cut,
and new territorial system and concluded:
The provisions affecting taxation of foreign activity
are expected to reduce the incentive for this
“profit-shifting” activity… The macroeconomic
estimate projects an increase in investment in the
United States, both as a result of the proposals
directly affecting taxation of foreign source income
of U.S. multinational corporations, and from the
reduction in the after-tax cost of capital in the
United States due to more general reductions in
taxes on business income.173

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The Relationship between Corporate Taxes and Wages
Since passage of TCJA, companies across America have
announced worker bonuses, pay raises, investment in worker
training, more generous benefits, greater investment in the United
States, movement of overseas production to the United States, and
increased contributions to charity.174 In the Report CEA calculated
that as of the date of publication, 4.2 million workers were
enjoying higher wages, salaries, bonuses, and contributions to
401(k) retirement accounts as a direct result of TCJA. CEA also
estimated the worker bonuses totaled $2.4 billion and that newly
announced business investments totaled $190 billion.175
Despite tangible benefits to workers that are already apparent,
economic debate continues over the incidence of corporate taxes,
that is, which taxpayers bear the burden of the corporate tax. Prior
to 2013, JCT assumed that the corporate tax was borne solely by
owners of capital, generally the shareholders. However, in 2013
JCT announced that based on economic literature it would begin
attributing 25 percent of the burden of corporate taxes to labor—
in the form of lower compensation for U.S. workers—when
analyzing the impact of various policy changes on taxpayers.176
JCT cited a range of opinions on the matter. For example, in 2006
a working paper prepared by the Congressional Budget Office
concluded that workers bear 70 percent of the burden. JCT
therefore indicated it could no longer ignore the impact on workers
due to the increasing weight that recent economic literature placed
on labor.
The extent to which corporate taxes are borne by owners of capital
or labor hinges on the mobility of capital. If capital is mobile, it
will shift from high-tax to low-tax jurisdictions, leaving labor,
which is less mobile, to bear the burden. Economists who assume
America is a closed economy tend to claim that reducing corporate
taxes will only benefit shareholders and other owners of capital,

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but that is not a sound assumption in today’s global economy. It is
much easier to move funds to the United Kingdom, for example,
than for a worker to move to the United Kingdom. JCT’s
acknowledgement of the open nature of the U.S. economy was part
of the reason for attributing at least some of the long-run effect of
corporate taxes to labor.
However, JCT also considered other economic studies positing
that the U.S. economy is so large that there are limited
opportunities to shift capital overseas.177 This led the authors to
conclude that owners of capital bear a much larger share of
corporate taxes, which perhaps influenced JCT to allocate a
relatively small share to workers.
The trend outlined in the previous section of growing U.S.
earnings kept offshore, corporate inversions, and profit shifting to
lower-tax jurisdictions provides ample evidence of the mobility of
U.S. capital despite the large size of our economy. For this reason,
the JEC Majority believes that JCT may have underestimated the
impact of corporate taxes on the wages of workers. For its part,
CEA noted that profit-shifting activity is highly responsive to tax
rate differentials and that U.S. business profits kept offshore tend
to reduce the wages of U.S. workers.178
CEA analyzed the impact on wages of two pro-growth elements
of TCJA that reduce the cost of capital—the reduction in the
Federal corporate rate from 35 percent to 21 percent and the
introduction of expensing of business investments. After
examining a range of economic literature and cross-country
studies, CEA concluded that these two reforms alone would boost
annual average household incomes by about $4,000 or more in the
long run.179
It is also important to remember that stock ownership is not
exclusive to wealthy individuals. For example, an estimated 37

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percent of corporate stock is held in retirement accounts,
indicating that average workers would benefit from lower
corporate taxes through more income in retirement.180
Additionally, high taxes that burden either capital or workers
damage the levers of economic potential outlined at the beginning
of this chapter—labor supply, capital investment, and
productivity.
Tax Simplification for Individuals
As noted earlier, the cost of filling out tax forms alone costs
America more than $400 billion annually in lost productivity, a
figure CEA also cited in a discussion of the excess burden of
taxation on the economy.181 Compliance costs, along with the cost
of tax avoidance schemes, are part of the excess burden—or
deadweight loss—which occurs when it costs the economy more
than one dollar to collect one dollar in taxes. TCJA contains
several provisions that offer greater simplicity to both individuals
and businesses, which will reduce the excess burden of taxation.
The increased standard deduction simplifies the taxes of millions
of Americans who would otherwise itemize a series of deductions.
TCJA also eliminated a complex limit on itemized deductions that
reduced their value for some taxpayers. Additionally, the law
repealed a complicated phase-out of personal exemptions,
choosing instead to replace personal exemptions with a
straightforward $500 tax credit for non-child dependents. TCJA
eliminated other targeted provisions that added extra lines to
individual tax forms in favor of broad-based tax relief for all
taxpayers.
Earlier versions of TCJA also would have repealed the individual
Alternative Minimum Tax. The AMT operates as a parallel tax
system that requires Americans to calculate their tax burden under
two separate structures. The AMT tends to ensnare taxpayers with

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many children, a second mortgage, high State taxes, or who
otherwise claim various tax benefits. AMT taxpayers must then
recalculate their taxes under a different set of rules, usually
resulting in paying much higher taxes.182
The AMT was originally inspired by 1969 testimony of the thenTreasury Secretary to the Joint Economic Committee that 155
affluent individuals paid no income tax.183 Yet, instead of
targeting the ultra-wealthy the AMT hit almost 4.5 million
taxpayers during the 2016 tax filing season, including thousands
of Americans with incomes of less than $15,000.184 Over 10
million taxpayers in the same year had to use complicated
calculations on a separate form to determine whether AMT might
apply, and millions more had to do other calculations to see
whether they were required to fill out that form.185
The final version of TCJA increased the amount of income that is
exempt from the individual AMT rather than fully repealing it.
While this provides additional monetary relief from the AMT, it
does not lift the complexity burden for taxpayers who will still
have to determine whether they owe AMT. The JEC Majority
recommends that lawmakers consider fully repealing the
Alternative Minimum Tax.
Tax Simplification for Businesses
Witnesses at the October 2017 JEC hearing on tax reform and
entrepreneurship frequently mentioned tax complexity as a barrier
for startups and other small businesses. The National Federation
of Independent Business (NFIB) reports that tax compliance is 67
percent more costly for small businesses than for larger ones.186
Large businesses enjoy economies of scale and can dedicate a
team of professionals to compliance, while small startups
generally need to focus precious resources on business survival
and have difficulty affording professional help. Further, a study by

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the U.S. Small Business Administration noted that the tax system
represents 80 percent of the overall Federal paperwork burden.
The hearing testimony recommended expanding the use of cash
accounting for startup businesses. The two most common types of
accounting are the cash and accrual methods. The cash method is
considered simpler because it generally reflects the cash flow of
the business; reportable income occurs when businesses receive
payment and expenses are deducted when payments are made.
Under the accrual method, taxpayers must report income when it
is earned and payments when they are owed, even if payments are
not made or received until a different tax year. As a result, a
business may be taxed on phantom income it has not received yet
and may never receive. Before TCJA, companies with $5 million
or less in gross receipts could generally use the cash method, but
the rules could be more or less restrictive depending on the type of
business structure and activity, and a company could be forced to
switch to the accrual method if it no longer qualified for the cash
method under the maze of rules.187 TCJA expanded the gross
receipts test to $25 million and loosened other restrictions,
allowing a larger universe of small businesses to grow without fear
of triggering more burdensome accounting.188
TCJA’s expansion of small business expensing and 100 percent
bonus depreciation also provide relief from complexity.
Traditional depreciation rules require business owners to track
when an asset was purchased, which depreciation schedule applies
to particular assets, and how much has already been deducted from
the purchase price over past years. The Tax Foundation estimates
that replacing depreciation with expensing would reduce annual
tax paperwork costs by an estimated 448 million hours and $23
billion.189 This is in addition to the other economic benefits
mentioned earlier of higher business investments, economic
growth, productivity, and wages, which is why the JEC Majority

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recommends that expensing be made permanent for businesses of
all sizes.
Expiring provisions in the tax code also create complexity and
uncertainty for business owners and make long-term planning
difficult, as it is unclear which tax rules will apply in a given year.
Due to budget constraints and other factors, TCJA contains several
provisions that expire, including bonus depreciation, the passthrough deduction, most tax relief for individuals and families, and
several other provisions affecting businesses. The JEC Majority
recommends that lawmakers make sound tax policy permanent by
determining which provisions should be kept and which should be
allowed to expire.
The Impact of Economic Growth on Deficits
Measuring debt as a share of GDP provides a useful guide for
gauging an economy’s ability to pay for the debt the Federal
Government owes. The debt-to-GDP ratio can be reduced either
by lowering the amount of debt owed or boosting the level of
output a country produces. The debt-to-GDP ratio rose
dramatically during the Obama Administration, worsened because
the economy was growing slowly. The JEC Majority attributes
much of this slow growth to the previous Administration’s policies
of increasing tax and regulatory burdens and the fact that most of
the tax revenue was spent on Government transfer payments
instead of productivity-enhancing investments.
The top line on the chart below is CBO’s most recent projection
of the long-term ratio of debt to GDP.190 The bottom line shows
that CBO’s debt trajectory would have been much less steep had
the Obama Administration’s FY2010 projections of economic
growth materialized.191 This does not even include the
macroeconomic effects of higher GDP on Federal revenues, which

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would have lowered the debt trajectory further. Because the
promised growth dissolved into sluggish growth, subsequent
Administrations and Congresses face a substantially more
challenging fiscal situation.
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Faster economic growth not only reduces the debt-to-GDP ratio
by enlarging the economy but lowers the nominal amount of
deficits and debt as well. A growing economy generates more tax
revenue through a greater number of people working and higher
profits. It also reduces Federal spending on safety-net programs
such as unemployment insurance and welfare payments.
Similarly, slow growth worsens deficits. For example, in its
January 2016 budget and economic projections, CBO estimated
that if real GDP growth was even 0.1 percentage point lower than
projected over the decade, deficits over the same period would
grow by a total of $327 billion.192

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TCJA aimed to boost economic potential and reset the economic
growth trajectory to a higher level by transforming a broken tax
code into one that allows faster economic growth, which would
have the added benefit of making Federal debt less challenging to
manage over the long term. The need for fundamental rather than
incremental reform is why Congress dedicated $1.5 trillion in net
tax relief within the first 10 years for TCJA.
Some critics who seemed less concerned about increases in
Federal spending and debt of a far greater magnitude under the
previous Administration now cite concerns about TJCA’s impact
on deficits and debt. The debt-to-GDP ratio nearly doubled on the
Obama Administration’s watch,193 fueled by deficit spending on
transfer payments and not growth-producing investments, and its
policies slowed the recovery far below what is normal after a
severe recession. TCJA facilitates faster economic growth, which
renders deficits less threatening and creditors less concerned. The
JEC Majority continues to believe that long-term debt represents
a looming problem, but the major drivers of deficits and debt
continue to be ever-growing mandatory spending programs, not a
lack of revenue.
In June 2017, CBO projected that Federal revenue would remain
above its historical average over the next decade, while spending
will accelerate at a much faster rate.194 Mandatory spending,
which accounts for roughly two-thirds of the spending line in
Figure 3-13, is expected to grow in nominal terms by 70 percent
over the decade, far outpacing expected growth in GDP over the
same period.195

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Or from another perspective, the $1.5 trillion in net tax relief from
TCJA is roughly equivalent to the amount of tax increases enacted
during the Obama Administration, including over $1 trillion from
the ACA and hundreds of billions more from the 2013 increase in
individual and capital gains taxes due to the so-called “Fiscal
Cliff” negotiations.196 But while the Obama Administration’s tax
increases tended to slow economic growth, the tax relief in TCJA
will accelerate economic growth.
CEA cited a study by Christina Romer, former CEA Chair in the
Obama Administration, and well-known economist David Romer,
which found an inverse relationship between tax increases and
economic output.197 Their research indicated that the effect of an
exogenous tax increase—or in other words, an isolated change not
affected by other factors that determine output—is not only large
but highly statistically significant. Romer and Romer removed
other factors that determine output—such as the business cycle,
countercyclical Government fiscal policy and monetary policy—

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and concluded that a tax increase equal to one percent of GDP
lowers output up to three percent ten quarters later.198 Thus, a tax
reduction of equal magnitude to the tax increases enacted in the
previous Administration was necessary to counteract residual
negative effects on the economy.
Additionally, it is important to remember that TCJA was enacted
under budget reconciliation procedures, which require that
legislation not add to long-term deficits after the first 10 years.
And even when examining the more temporary budget effect in
the first 10 years, the tax reduction represents roughly three
percent of Federal revenues and 0.6 percent of the GDP that CBO
previously projected over the next decade, even without taking
economic growth effects into account.199 When growth effects are
factored in, the temporary impact on deficits in the first decade is
smaller still, even according to the relatively modest
macroeconomic estimates of JCT.200
CEA projects a more robust effect on economic growth from
TCJA than JCT. In addition to the effect on household income
mentioned above, CEA estimates that lower corporate rates and
expensing of business investment alone will boost GDP by two to
four percent in the long run by lowering the cost of capital. If
businesses expect that expensing will be made permanent, CEA
projects the increase in GDP will be at the high end of that
range.201
CONCLUSION
The Tax Cuts and Jobs Act will encourage potential workers to
rejoin the workforce and boost capital investment and
productivity. Tax reform will also help counter the policy
constraints that burdened the economy under the previous
Administration. All of these are necessary for restoring our

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Nation’s economic potential and creating greater prosperity for
American households.
Recommendations
In order to build upon the progress achieved by TCJA, the JEC
Majority recommends additional reforms that:
¾ Make permanent TCJA’s provisions affecting individual
taxpayers and pass-through businesses;
¾ Make expensing of business investments permanent;
¾ Provide additional tax simplification, including full repeal
of the individual Alternative Minimum Tax; and
¾ Address the growing Federal debt through reforms to
mandatory spending programs, which are the true drivers
of deficits and debt.

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CHAPTER 4: REGULATION
x

The Report discusses the benefits and costs of regulation
extensively, drawing particular attention to less apparent
costs such as from land use restrictions, which decrease
labor mobility and job creation. It cites economic
literature showing large burdens on the economy from
unexpected regulatory costs.

While regulation—and its economic impact—are not easy
to measure, varied approaches all show that regulation in
America has substantially increased both over time and in
relation to a number of other countries.

The Trump Administration’s deregulatory actions
eliminate unnecessary and harmful rules, and importantly,
exceed the number of new regulations, thereby expanding
economic opportunities.

REGULATION THAT HELPS OR HINDERS THE ECONOMY
When examining the relative health of economies around the
world, one of the most important determinants of prosperity is the
freedom of markets within a nation.
Markets are the Engine of Economic Growth
Natural resources, labor, capital, and technology determine
economic growth in the long run. However, certain countries rich
in factors of production do not succeed economically (Venezuela),
while others with few of these factors become some of the world’s
wealthiest economies (Singapore). Institutional frameworks set
them apart—government control and discretion in the former, and

127

the freedom to conduct private commerce under predictable,
generally unobtrusive laws in the latter.
Since the collapse of the Soviet Union, many countries have relied
more upon markets. These include the social welfare states of
Western Europe that already had market economies. Twenty-eight
countries formed the European Union (EU) with no tariffs among
them; some privatized state-owned enterprises, and many reduced
business taxes and regulation. As Chapter 1 documents regarding
corporate taxes and product market regulations, various EU
countries continue efforts to scale back government overreach and
liberalize markets to raise low economic growth. A prominent
example is France since the election of President Emmanuel
Macron last year.202
Markets Can Deal with Economic Challenges
The experience of countries that have risen from poverty by
making their institutions conducive to private entrepreneurship,
particularly the ones with few natural resources such as South
Korea, serves as a reminder of how best to address various
challenges at home. Changes in the factors of production such as
an aging workforce (see Chapter 1), and social problems such as
the opioid crisis (Chapter 8) can make it more difficult to continue
raising the standard of living. At the same time, advancing
technologies continually demand new skills and new
infrastructure. These developments challenge the economy to keep
resources fully employed and productive.
Allowing markets to work without unduly restraining them is most
effective. One kind of regulation tends to be more helpful in that
pursuit than another. Economics Nobel Prize laureate F. A. Hayek
distinguished “formal” rules that facilitate the use of resources and
are almost a means of production from “substantive” rules by
which governments direct resources to particular uses:

128

The difference between the two kinds of rules is the
same as that between laying down a Rule of the
Road, as in the Highway Code, and ordering
people where to go; or better still, between
providing signposts and commanding people
which road to take.
When the government has to decide how many pigs
are to be raised or how many busses are to be run,
which coal mines are to operate, or what price
shoes are to be sold, these decisions cannot be
deducted from formal principles or settled for long
periods of time. They depend inevitably on the
circumstances of the moment, and, in making such
decisions, it will always be necessary to balance
one against the other the interests of various
persons and groups. In the end somebody’s views
will have to decide whose interests are more
important …203
The Obama Administration prioritized social objectives and
viewed markets as failing these objectives. Therefore, his
Administration felt justified in advancing discretionary and
prescriptive government intervention without publicly
demonstrating concrete net benefits. From 2008 to 2016, the rules
proliferated even faster than usual in health care, environment,
finance, consumer products, employment, transportation, and
more. What Hayek called substantive rules resulted in over 10
million words of tax rules204 and 178,277 pages in the Code of
Federal Regulations (CFR) as of 2015. The Mercatus Center
counted 1,080,000 regulatory restrictions in the CFR at the end of
2016—compared with 400,000 in 1970—and estimated it would
take three and one-half years to read.205

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1-!& 94

The Obama Administration attributed productivity gains to social
regulation, and its Office of Information and Regulatory Affairs
(OIRA) showed much larger total benefits than costs from Federal
regulation in its annual reports to Congress under the Regulatory
Right-to-Know Act.206 For example, the Obama OIRA estimated
aggregate annual benefits between $269 and $872 billion and costs
between $74 and $110 billion (2014 dollars), for the major Federal
regulations it reviewed from October 1, 2005, to September 30,
2015. The 2017 OIRA report released on February 23, 2018,
shows even larger annual benefits of rules issued during the last
decade, ranging from $287 to $911 billion and estimated costs in
a similar range to last year between $78 and $115 billion (2015
dollars).207
While regulatory costs clearly depressed business formation and
expansion as shown in Chapter 1, OIRA never showed how and
when claimed regulatory benefits would increase GDP.208
Tangible regulatory costs beyond agency expenditures are not

130

subject to any budget constraint, and they have accumulated much
faster than the rate of economic growth.
The vast majority of regulations have not undergone any net
benefit test and agency estimates do not include the cost of
duplicative, conflicting, or even contradictory rules nor the costs
arising from complying with a multiplicity of regulatory
requirements. However, even by the regulators’ own incomplete
estimates, the cumulative regulatory burden has been rising in
proportion to the economy.
Figure 4-2 from a study by NERA Consulting shows that the cost
growth of major Federal regulation far outstrips GDP growth, and
even more so output growth in manufacturing, a sector particularly
burdened by prescriptive regulations. From 1998 to 2011, physical
manufacturing volume grew by 0.4 percent, real GDP grew by 2.2
percent, and the cumulative cost of major regulations grew by 8.8
percent annually, inflation adjusted, based on NERA’s summation
of costs calculated by Federal agencies for their own rules.209

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1-!& 94
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$#!$+!&#- !(!
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Those who resort to government prohibitions and mandates should
prove their net public benefit. Government policies and mandates
that raise workers’ “reservation wage, which is the minimum they
will work for; impose price and wage controls; or prescribe
production methods, product attributes, and terms of employment
may serve particular interests and political priorities. However, as
Hayek pointed out, they are presumptively counterproductive to
the optimal allocation and use of scarce resources.
Containing Growth of Regulations Long-term
Starting in 2017, Congress and the Administration began rolling
back the regulatory surge to the greatest extent since Ronald
Reagan, but Executive Orders reduced much of the regulatory

132

burden, and another Administration could reverse those in the
future.
One method of preventing a resurgence of rulemaking is to require
an affirmative vote of Congress in order for major rules to go into
effect and create a statutory requirement that certain regulations
be eliminated in order for new ones to go into effect. 210 Another
approach would extend cost-benefit analysis to more rules and to
all Federal agencies, including independent agencies211, while
establishing a “regulatory budget” that Congress sets to limit the
total regulatory burden each Federal agency imposes on the U.S.
economy in a given year.212 This latter approach should include
improvements to the analytical methods agencies employ by
giving stakeholders a greater say. The results of enhanced costbenefit analysis then should carry increased legal significance for
agency rulemaking and in the adjudication of disputes.
As mentioned earlier, it is also important to compare total
regulatory cost growth with the growth rate of the economy.
Perhaps fewer rules should be implemented during recessions, for
instance, or particular ones introduced only when the economy has
recovered, which was a consideration when President Obama
delayed EPA’s ozone rule in 2011.213 Applying a more thorough
evaluation process to more rules and holding the rate of growth in
cumulative regulatory cost to the rate of GDP growth would allow
Congress to prevent new cost accumulation from exceeding what
the economy can afford. The existing process, by which OIRA
sums regulatory costs and benefits of major regulations in an
annual report to Congress, lends itself to that approach. Setting a
limit for total regulatory cost growth at the rate of GDP growth
also would motivate an administration to manage the regulatory
state by rescinding ineffective rules, prioritizing implementation
of new ones, and devising rules that facilitate rather than hinder
market function.

133

CONCLUSION
As noted in Chapter 2, Government responses to the recession and
other policies progressively constrained the economy’s potential,
and before the surprise outcome of the last election most expected
they would continue to do so. The United States fares better when
the price and wage system can redirect the allocation of resources
and motivate innovative solutions than when the government takes
control and expands regulation, bureaucracy, transfers, and taxes.
A quantitative regime that contains the growth in cumulative
regulatory costs could help assure that Government does not
increasingly weaken market function.
Recommendations
¾ The design of regulations generally should prioritize
enhancing market function rather than attempt to impose
preconceived outcomes.
¾ Congress should consider reforms that prevent a
resurgence of the regulatory burden.
¾ OIRA should give priority to rules that benefit the
economy. Regulatory benefits often do not increase
economic output even though they are monetized in costbenefit analysis the same as costs. Regulatory costs tend to
materialize before the benefits and reduce output.
¾ Once the Administration has streamlined the massive
existing regulatory burden, it should take steps to stabilize
cumulative regulatory costs relative to the size of the
economy.

134

2; AN EDUCATION AND TRAINING SYSTEM

WORTHY OF AMERICAN WORKERS
x

Despite massive spending, American high-school students
perform far below that of other developed countries.

Limited vocational and technical training, and choice of
school, reduce student preparedness and employment
options.

Federal aid programs incentivize student-debt
accumulation, passing costs onto taxpayers.

High-school and college graduates fail to provide skills
demanded by today’s employers.

INTRODUCTION
America’s education system is an expansive, well-funded
combination of public and private, K-12 and post-secondary
institutions. Total elementary and secondary enrollment exceeded
55 million in 2015, with 50.3 million students attending public
schools and 5.3 million in private schools.214 College enrollment
was 20.2 million in the fall of 2014.215 Elementary, secondary, and
college enrollments are projected to rise in the coming years. In
2013, total public and private spending on all levels of education
was 6.2 percent of GDP—higher than all Organization for
Economic Cooperation and Development (OECD) countries
except for the United Kingdom, New Zealand, Denmark, and
Norway.216 Similarly, American elementary and secondary
spending per student was more than all OECD countries except
Luxembourg, Switzerland, Norway, and Austria.217

135

Despite considerable funding, K-12 students perform relatively
low compared to other countries and post-secondary schools do
not always provide students with the required skills for gainful
employment. In 2015, American secondary students age 15
ranked 25th internationally in science, 23rd in reading, and 40th in
math;218 and at the end of 2017 the skills gap contributed to nearly
6-million unfilled jobs.219
Many Americans attend high-quality K-12 and post-secondary
schools that suit the individual needs and interests of the student,
while others do not. Elementary and secondary school students
often face barriers to a quality education, including Stategovernment policies that force students to attend a public school
that is underperforming and/or a poor fit for a child—a school
based solely on a student’s address. K-12 and post-secondary
schools often fail to offer sufficient vocational and technical
training for students not pursuing a 4-year degree. Post-secondary
education barriers include a lack of awareness of educational
options because of an over emphasis on traditional 4-year colleges
and universities.
School choice may be beneficial by allowing students to attend a
better fit public or private school. Public-school choice includes
choice within the same school district (intra-district), in another
school district (inter-district), a charter school, or a magnet school.
Private-school choice includes tuition assistance in the form of
vouchers, individual tax credits or deductions, tax-credit
scholarships, and education savings accounts. Parents may also
choose homeschooling.220
Access to the best-fit post-secondary school is achievable through
a trade school, community college, or a traditional 4-year college
or university; however, some poorly advised students pursue a 4year degree, accumulate substantial debt, and yet fail to complete
the school program or graduate with an unmarketable degree.

136

These students may have been better served in a trade school or
community college. The result is a skills gap, leaving millions of
job openings, and growing taxpayer costs through the inefficient
Federal student loan program. By better matching students with
the most appropriate post-secondary education—which may not
be a 4-year degree—workers, firms, and taxpayers all benefit.
ELEMENTARY AND SECONDARY EDUCATION
In recent years, American student academic scores have fallen.
The OECD Program for International Student Assessment (PISA)
periodically assesses 15-year-old student performance in science,
math, and reading; from 2009-2015, all three discipline’s scores
have fallen (Figure 5-1). With 90 percent of Americans attending
public schools, these scores capture a troubling trend of declining
student performance in our nation’s public school systems.
Another public-education concern is the low 4-year high school
graduation rate. Nationally, the 2015 graduation rate was 83
percent, ranging from a low of 69 percent in New Mexico to a high
of 91 percent in Iowa. Most minority graduation rates are even
lower.221

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1-!& 24

For decades, Federal Government attempts to improve public K12 schools have not led to the desired improvements—low
graduation rates and falling performance persist. However, in hope
of improving educational outcomes, a growing number of state
governments and the Federal Government—in Washington,
D.C.—have introduced school-choice options for families who
wish to have students attend a school other than their assigned
district school. By allowing students—with special needs, who are
enrolled in underperforming public schools, or who are in lowincome families that are dissatisfied with their children’s
education—the choice to attend a better-fit school, they are given
the opportunity flourish in a more suitable academic environment.
Prior to these recent school-choice expansions, American public
education was unusual as a large government-funded program that
generally prohibited or greatly limited provider choice. As stated
in the Committee’s December, 2017 analysis, “The Fiscal Effect
of Private-School Vouchers,” Americans are able to choose the

138

provider of goods or services for most other large government
programs.
Social Security beneficiaries can choose how they
spend their benefits. Medicare and Medicaid
recipients generally choose their health care
providers. Supplemental Nutritional Assistance
Program (SNAP) recipients can choose where they
shop. Federal Housing Choice Voucher program
recipients can choose where they live, and in fact,
the federal government touts the accommodating
aspect of housing choice: ‘Since housing
assistance is provided on behalf of the family or
individual, participants are able to find their own
housing,
including
single-family
homes,
townhouses and apartments.’ Thus, adding choice
in education is consistent with the tradition of other
large government-funded programs’222
Fortunately, a growing number of states and localities are
acknowledging school-choice benefits by implementing new
programs that help match more students with the most appropriate
school. Public school choice expansion includes: a more than
doubling of public-charter-school enrollment to more than 3
million from 2008-2017;223 a 24 percent magnet-school
enrollment increase to 2.6 million from 2010-2016;224 and today
all states and Washington D.C.—except for Alabama, Illinois,
Maryland, and North Carolina—have clear intra-district or interdistrict open enrollment options.225
Private-school choice is also expanding. The past 20 years have
seen the introduction of new programs and annual student
participation rise from roughly 1,000 to more than 450,000 (Figure
5-2).226 In addition to their popularity—which is evident by the
high level of voluntary participation—research finds other

139

benefits including: higher academic outcomes of choice
participants; higher academic outcomes of public schools through
competition; lower school racial segregation; and greater student
civic values and practices.227 Also, some school-choice programs
offer taxpayer savings and may simultaneously increase publicschool per-pupil education spending. For example, private-school
vouchers offer families the opportunity to have their child attend
a private school paid for by a state-government issued voucher.
Taxpayers benefit from lower education costs as voucher amounts
are set below the public-school education costs—aggregate
estimated 1990-2015 taxpayer savings is $3 billion.228
Additionally, with relatively stable public-school funding, and
fewer students in a school, there is higher per-pupil spending.
1-!& 24

While both public-school and private-school choice expansion are
improvements to America’s education system, private-school
offers a wider range of school options including schools
specializing in special-needs students and religious schools—the

140

latter of which are not publically available—and can save taxpayer
dollars.
Public and private schools could serve students better by offering
more options in vocational and technical training for the many
students who choose not to attend a 4-year college. The German
education system offers multiple secondary-school tracks, a
college bound track or a vocational track that incorporates
apprenticeships. Upon successful vocational completion, students
are awarded certification in a trade or field of work.
Economists Edward Lazear and Simon Janssen Wall Street
Journal’s op-ed explain the earnings of German non-college
graduates relative to their American counterparts.229
Germans with vocational apprenticeships earn
about 92% of the average German wage;
American high-school grads earn only 70% of the
average American wage. Germans with vocational
apprenticeships are considerably better off than
their American counterparts. Data show this to be
true for nearly 15 years.
The skills gap indicates that Americans can be better equipped for
post-secondary school employment. School-choice participants
represent a small portion of total K-12 students. However, due to
new and expanded programs more families are able to have a say
in the schools their children attend. Moving forward, the
combination of greater school choice and more vocational training
will better prepare students for productive post-secondary work.
POST-SECONDARY EDUCATION
About two in three high-school graduates enroll in a 4-year college
the following fall semester.230 Many successfully earn a college
degree and have long and rewarding careers, others graduate

141

without marketable skills, and still others drop out of school; all
categories of students often leave college with student debt.
Federal intervention in education financing has fueled a number
of problems including: tuition inflation; exposing taxpayers to
growing Federal student-debt defaults and loan-forgiveness costs;
and incentivizing debt accumulation by students. Additionally, the
focus on bachelor’s degrees, as opposed to technical and
vocational training, has failed to close the skills gap, leaving
workers unemployed and firms with unfilled positions. Clearly,
America can do a better job preparing workers for a successful and
rewarding career.
Over the past 30 years, tuition increased 225 percent more than
inflation.231 This increase is partly driven by schools’ easy access
to Federal student loans. When the Federal Government increases
annual student loan amounts, colleges and universities raise their
price and absorb the increase. As noted in the 2017 Response, a
Federal Reserve study found that every subsidized student-loan
dollar received by a college increased tuition by 60 cents, and
every Pell Grant dollar received increased tuition by 40 cents.232
Federal student debt and taxpayer costs are rising. Many students
find that the only way to afford a college education is to take out
large student loans. Rising costs and the 2010 Health Care and
Education Reconciliation Act—a Federal takeover of student
loans—caused the doubling of Federal student debt in the past 8
years to about $1.4 trillion (see Chapter 1). Federally-run student
debt means taxpayers must pay for the five million borrowers who
have defaulted.233 Additionally, the growth of Obama
Administration student-loan forgiveness programs such as Pay as
You Earn (PAYE), Revised Pay as You Earn (REPAYE), and
Income Based Repayment (IBR) add costs by transferring college
debt from students to taxpayers. The 2017 Response explained that
these programs cap repayment amounts at 10 or 15 percent of

142

discretionary income, and they forgive all outstanding debt after
20 years of payments.234 The Wall Street Journal reports that loan
forgiveness programs are pushing the student loan program toward
deficits.235
Colleges and universities are also unaccountable for Federal
student-debt defaults. If a student fails to complete the program or
graduates with an unmarketable degree and is unable to make
student-loan repayments, the school is financially unaffected.
Schools receive Federal dollars during enrollment periods;
following graduation, or pre-graduation student separation from
the institution, all of the Federal student-debt risk falls on
taxpayers.
Many students pursing a bachelor’s degree would be better served
by pursuing an associate’s degree. Columbus State Community
College President David T. Harrison explained at the Committee’s
July 2017 hearing, A Record Six Million U.S. Job Vacancies:
Reasons and Remedies that overemphasizing a bachelor’s degree
has caused more than half of these students to reach age 25 without
a post-secondary credential or employable skill. Further, he notes
the benefits to an associate’s degree:
Harvard University notes that jobs requiring an
associate degree are growing at three times the
rate as those requiring a bachelor's degree. Only a
third of new jobs will require a bachelor's degree,
with the rest requiring an associate degree or
technical certificate.236
Today many employers are unable to fill job openings because
applicants do not have the necessary skills. As Honda North
America’s Scot McLemore explained at the Committee’s July
2017 hearing, A Record Six Million U.S. Job Vacancies: Reasons
and Remedies:

143

Modern manufacturing equipment and processes
involve an integration of pneumatic, hydraulic,
mechanical and computer network components.
Too often individuals do not possess the problem
solving ability, technical training, computer
knowledge, or math skills needed to compete in the
21st century workforce.237
The skills gap represents an opportunity to better serve Americans
who prefer a post-secondary path other than a 4-year degree. Highschool guidance counselors and community colleges are the
perfect vehicle to inform students of these opportunities.
Manhattan Institute’s Diana Furchtgott-Roth testified about
community colleges’ important role for a specific student type at
the Committee’s July 2017 hearing, A Record Six Million U.S. Job
Vacancies: Reasons and Remedies:
I performed research using individual students in
the State of Florida in 2009, showing that C
students, students with a C average, performed
much better when they went to community colleges
and took a highreturn degree. They were earning
about $45,000 a year when they graduated…238
Programs such as the American Association of Community
Colleges Pathways Project guide students toward high-return
professions where they can get a good high-earing job upon
graduation. Speaker Ryan notes efforts by the House to overcome
the skills gap through the Strengthening Career and Technical
Education for the 21st Century Act, which aims to help equip
students for in-demand jobs.239 Closing the skills gap through
vocational and technical training benefits students and taxpayers.

144

CONCLUSION
America has a strong K-12 and post-secondary education
foundation; but through more and better choices and highereducation financing reform, America can more effectively provide
all students with the education that best meets their needs. The
Trump Administration and Congress are working toward
education improvements. Education Secretary, Betsy DeVos’s
support of local control and more choices will improve K-12
learning and empower parents in their children’s education.
Legislation such as Senator Lee’s Higher Education Reform and
Opportunity Act of 2017 and Representative Foxx’s Promoting
Real Opportunity, Success, and Prosperity through Education
Reform Act (PROSPER), among others, address post-secondary
education financing inefficiency.
Recommendations
The Committee Majority recommends that policy makers examine
alternative approaches to expand opportunities and promote
responsible choices, such as:
¾ Stop portraying college as necessary for a good career and
avoid disparaging vocations that are technical or hands-on.
¾ Look for ways to expand more local control in education.
¾ Expand and encourage education options including
technical and vocational training.
¾ Support higher education as an investment good, not as a
consumption good, resulting in a net positive return in
earnings an education.

145

1*% %

Chapter 4 of the Report emphasizes the importance of
infrastructure for economic growth and points out that
supply has not kept up with increasing demand.

The Report’s primary emphasis on how infrastructure
affects productivity stands in contrast to the Obama
Administration’s emphasis on demand stimulus.

The funding mechanisms for public infrastructure projects
are often problematic.

Overregulation has slowed
infrastructure investment.

public

and

private

PUBLIC VS. PRIVATE INFRASTRUCTURE
What is Infrastructure?
The nature of a debate can change the use of critical terms, and
their changing meaning in turn can affect the debate over time. For
example, regulation has become synonymous with restriction and
prescription, but what is often forgotten is that regulation can also
be enabling and facilitating (see Chapter 4 on regulation).
“Infrastructure” is another term that has taken on a particular
meaning in policy discussions with a tendency to limit relevant
considerations and narrow the range of policy options deemed
appropriate. The term “infrastructure” is often used synonymously
with public infrastructure, but such a premise is far too narrow.
In the context of a national economy, infrastructure assets are
long-lived fixed assets that have an intermediate role in many
supply chains for widely used goods or services. The private sector

146

builds and maintains most infrastructure, which is not prone to
systemic deficiencies and generally functions well. Under
particular circumstances, government involvement can enhance
economic efficiency—such as when it is difficult to collect a
service charge from users—but different levels of government—
Federal, State, or local—can choose from a range of measures
short of public ownership and operation to facilitate the supply of
infrastructure services. Indeed, various business models exist in
other countries for providing a given infrastructure service.
Infrastructure Provision Is by No Means an Exclusive Government
Function.
Infrastructure takes many forms and is supplied primarily by the
private sector (Figure 6-1). In 2015, the Federal nondefense
portion of gross fixed nonresidential investment was less than 6
percent. Federal, State, and local governments’ combined portion
was only 16 percent. Private investment in pipelines, power plants,
satellites, cell towers, and so on—some of which also are
considered public utilities or common carriers and regulated as
such by the government—far exceeds government investment in
projects such as highways, schools, and urban transit systems. If
one excludes even half of private-sector gross domestic fixed
investment as non-infrastructure, it still far exceeds what
governments invest.

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1-!& 64

Petroleum pipelines are a good example of private infrastructure.
Networks of crude oil, refined products, and natural gas pipelines
that are built and operated by private firms traverse the country
(see Report, p. 206). Pipelines have the same common use
characteristic as highways, which State governments typically
fund.
When critics say “American infrastructure is crumbling,” they are
generally referring to roads and bridges. Yet the claim does not
apply to most infrastructure, certainly not the private portion and
not even the much smaller public portion. The number of
structurally deficient bridges declined from 138,000 in 1990 to
56,000 in 2016 (Figure 6-2),240 even as the number of highway
bridges increased. Highway pavement has similarly improved.
America’s rail transit systems, on the other hand, are deteriorating.

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1-!& 64

It is important to identify the specific reasons why certain kinds of
public infrastructure are in poor condition. The reason could be
that a government is not the right entity to own and/or operate the
kind of infrastructure in question. Alternatively, the wrong level
of government carries out the function, or that the government is
not financing it in the right way.
The vast majority of structurally deficient bridges and roads are
locally owned. States pay for road maintenance almost entirely out
of user fees, while local governments pay for it with a combination
of taxes and user fees. State and local transportation agencies
collect about $2 in fuel taxes, tolls, transit fares, and other user
fees for every dollar of Federal fuel taxes collected. Mass transit
agencies, on the other hand, are not spending enough on the
maintenance that they fund entirely with taxes. The quality of
public infrastructure maintenance is inversely related to the share
financed with general tax revenue.241

149

The line between government-administered and private-sector
infrastructure is not the same in all countries. Over the past three
decades, thousands of state-owned enterprises around the world
have been sold to private buyers for trillions of dollars. Several
other countries have privatized airports and harbors, for example,
while they remain under government ownership and operation in
the United States.242 So-called public-private partnerships (P3s)
have gained favor in other parts of the world. Privatization can
take different forms and degrees. Governments may retain full or
partial ownership and/or contract out operation and maintenance
of facilities to private contractors, or they may allow private firms
to build, manage, and profit from facilities under long-term leases.
Alternatively, Canada fully privatized its air traffic control system
by establishing a self-funding nonprofit corporation. Different
governments do not necessarily exercise control over particular
kinds of infrastructure the same way.
Different Reasons and Models for Government Infrastructure
Provision.
Several considerations enter into whether and to what extent
governments have a role in building and operating infrastructure.
One is how difficult it is to charge for usage. Tollbooths and weigh
stations introduce costs that in many cases make it prohibitive for
private investors to recover their investment and earn a return from
operating a road. In addition, traditional methods of collecting use
charges from drivers cause traffic congestion and shipping delays.
Governments have the power to tax and therefore can finance
roads that otherwise would not be built even though they yield a
net benefit.243
Another consideration is economies of scale relative to the size of
the market. If scale economies lead to provision by a single
supplier who can realize the lowest cost by virtue of supplying the

150

entire market, a so-called natural monopoly, then the supplier can
restrict the quantity and charge a price above cost. The
presumption of natural monopoly has led governments to
nationalize the providers in some cases (postal services) or to
regulate them as utilities (electricity) or common carriers
(telecommunications).244
A further reason for government involvement is “eminent
domain.” The negotiation and transaction costs of obtaining rights
of way from many individual property owners may be prohibitive
for a private undertaking, blocking projects in which the value
exceeds that of the use rights given up by the private property
owners. Governments have the power to reduce negotiating and
transactions costs and clear the way for investments that have a net
benefit for society.
It bears emphasis that realizing greater public interest benefits
through government financing of infrastructure, curtailing the
potential for private market power, and overriding individual
ownership rights can take varying forms and degrees. And it
certainly does not imply that the government must replace private
ownership and operation. A government should nationalize a
function only for the most compelling reasons, because it thereby
removes profitability as a gauge for value creation and the spur to
achieve success. The persistently dismal conditions of some
publicly owned and operated facilities and services (e.g., schools,
mass transit systems, airports), derive from lack of accountability
and corrective action that private stakeholders would demand if
they were incurring losses.
A very important consideration is that the deeper a government’s
involvement in supply, the more likely it will slow technological
advancement. The concept of a natural monopoly, for example,
holds technology constant. But technologies may develop that
enable new market entrants to achieve lower costs and better

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service than those of the “natural monopolist.” Utility and
common carrier regulation—not to mention nationalization—
protects existing suppliers and their methods from competition,
delaying innovation.
Which Levels of Government Should Deal with Infrastructure?
The debate over infrastructure investment is taking place at the
national level but most of the benefits are regional. Those who
benefit should be the ones to pay for the cost and those who pay
the cost should have oversight responsibility. Separating costs,
benefits, and oversight invites inefficiency. Appropriately, States
and localities build and operate most public infrastructure for this
reason. To the extent that certain infrastructure facilities are
beneficial nationally, supplemental Federal funding granted States
and localities to increase supply may be useful, but the mechanism
must not distort their incentives to invest in and maintain the
facilities.
Is Infrastructure a Tool to Manage the Business Cycle?
The previous Administration represented debt-financed public
infrastructure spending as a demand stimulus for the economy
during the last recession, but long lead times make infrastructure
generally ill-suited to accomplish countercyclical spending
objectives. Long-lived fixed assets with a purpose of meeting
specific, varied needs around the country that each take time to
plan, implement, and construct cannot be accelerated in unison to
lend the economy a short-term demand boost, whether they are
public or private, debt or equity financed. Accordingly, President
Obama found that there were not many “shovel ready” projects.
Governments can crowd out private investments that are more
valuable by paying for preferred projects with higher taxes or by
bidding up interest rates based on the power to raise future taxes.

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Funding low-value projects this way is no less wasteful during a
recession than afterwards. At full employment, the adverse effect
may be more immediately apparent if better projects in progress
lose funding as a result, but wasteful government spending during
recessions will become apparent soon enough.
Productive infrastructure projects should also not be singled out
and held back just because the economy is at full employment. The
concern that infrastructure spending will be inflationary is
misplaced, even when it is debt financed.245 If there is an urgent
need, then the benefit from addressing it presumably is greater
than from some other investment, and the country should not have
to wait until the next recession.
Productive infrastructure spending is an intermediate link in many
supply chains that sustains and augments the economy’s
productive capabilities. Useful infrastructure strengthens the
economy’s supply potential just as factories, warehouses, and
trucks. It thus will serve to reduce scarcity and prices. Financing
construction of pipelines and bridges is not inherently more or less
important than financing other worthwhile projects and should
compete with their use of capital. Overinvestment can occur in an
industry—as in the telecommunications industry during the late
1990s—but that by itself will not lead to inflation, because money
that went into laying optic fiber cable was not available for other
uses. When projects compete on an equal footing for the capital
they use, they do not “overheat” the economy.
Problems with Regulation and Bureaucracy
Construction permits, regulations, and legal challenges combine
to delay or thwart many projects. Nowhere is this more evident
than with infrastructure. Bureaucracies and their approval process
are often unaccountable and dysfunctional, as The Rule of
Nobody,246 for instance, documents. Many projects are held up for

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inordinate periods, including ones an administration especially
desires. The deadline for completion of the California bullet train’s
first segment, initially mandated in 2010, was extended to 2022.247
High-speed rail is the kind of project the Obama Administration
and members of the same party favored. Larry Summers, former
National Economic Council director in the Obama White House,
complained bitterly about the drawn-out repair of a bridge
connecting Boston and Harvard Square that began in 2012, which
took five times longer to repair than it to build a century ago.248
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Figure 6-3 shows the cumulative laws and amendments applied to
transportation for environmental protection alone. Before
appropriating more money to infrastructure projects, it would
appear prudent first to remove extraneous obstacles to building
them.

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CONCLUSION
There are inefficient aspects to the way the Federal Government
supports infrastructure development; many obstacles exist in
current law and rules that hinder the use of alternative models
involving privatization; and Federal regulation of constructing and
renovating projects causes inordinate delays. It is no exaggeration
to say that the Government essentially has lost control over the
permitting process and the ability to deliver, even on infrastructure
it particularly favors. The legal means to deliberately block
construction are vast, and bureaucratic inertia itself makes it
impossible to hold to a schedule.
From this perspective, it is highly appropriate to reevaluate the
division of responsibilities among Federal, State, and local
governments; try new business models involving the private
sector; and explore ways to streamline the regulatory requirements
construction projects face in this country. The Trump
Administration infrastructure plan would seem to do so.
Recommendations
¾ For purposes of organizing infrastructure provision, it is
best not to think of it as a unique segment of the economy
that calls for government control, but to focus on the costs
and benefits of particular functions the government may
perform.
¾ In this connection, it is important to consider the effect that
government’s supply of infrastructure services has on
technological progress. New technologies may greatly
enhance existing forms of infrastructure and new forms
may change their “public good” character.
¾ The incentives created by government support of
infrastructure projects are critical. The terms of

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government subsidies, private contracting, and
privatization determine success more than appropriations
to infrastructure projects. Further, overregulation and
bureaucratization can thwart the best models for
infrastructure provision and must be remedied.

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3 %* A

3) =)

The Report highlights that American exporters generally
face higher trade barriers in other countries than foreign
exports face upon entering the United States.

China, in particular, is not playing by competitive market
rules and has been causing market distortions.

America’s approach to disagreements with other countries
over the terms of trade requires careful consideration as
retreat from trade liberalization will harm the domestic
economy. For instance, imposing tariffs on steel and
aluminum, which are inputs to many products, is
disconcerting.

The United States possesses a comparative advantage in
digital trade as well as energy and agriculture with which
it may be able to increase export earnings.

This chapter of the Response focuses on the issue of digital
trade, which the Committee has studied extensively.

DIGITAL TRANSFORMATION OF THE ECONOMY
Digital technology and the internet have transformed the
economy’s information processing, storage, communications, and
transmission capabilities. Through countless applications, entirely
new products and services have been created and conventional
ones enhanced or replaced. Advances in digital technology and the
internet continually accelerate production and distribution
methods at lower costs, higher quality, and with more
customization. These advances have facilitated management of
global supply chains and international banking on a higher level.

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The advances expand markets and give rise to startup firms.
Digital technology has developed more rapidly in the United
States than in most countries, but it has spread around the world,
shaping international trade.
Digital trade includes a wide range of products—from movies and
video games to the means of facilitating physical goods and
services trade. The U.S. International Trade Commission (USITC)
defines digital trade as “U.S. domestic commerce and international
trade in which the internet and internet-based technologies play a
particularly significant role in ordering, producing, or delivering
products and services.” Examples include orders received on ecommerce websites, such as Amazon and eBay; email and voice
over internet protocol (VoIP); electronic banking; and data
transmissions to manage global supply chains.249
At the Committee’s September 2017 hearing, The Dynamic Gains
from Free Digital Trade for the U.S. Economy, Chairman Paulsen
emphasized the importance of advancing in this area:
There are hundreds of thousands of U.S. small
businesses in nearly every sector, from
manufacturing, to financial services, to mining, to
agriculture, and food, in every single state and
every Congressional District across the country
that are harnessing the power of the internet and
technology to reach new customers around the
world. Digital trade accounts for more than half of
all U.S. service exports. Digital trade is
responsible for nearly 6.7 million American jobs.
Nearly half of all U.S. companies have an online
trading relationship with the EU, and the U.S. runs
a $159 billion trade surplus in digitally deliverable
services.250

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Vice Chairman Lee observed, “We are swiftly approaching the
point where the word ‘digital’ will be an unnecessary adjective for
trade.”
A.

* 1 A 3 ) A

The basic case for international trade is that national resources
move to uses in which a country has a comparative advantage—
production tends to specialize in what a country does best. The
U.S. economic system has a comparative advantage in bringing
innovations to market, which is particularly important as digital
development opens up ever more possibilities. The $159 billion
digitally deliverable trade surplus referenced by Chairman Paulsen
resulted from $399.7 billion in exports and $240.8 billion in
imports in 2014, according to the U.S. Commerce Department.
The surplus increased by 19 percent from 2011 to 2014.251
The United States is a leader in both connectedness and content
production. McKinsey Global Institute’s “Connectedness Index”
measures how much countries participate in digital trade and their
openness to trade flows. America ranks third on the
“Connectedness Index,” trailing only Singapore and the
Netherlands, and America produces more than half of online
content consumed in all regions outside Europe.252
U.S. firms have been the pioneers on the digital/internet
technology frontier and are global leaders. Their pursuit of digital
trade and investment internationally yields large dynamic gains
that provide ongoing benefits for the United States. Digital trade
increases economies of scale, product and service variety, and
productivity. It continually reduces import costs for domestic
production processes and increases potential export earnings.
Advancements in digital technology and its widening applications
mean digital trade’s scope is growing and capable of delivering

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ongoing improvements in production, distribution, and value
delivered to Americans.
Economic Impact
USITC estimated that U.S. domestic and international digital trade
added 3.4 to 4.8 percent ($517 billion to $710.7 billion) to U.S.
GDP in 2011 and that digital trade increased real wages by 4.5 to
5.0 percent while adding up to 2.4 million jobs.253
McKinsey Global Institute estimated the contributions from
increased digital globalization and found it contributed 10 percent
to global GDP, or $7.8 trillion in 2014 dollars—almost equivalent
to half the U.S. economy in extra global value.254 Further, 12
percent of global goods now trade via digital platforms, and
digitally delivered services doubled in value during the past
decade to $2.4 trillion in 2014, or approximately half of the
world’s traded services.255 From 2007 to 2014, cross-border
internet capacity expanded by 38 percent annually.256
The McKinsey Global Institute found strong evidence that global
data flows—both inflows and outflows—raise productivity by
improving operating efficiency, extending economies of scale,
tapping wider pools of talent and ideas, and increasing foreign
direct investment. Dan Griswold’s testimony explained:
The impact of digital trade on the US economy is
not a one-time shift but an ongoing process that
enhances the dynamic, long-term growth potential
of the US economy. By reducing costs, spurring
competition, and expanding markets, digital trade
creates ongoing gains in efficiency that fuel
productivity gains. By facilitating the spread of
ideas and collaboration, digital trade contributes
to product innovation. By playing to America’s
competitive strengths, digital trade allows us as a

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nation to use our physical, intellectual, and human
capital in ways that permanently boost our gross
domestic product and general living standards.
Barriers to Digital Trade
… [I]f an economist wrote a free trade deal, then it
would be one sentence. We would say: We got free
trade. (CEA Chairman Kevin Hassett, JEC hearing
“The Economic Outlook,” October 25, 2017).257
Digital technologies raise issues regarding protection of private
property rights and contract enforcement that in principle are no
different from conventional commerce. The former includes
intellectual property such as trademarks, patents, copyrights, and
rights to private information. Ensuring compatibility of technical
standards in different countries is also important.
Governments introducing legal definitions, regulations, and
technical standards can facilitate trade and innovation, but such
actions can also be a hindrance—either inadvertently or by design.
Rules and standards can all too easily constrain the use of better or
more suitable technology. It bears emphasis that regulation should
follow technology and not get in the way of market adaptation.
U.S. laws and regulations have largely allowed digital and internet
applications to progress.258 However, in other countries
impediments to innovation and digital trade can seriously hinder
expansion. World Trade Organization (WTO) frameworks cover
some aspects of digital trade, but there is no comprehensive WTO
agreement on digital trade. In 1998, WTO members agreed not to
impose customs duties on electronic transmissions, but the
agreement is neither permanent nor legally binding. Members
have been renewing it at each WTO conference. Furthermore, the
definition of electronic transmissions is not precise and members

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continue to debate it.259 Bilateral or multilateral agreements have
only recently begun to address digital trade issues.
The Office of the U.S. Trade Representative identified a number
of key barriers to digital trade, such as China’s government
filtering cross-border internet traffic, blocking websites, and
imposing redundant testing requirements for mobile phones;
Russia’s government requiring certain data to be stored and
processed in country; and Brazil’s requirement that foreign
winners of spectrum-use rights in Brazil favor domestic
technology, services, equipment, and materials for their networks.
In 2015, Indonesia issued a regulation that appears to require all
4G-enabled devices to contain 30 percent local content, and all 4G
base stations to contain 40 percent local content.
Telecommunications operators in several EU Member States,
including Portugal, Czech Republic, Croatia, Greece, and France,
apply higher rates to phone calls if they originate outside the
EU.260 The French government promotes the use of le cloud
souverain—the sovereign cloud—while Germany, as of July 1,
requires local storage of telecommunications metadata.261
The reasons governments may want to impose tariffs or surcharges
on digital trade or manage, condition, and limit digital trade are
largely familiar: raising revenue for the state, protecting domestic
firms and employment from foreign competition, nurturing
particular domestic industries or technologies, and furthering
national security interests.
In the digital era, certain interests and concerns are more
pronounced than in the past. The ease of moving proprietary
information across borders and a desire for preserving data privacy
may motivate national requirements for local data storage,
although physical location has little to do with securing data.262
The fear of falling behind in extraordinarily fast-paced
technological developments or a desire to jump ahead also may

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motivate requirements for national participation in data storage
and processing; this may even include demands for foreign
technology transfers.
USITC estimated that in 2011 the removal of foreign barriers to
digital trade would have increased real GDP by 0.1 to 0.3 percent
($16.7 billion to $41.4 billion), real wages by 0.7 to 1.4 percent,
and full-time equivalent employment by up to 400,000 in the
United States.263 A study commissioned by the U.S. Chamber of
Commerce found that reducing market and regulatory barriers to
cross-border information and communication technology (ICT)
services could produce $1.72 trillion in global GDP gains, create
millions of new jobs, and generate billions of dollars in potential
new Government revenues.264
It is important to recognize that non-tariff barriers can become
embedded in national regulatory regimes, even unintentionally.
Sean Heather, Vice President of the U.S. Chamber of Commerce’s
Center for Global Regulatory Cooperation (GRC), noted at the
Committee’s digital trade hearing that the European Union’s
General Data Protection Regulation (GDPR), for instance, is not
necessarily a traditional trade problem.
Complying with multiple national regulations raises costs and
thwarts trade. Capitalizing on digital technology’s potential to
make international trade seamless requires regulatory
harmonization. Heather referred to emerging rules in different
countries for autonomous vehicles and challenged regulators and
legislators to reorient their thinking:
There's a huge role here that goes beyond
Commerce and State and USTR [U.S. Trade
Representative] that goes to … the mainline
regulatory agencies that this Congress created in
many cases 100 years ago before there were

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international markets. And these regulatory
agencies all have offices of international affairs,
but they aren't central to the policymaking function
of these agencies. … [O]nce we've decided on a
regulatory model we think works here, why aren't
we out there advocating it to the rest of the world?
Former State Department Ambassador Daniel Sepulveda
seconded this concern at the hearing:
The United States needs to lead the way with
workable solutions to these challenges or we will
end up dealing with a global patchwork of laws and
regulations that end up doing more harm than
good, and splintering the global Internet.
If America does not engage and seek
harmonization, we could quickly end up in a
morass of international red tape that will prevent
small businesses from navigating.
Rules for Digital Trading
How to appropriately conduct regulation and standard setting is an
important question. Although universal rules would be desirable,
establishing them through the WTO is an arduous task that may
never come to fruition because it requires consensus among all
members.
The U.S.-Korea Free Trade Agreement was the first U.S.
agreement to include a chapter on digital commerce, guaranteeing
the movement of data and digital items without tariffs or fees.265
Congress subsequently codified instructions for digital trade
negotiations. In 2015, Congress passed and President Obama
signed the Bipartisan Congressional Trade Priorities and
Accountability Act of 2015, known as Trade Promotion Authority

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(TPA).266 TPA instructs U.S. negotiators to ensure that foreign
governments allow cross-border data flows; do not require local
storage or processing of data; and refrain from imposing other
impediments on digital trade. Additionally, U.S. trade
representatives are directed to seek openness, transparency, and
harmonization of standards to encourage cross-border investment
and trade. TPA also sets the negotiating objective of a permanent
WTO moratorium on duties for electronic transmissions.267
Using trade agreements to negotiate digital rules may be more
manageable, but also risks becoming tangled in other trade matters
and even non-trade matters inserted into trade negotiations, such
as environmental and workplace conditions. The fate of the TransPacific Partnership (TPP) illustrates how generally well-regarded
rules for digital trade were not adopted because they were part of
a larger, controversial agreement.268
Chairman Paulsen and Rep. Suzan DelBene launched the
Bipartisan Digital Trade Caucus in May 2017. The Caucus aims
to engage fellow policymakers and promote American leadership
in the digital economy.269
Digital Trade as Equalizer
Small and medium sized enterprises (SMEs) that previously could
not afford the initial investment and/or operating costs are able to
import and export goods and services through the internet. Digital
devices and services and the internet lower entry and operating
costs in many international markets, which reduces the minimum
required firm size. A local small business with a computer (or even
a smartphone) and a worldwide web connection now has the
capacity to do what was once possible only for larger firms, such
as advertising abroad. This boosts domestic production and
employment, and it may introduce more competition to the benefit
of consumers.

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According to the Boston Consulting Group, SMEs that are heavy
internet users are 50 percent more likely to sell outside their
immediate region and 63 percent more likely to source products
and services from afar.270 Another Boston Consulting Group study
found SMEs that were high web users realized 10 percent sales
growth on average during the previous three years, while SMEs
that were low web users or had no presence online experienced
sales declines over the same period.271 Similarly, when McKinsey
surveyed small businesses around the world in 2011, it found firms
with a strong web presence grew twice as fast as companies with
little or no web presence.272 With ever-expanding smartphones
and network coverage, this trend will likely continue.
The digital ubiquity has been so powerful that smaller firms are
exporting at rates similar to their larger competitors. For example,
eBay found that 94 percent of small firms engage in exports,
comparable to the 97 percent rate of the largest firms.273 Even on
the American craft site Etsy, approximately one-third of all
transactions involve buyers or sellers outside of the U.S. 274 Such
trends prompted researchers to coin new terms such as “micromultinational” and “born global.” Micro-multinationals are
smaller firms that can navigate into new international markets as
well as their larger counterparts, and “born global” or “global on
day one” refers to an entrepreneur’s ability to conduct business
globally with no longer lead-time than domestically.
All the witnesses at JEC’s September 2017 trade hearing
expressed full agreement that raising the de minimis threshold for
duty-free goods around the world would accommodate many more
opportunities for cross-border sales by small- and medium-sized
businesses.

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CONCLUSION
International trade is beneficial because it offers more choices to
American consumers and allows gains from greater specialization
in production. Digital trade, in particular, also continually lowers
costs as it grows and transforms the ways in which trade is
conducted, whereby technological advancements expand its
applications ever further. “Blockchain,” for example, is a secure
transmission and recordkeeping technology in its infancy with vast
potential to revolutionize the forms in which we transact and
document commercial activity of virtually any kind around the
world (see Chapter 9).275 The “Internet of Things,”276 which is
projected to connect more than 50 billion devices by 2020,277
drones, and autonomous vehicles are other examples of new
technologies that are in the early stages of development. It is
critical for future U.S. economic success to ensure a regulatory
setting in which innovators, entrepreneurs, and businesses of any

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shape and size can experiment with new technology, are free to
compete, and adopt the best methods of supply.
That applies both domestically and internationally. Free external
trade is good for the economy but free internal trade is no less
important. An overregulated, overtaxed domestic economy cannot
realize maximum gains from trade. On the contrary, domestic
market rigidity is prone to creating tensions with imports and
forgoing opportunities for export earnings.
Recommendations
¾ Raise de minimis thresholds for duty free trade of lowvalue goods, and expedite the customs process with
electronic customs forms, electronic signature and
authentication, electronic labeling, and secure on-line
payment.
¾ Prohibit customs duties on electronic transmissions.
¾ Prohibit measures that condition market access on
localization of data; require use of local technology
infrastructure; sharing software source code or algorithms;
or discriminate against U.S. companies, products, and
services.

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; ADDRESSING HEALTHCARE CHALLENGES
THROUGH INNOVATION

Chapter 6 of the Report outlines many of the failures of
the Affordable Care Act (ACA). CEA notes that expanded
insurance coverage from the ACA did not translate into
improved health outcomes.

CEA also provides economic analysis of the healthcare
industry and its regulatory framework, identifying reasons
and remedies for public dissatisfaction with existing
practices and conditions such as pharmaceutical pricing.

CEA also mentions Administration efforts to combat the
opioid epidemic—a topic the JEC has studied extensively.

The JEC Majority agrees that the ACA failed to improve
health outcomes and instead left patients with fewer
choices, less flexibility, rising costs, and higher taxes.

The ACA also reduced economic potential by damaging
incentives to work, which limits both the economic
mobility of low-income Americans and the health of the
economy they live in.

Though Congress was unable to pass a full repeal and
replacement of the flawed ACA, Congress and the
Administration have made progress in addressing some of
the more harmful aspects of the ACA.

Rising healthcare costs, an aging population, and a broken
healthcare system require more innovative solutions for
delivering quality health care in a cost-effective manner.

169

THE HEALTH SYSTEM AFTER THE AFFORDABLE CARE ACT
Before the ACA, the vast majority of insured Americans were
covered either through a plan offered by their employer or a
Government program such as Medicare, Medicaid, the State
Children’s Health Insurance Program (CHIP), or plans through the
Departments of Defense or Veterans Affairs. The same is true after
the ACA. These types of programs already offered protections for
those with pre-existing medical conditions before the ACA.
People without this kind of coverage could seek health insurance
through the individual (non-group) insurance market regulated by
States. However, people with pre-existing conditions sometimes
had difficulty affording or obtaining coverage in the individual
market.
Prior to ACA enactment, national healthcare spending represented
a larger share of the U.S. economy than similar measures in other
developed economies. Supporters of the ACA claimed that the law
would provide universal health insurance coverage for Americans
at a lower cost.
A Failed Design
The ACA expanded the Medicaid program beyond its original
mission of serving vulnerable Americans below the poverty line,
requiring States to expand Medicaid coverage to able-bodied
adults with incomes up to 138 percent of the Federal poverty level.
The U.S. Supreme Court subsequently made this requirement
voluntary through its decision in National Federation of
Independent Business v. Sebelius.278
The ACA also established a Federal health insurance marketplace
for States that elected not to create their own exchange. Individuals
without employer-sponsored insurance or coverage by a
Government program—but with incomes too high to qualify for
Medicaid—were required to purchase insurance that met ACA’s

170

strict requirements, either through the ACA-established
marketplace exchanges or otherwise through the individual
market. Those who choose insurance through Federal or State
exchanges with incomes between 133 percent and 400 percent of
the poverty line are eligible for Federal subsidies through premium
tax credits, which are sent directly to the insurer they select.279
Consumers lost flexibility in choosing an insurance plan because
the ACA required all health insurance plans to meet federally
mandated minimum standards, including requiring them to cover
types of care an individual may not want or need.280 After the
ACA’s enactment, millions of people who were enrolled in health
plans received notices that their plan would no longer be offered
because it did not fully comply with ACA mandates.281 By some
estimates, roughly four million Americans lost their health
insurance.282
The ACA also prohibited those eligible for Medicaid from
receiving insurance subsidies in the exchanges. In States that did
not expand Medicaid income eligibility to 138 percent, ACA
guidelines required individuals to earn at least 100 percent of the
poverty level to qualify for a premium subsidy. That left roughly
2.5 million low-income Americans below 100 percent of the
poverty level with no meaningful coverage option, since they
earned too much to qualify for traditional Medicaid and too little
to get help affording a private plan.283
In order to enforce the requirement that Americans have insurance
that meets strict ACA requirements, the ACA created a tax on
uninsured Americans known as the individual mandate designed
to become more severe over time. As of 2017, the tax was the
higher of 2.5 percent of household income or $695 per adult and
$347.50 per child.284

171

Over the past year, the JEC Majority has documented the failures
of the ACA. Premiums have skyrocketed in the individual market,
with an average premium increase in the Federal exchange of 105
percent from 2013 to 2017.285 In 2018, the average premium for
27-year-olds—a relatively healthy and low-cost demographic—is
37 percent higher than in 2017.286
Even with Federal subsidies for premiums, consumers with ACA
plans are facing higher out-of-pocket costs through rising
deductibles,287 limited choices of doctors and hospitals, and a
shrinking number of insurance choices. The Centers for Medicare
and Medicaid Services (CMS) recently estimated that almost 30
percent of enrollees will have only one insurer to choose from in
the ACA exchanges this year.288
Because the ACA limits the ability of health insurers to vary
premiums based on age, the ACA exchanges continue to lack the
40 percent of young, healthy enrollees needed to keep premiums
stable.289 The population that remains in the exchanges tends to be
older, sicker, and costlier. Unsurprisingly, enrollment in the
exchanges is dwindling. When ACA became law in 2010,
actuaries for CMS predicted that over 31 million Americans would
have insurance through the exchanges in 2018,290 while CBO
projected 24 million.291 As of the end of open season for
enrollment, only 8.7 million had signed up for 2018 coverage, and
many of those will drop out by not paying monthly premiums.292

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Rising Healthcare Costs
During President Obama’s first year in office in 2009, National
health expenditures—which include the amount Federal and State
governments, individuals and institutions spend on health care—
represented 17.3 percent of GDP, larger than the ratios in other
developed economies.293 This was often cited by proponents of the
ACA as a reason to reform the healthcare system. However,
following implementation of the ACA exchanges and Medicaid
expansion, health spending began consuming a growing share of
the U.S. economy. CMS recently projected that health spending
will represent nearly 20 percent of the economy by 2025 (Figure
8-1).
1-!& 4

This cannot be attributed solely to an aging population, since both
private- and public-sector spending are growing at faster rates in
the U.S. than in other comparable countries with similar
demographic challenges.294

173

Even before this surge in spending that followed ACA
implementation, a 2011 study featured by the National Institutes
of Health observed, “The fraction of GDP devoted to health care
in the United States is the highest in the world and rising
rapidly.”295 The authors concluded that high levels of spending
would lead to future tax increases:
With almost half of health expenditures publicly
financed and the prospect of further government
subsidization of health insurance under health care
reform, the rising burden of health care spending
during the next half-century will most likely
necessitate large increases in tax rates.
As outlined in previous chapters of this Response, large tax
increases can have very damaging effects on economic growth.
The Tax Burden Imposed by the ACA
In addition to threatening future tax increases, the ACA imposed
over $1 trillion in new taxes, many of which damaged the
economy and drove up the cost of health care. Importantly, despite
President Obama’s pledge not to raise taxes on those making less
than $200,000 ($250,000 if filing jointly) per year,296 several of
the taxes hit Americans with incomes far below that threshold.297
The Joint Committee on Taxation (JCT) confirmed that many
ACA taxes affect lower-income taxpayers, either directly by
increasing their tax burden or indirectly through higher consumer
prices arising from taxes on insurance and healthcare products.298
A particularly harmful provision in ACA that raised the cost of
health care for consumers is the medical device excise tax, which
also operates as a tax on innovation. According to one estimate,
when it is in effect the 2.3 percent excise tax reduces research and

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development (R&D) investments by $2 billion per year, depriving
patients of potentially lifesaving breakthroughs.299
Because the device tax is based on gross sales and not profits, it is
particularly harmful to small companies that are not yet profitable
but are struggling to launch innovative devices.300 Additionally,
before Congress temporarily suspended the tax for 2016 and 2017,
there was evidence it caused job losses even among large
companies.301 In fact, when the tax was in effect from 2013 to
2015, Census data indicated it caused the loss of an estimated
28,800 jobs in the medical device industry.302 Another study
calculated that full repeal of the tax could net more than 53,000
additional jobs:
If the tax is permanently repealed, it is likely that
the 28,800 jobs lost when the tax was in effect will
be recovered within three to five years. Combined
with the 25,000 jobs projected to be lost upon
resumption of the tax, permanently repealing the
medical device tax could net an excess of 53,000
additional jobs, compared to current law.303
According to an industry survey, 71 percent of companies would
reinstate previously foregone hiring and 85 percent would
reinstate foregone R&D investments if the tax were repealed.304
These are some of the reasons that efforts to repeal the device
tax—led by JEC Chairman Paulsen in the House and Senate
Finance Committee Chairman Orrin Hatch in the Senate—have
gained such broad bipartisan support.305
The device tax was recently suspended for two additional years,
2018 and 2019, in the Extension of Continuing Appropriations Act
of 2018 (ECAA). However, the JEC Majority strongly
recommends full repeal to lower health costs, spur greater
innovation, prevent job losses, maintain the U.S. competitive edge

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in medical technology,306 and preserve patients’ access to devices
that save and improve lives.
ACA also raised health costs by imposing taxes on manufacturers
and importers of brand-name drugs. Patients have very little
discretion to forgo a medication when it becomes more expensive,
which makes the tax likely to be passed to consumers in the form
of higher prices.307 According to Tax Foundation analysis, the tax
may have contributed to recent spikes in prescription drug costs.308
Another ACA tax increase discourages employers from offering
prescription drug coverage to their retirees. When Congress
created Medicare Part D to provide seniors with prescription drug
coverage, the law provided a tax incentive for companies to
maintain retiree drug coverage out of concern that they might
otherwise drop the coverage and shift costs to retirees and
Medicare.309 The ACA repealed the 28 percent deduction for
retiree coverage, which human resources professionals warned
would likely cause retirees to lose access to employer drug
plans.310
In addition to indirect taxes that affect low-and middle-income
taxpayers through higher costs, the ACA imposed direct taxes
affecting people who are far from wealthy. As explained in
Chapter 3 of this Response, the ACA’s penalty tax on uninsured
Americans through the individual mandate was paid
disproportionately by Americans with incomes less than $50,000.
At the same time, studies by ACA architect Jonathan Gruber and
other researchers found that the individual mandate was
ineffective at boosting insurance coverage.311
Chapter 3 also explained how the ACA made catastrophic health
costs more unaffordable by slashing the medical expense
deduction, which is primarily used by Americans with less than
$100,000 in income.

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The ACA also placed a limit on healthcare flexible spending
arrangements (FSAs), which made it more difficult for families to
manage rising out-of-pocket expenses. FSAs are offered by
employers and allow workers to set aside a portion of their
paychecks on a pre-tax basis for out-of-pocket medical costs. The
ACA cap on FSAs is particularly burdensome for families with
many children, those who are dealing with multiple chronic
conditions,312 or who use FSAs to finance services for children
with special needs.313
Additionally, the ACA raised the penalty tax on certain
withdrawals from Health Savings Accounts (HSAs). HSAs
combine the benefit of a lower-premium high deductible health
plan with a tax-free savings account to cover out-of-pocket
medical expenses. Previously, when consumers withdrew funds
from an HSA for unexpected non-medical expenses, the rules were
similar to those governing retirement accounts—the funds would
be taxable and a 10 percent penalty applied. The ACA doubled the
HSA penalty to 20 percent, making it more difficult for families
facing situations like sudden job loss.
Over-the-counter (OTC) medications also became less affordable
under the ACA. OTC medications theoretically allow consumers
to treat their ailments without the inconvenience and expense of
dealing with the healthcare system. Previously, Americans could
easily use tax-free FSAs, HSAs, or Health Reimbursement
Accounts (HRAs) to purchase OTC products like allergy
medications or smoking cessation aids. The ACA prohibits using
these accounts for OTC medicines unless consumers first obtain a
doctor’s prescription, causing more costly interactions with the
health system.314
The ACA not only imposed taxes on those without health
insurance, but also on those who are insured. One of the ACA’s
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was passed directly to consumers in the form of higher premiums
and it even appeared as a line item on monthly premium bills.315
JCT estimated that the HIT would raise the cost of premiums up
to 2.5 percent and that repealing it would have reduced premiums
for the average family by $350-$400 in 2016.316 A temporary
moratorium on this tax was extended in ECAA through 2019.317
A particularly destructive tax discourages employers from hiring
additional workers and providing full-time work. The employer
mandate forces employers to provide insurance or face a penalty
tax, triggered if even one full-time worker receives an insurance
subsidy in the ACA exchanges.318 Since the tax is generally
assessed per full-time worker—redefined by the ACA as someone
working 30 hours or more per week—the mandate provides an
incentive to cut individual workers’ hours.319 Even if employers
do provide insurance, another tax applies if the government
determines it is not “affordable.”320 Also, because the mandate
applies to companies with 50 or more full-time employees, it
discourages small businesses approaching that threshold from
hiring additional workers,321 causing an estimated loss of 250,000
jobs.322
An employer offering health insurance that meets the ACA’s
definition of “affordable” may face yet another tax if the ACA
defines the benefits as too generous to employees. The ACA
imposes a 40 percent excise tax known as the “Cadillac tax” on
the value of health benefits that exceed a certain threshold,
including both employer and employee contributions to the
plan.323 The tax is broad, covering not only the value of basic
health plans offered by employers but also any pre-tax wellness
programs, disease-specific coverage, HRAs, FSAs, and
contributions to HSAs by either the employer or employee.
Because the threshold that triggers the tax is designed to grow
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be subject to the tax over time.324 The likely result will be fewer
benefits, reduced networks for receiving care, and higher costs for
employees.325 Along with temporarily suspending the health
insurance tax and medical device tax, ECAA postponed the
implementation of the Cadillac tax from 2020 to 2022.
Other ACA taxes aimed at higher-income Americans caused
collateral damage for small business owners and employment. The
ACA imposed an extra 0.9 percent Medicare payroll tax and a 3.8
percent investment income tax on individuals with incomes over
$200,000 ($250,000 for married couples). Like many tax penalties
aimed at higher-income Americans, both of these taxes hit small
businesses. As mentioned in Chapter 3 of this Response, the vast
majority of small businesses are organized so that income from the
business is taxed on business owners’ individual tax returns.326 An
Obama Treasury Department study released shortly after the ACA
was enacted found the average gross income of small businesses
was $270,000, putting many of them at risk of paying this tax.327
Chapter 3 also discussed how the investment income tax
contributed to the top small business tax rate rising from 35
percent in 2012 to effectively 44.6 percent in 2013. With more
small business income consumed by taxes, fewer funds are
available to hire workers, give pay raises, and make capital
investments to expand the business.
Similarly, the 0.9 percent Medicare surtax affects owners who
manage the day-to-day operations of the business and are
compensated by the business for their work. CBO listed several
ACA policies that contribute to its projection of the law causing a
loss of the equivalent of two million full-time employees over the
decade, and the Medicare surtax is one of them.328 CBO also noted
the surtax would affect a growing share of workers over time
because the tax is not indexed for inflation.

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Aside from the possible loss of job opportunities from small
businesses, low- and middle-income Americans also face direct
tax increases from these two tax hikes. While most of the impact
will fall on high-income taxpayers, JCT estimated that people with
incomes of less than $75,000 would face a total of $20 million in
higher taxes in 2015 alone due to these two ACA taxes, and this
includes some taxpayers earning less than $10,000.329
Economic Effects of the ACA
CBO recently analyzed factors contributing to the subdued levels
of workforce participation by prime-age workers.330 CBO
discussed how effective marginal tax rates—including both higher
tax rates and the loss of Federal benefits—affect the willingness
to work (Figure 8-2). Average marginal tax rates increased as
Fiscal Cliff tax increases (see Chapter 3), the ACA exchanges,
Medicaid expansion, and major ACA taxes were implemented.
CBO also concluded:
…[S]ome provisions of the Affordable Care Act
probably discouraged some people from
participating in the labor force in the past few
years by raising their effective tax rates. The
resulting reduction in take-home pay probably had
the largest effect on lower-earning workers.331

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CBO’s most recent analysis of marginal effective tax rates faced
by low- and middle-income Americans reinforced that those with
very low incomes have the greatest fiscal incentive to stay out of
the workforce. CBO estimated that in 2016, the income group with
the highest potential marginal tax rates included people between
100 and 149 percent of the poverty level.332 Depending on factors
such as family circumstances, those slightly above the poverty
level could lose over 65 cents of each additional dollar earned.
People in this income range represent the Medicaid expansion
population and those who receive the largest insurance subsidies
in the ACA exchanges. In essence the ACA discourages those on
the edge of climbing out of poverty from seeking employment that
would give them greater economic mobility and the dignity of a
job.
These are among the reasons why CBO projected in the report
mentioned earlier that the ACA will cause the equivalent of two

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million full-time workers to leave or stay out of the workforce in
2025.333
Other economists have found even more severe economic damage
from the ACA. Noted economist Casey Mulligan testified at a
2016 JEC hearing that the combination of ACA tax increases and
ACA’s benefit structure would reduce aggregate hours worked by
almost three percent and national income by two percent.334
Mulligan also explained that the ACA had a negative impact on
productivity:
The Affordable Care Act has several effects on
productivity… Households and businesses
sacrifice productivity in order to rearrange
activities for less of a tax burden. These include
excessive part-time work, segregation of low-skill
and high-skill employees, constricting large
employers in order to expand small ones, and
failing to invest as much in business capital.335
Mulligan concluded his testimony with this warning:
The bottom line is that helping people who cannot
or will not purchase health insurance has a price
in terms of labor market inefficiency. The ACA is
no exception: it creates new income taxes and fulltime employment taxes that will be directly
experienced by about half of the workforce and
indirectly experienced by essentially the entire
nation. As long as incentives to work and earn
remain far below what they were eight or nine
years ago, we cannot reasonably expect the labor
market to return to where it was back then. We
cannot expect employment per capita to go back to
where it was.336

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Questionable Outcomes
The ACA’s top-down design—reliant on a complex web of
regulations, taxes, and other incentives—is now entrenched in the
healthcare system. Yet, in spite of a massive Government takeover
of the healthcare system and a Federal command to buy insurance,
CBO projected as of December 2017—before Congress removed
the individual mandate penalty—that 30 million Americans would
still lack health insurance this year.337
CEA estimated that at most, the ACA extended coverage to six
percent of the population, and much of this through expanded
Medicaid enrollment.338 And as CEA discussed, despite expanded
insurance coverage, there is scant evidence that health outcomes
improved.339 In fact, life expectancy in the United States actually
declined in 2015 and 2016, the first time in half a century that it
dropped for two consecutive years. CEA attributes part of this
decline to increased substance abuse.340
AMERICA’S OPIOID EPIDEMIC
CEA included a discussion of the opioid epidemic in a section of
the Report addressing costly diseases that can be prevented, such
as obesity and smoking-related illnesses.341 The JEC Majority
agrees that a greater emphasis on prevention and promoting
healthy behaviors within the health system could reduce needless
costs as well as mitigate human suffering.
As mentioned in Chapter 1 of this Response, the JEC has devoted
a great deal of study to the opioid epidemic, which the
Administration rightly declared a “public health emergency.”342
The opioid market is expanding in both demand and supply; opioid
overdose deaths continue to increase and today are at an
unprecedented level (Figure 8-3). Since 2009, total annual drugpoisoning deaths have surpassed automobile deaths; from 1999-

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2016, opioid-involved deaths increased five-fold to 42,249.343
CEA estimates that in 2015 alone, the economic cost of the opioid
crisis was more than $500 billion or 2.8 percent of GDP.344 Opioid
overdose deaths fall into three broad categories: prescription
drugs, heroin, and synthetics such as fentanyl. From 2000-2011,
prescription overdose deaths grew steadily; however, following
the 2010 reformulation of heavily abused OxyContin, prescription
opioid overdoses leveled off as users switched to greater-potency
heroin and fentanyl.345
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Addiction and overdose deaths, initially fueled by expanded use
of legitimate and black-market prescription painkillers, were later
exacerbated by an increased supply of potent low-cost Mexican
heroin and Chinese fentanyl. As Ohio Attorney General DeWine
testified before the Committee, “Four out of five individuals now
suffering from heroin or fentanyl addiction first started down this
road by using prescription opioids.”346 Aggregate measures

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reinforce that this is a national crisis, while State death rates vary
widely (Figure 8-4).
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Heroin overdose deaths have been a persistent problem for several
counties with dense metropolitan areas for a number of decades.
The arrival of new prescription opioids in the late 1990s and their
use in the treatment of chronic pain presented a new avenue for
opioid misuse. In 1999, prescription opioids were already
becoming a problem in a handful of areas around the United
States, and by 2015 deaths from prescription opioid overdoses
were widespread. Heroin and fentanyl followed suit, with
overdose death rates spreading in areas that heavily overlap with
prescription overdose deaths.
Synthetic opioid overdose death rates, like those from fentanyl and
its derivatives, remain largely concentrated in the eastern United
States. Recent research suggests that this might reflect a divide in
the type of heroin distributed in the eastern and western United

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States. West of the Mississippi River, heroin is largely found in its
black tar form, while in the eastern United States, heroin is mostly
sold and distributed in white powder form.347 This makes fentanyl
and its derivatives, which are also commonly in white powder
form, more easily disguisable as heroin and counterfeit pills in the
eastern States.348
Prelude to a Crisis: Demand
In 1986, the World Health Organization published Cancer Pain
Relief and encouraged the use of opioid painkillers. The Food and
Drug Administration (FDA) approved a pharmaceutical
company’s semisynthetic-opioid OxyContin in 1995 for the
treatment of moderate-to-severe pain lasting for more than a few
days. With an expanded sales force rewarded with large bonuses,
the company aggressively marketed OxyContin encouraging
physicians—many of whom may not have been trained in pain
management—to prescribe it as an initial medication for noncancer pain. Twice the FDA cited the company for using
potentially
false
and
misleading
medical
journal
349
advertisements. Prescription opioid demand increased rapidly
as doctors and dentists prescribed opioid painkillers on an
expanded scale.
A 2016 Time article entitled “How Obamacare Is Fueling
America’s Opioid Epidemic” described one way the ACA may
have contributed to the crisis.350 The ACA conditioned a portion
of hospitals’ funding on patient surveys, including how well they
managed patients’ pain and even whether the hospital was doing
everything it could to control pain. Unsurprisingly, this created an
incentive for hospitals to overprescribe painkillers. While this
policy has thankfully ended, the damage will likely linger for some
time to come. Prescription opioids still account for nearly half of
all opioid overdose deaths,351 and though addiction to illicit

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opioids like heroin is becoming more prevalent, an estimated 80
percent of people addicted to heroin started by using prescription
opioids.352
Prescription opioid use has lasting implications for patients. In
2015, physicians prescribed 648.7 morphine milligram
equivalents per person in the median U.S. county.353 That amounts
to nearly a two-week supply for every resident. In 2016, nearly
215 million prescriptions for opioids were filled in the United
States. Data analyzed by the Centers for Disease Control (CDC)
show that 61.8 million patients received those prescriptions, or
19.1 percent of the U.S. population.354 Of the patients who were
prescribed opioids, 3.7 million were ages 19 and under. Forty-one
percent of opioid prescriptions were for a supply of 30 days or
more. A March 2017 study from the CDC determined that 13.5
percent of patients receiving eight days or more of prescription
opioid therapy used opioids one year later—up from 6 percent
among patients receiving any prescription opioid therapy.355
Among patients taking prescription opioids for at least 30 days, 30
percent were using opioids one year later.
Simultaneously, labor market changes have posed significant
challenges to workers in certain geographic and occupational
segments. The cohort of workers affected the most tends to have a
high-school education or less and live in industrial areas
concentrated in the Midwest. Princeton University’s Professor Sir
Angus Deaton’s testimony at the Committee’s June 2017 hearing,
Economic Aspects of the Opioid Crisis explained that these
workers had a prolonged decline in their economic position.
Progressively deteriorating labor-market opportunities have
worsened working and personal outcomes, partially contributing
to the doubling of “deaths of despair” since 2000.356 These deaths
include suicide, deaths from alcohol liver disease, and accidental
overdoses from legal and illegal drugs; they are often the result of

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long-term conditions for those currently in their middle age from
a “cumulative disadvantage.” The largest component of these
deaths is opioid overdoses.
The first reports of OxyContin abuse were from rural communities
in the Appalachian region (Kentucky, Ohio, Pennsylvania,
Virginia, and West Virginia) and Maine. In these areas in 2000,
pain patients, teens, and recreational drug users that abused the
drug entered drug treatment with physical-addiction symptoms.357
The Appalachian region’s mining, timber, and manufacturing
industries are prone to pain-producing injuries and together with a
high unemployment rate and low employment-to-population ratio
may predispose the region to drug overuse.358
Prior to its 2010 abuse-deterrent reformulation, OxyContin was
particularly conducive for abuse because its controlled-release
property allowed for a high quantity of the opioid active ingredient
per pill. Abusers found that in addition to simply swallowing a pill,
crushing it bypassed the controlled-release property, intensifying
the effect. Abusers’ demand for prescription painkillers eventually
spilled over to illicit heroin and fentanyl.
Prelude to a Crisis: Supply
The expanding opioid supply is rooted in prescription drugs.
OxyContin prescriptions grew from 300,000 in 1996 to more than
7.2 million in 2002; simultaneously annual sales grew from $45
million to $1.5 billion.359 The expansion of OxyContin
prescriptions was partly due to physicians’ honest mistakes, which
caused some high-school athletes, for example, to become
addicted after taking pain medication following sports injuries.
Additionally, unethical and criminal conduct by doctors and
pharmacies fueled widespread distribution. The rise of “pill mills”
where doctors would prescribe large amounts of opioids to anyone
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Medicaid, Medicare Part D, and private insurance paid for
prescribed opioids allowing patients low-cost access to a lucrative
black market product.360 Dreamland: The True Tale of America’s
Opiate Epidemic, by Sam Quinones explains how Dr. David
Proctor of Portsmouth, Ohio, ran an early pill mill operation,
launched others into the business, and spread opioids throughout
the Appalachian region that became the epicenter of the opioid
crisis. In 2003, Dr. Proctor pled guilty to illegally prescribing
controlled substances. Attorney General DeWine testified that,
since taking office, he has revoked over 100 doctor and pharmacist
licenses from individuals he described as “drug dealers.” A
number of States and localities have filed a multidistrict litigation
againts pharmaceutical manufacturers and distributors to recoup
costs associated with the epidemic.
Around 1997, drug traffickers from Mexico began selling blacktar heroin wholesale to New Mexico dealers. In 1998, it crossed
the Mississippi and arrived in Columbus, Ohio, compounding the
region’s opioid problem.361 Due to the relatively short
transportation distance from producer to customer, inexpensive
but potent Mexican heroin spread across America. Mexican
smugglers and dealers developed a low cost, door-to-door method
of delivering heroin. Attorney General DeWine referred to this as
a “pizza delivery system” in his testimony:
You pick up the phone, you call, and they will
deliver it to you. You get it in half an hour, and you
are going to get it cheap...362
Fentanyl is even more deadly than heroin; as little as two
milligrams can be lethal.363 According to Congressional Research
Service analyst Lisa Sacco’s hearing testimony, it is 50 to 100
times more potent than heroin.364 Licit fentanyl is available in
patches and lozenges or can be injectable or sublingual—under the
tongue—and can be diverted to black markets. Illicit fentanyl is

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often used as a substitute active ingredient in black-market
products; frequently the customer is unaware of its presence in the
drugs. It is known to be manufactured in China, is suspected to be
manufactured in Mexico, and is sold as or mixed with heroin and
used in the production of counterfeit prescription pills.365 National
Forensic Laboratory Information System estimated that from
2013-2015 fentanyl reports grew to 14,440 from 978.366 The
National Center for Health Statistics reports that overdose deaths
involving synthetic non-methadone opioids (fentanyl, fentanyl
analogs, and tramadol) doubled from 2015 to 2016.367
Opioid Crisis and the Labor Market
More than a year ago, the New York Times published, “Hiring
Hurdle: Finding Workers Who Can Pass a Drug Test.” Employers
across the country are having difficulty finding applicants who can
pass a drug test.368 Attorney General DeWine testified that Ohio
employers tell him many applicants either withdraw their
application upon discovering they must take a drug test, or they
take it and fail. Since the 2009 peak unemployment rate of 10
percent, the rate has trended downward; however, despite the
current low rate some aspects of the labor market continue to show
weakness. Job openings remain around six million as the primeage labor force participation rate remains depressed (Figure 8-5).
Among the reasons for this divergence may be job applicants’
failure to pass drug tests. Drug abuse also hinders worker
relocation from less productive positions to more productive
positions that generally offer higher wages.369

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Opioid Crisis and Future Generations
An opioid-related addiction, overdose, or death is far from an
isolated event. Many lives are affected by the devastation caused
by these drugs. Families struggle to keep their loved ones alive
through treatments and interventions. Children are affected
directly, making this crisis multigenerational.
Reports of young children overwhelming foster care systems are
pouring out of States like Ohio, which since 2010 have witnessed
an increase of nearly one-fifth in the number of children placed
with relatives or in foster care.370 Between fiscal years 2009 and
2016, the percentage of children nationwide with parental drug use
as a factor in out-of-home placement rose from 21.3 percent to
33.7 percent, according to data from the National Data Archive on
Child Abuse and Neglect.371
Rising rates of neonatal abstinence syndrome (NAS), the
diagnosis of a newborn physiologically dependent on drugs or

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alcohol that leads to withdrawal symptoms, are generally driven
by the opioids that mothers abuse while pregnant.372 About half of
babies who are exposed to opioids during pregnancy will
experience NAS.373
New England and Appalachia have the highest rates of NAS per
1,000 hospital births. In 2013, according to a CDC study, NAS
incidence per 1,000 hospital births was highest in Vermont (33.3)
and West Virginia (33.4). In 2012, Maine had a similar level
(30.4), but data were not available for 2013.374
Increasing numbers of children entering foster care, living with
grandparents, or entering the world dependent on opioids will have
consequences for decades to come. Many dealing with the
childhood trauma of a parent addicted to opioids have suffered
severe physical and mental distress, and some researchers
speculate that the damage may be behind the recent rise in suicides
among children and teenagers.375
Economic Costs of the Opioid Crisis
This crisis has been costly to society in many ways. Recent
estimates have focused on both the fatal and non-fatal costs. For
2013, CDC researchers estimated that the total economic burden
of the crisis was about $78.5 billion.376 This estimate includes an
analysis of the costs derived from health care, substance abuse
treatment, criminal justice, and lost productivity.
CEA partially relied on the CDC research to build an even broader
cost estimate of the crisis. Using generally accepted methods to
estimate the value of a statistical life, CEA estimated that the costs
of the crisis due to premature loss of life in 2015 was $431.7
billion.377 By combining its estimate of the fatality costs with the
CDC’s estimate, the CEA reported that the total costs of the crisis
in 2015 were $504 billion.

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Research at the American Enterprise Institute (AEI) relied on both
the CDC’s and CEA’s cost estimates to produce a State-by-State
analysis of the cost of the opioid crisis.378 AEI’s estimates use the
differential effect of the crisis across States for opioid overdose
deaths, opioid abuse disorders, and other costs related to the crisis.
To account for variation in population, AEI presents costs by State
on a per-capita basis. The analysis shows that non-fatal opioid
costs per capita are generally higher in western States and in New
England. The highest non-fatal costs per capita are in the District
of Columbia ($352 per person) while the lowest are in South
Dakota ($162 per person). However, when costs due to loss of life
are included, the highest per-capita costs are in Appalachia. West
Virginia has the highest per-capita cost by this measure at $4,793
and Nebraska has the lowest at $465 per person.
Possible Solutions
Advances in medical technology may offer solutions for treatment
of pain without the need for addictive opioid-based painkillers. For
example, devices that emit electronic pulses can interrupt pain
signals for patients suffering with chronic pain.379 Other advances
are assisting with controlling the supply of opioids by providing a
safe means of deactivating and disposing of unused prescription
painkillers.380
On a broader economic level, an improved labor market—
especially for those who choose not to pursue a college degree—
would be beneficial (see Chapter 5 of the Response). Also, certain
opioid solutions may best be crafted at the community level since
aspects of the crisis vary across States and localities. Additionally,
CEA outlined several steps the Administration has taken to
prevent opioid abuse, improve access to treatment, encourage
innovative solutions through research, and disrupt the illicit supply
of opioids.381

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Other solutions will likely come from public and community
initiatives. Manhattan Institute’s Diana Furchtgott-Roth testified
that past massive reeducation campaigns have reduced smoking,
decreased littering, and increased recycling; a similar strategy
should be applied to opioids beginning in grade school.382
Representative Darin LaHood explained that drunk driving was
reduced in his State through both aggressive law enforcement and
campaigns by Mothers Against Drunk Driving (MADD).383
INNOVATIVE SOLUTIONS FOR IMPROVING THE HEALTHCARE
SYSTEM
Clearly, the health system under its current structure is not serving
patients well. Americans deserve more innovative solutions, a
point also emphasized by CEA in Chapter 6 of the Report.
Efforts to Repeal and Replace the ACA
In 2017 Congress attempted to repeal and replace the ACA with
more market-driven reforms. The House of Representatives
succeeded in passing the American Health Care Act (AHCA).384
AHCA offered States greater flexibility and control over their
insurance markets, and CBO estimated that if AHCA became law,
average premiums within a decade would be 30 percent lower in
certain states that make modest changes, 20 percent lower on
average across all states that make changes, and four percent lower
in States that made no changes.385
CBO also projected that AHCA would reduce mandatory spending
by $1.1 trillion, provide nearly $1 trillion in tax relief by repealing
ACA taxes, and reduce deficits by $119 billion over the decade.386
In addition to maintaining protections for people with pre-existing
conditions, AHCA aimed to reduce the price and increase the
quality of health care for consumers. To stabilize State insurance
markets, it provided a $138 billion Patient and State Stability Fund

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to lower costs and provide better access for patients. The fund also
dedicated $15 billion for State-run invisible risk pools (with
subsidies for high-cost enrollees who remain within a general
insurance pool in the individual market) and an additional $8
billion for high-risk pools (separate insurance pools of high-cost
individuals). Additionally, the fund included $15 billion targeted
for treating addiction and serious mental illness, as well as for
maternity and newborn care.
AHCA also reformed ACA’s age band restrictions that have made
insurance unaffordable for young and healthy enrollees that are
needed to keep insurance costs down for everyone in the insurance
pool. At the same time, AHCA provided tax credits for buying
insurance that increase with age.
Other AHCA reforms included improved and expanded HSAs as
well as repeal of ACA taxes, including those that make health care
less affordable. To provide more State flexibility and insurance
options for patients, AHCA included a waiver process allowing
States to design their own package of “essential health benefits”
that insurers must cover—rather than a one-size-fits-all Federal
list—so their residents are not forced to pay for coverage they do
not want and will never use.387
The Senate was unable to pass its own repeal and replacement
legislation, but the JEC Majority recommends that Congress
continue to pursue replacement reforms that will reduce the
economic burden and provide consumers with lower costs and
more choices.
Progress on Repairing Economic Damage
In addition to actions by Congress to repeal the harmful individual
mandate tax and delay other ACA tax increases, the current
Administration has taken several steps on its own to provide States

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with more flexibility, address harmful disincentives to work, and
allow consumers to have more insurance options.
Allowing work incentives within Medicaid. In January 2018 the
Administration announced a new Medicaid waiver process so that
States could require able-bodied enrollees to engage in work,
education and training, or other community engagement such as
volunteer service. The announcement cited evidence that higher
earnings are associated with a longer lifespan and that unemployed
persons are more likely to suffer from severe physical and mental
health challenges.388 As noted earlier, the work disincentives of
the ACA are particularly severe for those on the edge of poverty—
the Medicaid population. Providing an incentive to work may lead
to greater future prosperity and better health outcomes for
enrollees. The program is voluntary with required protections for
enrollees and will provide a useful experiment to determine
whether more Americans can be moved out of poverty with
incentives to work.
Greater access to Association Health Plans. The current
Administration is also improving small business access to
affordable health coverage by expanding Association Health Plans
(AHPs). AHPs allow small businesses to join together and form a
single insurance pool, which provides them with greater
purchasing power and lower costs. The Department of Labor
estimates that the proposal would benefit up to 11 million
Americans who are working in small businesses or are sole
proprietors.389
The same proposal rule would allow insurance to be purchased
across State lines, injecting greater competition in the market,
while providing relief from some of the ACA’s more onerous
requirements about the design of insurance. However, insurers
participating in AHPs could not discriminate against enrollees or
employers based on health factors.

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Expanded short-term coverage. On February 20, 2018, the
Administration announced that it would expand the duration of
short-term insurance plans used to fill gaps in health coverage
from less than three months to less than a year. These plans are
generally available for less than a third of the cost of other ACA
individual market plans and allow consumers to choose the types
of coverage they prefer instead of imposing a one-size-fits-all
design.390
Chronic Care Management
According to the CDC, chronic diseases are the leading cause of
death and disability in the United States and were responsible for
86 percent of the $2.7 trillion spent on health care in 2014.391 The
CDC also cites research findings that chronic conditions have a
significant impact on worker productivity. For example, from
2012 to 2013 cardiovascular disease cost $126.4 billion in lost
productivity through premature death. In 2012 diabetes reduced
productivity by $69 billion due to absenteeism and by causing
workers to be less productive on the job. From 2009 to 2012,
smoking-related diseases cost over $156 billion in lost
productivity.392
Thus, a health system that incentivizes better management and
prevention of chronic diseases would prevent needless human,
monetary, and economic costs.
Much of the health system is designed on a fee-for-service model.
That is, providers are reimbursed based on the volume of visits,
treatments, and procedures rather than the health outcomes of
patients. In the Medicare program—which serves Americans age
65 and older as well as those unable to work due to a disability—
patients with multiple chronic conditions are responsible for 93
percent of Medicare costs, and a system that rewards volume over
quality does not serve them well.393

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In 2016, JEC Chairman Paulsen joined with Rep. Peter Welch in
introducing the bipartisan Better Care, Lower Cost Act to provide
more coordinated care, better health outcomes, and lower costs for
Medicare patients with multiple chronic conditions.394 By
providing a flat payment to a group of providers and rewarding the
coordinated group for keeping a patient healthy, the legislation
would promote—as the name suggests—better care at a lower
cost.
A structure in which providers have some “skin in the game” is
vastly superior to the Accountable Care Organizations (ACOs)
that were created through the ACA. As CEA discussed, ACOs
were intended to help curb costs but had the opposite result. ACOs
received “shared savings” through Medicare if they provided
efficient care but bore little downside risk if the care became
costly. Rather than reducing Medicare costs, ACOs increased
Medicare spending by $216 million in 2015 and $39 million in
2016, according to a study cited by CEA.395
The JEC Majority recommends that Congress consider the Better
Care, Lower Cost Act and other approaches that reward quality
outcomes rather than expensive care.
The Promise of Medical Technology
Advances in medical technology also hold great promise for
treating patients with chronic conditions, both in saving and
improving lives and preventing lost productivity. For example,
insulin pumps allow patients with Type I diabetes to better manage
their disease. Implanted pacemakers and defibrillators can prevent
death for people with cardiovascular disease. Also, orthopedic
devices allow patients to perform better at work and in their private
lives.

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That is why the JEC Majority continues to advocate full repeal of
the medical device tax, which is making breakthroughs like these
less likely in the future. The U.S. also generally experiences trade
surpluses with medical technology products, which helps boost
GDP.396
As CEA noted, the fact that the new tax law allows expensing of
capital investments is likely to encourage further innovation in the
healthcare field.397 The Administration has also streamlined the
FDA approval process for new therapies. CEA indicated that in
2017 this resulted in the first-ever gene therapies as well as record
numbers of approved new medical devices, new drugs and
biologics, and generic drugs.398
Another technological innovation that could provide patients with
better and more efficient care is greater coordination and
portability of medical records. The 2016 Better Way framework
for reforming health care called for policies to promote innovation
in electronic medical records.399 These included reforming
unnecessary restrictions while protecting patient privacy. The plan
envisions records that would be portable for patients, freeing them
from paperwork burdens each time they see a new provider and
preventing medical errors that occur because of incomplete
information about the patient’s medical history.
Blockchain technology, discussed more fully in Chapter 9 of this
Response, could provide a powerful solution for portability,
enabling medical records to be carried on a smartphone or other
mobile device with very little risk of being vulnerable to
cyberattacks.
CEA devoted a great deal of discussion to pharmaceuticals and
their affordability. As mentioned earlier, repealing the ACA’s tax
on brand-name drugs would likely reduce prices for patients, since
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Other nations impose price controls on prescription drugs, a
practice that the JEC Majority strongly cautions against. The freer
market in the United States is one of the reasons that
pharmaceutical innovation has flocked to the United States. As
CEA described it, America is “the engine of worldwide
pharmaceutical innovation, accounting for an estimated 46 percent
of OECD patented pharmaceutical sales.”400
The JEC Majority also agrees that reforming Governmentimposed regulatory burdens and eliminating other artificial
barriers that create unnecessary costs are part of the solution. As
CEA noted, the more efficient FDA approval process is an
example of one of those reforms.401
The JEC Majority looks forward to seeing more details on
Administration proposals for lowering prescription drug costs and
injecting more price competition in the health system. Congress
and the Administration have a shared goal of ensuring that
Americans have access to the best medical innovations in the
world.402
CONCLUSION
The ACA has damaged the economy and left patients with higher
costs, fewer choices, and questionable health outcomes. While
Congress and the Administration have made some progress in
addressing harmful aspects of the ACA, more should be done to
provide greater competition and choices within insurance markets,
lower costs, and higher quality.
Recommendations
In order to provide more innovative solutions for challenges
within the healthcare system, the JEC Majority recommends:

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¾ Continuation of ACA replacement efforts that reduce work
disincentives, lower costs, expand choices, and repeal
harmful ACA taxes;
¾ A national focus on combatting the opioid epidemic,
including through better prevention via an education
campaign, treatment of pain without addictive painkillers,
community-oriented solutions for those already addicted,
and greater disruption of supply.
¾ Greater emphasis on preventing and coordinating
treatment for chronic conditions, with a focus on
rewarding quality outcomes instead of costly care; and
¾ Expanded access to medical technology that could
revolutionize health care, including through (1) repeal of
the medical device tax, (2) coordination and portability of
medical records, and (3) reform of regulatory burdens that
delay innovation or make products more costly.

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3 * % 1%%

The Report estimates the substantial direct costs and
longer-term indirect loss incurred to the economy and
critical infrastructure from cyberattacks and threats. The
Report suggests blockchain as a potential tool for securing
America’s digital infrastructure.

Blockchain technology—providing cybersecurity and
many other potential benefits—broke into the mainstream
in 2017 driven by widespread interest and surging
valuations in digital currencies such as Bitcoin and
Ethereum.

These new innovations and markets presented America’s
regulatory and legislative institutions with unique
challenges as well as technology that could revolutionize
the world’s digital landscape and economy.

INTRODUCTION
The Report reviews the new digital threats facing America today.
Ensuring the security of computers, the internet, networks, and
infrastructure is an enormous task, and the Report estimates the
costs incurred from cyberattacks. As methods of theft, espionage,
and vandalism shift from physical toward virtual—including data
and intellectual property—law enforcement’s role in fighting
property crime remains vital. The economy benefits from
protecting private property and contract integrity.
This chapter of the Response discusses a particular technology—
blockchain—that is not only nearly invulnerable to cyberattack but

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is revolutionizing the way the world conducts commerce and
shares information.
THE YEAR OF CRYPTOCURRENCIES
Many significant economic events stand out in 2017—passage of
tax reform, regulatory reform, the continued drop in
unemployment and the emergence of cryptocurrencies should be
listed among them. Sensational headlines and intense fascination
drove “Bitcoin” to second place as a global news topic in Google’s
Year in Search 2017.403 As shown in Figure 9-1, “Bitcoin”
searches skyrocketed, and “blockchain” and “Ethereum” moved
out of relative obscurity.
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In addition to the surge in searches, the price of many
cryptocurrency and blockchain assets skyrocketed. The Dow
Jones Industrial Average (DJIA) started 2017 over 19,881 points
and grew 24 percent to 24,719; the S&P 500 grew by more than

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17 percent.404 Yet, while both stock market measures experienced
strong growth, cryptocurrencies dwarfed their performance.
Bitcoin started 2017 at a price just under $1,000 per bitcoin and
finished well over $12,500 per bitcoin, an appreciation of over
1,100 percent. During that period, Bitcoin topped out over $19,000
per bitcoin. The second largest cryptocurrency, Ethereum, did
even better. At the beginning of 2017, ether (Ethereum’s currency)
was worth under $10. By the end of 2017, ether shot up to over
$719, an astronomical appreciation of 6,713 percent.405 Stock
market gains seem meager in comparison (Figure 8-2).
The buzz surrounding digital currencies resembles the internet
excitement in the late 1990s when people recognized technology
companies could change the world. Many internet companies
launched and their valuations took off in short order. Many failed,
but a few succeeded spectacularly and challenged the conventional
ways of doing business. For example, people considered
GeoCities the “home page” for individuals and Yahoo bought the
company for $3.57 billion in 1999.406 GeoCities had
characteristics similar to Facebook today (or MySpace in the early
2000s), but it never came close to Facebook’s reach and remained
unprofitable. A company that did eventually succeed is an online
book retailer called Amazon.com, but along the way its price
gyrated with stock splits and recessions.407

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Surging prices also drove up cryptocurrency market capitalization.
At the beginning of 2017, the total value of all bitcoin in
circulation was almost $15.5 billion, but by year’s end it increased
almost 14-fold to over $216 billion. Other cryptocurrencies such
as Ethereum, Ripple, and Litecoin experienced similar gains.
Ether’s total circulating value multiplied by 98 from just under
$700 million to over $68 billion. Ripple’s market cap multiplied
by an even larger 342 from $237 million to over $81 billion.
Finally, Litecoin lost its position as the third-largest
cryptocurrency in 2017. It still grew robustly but increased to just
55 times its original market cap of over $212 million, to well over
$11 billion.408

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WHAT ARE CRYPTOCURRENCIES AND BLOCKCHAIN?
Blockchain is the distributed ledger technology that underlies
digital currencies such as Bitcoin. A ledger is the accounting tool
that tracks the movement of money from one person or account to
another. Conventionally, such records are stored in central
locations like banks, headquarters, and Paypal servers. Blockchain
revolutionizes ledger technology with a network of distributed
ledgers. Instead of one central, authoritative record of all
transactions or information, blockchain creates potentially
thousands of identical ledgers in computers and servers all over
the world.
In “permissionless” proof-of-work blockchain, people compete to
validate each transaction in return for a reward. The protocol
rewards users for creating and validating entries into the ledger.
This reward creates an incentive for competition and gives these
validators (“miners” see Box 9-1) new tokens to use in the system.
Users who do not earn tokens by performing verifications, i.e., not

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“miners,” must buy the tokens. This interplay between miners and
purchasers create an ecosystem where people have clear incentives
and rewards to maintain the distributed ledger for everyone.409
Bitcoin was the first blockchain. Bitcoin’s network creates a new
record of verified transactions approximately every ten minutes
and packages the records into a so-called “block”. Ethereum is the
second-largest cryptocurrency in the world, and though it uses the
same blockchain technology as Bitcoin, it serves different
purposes. While Bitcoin’s blockchain records each transaction in
its currency, Ethereum records results from the programs users
upload to its network. It allows programmers to create applications
and “smart contracts” that utilize computing power from
Ethereum’s network to execute them.410 This brings the
decentralized security of blockchain to computing power, while
allowing developers to build applications, smart contracts, and
other digital coins on top of Ethereum. Additionally, it uses the
same proof-of-work mining that Bitcoin does, but its network
produces a block every 12 to 15 seconds and rewards its miners
three ethers per block, with additional rewards for solutions found
but not included.411
Box 9-1: Bitcoin Mining (Proof-of-Work)
Each block contains data related to Bitcoins sent and received, as
well as digital signatures using cryptographic keys, by which each
party confirms its agreement to a transaction. Each block is
chained to the previous block, as computers throughout the
network confirm its validity and solve a complex cryptographic
proof. Solving this proof requires immense energy consumption,
deterring other computers from spamming the Bitcoin network.412
Once a block is in the chain, it can never be removed or altered
and will be there for everyone on the network to see. The protocol
then begins working on the next block in the chain.

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The process is called mining using a proof-of-work method.413
Essentially, users on the network have to prove that they
constructed a block and solved the cryptographic proof. The
Bitcoin protocol adjusts the difficulty of the proof to ensure a new
block approximately every ten minutes. The users who
successfully mine a new block are allowed to reward themselves
with new bitcoins. The rewards dwindle based on the number of
blocks in the chain. Thus, the only revenue miners can earn will
come from the transaction fees.414 The mining process varies
among cryptocurrencies.
Are Digital Currencies Actual Currencies?
Blockchain technology could compete with existing mechanisms,
goods, and services. Its initial application as a payment medium
prompted questions about whether it might replace national
currencies and challenge the U.S. dollar. While skyrocketing
cryptocurrency prices impress, economists question whether these
new digital technologies should be considered currencies.
Currencies serve three functions: medium of exchange, unit of
account, and store of value. A medium of exchange is something
people willingly accept for goods and services. People willingly
accept the medium of exchange because they believe it can be used
for other transactions. A unit of account is a measure people use
to post prices. A currency provides a common measurement unit
of pricing, enabling direct comparisons across different products
or services. Finally, a store of value is something that individuals
can use to transfer purchasing power over time. A currency will
not be the only store of value in an economy. Many items can
potentially store value, but money normally maintains relatively
stable purchasing power over time and individuals expect it to
remain an acceptable medium of exchange in the future.415

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At this point, many prominent economists do not believe
cryptocurrencies fit the standard definition of money. Former
Federal Reserve Chair Janet Yellen considered Bitcoin a “highly
speculative asset” that is not considered legal tender.416 Bitcoin
itself has technical and economic limitations that hinder its use as
a medium of exchange. Transaction processing time and fees on
the Bitcoin network keep increasing and render Bitcoin
uneconomical for common purchases. According to one report,
Bitcoin transaction fees averaged $28 in December 2017 and
processing time reached an average of 19.8 hours.417 This was at
the height of Bitcoin’s popularity in 2017 and highlighted the
limitations of its underlying protocol. Bitcoin’s current design can
only process about seven transactions per second, while Visa or
Mastercard can process thousands. The debate over scalability
deeply divides the Bitcoin community. Ethereum experienced
similar problems, but underwent a planned and substantial
upgrade in October of 2017 that improved its processing time.418
If Bitcoin or other digital currencies can improve their underlying
protocols or find off- chain solutions, they could speed up
processing time and reduce transaction fees.
Extreme volatility in the dollar price of cryptocurrencies also
impairs their use as money because people price goods and
services in dollars and thus their purchasing power fluctuates
wildly. For example, the price of pizza could move from a fraction
of a bitcoin to thousands of them in a short time.419 In order to
value items in terms of bitcoin, ether, or ripple, the dollar exchange
values of these units would have to stabilize. The dollar loses
about two percent of its value per year due to inflation, but its
purchasing power loss is modest and predictable so people can
incorporate it in their decisions. If digital currencies become less
volatile in the future, valuing items in those denominations could
become easier and individuals might begin using them more
frequently as a medium of exchange.

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Some critics of currencies controlled by government fiat welcome
cryptocurrencies because their supply is preprogrammed and
perceived as unchangeable.420 For example, only 21 million
bitcoins will ever be issued and the last fraction of a bitcoin will
be issued in approximately 2140.421 Additionally, the creator of
Ethereum designed its mining reward to decline exponentially as
more miners create blocks, and according to his calculations the
supply will be just over 100 million ether.422 The volatility of
digital currency values has not resulted from variability of their
supply,423 as was the case with the Venezuelan bolivar, which lost
essentially all its value in less than a year;424 rather, the value
fluctuations of digital currencies stem from the demand side.
In 2017, demand for these assets spiked, leading to the significant
price appreciation. Whether digital currencies hold their value will
depend upon whether they offer benefits in terms of ease of use
and accessibility, low transaction costs, security, anonymity, and
other considerations in sufficient degree relative to conventional
currencies and other stores of value such as gold. Venezuelans
bought Bitcoin in increasing amounts recently, presumably
because their national currency lost value and the government
imposed capital controls. In this sense, cryptocurrencies resemble
real assets or commodities more than currencies, though their
future role could expand to include functioning as mediums of
exchange.
Initial Coin Offerings
A new market formed around blockchain startups, called Initial
Coin Offerings (ICO). An ICO allows developers to raise funds
for a project by issuing tokens to use on that project. For example,
if a group of economists wants to exchange papers, research,
analysis, and review or editing services, developers would create
an online platform to allow each person to have an account for

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conducting these activities. Before blockchain, such a site would
usually use outside payment systems such as Paypal or Visa to
process transactions, but in this example, users could transact with
hypothetical scarce tokens called EconoCoins.425
The second element would be a “smart contract.” While smart
contracts might sound new, the concept is rooted in basic contract
law. Usually the judicial system adjudicates contractual disputes
and enforces terms, but it is also common to have another
arbitration method, especially for international transactions. With
smart contracts, a program enforces the contract built into the
code. Using the EconoCoin example above, if economist A wants
economist B to edit her paper, economist B agrees and both create
a smart contract that will reward economist B with EconoCoins
from economist A’s wallet upon delivery of edits. The network
will enforce the contract without a third party, but the two
economists can also build in a provision that would enlist others
in the network to resolve disputes for a fee.
The developers and economists in this example do not need an
influx of outside capital to begin the project. With an ICO, the
creators explain the concept to potential users and offer for
purchase initial coins that can be used in the network. Platform
users would utilize the coins on the network to obtain the services
or goods listed above.
An ICO consolidates two important elements of building a new
economic ecosystem, obtaining funding and creating a network.
ICOs do not offer equity and are much less expensive than an
Initial Public Offering (IPO). PricewaterhouseCoopers estimated
that an IPO costs companies between four to seven percent of the
capital raised and an additional $4.2 million in accounting costs.
Further,
after
surveying
chief
financial
officers,
PricewaterhouseCoopers found that companies spend between $1
million and $2 million annually on maintaining their status as a

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publicly listed entity.426 These costs help explain why only the
largest of companies go public.
In contrast, developer Merunas Grincalaitis estimated that an ICO
would take three months and cost approximately $60,000. A third
of this cost comes from legal fees to ensure the ICO complies with
relevant laws.427 Once up and running, these platforms continue to
raise funding for upgrades and maintenance through either
transaction fees for verification, appreciation of the tokens, or
donations. During 2017, developers launched hundreds of ICOs
and investors realized their potential. Most new tokens utilized the
Ethereum blockchain to launch their tokens and execute their
code.
As shown in Figure 9-4 below, the enthusiasm led to an explosion
in capital flowing into the ICO market. Before 2017, developers
raised just under $300 million in funding for ICO projects.
Although this number may seem high, it is misleading.
Approximately $152 million of these funds went into the infamous
Decentralized Autonomous Organization (DAO) which
eventually shut down and returned a portion of those funds (more
details below). During 2017, developers raised over $5.3 billion
for new token companies. Such capital includes a plethora of
projects and ideas. For example, FileCoin, a blockchain intended
to decentralize cloud storage away from Amazon and Google,
raised $262 million to move forward with its vision. Many of these
projects will likely fail, as most startups do, but the ones that do
survive could transform the way the internet and technology works
for decades to come.

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Blockchain Innovations
Cryptocurrencies and ICOs create headlines, and the pace of
financial innovation in the blockchain space amazes skeptics. Yet,
with all the headlines focusing on the financial applications,
people may miss the digital revolution now happening with other
blockchain applications. Even worse, people could be frightened
about new developments with the technology as they associate
blockchains with the negative headlines. Blockchain technology
offers a decentralized, secure, and efficient way to store almost
any form of data across multiple platforms. Developers,
companies, and governments recognize the potential and have
already starting to implement blockchains for many different uses.
For instance, health care providers, patients, and policymakers
continue searching for portable and secure ways to store medical
records digitally. On a Joint Economic Committee podcast,
Committee member Representative David Schweikert described

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how health care companies are already researching blockchains as
a secure way to keep medical records on personal smartphones or
within provider networks, and what this advance could mean for
America’s future:428
[M]edical records have no value if they don’t move
with you. So think of if I could put my medical
records on a blockchain where just like on many
phones, I could use my thumbprint and a password
and with a certain type of encryption…It would be
HIPAA [Health Insurance Portability and
Accountability Act, which includes patient privacy
protections] compliant. Now all of a sudden you
and I and the rest of society can carry their medical
records on their phone.429
Unlike many innovations that attempt to skirt laws or regulations
and become associated with the underground, these new
blockchain products attempt to comply with the current system
and even work together with regulators. The new products range
from coordinating payment (healthnexus),430 monitoring and
rewarding patients for following clinical recommendations
(RoboMed Network),431 tracking pharmaceuticals along the
supply chain (MediLedger),432 and even identifying specific
supply chain problems such as those associated with the opioid
crisis (BlockMedx).433
On the regulatory side, Representative Schweikert currently
coordinates with institutions like the Massachusetts Institute of
Technology and the National Institute of Standards and
Technology (NIST) to develop encryption standards that would
protect Americans’ private medical data.434 Further, in 2016 the
United States Department of Health and Human Services (HHS)
announced the “Use of Blockchain in Health IT and HealthRelated Research” Ideation Challenge.435 The initiative requested

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white papers examining how blockchain technology could change
health information technology. Researchers submitted 77 papers
and 15 won awards from their work.436
From applications ranging from management of the electrical grid
and utilities to how companies manage global supply chains, the
potential for blockchain is truly revolutionary. For example, power
plants could record the electricity they generates on a blockchain
as available for purchase. Utilities could then purchase the power,
and the blockchain would record the purchase and the transfer.
Finally, the meters of end users would communicate with the
utility to purchase portions of the power. These steps occur now
but using a distributed ledger would streamline and speed up
delivery, lowering costs and saving power.
Blockchains could also enable microgrids from local power
sources. The company LO3 Energy currently runs a pilot program
for trading power from solar panels on Brooklyn roofs. Smart
meters throughout the neighborhood would buy and sell power
generated from these alternative sources as it enters the grid.437
With these developments and countless possibilities, it is no
surprise that governments around the world started working with
energy providers to explore blockchain’s use.438 Even the
Department of Energy partnered with BlockCypher to
demonstrate how blockchains could facilitate a smarter energy
grid.439
Shipping a product from a supplier to retail creates mountains of
paperwork or computer records that are rarely compatible across
differing systems, especially a when distributor acts as a middleman between the two. The paperwork and data tracking multiplies
when sending said product overseas or importing. Not only will
multiple parties need to ship the product, but the supplier and
customer will have to deal with customs agency paper work.
Recognizing blockchain’s potential, IBM teamed up with the

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world’s largest shipping company, Maersk, to develop a consensus
distributed ledger that would allow all companies and government
agencies along the chain to record, track, and verify products
throughout their journey.440
Walmart and other grocers started testing blockchains for their
supply chains. In testimony before the House Science and
Technology Committee, Frank Yiannas, Walmart’s Vice
President of Food Safety, described how tracking E. coli and other
contaminated food took companies and regulators weeks, which
left Americans at risk and incurring large costs in food waste.
Walmart tested a blockchain platform to track sliced mangos from
farm to shelves and reduced the tracking time from 7 days to 2.2
seconds. Walmart and ten of the largest grocers in America formed
a coalition to implement this technology throughout their supply
chains.441
Growing Pains and Misuses
The potential for theft remains a problem but not due to the
structure of blockchain. No evidence exists of anyone hacking
blockchain’s underlying protocol, but digital currencies are still
vulnerable to theft. Users keep their currencies on digital “wallets”
stored as files on a computer. For many, this could be a technical
barrier deterring them from directly using the tokens. Centralized
exchanges and internet services emerged to solve this hurdle
where users could buy, sell, and store their virtual currency on that
site. The most well-known American example is the site Coinbase.
However, using an exchange to store ones’ digital assets increases
the risk of theft. When individuals keep their digital asset in a
single “wallet,” the only way to access it is by knowing their
private key. But with online exchanges that pool multiple assets
into much larger “wallets” to facilitate trading, many people will
have access to those funds.

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Although Coinbase and other exchanges earned reputations for
security, a few early exchanges did not. The most infamous theft
occurred on the Mt. Gox exchange. This early Japanese exchange
allowed users to create accounts and store Bitcoin. In 2014, bad
actors gained access to Mt. Gox’s main wallet and transferred
hundreds of millions of dollars’ worth of Bitcoin to their account.
Mt. Gox’s system was so flawed that a user accidently entered a
negative symbol under payment and the site credited him with
extra bitcoin. After multiple thefts and the arrest of the owner, the
site was shut down.442 Users in a cryptocurrency exchange must
remember that they are putting their trust in the security of that
entity in a manner similar to depositors in early banks.
In July 2017, YouGov polled internet users about what they
believed people mainly used cryptocurrencies to do. While just
under 40 percent said they did not know, almost a quarter said
these currencies were used for illegal transactions. Anecdotal
reports furthered this sentiment as sites such as Silk Road, an
online marketplace for illicit drugs, publicized Bitcoin’s use for
the transactions.443 Recently economists estimated that
approximately 25 percent of all users conduct illegal transactions
on Bitcoin, and while the proportion of transactions for illegal
purposes fell, the absolute level remained at an all-time high in
April 2017.444
The rapid appreciation in value of cryptocurrencies and ICOs
contributed to the doubt and unease about blockchain technology.
The New Palgrave Dictionary of Economics defines price bubbles
as “asset prices that exceed an asset’s fundamental value because
current owners believe they can resell the asset at an even higher
price.”445 Nobel Prize Winners Eugene Fama and Robert Shiller
disagree on the reasons for an asset’s value.446 The former
maintains that markets always set efficient prices based on the
information available. The latter claims that, at times, irrational

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decisions can determine prices. With new kinds of investments,
detailed information about the product will likely be hard to find
or could be manipulated. This makes establishing the fundamental
value difficult. Investors will estimate the possible future value,
but with only unreliable and changing information to go on, their
valuations fluctuate. Market participants will rationally speculate
to varying degrees and the price reflects the “best guess” of future
value. Still, Robert Shiller would note that “irrational exuberance”
could take hold and drive up asset prices beyond reasonable
estimations of fundamental value, which eventually leads to a
rapid downward correction. “Bubble” sceptics will point out that
no one can identify bubbles a priori with any consistency.447
Blockchain’s market reception fits the pattern of a new, not fully
understood technology. Within the financial community, it is a
running joke that adding “blockchain” to a company’s name,
prospectus, or business plan will drive up the stock price. A recent
example of this phenomenon is the unprofitable New York-based
Long Island Iced Tea Corporation, which specialized in selling
non-alcoholic beverages. With the NASDAQ threatening to delist
the publicly traded company, it changed the name to Long
Blockchain Corporation.448 As Figure 9-5 shows, the stock price
skyrocketed after the announcement and closed at a price three
times the higher value.

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Outside what may seem an obvious attempt at cash grabs,
observers will point to other warning signs such as Useless
Ethereum Token (UET) and DogeCoin. The creator of UET
advertised the coin with the following: “The UET ICO
transparently offers no value” and “Might be secure, definitely not
audited.”449 The ICO still raised $336,038 and issued almost 4
million tokens. DogeCoin’s recent rise raises similar concerns. In
2013, Jackson Palmer created a “joke” cryptocurrency called
DogeCoin as a parody of many alternative currencies started at
that time and to raise awareness about cryptocurrencies generally.
A year later, scammers fleeced millions from the DogeCoin
community, and users including Jackson Palmer left as enthusiasm
and good will evaporated.450 Prior to 2017, the highest market
capitalization was just over $89 million in February of 2014. As
enthusiasm grew, DogeCoin expanded to almost $2 billion in
market capitalization.451
REGULATORY QUESTIONS
Cryptocurrencies, ICOs, and their exchanges present novel
regulatory challenges. Their rapid ascension led to instances of

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new products running afoul of America’s current regulatory
framework. This demonstrated how certain regulatory
environments are simply out of touch with the internet age. The
market expanded with a light regulatory touch, but its explosion in
2017 and the well-publicized nefarious actions in this space
prompted regulators to act. Further, American regulators spent
years convening working groups, watching developments, and
conducting research to ensure they understood how these
technologies operated and how they could be regulated. Rather
than covering the plethora of regulatory challenges
cryptocurrencies and blockchain present, this Response will focus
on securities regulations, money transmission laws, taxation
definitions, and possible future regulatory action.
Securities Regulation
ICOs developed so rapidly, as shown in the above in Figure 9-4,
that many innovators did not ask the question, “Is this a security
that would need to be registered with the Securities and Exchange
Commission (SEC) or other regulators?” The most well-known
example is Ethereum’s Decentralized Autonomous Organization
(DAO). The DAO was a digital organization that allowed users to
contribute ether to a pool that would be invested in proposed
projects based on a vote. The amount contributed would determine
how many votes a user had. The DAO launched its tokens on
Ethereum’s blockchain as an open source program in May 2016
and attracted 14 percent of all ether created at that point.452 Within
a month, someone exploited a flaw in the code and stole over $50
million in ether.453 This caused Ethereum’s value to drop and
eventually led to shutting down the DAO and a splitting of the
currency to return the ether to its original owners before the
DAO.454

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The DAO represented amazing innovation in democratized
finance, but its operation certainly seemed as if it were similar to
a mutual or hedge fund. If so, then it should have registered as a
security with the SEC. The SEC launched an investigation into the
DAO to determine if it should have been defined as a security
subject to SEC regulation. The normal test for this purpose is
considered the Howey Test, named for a case the SEC brought
against a 1946 orange grove.455 Peter Van Valkenburgh
summarizes the test as four prongs:
A [security] for the purposes of the Securities Act means a
contract, transaction or scheme whereby a person…
x

invests his money in

a common enterprise and is led to

expect profits

solely from the efforts of the promoter or a
third party456

The SEC found the DAO should have been defined as a security
under this test.457 Since this ruling, the SEC started pursuing more
enforcement actions against new tokens for both securities
registration issues458 and fraud.459 Additionally, SEC Chairman
Clayton started warning against unregistered securities offerings,
fraud, and pursuit of superficial name changes such as the one
undertaken by Long Island Iced Tea.460
Market innovators knew securities regulators would scrutinize
both the potential fraud and securities registration. A group of
participants joined in brainstorming an industry standard for future
token launches.461 The agreement they launched was called the
Simple Agreement for Future Tokens (SAFT).462 The SAFT
acknowledges that presale tokens before a network operates
should be considered a security available for accredited investors.

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Once the network is running, the tokens would be available to the
public as utility tokens and not classified as securities. Using the
EconoCoin example, the token sales to raise funds for the project
would be considered a security. Once the project was up and
running, those tokens would then be available to the public and
not a security. SEC Chairman Clayton has yet to comment on the
SAFT proposal, but it exemplifies the good actors within a market
working to root out fraud and ensure that new innovations comply
with existing regulations.
Taxation
Securities regulations are not the only federal rules challenged by
the innovation of cryptocurrencies challenge. Bitcoin’s rise
introduced an ever-growing question about how these assets
should be taxed. For example, dollar fluctuations are not taxed. If
a person held cash for a number of years and the purchasing power
went up relative to other currencies, the appreciation would not be
considered taxable if the dollar is later exchanged for foreign
currency. However, the tax code treats foreign currency as
property rather than currency.
If foreign currency is received as part of a business transaction, it
is considered ordinary income and must be reported as a dollar
value at the time it is received. If the currency then appreciates
before the foreign currency is actually exchanged for dollars, the
appreciation is treated as a capital gain and subject to capital gains
taxes. If the taxpayer is an individual and not a business and holds
foreign currency for an investment, the gains when the currency is
converted to dollars are considered capital gains. However, if an
individual is not holding foreign currency as part of a business or
an investment—as often occurs in foreign travel—then up to $200
in appreciation is exempt from taxes and any additional amount is
capital gain.

222

This distinction made participants wonder if cryptocurrencies
receive the same treatment. In 2014, the IRS recognized the need
for clarity and issued a guidance document to answer frequently
asked questions and request further comments on the issue. Like
foreign currency, the IRS classified virtual currencies as property
and not currency, but noted they should not be considered foreign
currency for tax purposes. Similar to foreign currency, taxpayers
who receive digital currency as payment for goods and services
must treat it as ordinary income and report the fair market value in
dollars, and any appreciation after that point as capital gain when
exchanged for dollars. Additionally, taxpayers who hold virtual
currency as an investment must treat appreciation like capital gain.
However, the $200 exemption that applies to personal foreign
currency transactions does not appear to apply to virtual currency.
Hypothetically, if a person paid a coffee shop for a cup of espresso
with a virtual currency, that person would need to track the basis
and fair market value of each small transaction like this to
determine gain or loss in the virtual currency. Additionally, the
IRS clarified that mining awards should be included in users’ gross
income.463
While the guidance provided some clarity, it left many
unanswered questions that prompted comments requesting
clarification. For example, the American Institute for Certified
Public Accountants (AICPA) noted that while the IRS indicated
fair market value could be obtained from exchanges, it did not
specify which exchanges should be used. Further, AICPA pointed
out that tracking basis and fair market value in very small
transactions would create an enormous compliance burden for
users without significantly affecting the total gain or loss in virtual
currencies.464 The IRS has agreed to better coordinate virtual
currency.465

223

The larger issue for virtual currency market participants is that the
absence of guidance could expose them to enforcement actions
later if rules are applied retroactively. Such a situation could freeze
investment and exploration into new virtual currencies, especially
for smaller transactions such as coffee purchases. Representative
Schweikert, along with Colorado Representative Jared Polis,
introduced the Cryptocurrency Tax Fairness Act of 2017.466 The
bill would essentially create a de minimis reporting exemption for
virtual currency purchases under $600.467 The bill has yet to
become law, but as virtual currencies’ popularity and technical
abilities improve, more bills on this topic will likely be introduced.
Money Transmission
One of the more vexing questions cryptocurrencies created
involve money transmission laws. Money transmitters are entities
that take money from one customer and give it to another; common
examples include Western Union and MoneyGram. As explained
by Peter Van Valkenburgh, historically, States regulated and
licensed money transmitters. These licensure regimes were
intended to protect customers if the funds were lost or stolen.
However, State licensing requires those operating across State
lines to obtain a license to operate in all States and territories
except Montana.468 Normally, many take the federalist view on
state laws and regulations.469 From this perspective, States can
experiment with new and novel policies and if citizens do not like
it, they can move to another State. It also gives State policymakers
flexibility to craft new policies that might better fit their
circumstances than a uniform national policy.
Cryptocurrency and ICO emergence challenged the “states as
laboratories” view on these licensing regimes. Every
cryptocurrency exchange or ICO is “global on day one.” This
means once launched, anyone around the world can access the site
and potentially use its services. Using the example of EconoCoin

224

above, when the new token launches the sites that traded the token
for money—including the launch site itself—might theoretically
have needed a license in every State. This would deter investment
and research into new innovative products.
Market participants and organizations proposed multiple ways for
a path forward. The Uniform Law Commission, a nonpartisan
commission focused on creating consistent state laws, drafted and
approved legislative text that would clearly define what virtual
currency businesses need to file as money transmitters.470 States
would still need to enact the proposed legislation, which would
likely take years. This delay caused others to recommend Federal
alternatives. Peter Van Valkenburg listed various options,
including creating a “passporting” regime similar to the European
Union or Federal preemption of State transmission laws.471 None
of these solutions would be perfect, and all should undergo
rigorous cost-benefit analysis.
Future Regulatory Questions
Solving the challenges cryptocurrencies and blockchains present
will require unique solutions that balance the needs of consumer
protection, security, and entrepreneurship. While it is impossible
to determine precisely which rules, regulations, and guidance will
result from this process, one thing is certain. Regulatory agencies
will need to coordinate to ensure they do not work at cross
purposes. America is already subject to a complex set of regulatory
institutions governing financial products and transactions. As
Perianne Boring of the Chamber of Digital Commerce
highlighted, this regulatory web produced four different
classifications of digital assets (commodity, security, currency,
and property),472 which is not conducive an environment where
entrepreneurs are enthusiastic about launching a startup.

225

Regulators recognized the need for coordination. In the Wall Street
Journal, SEC Chairman Jay Clayton and Commodities Futures
Trading Commission Chairman J. Christopher Ginacarlo noted:
The CFTC and SEC, along with other federal and
state regulators and criminal authorities, will
continue to work together to bring transparency
and integrity to these markets and, importantly, to
deter and prosecute fraud and abuse.473
Outside the financial space, as noted above, other executive
agencies such as NIST and HHS continue working towards
standards that promote compliance without needlessly halting
innovation. For cryptocurrencies and blockchain to further thrive,
policymakers will need collaborative and innovative solutions that
set the rules of the game without overly prescriptive regulations
that constrain this emerging technology from reaching its full
potential
CONCLUSION
Technology presents evolving challenges and generates new
solutions. Blockchain technology essentially stores and transmits
data securely, in large volume, and at high speeds. So far, the
technology has proved largely resistant to hacking, and given this
feature, developers first applied it to digital currencies. Yet
blockchain has many more potential applications, such as portable
medical records and securing the critical financial and energy
infrastructure that the Report identified.
Recommendations
¾ Policymakers and the public should become more familiar
with digital currencies and other uses of blockchain

226

technology, which have a wide range of applications in the
future.
¾ Regulators should continue to coordinate among each
other to guarantee coherent policy frameworks,
definitions, and jurisdiction.
¾ Policymakers, regulators, and entrepreneurs should
continue to work together to ensure developers can deploy
these new blockchain technologies quickly and in a
manner that protects Americans from fraud, theft, and
abuse, while ensuring compliance with relevant
regulations.
¾ Government agencies at all levels should consider and
examine new uses for this technology that could make the
government more efficient in performing its functions.

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start year to analyze these averages as inflation had been trending downward
as a result of the Great Inflation of the 1970s and the Volcker Fed’s efforts to
diffuse it. After 1990, the inflation rate stabilized around 2 percent.
76
ERP 2018, pp. 20.
77
ERP 2018, pp. 432.
78
ERP 2018, pp. 422.
79
“Monetary Policy Report,” Board of Governors of the Federal Reserve
System, February 23, 2018, p. 14,

233

https://www.federalreserve.gov/monetarypolicy/files/20180223_mprfullreport
.pdf
80
“Nominal” means unadjusted for inflation. “Aggregate demand” means total
spending in the economy.
81
“Economic growth was moderate during the first half of the year, but the
tightening of credit conditions has the potential to intensify the housing
correction and to restrain economic growth more generally. Today’s action is
intended to help forestall some of the adverse effects on the broader economy
that might otherwise arise from the disruptions in financial markets and to
promote moderate growth over time.” “FOMC Statement,” Board of
Governors of the Federal Reserve System, September 18, 2007,
https://www.federalreserve.gov/newsevents/pressreleases/monetary20070918a
.htm
82
The first such facility was the Term Auction Facility (TAF), in which the
Federal Reserve, “…auctioned term funds to depository institutions. All
depository institutions that were eligible to borrow under the primary credit
program were eligible to participate in TAF auctions. All advances were fully
collateralized. Each TAF auction was for a fixed amount, with the rate
determined by the auction process (subject to a minimum bid rate). Bids were
submitted by phone through local Reserve Banks. The final Term Auction
Facility auction was conducted on March 8, 2010.” “Term Auction Facility,”
Board of Governors of the Federal Reserve System, November 24, 2015 (last
update), https://www.federalreserve.gov/monetarypolicy/taf.htm, For other
such facilities refer to: “Expired Policy Tools,” Board of Governors of the
Federal Reserve System, November 24, 2015 (last update),
https://www.federalreserve.gov/monetarypolicy/expiredtools.htm
83
Hetzel, Robert L, “The Great Recession,” Cambridge University Press,
New York, NY, 2012, p. 282.
84
Sumner, Scott, “Monetary policy rules in light of the great recession,”
Journal of Macroeconomics, Elsevier, vol. 54(PA), p. 94. See also: Bernanke,
Ben S, “Speech Given at the Federal Reserve Bank of Dallas Conference on
the Legacy of Milton and Rose Friedman’s Free to Choose,” The Federal
Reserve Board, October 23, 2003.
https://www.federalreserve.gov/boardDocs/Speeches/2003/20031024/default.
htm
85
For a more complete history of the Federal Reserve’s emergency lending,
commercial and shadow banking and analysis of the factors in the 2008
Financial Crisis, see the Joint Economic Committee paper, “Lender of Last
Resort in the Modern Financial System: Development of the Federal
Reserve’s Policy,” Joint Economic Committee, November 29, 2012,
https://www.jec.senate.gov/public/_cache/files/8b7982e8-5ac5-4ec7-89440b5584f71d5d/20121129-jec-lolr-analysis.pdf.pdf
86
This was known as the Treasury’s Supplementary Financing Program. See:
“Treasury Announces Supplementary Financing Program,” U.S. Department
of the Treasury press release HP-1144, September 9, 2008,

234

https://www.treasury.gov/press-center/press-releases/Pages/hp1144.aspx. Ben
Bernanke’s 2009 description of the program: “…the Treasury issues special
Treasury bills and places the proceeds in the Treasury supplementary
financing account at the Federal Reserve. The net effect of these operations is
to drain reserve balances from depository institutions,”Bernanke, Ben S,
“The Federal Reserve Balance Sheet,” Board of Governors of the Federal
Reserve System, April 3, 2009,
https://www.federalreserve.gov/newsevents/speech/bernanke20090403a.htm
87
“Inflation has been high, spurred by the earlier increases in the prices of
energy and some other commodities. The Committee expects inflation to
moderate later this year and next year, but the inflation outlook remains
highly uncertain.
“The downside risks to growth and the upside risks to inflation are both of
significant concern to the Committee. The Committee will monitor economic
and financial developments carefully and will act as needed to promote
sustainable economic growth and price stability.”
“FOMC Statement,” Board of Governors of the Federal Reserve System,
September 16, 2008.
https://www.federalreserve.gov/newsevents/pressreleases/monetary20080916a
.htm. For additional evidence refer to: Hetzel, Robert L, “The Great
Recession,” Cambridge University Press, New York, NY, 2012, pp. 217-223.
88
This was written into the Emergency Economic Stabilization Act of 2008
(the same legislation that created the Troubled Asset Relief Program (TARP),
which bailed out the banks. It authorized the Fed to pay interest on reserves,
of which there are two classes: required and excess. The IORR rate is the
payment banks receive for required reserve holdings (excluding vault cash
held to satisfy reserve requirements). The IOER rate is the payment banks
receive for depositing funds in excess of their required reserves. As the latter
is far more consequential, IORR is not discussed in this chapter.
89
The Federal Reserve’s rationale was that “The payment of interest on excess
reserve balances will give the Federal Reserve greater scope to use its lending
programs to address conditions in credit markets while also maintaining the
federal funds rate close to the target established by the Federal Open Market
Committee.”
“Board announces that it will begin to pay interest on depository institutions’
required and excess reserve balances.” Board of Governors of the Federal
Reserve System, October 6, 2008,
https://www.federalreserve.gov/newsevents/pressreleases/monetary20081006a
.htm
90
Bernanke, Ben S, The Courage to Act, W.W. Norton, New York, NY, 2015,
pp. 325–6.
91
Pure usage (as opposed to the general usage) of the term “quantitative
easing” refers to an increase in the supply of reserves intended to ease
monetary conditions. In contrast, the incidentally created reserves from the
Fed’s LSAP programs were largely sterilized as the Fed was focusing on
directing liquidity toward particular market segments (i.e., long-term Treasury

235

securities and residential MBS), which constitutes a credit easing policy (also
Ben Bernanke’s term, see next footnote) rather than a monetary easing policy.
92
In pursuing our strategy, which I have called ‘credit easing,’ we have also
taken care to design our programs so that they can be unwound as markets
and the economy revive.” Bernanke, Ben S, “The Federal Reserve Balance
Sheet,” Board of Governors of the Federal Reserve System, April 3, 2009,
https://www.federalreserve.gov/newsevents/speech/bernanke20090403a.htm.
Note: Bernanke’s identification of QE1 as “credit easing” implies that the
intent to sterilize the expansion using IOER.
93
Duy, Tim. “Johnson and Kwak vs. Bernanke,” Tim Duy’s Fed Watch, April
3, 2009, http://economistsview.typepad.com/timduy/2009/04/johnson-andkwak-vs-bernanke.html
94
“If the monetary injections are expected to be temporary, the inflationary
effect is far smaller. The Japanese central bank did lots of QE in 2003, but
pulled much of the money out in 2006 when deflation ended. It worked in
preventing high inflation, indeed it may have worked too well.” Sumner,
Scott. “Open Letter to Conservatives on Monetary Policy,” The American
Catholic, November 16, 2010, http://the-americancatholic.com/2010/11/16/open-letter-to-conservatives-on-monetary-policy/
95
“…[If] the monetary base is increased in the current period but is expected
to be fully offset in some future period there will be zero change in the price
level.” Beckworth, David, “Permanent versus Temporary Monetary Base
Injections: Implications for Past and Future Fed Policy,” Journal of
Macroeconomics, Vol. 54, Part A, December 2017, p. 113.
96
“But a monetary expansion the private sector expected to be temporary, to
be wound down after the crisis had passed, would do nothing at all: the extra
monetary base would just sit there.” Krugman, Paul, “It’s Baaack, Twenty
Years Later, February 2018, p. 5,
https://www.gc.cuny.edu/CUNY_GC/media/LISCenter/pkrugman/Itsbaaack.pdf
97
“If the Fed pays interest on reserves, then the quantity theory of money
(more money means more inflation) doesn’t necessarily hold. They recently
started paying interest on reserves, and that’s one reason why the big
injections from 2008 didn’t have an inflationary impact. The Fed can adjust
the rate as necessary, and indeed in my view a lower IOR [interest on
reserves] would be more effective than QE2.” Sumner, Scott, “Open Letter to
Conservatives on Monetary Policy,” The American Catholic, November 16,
2010, http://the-american-catholic.com/2010/11/16/open-letter-toconservatives-on-monetary-policy/
98
“The link between Fed bond purchases and the subsequent growth of the
money stock changed after 2008, because the Fed began to pay interest on
excess reserves. The interest rate on these totally safe and liquid deposits
induced the banks to maintain excess reserves at the Fed instead of lending
and creating deposits to absorb the increased reserves, as they would have
done before 2008.” Feldstein, Martin, “Why is US Inflation So Low?” Project

236

Syndicate, June 28, 2013, p. 2.
http://www.nber.org/feldstein/projectsyndicatejune2013.pdf
99
“…[The] large expansion of the monetary base has to be temporary
otherwise the price level would have jumped several hundred percent
already…Ostensibly for this reason the Fed has been very clear that it plans
to eventually reduce its balance sheet. In the meantime, the Fed is using IOER
to manage its balance sheet in a manner that effectively sterilizes the abovetrend growth in the monetary base. The use of the IOER reinforces the Fed’s
goals that the excess reserves are to be ultimately temporary.” Beckworth,
David, “Permanent versus Temporary Monetary Base Injections: Implications
for Past and Future Fed Policy,” Journal of Macroeconomics, Vol. 54, Part A,
December 2017, p. 114.
100
Selgin, George, “Testimony Before the U.S. House of Representatives
Committee on Financial Services Monetary Policy and Trade Subcommittee
Hearing on “Monetary Policy v. Fiscal Policy: Risks to Price Stability and the
Economy.” July 20, 2017, p. 36,
https://financialservices.house.gov/uploadedfiles/hhrg-115-ba19-wstategselgin-20170720.pdf
101
“First, paying interest on reserves made monetary policy tighter than it
would otherwise have been, as measured either by the higher federal funds
rate or the lower equilibrium price level implied by the shifting but still
intersecting demand and supply curves for reserves. Ex ante, the use of
interest on reserves to minimize the effects of emergency lending on the price
level seemed prudent. Ex post, however, it turned out to be a mistake: as
Hetzel (2012) points out, monetary policy ought to have been substantially
more accommodative than it was throughout 2008, considering the severe
deflationary recession that followed.” Ireland, Peter N, “Interest on Reserves:
History and Rationale, Complications and Risks,” Boston College and
Shadow Open Market Committee, February 2018, p. 3,
http://irelandp.com/papers/somc201803.pdf
102
Blinder, Alan, “How Ben Bernanke Can Get Banks Lending Again,” The
Wall Street Journal, July 22, 2012,
https://www.wsj.com/articles/SB100008723963904448732045775372127389
38798
103
Blinder, Alan, “The Fed Plan to Revive High-Powered Money,” The Wall
Street Journal, December 10, 2013.
https://www.wsj.com/articles/the-fed-plan-to-revive-highpowered-money1386718437
104
“Financial Services Regulatory Relief Act,” Public Law 109-351, October
13, 2006, p. 4, https://www.congress.gov/109/plaws/publ351/PLAW109publ351.pdf
105
“Rules and Regulations,” Federal Register, Vol. 80, No. 119, June 22,
2015, Refer to subsection 204.10 (3), p. 35,567,
https://www.gpo.gov/fdsys/pkg/FR-2015-06-22/pdf/2015-15238.pdf. Note: it
is not feasible to set the primary credit rate below the IOER rate as banks
could borrow from the Fed at a lower rate and earn a higher rate of return by

237

depositing the borrowings with the Fed. Thus, the Fed’s balance sheet would
grow infinitely. By citing the primary credit rate as a relevant short-term
interest rate, the Fed remains in de facto compliance with the law.
106
Hensarling, Jeb, “Hensarling Welcomes Powell for First Monetary Policy
Hearing,” House Financial Services press release, February 27, 2018,
https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=
403092
107
Taylor, John B, “Alternatives for Reserve Balances and the Fed’s Balance
Sheet in the Future,” Hoover Institution Press, Stanford, CA, 2018, p. 24,
https://web.stanford.edu/~johntayl/2018_pdfs/Alternatives_for_Reserve_Bala
nces_and_the_Fed's_Balance_Sheet_in_the_Future.pdf
108
Hetzel, Robert L, “Monetary Policy in the 2008-2009 Recession,”
Economic Quarterly—Vol. 95, No. 2, Spring 2009, p. 216,
https://www.richmondfed.org/~/media/richmondfedorg/publications/research/
economic_quarterly/2009/spring/pdf/hetzel2.pdf
109
Taylor, John B, “Interest on Reserves and the Fed’s Balance Sheet,” Cato
Journal, Vol. 36, No. 3, Fall 2016, p. 719,
https://web.stanford.edu/~johntayl/2016_pdfs/Interest_on_Reserves_and_the_
Feds_Balance_Sheet_Cato-Fall2016.pdf
110
Nelson, Bill, “A former Fed insider explains the internal debate over QE3,”
Financial Times Alphaville, February 16, 2018,
https://ftalphaville.ft.com/2018/02/16/2198845/guest-post-a-former-fedinsider-explains-the-internal-debate-over-qe3/
111
Summers, Lawrence H, “U.S. Economic Prospects: Secular Stagnation,
Hysteresis, and the Zero Lower Bound, ” Business Economics, Vol. 49, No. 2,
February 24, 2014, p. 66, http://larrysummers.com/wpcontent/uploads/2014/06/NABE-speech-Lawrence-H.-Summers1.pdf
112
ERP 2018, p. 17 and p. 388.
113
Friedman, Milton, “The ‘Plucking Model’ of Business Cycle Fluctuations
Revisited,” The Hoover Institution, Stanford University, December 1988, p. 2.
114
Barro, Robert J. and Tao Jin, “Rare Events and Long-Run Risks,” NBER
Working Paper, No. 21871, January 2016,
http://www.nber.org/papers/w21871
115
Barro, Robert J, “The Reasons Behind the Obama Non-Recovery,” The
Wall Street Journal, September 20, 2016,
https://www.wsj.com/articles/the-reasons-behind-the-obama-non-recovery1474412963
116
In contrast, the Obama Administration’s 2017 Economic Report of the
President lauded the “forceful response of the Federal Government (p. 28)”
for the “remarkable recovery (p. 21).” Economic Report of the President 2017,
Council of Economic Advisers, January 2017,
https://obamawhitehouse.archives.gov/administration/eop/cea/economicreport-of-the-President/2017
117
Selgin, George, “Testimony Before the U.S. House of Representatives
Committee on Financial Services Monetary Policy and Trade Subcommittee
Hearing on “Monetary Policy v. Fiscal Policy: Risks to Price Stability and the

238

Economy,” July 20, 2017, p. 46,
https://financialservices.house.gov/uploadedfiles/hhrg-115-ba19-wstategselgin-20170720.pdf
118
Feldstein, Martin, “Stocks are Headed for a Fall,” The Wall Street Journal,
January 17, 2018. https://www.wsj.com/articles/stocks-are-headed-for-a-fall1516145624
119
“The Budget and Economic Outlook: Fiscal Years 2008 to 2017: January
2007,” Congressional Budget Office, January 24, 2007, Table 2-2, p. 41,
https://www.cbo.gov/sites/default/files/110th-congress-2007-2008/reports/0124-budgetoutlook.pdf
120
The BLS series ended in 2016. JEC linearly interpolated it forward to
February 2018. The projections come from:
Toossi, Mitra. “Labor force projections to 2016: more workers in the golden
years,” Monthly Labor Review, Bureau of Labor Statistics, November 2007,
https://stats.bls.gov/opub/mlr/2007/11/art3full.pdf
121
Laubach, Thomas, and John C. Williams, “Measuring the Natural Rate of
Interest,” Review of Economics and Statistics, 85(4), November 2003, pp.
1063–70.
122
Guvenen, F., R. Mataloni, D. Rassier, and K. Ruhl, “Offshore Profit
Shifting and Domestic Productivity Measurement,” NBER Working Paper,
No. 23324, April 2017, http://www.nber.org/papers/w23324
123
Economic theory suggests that all available information is taken into
account when financial instruments are valued. The day before the November
2016 election, prediction markets (exchanges for financial instruments of
which the value depends on some outcome being realized, such as election
results) estimated that the pre-2017 political and economic status quo would
be largely maintained (For example, on November 7, 2016, prediction markets
had implied presidential candidate Hillary Clinton had an 82 percent chance of
winning the election (see: https://www.predictit.org/Market/1234/Who-willwin-the-2016-US-presidential-election) and the current Majority had a 59
percent chance of losing that position in the Senate (see:
https://www.predictit.org/Contract/571/Will-Republicans-maintain-a-Senatemajority-after-the-next-election#data). The election results seem to have
surprised financial markets, providing a clear indicator that a change in the
political status quo had a substantive impact on the economic outlook.
124
When the forecast period ended before 2018, the Majority staff used the
final forecast growth rate to interpolate the implied level of potential real GDP
for 2028.
125
ERP 2018, p. 446.
126
As the proportion of goods and services produced rises relative to money,
this pushes inflation rates down.
127
Specifically, the average hourly earnings for all employees on private
nonfarm payrolls registered a gain of 2.9 percent as reported in the February 2,
2018 release of the BLS January Employment Situation report,
https://www.bls.gov/news.release/archives/empsit_02022018.htm

239

128

Feldstein, Martin, “Stocks are Headed for a Fall,” The Wall Street Journal,
January 17, 2018,
https://www.wsj.com/articles/stocks-are-headed-for-a-fall-1516145624
129
ERP 2018, pp. 437-9.
130
Christensen, Lars, “Fed NGDP targeting would greatly increase global
financial stability,” The Market Monetarist, March 19, 2013,
https://marketmonetarist.com/2013/03/19/fed-ngdp-targeting-would-greatlyincrease-global-financial-stability/
131
Hetzel, Robert L, “The Great Recession,” Cambridge University Press,
New York, NY, 2012, p. 279.
132
Hall, Keith, “Estimated Deficits and Debt Under the Conference
Agreement of H.R. 1, a Bill to Provide for Reconciliation Pursuant to Titles II
and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, as
filed by the Conferees to H.R. 1 on December 15, 2017,” Congressional
Budget Office, January 2, 2018, https://www.cbo.gov/system/files/115thcongress-2017-2018/costestimate/53437-wydenltr.pdf
133
“The 2017 Long-Term Budget Outlook,” Congressional Budget Office,
March 30, 2017,
https://www.cbo.gov/publication/52480
134
Dodd-Frank also held back lending by smaller banks.
135
The rationale behind the five year lag to the effective date for interest on
reserves to begin is described by then Federal Reserve Chairman Ben
Bernanke, during an FOMC meeting: “Because of budget-scoring rules, the
provisions of this act will not take place until October 2011.” Meeting of the
Federal Open Market Committee October 24-25, 2006, The Board of
Governors of the Federal Reserve System, October 24-25, 2006, p. 3.
https://www.federalreserve.gov/monetarypolicy/files/FOMC20061025meeting
.pdf
136
Then Federal Reserve vice chair, Donald Kohn, in a Congressional Hearing
when the topic was first discussed in 2005, noted that: “Having the authority
to pay interest on excess reserves also could help mitigate potential volatility
in overnight interest rates. If the Federal Reserve was authorized to pay
interest on excess reserves, and did so, the rate paid would act as a minimum
for overnight interest rates, because banks would not generally lend to other
banks at a lower rate than they could earn by keeping their excess funds at a
Reserve Bank.” Kohn, Donald. “Regulatory Relief,” Testimony before the
Subcommittee on Financial Institutions and Consumer Credit, Committee on
Financial Services, U.S. House of Representatives, June 9, 2005.
137
Under this arrangement, the fed funds rate should not rise above the
discount rate because it would be less expensive for banks to borrow reserves
directly from the Fed’s discount window.
138
JER 2017, Chapter 8.
139
“The Startup Slump: Can Tax Reform Help Revive American
Entrepreneurship?” Joint Economic Committee, October 3, 2017.
https://www.jec.senate.gov/public/index.cfm/hearingscalendar?ID=D47F4892-7AAF-47CA-AC0E-6ECFB04A5B96

240

140

“Dynamism in Retreat: Consequences for Regions, Markets, and Workers,”
Economic Innovation Group, pp. 29, 30, February 2017. http://eig.org/wpcontent/uploads/2017/02/Dynamism-in-Retreat.pdf
141
“Economic Growth and Tax Policy,” Joint Committee on Taxation, p. 2-3,
February 20, 2015.
https://www.jct.gov/publications.html?func=startdown&id=4736
142
Mankiw, Greg, “How are wages and productivity related?” Greg Mankiw’s
Blog, August 29, 2006.

http://gregmankiw.blogspot.com/2006/08/how-are-wages-andproductivity-related.html
143

Hodge, Scott A., “The Compliance Costs of IRS Regulations,” Tax
Foundation, June 2016.
https://files.taxfoundation.org/legacy/docs/TaxFoundation_FF512.pdf
144
JER 2017, Chapter 8.
145
“Distributional Effects of the Conference Agreement for H.R. 1, the ‘Tax
Cuts and Jobs Act’,” Joint Committee on Taxation, December 18, 2017.
https://www.jct.gov/publications.html?func=startdown&id=5054
146
“Updated 2018 Withholding Tables Now Available; Taxpayers Could See
Paycheck Changes by February,” Internal Revenue Service, January 11, 2018.
https://www.irs.gov/newsroom/updated-2018-withholding-tables-nowavailable-taxpayers-could-see-paycheck-changes-by-february
147
“Evaluating the Anticipated Effects of Changes to the Mortgage Interest
Deduction,” Council of Economic Advisers, November 2017.
https://www.whitehouse.gov/sites/whitehouse.gov/files/images/Effects%20of
%20Changes%20to%20the%20Mortgage%20Interest%20Deduction%20FIN
AL.pdf
148
“Macroeconomic Analysis of the Conference Agreement for H.R. 1, the
‘Tax Cuts and Jobs Act’,” Joint Committee on Taxation, p. 5, December 22,
2017. https://www.jct.gov/publications.html?func=startdown&id=5055
149
Giertz, Seth H. et al., “The Elasticity of Taxable Income with Respect to
Marginal Tax Rates: A Critical Review,” Journal of Economic Literature,
50:1, 3-50, 2012. https://eml.berkeley.edu/~saez/saez-slemrodgiertzJEL12.pdf
150
Barro, Robert J., “Tax Reform Will Pay Growth Dividends; the effects will
be even larger thanks to last-minute cuts in marginal individual rates,” Wall
Street Journal, January, 4, 2018. https://www.wsj.com/articles/tax-reformwill-pay-growth-dividends-1515110902 . In joint research with Charles
Redlick published in the Quarterly Journal of Economics, Robert Barro
showed that higher marginal income tax rates have significantly negative
effects on GDP. Barro derives the TCJA’s growth effect using estimates from
this study and the Tax Policy Center’s estimate that marginal income tax rates
will fall a weighted average of 3.2 percentage points through 2019.
151
ERP 2018, p. 70.
152
ERP 2018, pp. 56-57.

241

153

“Macroeconomic Analysis of the Conference Agreement for H.R. 1, the
‘Tax Cuts and Jobs Act’,” Joint Committee on Taxation, p. 6, December 22,
2017. https://www.jct.gov/publications.html?func=startdown&id=5055
154
“Distributional Effects of the Conference Agreement for H.R. 1, the ‘Tax
Cuts and Jobs Act’,” Joint Committee on Taxation, December 18, 2017.
https://www.jct.gov/publications.html?func=startdown&id=5054
155
“Table 2.7 All Returns: Affordable Care Act Items, by Size of Adjusted
Gross Income, Tax Year 2014,” Internal Revenue Service, Publication 1304,
August 2016. https://www.irs.gov/pub/irs-soi/14in27aca.xls
156
“Income Tax Returns with Exemptions and Itemized Deductions,” Internal
Revenue Service, 2015. https://www.irs.gov/statistics/soi-tax-stats-individualstatistical-tables-by-size-of-adjusted-gross-income#_grp2
157
ERP 2018, Figure 1-10, p. 54.
158
“SOI Tax Stats – Individual Income Tax Returns Publication 1304,”
Internal Revenue Service, January 2018. https://www.irs.gov/statistics/soi-taxstats-individual-income-tax-returns-publication-1304-complete-report
159
“Selected Issues Relating to Choice of Business Entity,” Testimony before
the Senate Finance Committee, Joint Committee on Taxation, p. 5, August 1,
2012. https://www.jct.gov/publications.html?func=startdown&id=4478
160
“Tax Revenues to More Than Double by 2023, While Top Tax Rates Hit
Highest Level Since 1986,” House of Representatives Ways and Means
Committee, February 13, 2013. http://waysandmeans.house.gov/tax-revenuesto-more-than-double-by-2023-while-top-tax-rates-hit-highest-level-since1986/
161
Public Law 99-514.
162
26 U.S.C. 179.
163
“How To Depreciate Property,” Internal Revenue Service, Publication 946,
February 28, 2018. https://www.irs.gov/pub/irs-pdf/p946.pdf
164
26 U.S.C. 179.
165
“Learn about Productivity,” Bureau of Labor Statistics.
https://www.bls.gov/lpc/
166
“Options for Reforming America’s Tax Code,” Tax Foundation, June 6,
2016. https://taxfoundation.org/options-reforming-americas-tax-code/
167
“Table II.1 Corporate income tax rate,” OECD,
https://stats.oecd.org/Index.aspx?DataSetCode=TABLE_II1
168
The graph includes average combined corporate income tax rates for
OECD member nations (Australia, Canada, France, Germany, Italy,
Netherlands, Norway, Sweden, Switzerland, and the United Kingdom). Except
for the United States, these were the only countries with OECD tax data going
back to 1981. In the same graph, reinvested earnings on U.S. direct investment
abroad are shown as a percent of income receipts on assets. The data source is
BEA's Table 1.6 Sources and Uses of Private Enterprise Income.
169
“American Jobs Creation Act of 2004,” Public Law 108-357, October 22,
2004. https://www.congress.gov/108/plaws/publ357/PLAW-108publ357.pdf

242

170

Congressional Budget Office (CBO), “An Analysis of Corporate
Inversions,” p. 4, September 2017. https://www.cbo.gov/system/files/115thcongress-2017-2018/reports/53093-inversions.pdf
171
CBO, p. 14.
172
CBO, p. 15.
173
“Macroeconomic Analysis of the Conference Agreement for H.R. 1, the
‘Tax Cuts and Jobs Act’,” Joint Committee on Taxation, pp. 6-7, December
22, 2017. https://www.jct.gov/publications.html?func=startdown&id=5055
174
“List of Tax Reform Good News,” Americans for Tax Reform.
https://www.atr.org/list
175
ERP 2018, Box 1-1, p. 50.
176
“Modeling the Distribution of Taxes on Business Income,” Joint
Committee on Taxation, October 16, 2013.
https://www.jct.gov/publications.html?func=startdown&id=4528
177
JCT cites Harry Grubert and John Mutti, “The Taxation of Capital Income
in an Open Economy: The Importance of Resident-Nonresident Tax
Treatment,” Journal of Public Economics 27, August 1985, pp. 291-309 and
Julie Anne Cronin et al., “U.S. Treasury Distributional Analysis
Methodology,” Office of Tax Analysis Working Paper, 2012.
178
ERP 2018, p. 64.
179
ERP 2018, p. 49.
180
Rosenthal, Steven M., “Integrating the Corporate and Individual Tax
Systems: The Dividends Paid Deduction Considered,” Urban-Brookings Tax
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ERP 2018, pp. 38-41.
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Solomon, Eric, “Alternative Minimum Tax,” Testimony before the House
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“Tax Cuts and Jobs Act, Conference Report to Accompany H.R. 1,” House
of Representatives, pp. 379-80, December 15, 2017.
https://www.congress.gov/115/crpt/hrpt466/CRPT-115hrpt466.pdf

243

189

Hodge, Scott A., “The Four Pillars of Corporate Tax Reform,” Testimony
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193
“Table 7.1 – Federal Debt at the End of Year: 1940 – 2023,” Office of
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“An Update to the Budget and Economic Outlook: 2017 to 2027,”
Congressional Budget Office, June 2017.
https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/52801june2017outlook.pdf
195
“An Update to the Budget and Economic Outlook: 2017 to 2027,”
Congressional Budget Office, Table 1, p. 13, June 2017.
https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/52801june2017outlook.pdf
196
Bishop-Henchman, Joseph, “Details of the Fiscal Cliff Tax Deal,” Tax
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ERP 2018, p. 55.
198
Romer, Christina D. and David H. Romer, “The Macroeconomic Effects of
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“An Update to the Budget and Economic Outlook: 2017 to 2027,”
Congressional Budget Office, p. 13, June 2017,
https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/52801june2017outlook.pdf and “Estimated Budget Effects of the Conference
Agreement for H.R. 1, the ‘Tax Cuts and Jobs Act’,” Joint Committee on
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https://www.jct.gov/publications.html?func=startdown&id=5053
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‘Tax Cuts and Jobs Act’,” Joint Committee on Taxation, December 22, 2017.
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201
ERP 2018, p. 68.
202
“Macron turns to reforming France after electoral earthquake,” Financial
Times, June 19, 2017. https://www.ft.com/content/391d17de-5273-11e7-bfb8997009366969
203
Hayek, F.A., “The Road to Serfdom,” The University of Chicago Press
edited by Bruce Caldwell, p.113, 2007.

244

204

Greenberg, Scott, “Federal Tax Laws and Regulations are Now Over 10
Million Words Long,” Tax Foundation, October 8, 2015.
https://taxfoundation.org/federal-tax-laws-and-regulations-are-now-over-10million-words-long/
205
McLaughlin, Patrick, “Regulatory Data on Trump’s First Year,” Mercatus
Center at George Mason University, January 30, 2018;
https://www.mercatus.org/publications/regulatory-data-trump-first-year ; and
“The Impossibility of Comprehending, or Even Reading, All Federal
Regulations,” The Mercatus Center, George Mason University, October 23,
2017;
https://www.mercatus.org/publications/impossibility-comprehending-or-evenreading-all-federal-regulations. For alternatives to prescriptive social
regulation, see, for example, Free Market Environmentalism (Revised
Edition), by Terry L. Anderson and Donald R. Leal, Palgrave, 2001.
206
The Obama Administration’s last report remained a draft, “2016 Draft
Report to Congress on the Benefits and Costs of Federal Regulations and
Agency Compliance with the Unfunded Mandates Reform Act,” Office of
Management and Budget, Office of Information and Regulatory Affairs,
December 23, 2016.
https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/assets/legislative
_reports/draft_2016_cost_benefit_report_12_14_2016_2.pdf
207
The Trump OIRA is merely listing the costs calculated by executive
agencies under the Obama Administration without endorsing them.
208
Most costs of regulation are tangible and precede the benefits. Social
regulation (environmental, workplace, consumer) predominates over
economic regulation (price and output) and is credited with benefits that in
large part are not tangible and tradable (although economists assign dollar
values to them for cost-benefit analysis). Proponents of social regulation may
characterize regulatory costs as “investments,” borrowing that term from the
private economy, but financial investments face budget constraints and when
they generate a positive return, it is convertible to tradable goods and services.
Private investments for particular purposes can outpace investment recovery
and returns only for a limited time and to a limited extent. Benefits must
materialize to justify continued investments, and investments are put off when
market conditions are unfavorable, unlike federal regulation.
209
“Macroeconomic Impacts of Federal Regulation of the Manufacturing
Sector,” NERA Economic Consulting, 1255 23rd Street, NW, Washington, DC
20037, August 21, 2012; Commissioned by Manufacturers Alliance for
Productivity and Innovation.
210
See the REINS Act, H.R. 26 (115th Congress).
https://www.congress.gov/bill/115th-congress/house-bill/26
211
President Ronald Reagan instituted cost-benefit analysis by executive order
to executive agencies and since then every Administration has continued the
practice but independent Federal agencies are not subject to the requirement.
The determinations resulting from cost-benefit analysis also are not legally
binding.

245

212

See Vice Chairman Senator Lee’s proposed Regulatory Budget Act.
“Obama Asks EPA to Pull Ozone Rule,” The Wall Street Journal,
September 3, 2011.
214
“Digest of Education Statistics, 2015,” National Center for Education
Statistics, p.5, December 2016. https://nces.ed.gov/pubs2016/2016014.pdf
215
“Digest of Education Statistics, 2015,” National Center for Education
Statistics, p.8, December 2016. https://nces.ed.gov/pubs2016/2016014.pdf
216
“Education Expenditure by Country,” National Center for Education
Statistics, Published May 2017, Web. January 2018.
https://nces.ed.gov/programs/coe/indicator_cmd.asp
217
“Digest of Education Statistics, 2016,” National Center for Education
Statistics, Web. January 2018.
https://nces.ed.gov/programs/coe/indicator_cmd.asp
218
OECD (2016), PISA 2015 Results (Volume I): Excellence and Equity in
Education, PISA OECD Publishing, Paris, p. 44, December 6, 2016.
http://dx.doi.org/10.1787/9789264266490-en
219
“Job Openings: Total Nonfarm,” Federal Reserve Bank of St. Louis FRED,
Web. January 2018. https://fred.stlouisfed.org/series/JTSJOL
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“Overview of Public and Private School Choice Option,” Congressional
Research Service, August 23, 2017. http://www.crs.gov/reports/pdf/IF10713
221
“Public High School Graduation Rates,” National Center for Educational
Statistics, Published April 2017, Web January 2018.
https://nces.ed.gov/programs/coe/indicator_coi.asp
222
“The Fiscal Effect of Private-School Vouchers,” Joint Economic
Committee, December 5, 2017.
https://www.jec.senate.gov/public/index.cfm/republicans/2017/12/the-fiscaleffect-of-private-school-vouchers
223
“Estimated Charter Public School Enrollment, 2016-17,” National Alliance
For Public Charter Schools, p. 2, February 1, 2017.
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224
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Table 216.20. https://nces.ed.gov/programs/digest/2017menu_tables.asp
225
“50 State Comparison,” Education Commission of the United States,
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“The ABCs of School Choice: The comprehensive guide to every private
school choice program in America,” EdChoice, p. 7.
https://www.edchoice.org/what-we-do/research/
227
“A Win-Win Solution: The Empirical Evidence on School Choice,”
EdChoice, May 2016. https://www.edchoice.org/research/win-win-solution/
228
EdChoice savings estimate through 2015, as of August 2017. Savings
estimates are ongoing and a savings report through 2015 with final numbers is
expected to be issued early in 2018.
229
“Germany Offers a Promising Jobs Model,” Wall Street Journal,
September 8, 2016. https://www.wsj.com/articles/look-to-germany-for-awinning-jobs-model-1473375942
213

246

230

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Bureau of Labor Statistics, web February 16, 2018.
https://www.bls.gov/news.release/hsgec.nr0.htm
231
Daniels, Mitchell E., “Financing Higher Education: Exploring Current
Challenges and Potential Alternatives,” Testimony before the Joint Economic
Committee, September 30, 2015.
http://www.jec.senate.gov/public/index.cfm/hearingscalendar?ID=7C64D2C3-1A88-423F-86E0-D524721C4AE2
232
JER 2017, pp. 110-111.
233
“The Mounting Student-Loan Shortfall,” Wall Street Journal, February 5,
2018.
234
JER 2017, p. 112; and “Credit Supply and the Rise in College Tuition:
Evidence from the Expansion in Federal Student Aid Programs,” Federal
Reserve Bank of New York Staff Report, Staff Report No. 733, July 2015
Revised October 2016.
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr733.
pdf
235
“The Mounting Student-Loan Shortfall,” Wall Street Journal, February 5,
2018.
236
Harrison, David T., “A Record Six Million U.S. Job Vacancies: Reasons
and Remedies,” Testimony before the Joint Economic Committee, July 12,
2017. https://www.jec.senate.gov/public/index.cfm/2017/7/a-record-sixmillion-u-s-job-vacancies-reasons-and-remedies
237
McLemore, Scot, “A Record Six Million U.S. Job Vacancies: Reasons and
Remedies,” Testimony before the Joint Economic Committee, July 12, 2017.
https://www.jec.senate.gov/public/index.cfm/2017/7/a-record-six-million-u-sjob-vacancies-reasons-and-remedies
238
Furchtgott-Roth, Diana, “A Record Six Million U.S. Job Vacancies:
Reasons and Remedies,” Testimony before the Joint Economic Committee,
July 12, 2017. https://www.jec.senate.gov/public/index.cfm/2017/7/a-recordsix-million-u-s-job-vacancies-reasons-and-remedies
239
“With a Worker Shortage, It’s Time to Develop America’s Workforce,”
Speaker Ryan Press Office, February 22, 2018.
https://www.speaker.gov/general/worker-shortage-it-s-time-develop-americas-workforce
240
“Table 1-28: Condition of U.S. Highway Bridges,” United States
Department of Transportation, Bureau of Transportation Statistics.
https://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/national_tr
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241
O’Toole, Randal, “The Truth About Infrastructure,” U.S. News, March 24,
2015. https://www.usnews.com/opinion/economicintelligence/2015/03/24/dont-raise-gas-tax-to-fix-supposed-infrastructurecrisis
242
This was not always the case. In the early 1930s, about half the nation’s
1,100 airports were private. See, Poole, Robert and Chris Edwards,

247

“Privatizing U.S. Airports,” Tax and Budget Bulletin, Cato Institute, No. 76,
November 2016.
243
A closely related consideration is the relation of marginal cost to marginal
benefit of additional users. On many roads the cost of another car travelling on
them is low relative to the benefit the user and the surrounding communities
derive. The tolls drivers are willing to pay will reflect wider benefits, but if the
cost of collecting an individual toll is significant relative to the marginal cost
of using a road and higher than the cost of tax collection, then the amount of
the toll may dissuade a significant number of drivers who could derive a net
benefit from using the road. The other side of this problem is the difficulty of
excluding people who do not pay for the benefits they derive and that the
marginal cost of their benefits may be small or zero. This is what technically
makes something a “public good.”
244
There was a time when many countries had nationalized postal,
telecommunications, and TV/radio broadcast services in one government
entity (so-called PTTs).
245
Leaving aside for the moment that the debt has to monetized by the central
bank for inflation to rise.
246
Howard, Phillip K., “The Rule of Nobody: Saving America from Dead
Laws and Broken Government,” Norton, 2014. The author cites many
examples of excessively prescriptive rules that prevent the exercise of good
judgment based on sound principles. Schuck, Peter H., “Why Government
Fails So Often,” Princeton University Press, 2014, is another study in
unintended consequences.
247
See “California’s Bullet Train to Whenever,” Review & Outlook, The Wall
Street Journal, May 22, 2016.
248
Lipson, Rachel and Lawrence H. Summers, “A Lesson on Infrastructure
from the Anderson Bridge Fiasco,” The Boston Globe, May 25, 2016.
Summers also points out that in 55 BC it took Julius Caesar 10 days to build a
bridge across the Rhine River that was six times longer.
249
U.S. International Trade Commission, Digital Trade in the U.S. and Global
Economies, Part 2, Publication No: 4485, Investigation No: 332-540, p.29,
August 2014, The definition of digital commerce has been evolving. USITC
prepared two reports (Parts 1 and 2) at the request of the U.S. Senate
Committee on Finance. Part 1, published in 2013, used a narrower definition
that only included products and services delivered over digital networks like
an e-book delivered to a tablet, but excluded goods like a physical book
ordered online via the same website (p. 13).
250
“The Dynamic Gains From Free Digital Trade,” Joint Economic
Committee, September 12, 2017.
https://www.jec.senate.gov/public/index.cfm/hearingscalendar?ID=EC4C2DC7-2CD9-4175-989C-B46E6DA9B74E
251
“Digitally Deliverable Services Remain an Important Component of U.S.
Trade,” United States Department of Commerce, Economics & Statistics
Administration, May 28, 2015. http://www.esa.doc.gov/economicbriefings/digitally-deliverable-services-remain-important-component-us-trade

248

252

Bughin, Jacques et al., “Digital globalization: The new era of global
flows,” McKinsey Global Institute, pp. 41, 57, February, 2016.
https://www.mckinsey.com/business-functions/digital-mckinsey/ourinsights/digital-globalization-the-new-era-of-global-flows
253
Ibid, p. 13-14 for summary statistics.
254
McKinsey, p. 10.
255
McKinsey, p. 23.
256
McKinsey, p. 30.
257
“The Economic Outlook with CEA Chairman Kevin Hassett,” Joint
Economic Committee, October 25, 2017.
https://www.jec.senate.gov/public/index.cfm/hearingscalendar?ID=E29B5AC2-01AF-4C3D-B774-DCCB1A4B5D2C
258
Application of Communications Act Title II regulation by the Obama
FCC’s threatened to end that tradition. The current FCC chairman does not
intend to regulate the internet more stringently.
259
“The WTO Work Programme on electronic commerce,” White & Case
LLP, March 13, 2015.
https://www.lexology.com/library/detail.aspx?g=a1770783-f8a5-4128-802060368b794044
260
For the full list, see, United States Trade Representative, “Fact Sheet: Key
Barriers to Digital Trade”
261
Heather, Sean, “The Dynamic Gains from Free Digital Trade for the U.S.
Economy,” Testimony before the Joint Economic Committee, p.3, September
12, 2017. https://www.jec.senate.gov/public/_cache/files/6eefe32e-6e2d-477cbc44-c26bf4756df8/testimony-digital-trade-joint-economic-committee-seanheather-09082017.pdf
262
The United States, the EU, and Switzerland are parties to Privacy Shield
programs that provide companies with a mechanism to comply with data
protection requirements when transferring personal data to the United States
in support of transatlantic commerce. The Privacy Shield program is
administered by the International Trade Administration (ITA) of the
Commerce Department. To join, a U.S.-based organization must self-certify to
the Commerce Department and publicly commit that it will adhere to the
Framework’s requirements. Joining the Privacy Shield is voluntary, but the
commitment to comply is enforceable under U.S. law.
263
The high end of the ranges is more realistic because that assumes the U.S.
labor supply increases when wages rise whereas the low end does not. USITC,
Digital Trade in the U.S. and Global Economies, Part 2, p. 19, August 2014.
264
Spire Research and Consulting conducted the study and estimated the
economic impact of full liberalization of cross-border ICT services and rules
globally. It examines a group of eight globally important markets, including
Brazil, the European Union, Indonesia, Japan, Korea, Nigeria, Turkey, and
Vietnam, February 22, 2017.
265
“Korean-United States Free Trade Agreement (KORUS),” Office of the
United States Trade Representative. https://ustr.gov/trade-agreements/freetrade-agreements/korus-fta/final-text

249

266

H.R. 2146, 114th Congress.
H.R. 1890, 114th Congress.
268
See summary of TPP digital trade provisions in Appendix, from USTR
“TPP: Promoting Digital Trade.”
269
Paulsen, Erik, “Paulsen, DelBene Launch Bipartisan Digital Trade
Caucus,” Congressman Erik Paulsen, May 1, 2017.
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270
Dean, David et al., “Greasing the Wheels of the Internet Economy,” The
Boston Consulting Group, January 2014.
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271
Dean, David et al., “The Internet Economy in the G-20: The $4.2 Trillion
Growth Opportunity,” The Boston Consulting Group, p. 50, March 2012.
https://www.bcg.com/publications/2012/technology-digital-technologyplanning-internet-economy-g20-4-2-trillion-opportunity.aspx
272
Bughin, Jacques et al., “Internet Matters: The Net’s sweeping impact on
growth, jobs, and prosperity,” McKinsey Global Institute, May 2011.
https://www.mckinsey.com/industries/high-tech/our-insights/internet-matters
273
“Enabling Traders to Enter and Grow on the Global Stage,” eBay.
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274
Patel Goyal, Kruti, “International Update”, Etsy News, October 15, 2012.
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275
“Blockchain’s Medical Potential,” Joint Economic Committee
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276
Everyday objects enabled to send and receive data and interconnected via
the internet.
277
Evans, Dave, “The Internet of Things: How the Next Evolution of the
Internet is Changing
Everything,” Cisco, April 2011.
https://www.cisco.com/c/dam/en_us/about/ac79/docs/innov/IoT_IBSG_0411F
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278
567 U.S. 519, 2012.
279
“Key Features of the Affordable Care Act By Year,” Health and Human
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280
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281
Crawford, Jan, “Policy Cancellations, Higher Premiums Add to Frustration
Over Obamacare,” CBS News, October 30, 2013.
http://www.cbsnews.com/news/policy-cancellations-higher-premiums-add-tofrustration-over-obamacare/
267

250

See Also: Myers, Lisa and Hannah Rappleye, “Obama Administration Knew
Millions Could Not Keep Their Health Insurance,” NBC News, October 29,
2013. http://www.nbcnews.com/news/other/obama-administration-knewmillions-could-not-keep-their-health-insurance-f8C11485678
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Drobnic Holan, Angie, “Lie of the Year: ‘If You Like Your Health Care
Plan, You Can Keep It,’” Politifact, December 12, 2013.
http://www.politifact.com/truth-o-meter/article/2013/dec/12/lie-year-if-youlike-your-health-care-plan-keep-it/
283
Garfield, Rachel and Anthony Damico, “The Coverage Gap: Uninsured
Poor Adults in States that Do Not Expand Medicaid,” Kaiser Family
Foundation, October 19, 2016. http://kff.org/uninsured/issue-brief/thecoverage-gap-uninsured-poor-adults-in-states-that-do-not-expand-medicaid/
284
“If you don’t have health insurance: How much you’ll pay,” HHS,
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285
“Individual Market Premium Changes: 2013 – 2017,” HHS, May 23, 2017.
https://aspe.hhs.gov/system/files/pdf/256751/IndividualMarketPremiumChang
es.pdf.
286
“Health Plan Choice and Premiums in the 2018 Federal Health Insurance
Exchange,” HHS, October 2017.
https://aspe.hhs.gov/system/files/pdf/258456/Landscape_Master2018_1.pdf.
287
Call, Adrienne et al., “Changes in Consumer Cost-Sharing for Health Plans
Sold in the ACA's Insurance Marketplaces, 2015 to 2016,” The
Commonwealth Fund, May 2016.
http://www.commonwealthfund.org/publications/issue-briefs/2016/may/costsharing-increases
288
“Health Plan Choice and Premiums in the 2018 Federal Health Insurance
Exchange,” HHS, October 2017.
https://aspe.hhs.gov/system/files/pdf/258456/Landscape_Master2018_1.pdf
289
Claxton, Gary et al., “The Numbers Behind “Young Invincibles” and the
Affordable Care Act,” Kaiser Family Foundation (KFF), December 17, 2013.
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290
Foster, Richard S., “Estimated Financial Effects of the ‘Patient Protection
and Affordable Care Act,’ as Amended,” CMS, April 22, 2010.
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291
“CBO’s Record of Projecting Subsidies for Health Insurance Under the
Affordable Care Act: 2014 to 2016,” Congressional Budget Office, December
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“Final Weekly Enrollment Snapshot For 2018 Open Enrollment Period,”
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293
CMS data found at https://www.cms.gov/Research-Statistics-Data-andSystems/Statistics-Trends-andReports/NationalHealthExpendData/NationalHealthAccountsProjected.html

251

294

Sawyer, Bradley and Cynthia Cox, “How does health spending in the U.S.
compare to other countries?” Peterson-Kasier Health System Tracker,
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295
Baicker, Katherine and Jonathan S. Skinner, “Health Care Spending
Growth and the Future of U.S. Tax Rates,” January 1, 2012.
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296
“No family making less than $250,000 will see ‘any form of tax increase’,”
Politifact, https://goo.gl/W0Wqo5
297
“CBO/JCT Confirm that Obamacare is a $1 Trillion Tax Hike,” House of
Representatives Ways and Means Committee, July 25, 2012.
https://waysandmeans.house.gov/cbojct-confirm-that-obamacare-is-a-1trillion-tax-hike/
298
“Hearing to Consider the Anticipated Nomination of [Mnuchin] to be
Secretary of the Treasury,” Senate Finance Committee, January 19, 2017.
https://goo.gl/QXRcgC
299
Zycher, Benjamin, “ObamaCare's Tax on Medical Devices: Cuts R&D by
$2 Billion a Year,” Pacific Research Institute, May 2012.
300
Hoghaug, Thomas A., “Small Business, Big Taxes: Are Taxes Holding
Back Small Businees Growth?” Testimony before the Joint Economic
Committee, April 15, 2015.
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301
For example, see Berger, Judson, “Company’s decision to nix expansion
over ObamaCare tax renews pressure on Congress,” Fox News, July 30, 2012.
http://www.foxnews.com/politics/2012/07/30/company-decision-to-nixexpansion-over-obamacare-tax-renews-pressurehttps://www.congress.gov/bill/115th-congress/housebill/184?q=%7B%22search%22%3A%22medical+device%22%7D&r=4on.ht
ml
302
Annual Survey of Manufacturers, Statistics for Industry Groups and
Industries, U.S. Census Bureau, Economics and Statistics Administration,
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303
Book, Robert, “Employment Effects Of the Medical Device Tax,”
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https://www.americanactionforum.org/research/employment-effects-medicaldevice-tax/
304
“Medical Device Tax,” Advanced Medical Technology Association.
https://www.advamed.org/RepealDeviceTax
305
See H.R. 184, 115th Congress. https://www.congress.gov/bill/115thcongress/housebill/184?q=%7B%22search%22%3A%22medical+device%22%7D&r=4

252

306

For discussion of medical technology export opportunities, see “2016 Top
Markets Report – Medical Devices,” International Trade Administration,
Department of Commerce, May 2016.
https://www.trade.gov/topmarkets/pdf/Medical_Devices_Top_Markets_Repor
t.pdf
307
Hosek, Susan D. et al., “The Elasticity of Demand for Health Care,” Rand
Health.
http://www.rand.org/content/dam/rand/pubs/monograph_reports/2005/MR135
5.pdf
308
Greenberg, Scott, “Five Years Later: ACA’s Branded Prescription Drug
Fee May Have Contributed to Rising Drug Prices,” Tax Foundation, June 17,
2015. https://taxfoundation.org/five-years-later-aca-s-branded-prescriptiondrug-fee-may-have-contributed-rising-drug-prices/
309
“Retiree Prescription Drug Subsidy: Background on Subsidy Amount and
Taxation,” American Benefits Council, January 10, 2010.
https://www.americanbenefitscouncil.org/pub/?id=e60986e7-903b-9917-e8dc6de90861b0e4
310
Miller, Stephen, “Health Reform Forces Taxing Decision on Retiree Drug
Plans,” Society for Human Resource Management, March 26, 2010.
https://www.shrm.org/hr-today/news/hr-news/pages/taxingretireedrugs.aspx
311
Miller, Thomas P., “Examining the Effectiveness of the Individual
Mandate under the Affordable Care Act,” American Enterprise Institute,
January 24, 2017. https://waysandmeans.house.gov/wpcontent/uploads/2017/01/20170124-OS-Testimony-Miller.pdf
312
Miller, Tom, “A hidden tax in Obamacare,” Los Angeles Times, May 31,
2013. http://articles.latimes.com/2013/may/31/opinion/la-oe-millerobamacare-seniors-tax-20130531
313
Walsh, Brendan, “How Obamacare Raises Healthcare Costs for Special
Needs Children,” Americans for Tax Reform, September 13, 2013.
https://www.atr.org/obamacare-raises-healthcare-costs-special-needs-a7858
314
“IRS Issues Guidance Explaining 2011 Changes to Flexible Spending
Arrangements,” Internal Revenue Service, September 3, 2010.
https://www.irs.gov/newsroom/irs-issues-guidance-explaining-2011-changesto-flexible-spending-arrangements
315
See line item for “ACA taxes” on sample premium bill at
https://uhahealth.com/uploads/forms/sample_Premium-Billing.pdf
316
See JCT letter to Senator Kyl posted at
http://www.stopthehit.com/sites/default/files/files/JCT%20Report.pdf
317
Public Law 115-120; summary found at
https://www.congress.gov/bill/115th-congress/housebill/195?q=%7B%22search%22%3A%5B%22Extension+of+Continuing+App
ropriations+Act+of+2018%22%5D%7D&r=3
318
“Employer Shared Responsibility Provisions,” Internal Revenue Service.
https://www.irs.gov/affordable-care-act/employers/employer-sharedresponsibility-provisions

253

319

For example, see Graham, Jed, “ObamaCare Employer Mandate: A List Of
Cuts To Work Hours, Jobs,” Investor’s Business Daily, September 5, 2014.
http://www.investors.com/obamacare-employer-mandate-a-list-of-cuts-towork-hours-jobs/
320
“Employer Mandate,” U.S. Chamber of Commerce.
https://www.uschamber.com/health-reform/employer-mandate.
321
For example, see Sergio, Joseph P., “Examining the Employment Effects
of the Affordable Care Act,” Testimony before the Joint Economic
Committee, June 3, 2015.
https://www.jec.senate.gov/public/_cache/files/53079a8d-acd2-4a8a-be539f919e7e81b0/sergio-testimony.pdf
322
Mulligan, Casey B., “How Many Jobs Does ObamaCare Kill?” Wall Street
Journal, July 5, 2017. https://www.wsj.com/articles/how-many-jobs-doesobamacare-kill-1499296604
323
“Cadillac Tax Fact Sheet,” Cigna.
https://www.cigna.com/assets/docs/about-cigna/informed-on-reform/882320a-cadillac-tax-sheet.pdf
324
Lemieux, Jeff and Chad Moutray, “About That Cadillac Tax,” Health
Affairs, April 25, 2016. http://healthaffairs.org/blog/2016/04/25/about-thatcadillac-tax/
325
Ibid.
326
“Present Law and Background Regarding the Federal Income Taxation of
Small Business,” Public Hearing before the Tax Policy Subcommittee of the
House of Representatives Committee on Ways and Means, July 13, 2017.
https://www.jct.gov/publications.html?func=startdown&id=5006
327
DeBacker, Jason et al., “Methodology to Identify Small Businesses and
Their Owners,” Office of Tax Analysis, Department of the Treasury, August
2011. https://www.treasury.gov/resource-center/tax-policy/taxanalysis/Documents/TP-4.pdf
328
Harris, Edward and Shannon Mok, “How CBO Estimates the Effects of the
Affordable Care Act on the Labor Market,” Congressional Budget Office, p.
14, December 2015. https://www.cbo.gov/sites/default/files/114th-congress2015-2016/workingpaper/51065-acalabormarketeffectswp.pdf
329
Memorandum from the Joint Committee on Taxation, May 4, 2010.
https://www.jec.senate.gov/public/_cache/files/01be31b4-f000-4c37-b26b5286b9782d25/revenue-estimate-050410.pdf
330
“Factors Affecting the Labor Force Participation of People Ages 25 to 54,”
Congressional Budget Office, February 7, 2018.
https://www.cbo.gov/publication/53452
331
“Factors Affecting the Labor Force Participation of People Ages 25 to 54,”
Congressional Budget Office, p. 18, February 7, 2018.
https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/53452lfpr.pdf
332
“Effective Marginal Tax Rates for Low- and Moderate-Income Workers in
2016,” Congressional Budget Office, p. 8, November 19, 2015.
https://www.cbo.gov/publication/50923

254

333

Harris, Edward and Shannon Mok, “How CBO Estimates the Effects of the
Affordable Care Act on the Labor Market,” Congressional Budget Office, p.
14, December 2015. https://www.cbo.gov/sites/default/files/114th-congress2015-2016/workingpaper/51065-acalabormarketeffectswp.pdf
334
Mulligan, Casey B., “Examining the Employment Effects of the Affordable
Care Act,” Testimony before the Joint Economic Committee, p. 9, June 3,
2015. https://www.jec.senate.gov/public/_cache/files/d0d17590-6762-4af0b508-95c0ed6b0a82/mulligan-testimony.pdf
335
Mulligan testimony, p. 11.
336
Mulligan testimony, p. 16.
337
“CBO’s Record of Projecting Subsidies for Health Insurance Under the
Affordable Care Act: 2014 to 2016,” Congressional Budget Office, December
7, 2017. https://www.cbo.gov/publication/53094
338
ERP 2018, p. 280.
339
ERP 2018, p. 281.
340
Ibid.
341
ERP 2018, pp. 292-299.
342
ERP 2018, p. 321.
343
“Drug Overdose Death Data,” Center for Disease Control, Web February 8,
2018. https://www.cdc.gov/drugoverdose/data/statedeaths.html
344
“The Underestimated Cost of the Opioid Crisis,” The Council of Economic
Advisors, November 2017.
https://www.whitehouse.gov/sites/whitehouse.gov/files/images/The%20Under
estimated%20Cost%20of%20the%20Opioid%20Crisis.pdf
345
“Economic Aspects of the Opioid Crisis,” Joint Economic Committee, June
8, 2017. https://www.jec.senate.gov/public/index.cfm/republicans/2017/6/theopioid-crisis
346
“Economic Aspects of the Opioid Crisis,” Joint Economic Committee, June
8, 2017. https://www.jec.senate.gov/public/index.cfm/republicans/2017/6/theopioid-crisis
347
O’Connor, Sean, “Fentanyl: China’s Deadly Export to the United States,”
U.S.-China Economic and Security Review Commission, February 1, 2017.
https://www.uscc.gov/sites/default/files/Research/USCC%20Staff%20Report_
FentanylChina%E2%80%99s%20Deadly%20Export%20to%20the%20United%20Stat
es020117.pdf
348
“Counterfeit Prescription Pills Containing Fentanyls: A Global Threat,”
Drug Enforcement Agency, July 2016.
https://www.dea.gov/docs/Counterfeit%20Prescription%20Pills.pdf
349
“Prescription Drugs OxyContin Abuse and Diversion and Efforts to
Address the Problem,” United States General Accounting Office, December
2003. http://www.gao.gov/new.items/d04110.pdf
350
Gregory, Sean, “How Obamacare is Fueling America’s Opioid Epidemic,”
Time, April 13, 2016. http://time.com/4292290/how-obamacare-is-fuelingamericas-opioid-epidemic/

255

351

“Prescription Opioid Overdose Data,” Centers for Disease Control and
Prevention. https://www.cdc.gov/drugoverdose/data/overdose.html
352
“Prescription Opioids and Heroin,” National Institute on Drug Abuse.
https://www.drugabuse.gov/publications/research-reports/relationshipbetween-prescription-drug-heroin-abuse/prescription-opioid-use-risk-factorheroin-use
353
Krueger, Alan B., “Where have all the workers gone? An inquiry into the
decline of the U.S. labor force participation rate,” Brookings Paper on
Economic Activity, September 7, 2017. https://www.brookings.edu/bpeaarticles/where-have-all-the-workers-gone-an-inquiry-into-the-decline-of-theu-s-labor-force-participation-rate/
354
“Annual Surveillance Report of Drug-Related Risks and Outcomes United
States, 2017,” Center for Disease Control, August 31, 2017.
https://www.cdc.gov/drugoverdose/pdf/pubs/2017-cdc-drug-surveillancereport.pdf
355
“Characteristics of Initial Prescription Episodes and Likelihood of LongTerm Opioid Use — United States, 2006–2015,” Center for Disease Control,
March 17, 2017. https://www.cdc.gov/mmwr/volumes/66/wr/mm6610a1.htm
356
Case, Anne, and Angus Deaton, “Mortality and morbidity in the 21 st
century,” Brookings Papers on Economic Activity (2017).
https://www.brookings.edu/bpea-articles/mortality-and-morbidity-in-the-21stcentury/
357
“Prescription Drugs OxyContin Abuse and Diversion and Efforts to
Address the Problem,” United States General Accounting Office, pp. 2, 9, 10,
December 2003. http://www.gao.gov/new.items/d04110.pdf
358
Hollingsworth, Alex et al., “Macroeconomic Conditions and Opioid
Abuse,” National Bureau of Economic Research, No. w23192, February 2017
revised March 2017. http://www.nber.org/papers/w23192.pdf
359
“Prescription Drugs OxyContin Abuse and Diversion and Efforts to
Address the Problem,” United States General Accounting Office, pp. 20, 31,
December 2003. http://www.gao.gov/new.items/d04110.pdf
360
Dowell, Deborah et al., “Payments for Opioids Shifted Substantially to
Public and Private Insurers While Consumer Spending Declined, 1999-2012,”
Health Affairs 35 (5), pp. 824-831.
https://www.healthaffairs.org/doi/full/10.1377/hlthaff.2015.1103. Also see
Eberstadt, Nicholas, “Our Miserable 21st century,” Commentary, February
2017. https://www.commentarymagazine.com/articles/our-miserable-21stcentury/
361
Sam Quinones Dreamland chronicles the development of the black tar
heroin market from Mexico to Columbus, Ohio.
362
Hearing recording available at
https://www.jec.senate.gov/public/index.cfm/hearingscalendar?ID=352D21CA-477D-4582-BE82-734CB29A520A.
363
“2016 National Drug Threat Assessment Summary,” Drug Enforcement
Administration, p. 65, November 2016.
https://www.hsdl.org/?view&did=797265

256

364

“Economic Aspects of the Opioid Crisis,” Joint Economic Committee, June
8, 2017. https://www.jec.senate.gov/public/index.cfm/republicans/2017/6/theopioid-crisis
365
“2016 National Drug Threat Assessment Summary,” Drug Enforcement
Administration, p. 65, November 2016.
https://www.hsdl.org/?view&did=797265
366
“NFLIS Brief: Fentanyl, 2001-2015,” National Forensic Laboratory
Information System, March 2017.
https://www.deadiversion.usdoj.gov/nflis/2017fentanyl.pdf
367
“Drug Overdose Deaths in the United States, 1999-2016,” National Center
for Health Statistics, December 2017.
https://www.cdc.gov/nchs/data/databriefs/db294.pdf
368
“Hiring Hurdle: Finding Workers Who Can Pass a Drug Test,” New York
Times, May 17, 2016. https://www.nytimes.com/2016/05/18/business/hiringhurdle-finding-workers-who-can-pass-a-drug-test.html?_r=0
369
Lazear, Edward and James Spletzer, “Hiring, Churn, and the Business
Cycle,” The American Economic Review 102 (3) (2012), pp. 575-579.
370
Whalen, Jeanne, “The Children of the Opioid Crisis,” Wall Street Journal,
December 15, 2016. https://www.wsj.com/articles/the-children-of-the-opioidcrisis-1481816178
371
The National Data Archive on Child Abuse and Neglect.
https://www.ndacan.cornell.edu/datasets/datasets-list-afcars-foster-care.cfm
372
Barfield, Wanda D. et al., “Incidence of Neonatal Abstinence Syndrome —
28 States, 1999–2013,” Center for Disease Control, August 12, 2016.
https://www.cdc.gov/mmwr/volumes/65/wr/mm6531a2.htm
373
Young, Nancy, K., “Examining the Opioid Epidemic: Challenges and
Opportunities,” Testimony before the United States Senate Committee on
Finance, Tuesday, February 23, 2016.
https://www.finance.senate.gov/imo/media/doc/23feb2016Young.pdf
374
Barfield, Wanda D. et al., “Incidence of Neonatal Abstinence Syndrome —
28 States, 1999–2013,” Center for Disease Control, August 12, 2016.
https://www.cdc.gov/mmwr/volumes/65/wr/mm6531a2.htm
375
Murgia, Madhumita, “Mapping out the causes of suicide in teenagers and
children,” The Washington Post, Auguat 22, 2017.
https://www.washingtonpost.com/national/health-science/mapping-out-thecauses-of-suicide-in-teenagers-and-children/2017/08/22/c146cc6c-770e-11e78839-ec48ec4cae25_story.html?utm_term=.3a2f202f046e
376
Florence, C. S. et al., “The Economic Burden of Prescription Opioid
Overdose, Abuse, and Dependence in the United States, 2013,” National
Institute of Health U.S. National Library of Medicine, October, 2016.
https://www.ncbi.nlm.nih.gov/pubmed/27623005
377
“The Underestimated Cost of the Opioid Crisis,” The Council of Economic
Advisors, November 2017.
https://www.whitehouse.gov/sites/whitehouse.gov/files/images/The%20Under
estimated%20Cost%20of%20the%20Opioid%20Crisis.pdf; one methodology
for estimating the value of a statistical life is

257

https://www.bls.gov/opub/mlr/2013/article/using-data-from-the-census-offatal-occupational-injuries-to-estimate-the.htm.
378
Brill, Alex, “New state-level estimates of the economic burden of the
opioid epidemic,” American Enterprise Institute, January 16, 2018.
http://www.aei.org/publication/new-state-level-estimates-of-the-economicburden-of-the-opioid-epidemic/
379
For example, see Welker, Grant, “Boston Scientific receives FDA approval
for non-opioid painkiller,” Worcester Business Journal, January 11, 2018.
http://www.wbjournal.com/article/20180111/NEWS01/180119981/bostonscientific-receives-fda-approval-for-non-opioid-painkiller
380
Vimont, Celia, “New Drug Deactivation System Allows Patients to Safely
Dispose of Opioids at Home,” Partnership for Drug-Free Kids, July 13, 2016.
https://drugfree.org/learn/drug-and-alcohol-news/new-drug-deactivationsystem-allows-patients-safely-dispose-opioids-home/
381
ERP 2018, Box 6-2, pp. 296-297.
382
“A Record Six Million U.S. Job Vacancies: Reasons and Remedies,” Joint
Economic Committee, July 12, 2017.
https://www.jec.senate.gov/public/index.cfm/2017/7/a-record-six-million-u-sjob-vacancies-reasons-and-remedies .
383
“Economic Aspects of the Opioid Crisis,” Joint Economic Committee, June
8, 2017. https://www.jec.senate.gov/public/index.cfm/republicans/2017/6/theopioid-crisis
384
H.R. 1628, 115th Congress (engrossed version).
385
“Congressional Budget Office – Cost Estimate: American Health Care Act
of 2017,” Congressional Budget Office, p. 6, May 24, 2017.
https://www.cbo.gov/system/files/115th-congress-20172018/costestimate/hr1628aspassed.pdf
386
CBO analysis of AHCA, Table 1.
387
See individual provisions contained in Title I and Title II of AHCA.
388
See CMS letter to State Medicaid Directors at
https://www.medicaid.gov/federal-policy-guidance/downloads/smd18002.pdf.
389
“U.S. Department of Labor Announces Proposal to Expand Access to
Healthcare Through Small Business Health Plans,” Department of Labor,
January 4, 2018. https://www.dol.gov/newsroom/releases/ebsa/ebsa20180104
390
“Fact Sheet: Short-Term, Limited-Duration Insurance Proposed Rule,”
CMS, February 20, 2018.
https://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2018Fact-sheets-items/2018-02-20.html.
391
“Chronic Diseases: The Leading Causes of Death and Disability in the
United States,” Centers for Disease Control and Prevention.
https://www.cdc.gov/chronicdisease/overview/index.htm
392
Ibid.
393
“Multiple Chronic Conditions,” Centers for Disease Control and
Prevention. https://www.cdc.gov/chronicdisease/about/multiple-chronic.htm.
394
Paulsen, Erik, “Paulsen, Welch Introduce Legislation to Improve Chronic
Care, Lower Costs for Patients,” Congressman Erik Paulsen, March 24, 2016.

258

https://paulsen.house.gov/press-releases/paulsen-welch-introduce-legislationto-improve-chronic-care-lower-costs-for-patients/
395
ERP 2018, p. 290.
396
“Background: The American Medical Technology Industry and
International Competitiveness,” Advanced Medical Technology Association,
August 15, 2011.
https://www.advamed.org/sites/default/files/resource/32_10_2011_Final_Stud
y_CAgenda_Backgrounder.pdf.
397
ERP 2018, Box 6-4, p. 306.
398
Ibid.
399
“A Better Way: Our Vision for a Confident America, Health Care,”
Speaker Paul Ryan, pp 28-29, June 22, 2016.
https://abetterway.speaker.gov/_assets/pdf/ABetterWay-HealthCarePolicyPaper.pdf
400
ERP 2018, p. 314.
401
ERP 2018, p. 307.
402
Pomerleau, “Analysis of the 2016 House Republican Tax Plan.”
403
“Year in Search 2017,” Google,
https://trends.google.com/trends/yis/2017/GLOBAL/
404
Data from the Federal Reserve Economic Data (FRED), Federal Reserve
Bank of St. Louis: Dow Jones Industrial Average:
https://fred.stlouisfed.org/series/DJIA, S&P 500:
https://fred.stlouisfed.org/series/SP500
405
Data from CoinDesk: Bitcoin: https://www.coindesk.com/price/, Ethereum:
https://www.coindesk.com/ethereum-price/
406
http://www.businessinsider.com/where-are-the-kings-of-the-1990s-dotcom-bubble-bust-2016-12
407
Yahoo Finance Data, https://finance.yahoo.com/quote/AMZN?p=AMZN
408
Data from CoinMarket Cap: https://coinmarketcap.com/coins/
409
Catalini, Christian and Joshua Gans, “Some Simple Economics of the
Blockchain,” NBER Working Paper 22952,
http://www.nber.org/papers/w22952
410
Buterin, Vitalik, “What is Ethereum?”, Coin Center, March 9, 2016,
https://coincenter.org/entry/what-is-ethereum
411
“What is Either?”, Ethereum Project, https://www.ethereum.org/ether
412
Lee, Timothy, “Bitcoin’s insane energy consumption, explained,” Ars
Technica, December 6, 2017, https://arstechnica.com/techpolicy/2017/12/bitcoins-insane-energy-consumption-explained/
413
There is another method called proof of stake, but due to space constraints
it is not discussed here.
414
Van Valkenburgh, Peter, “What is Bitcoin Mining, and Why is it
Necessary?” Coin Center, December 15, 2014,
https://coincenter.org/entry/what-is-bitcoin-mining-and-why-is-it-necessary
415
Mankiw, N. Gregory, “Principles of Macroeconomics, Fifth Edition,”
Cengage Learning, 2008, p. 338-341

259

416

Torres, Craig, “Yellen Says Bitcoin Is a ‘Highly Speculative Asset’,”
Bloomberg Technology, December 13, 2017,
https://www.bloomberg.com/news/articles/2017-12-13/yellen-sayscryptocurrency-bitcoin-is-highly-speculative-asset
417
Browne, Ryan, “Big transaction fees are a problem for bitcoin – but there
could be a solution,” CNBC, December 19, 2017,
https://www.cnbc.com/2017/12/19/big-transactions-fees-are-a-problem-forbitcoin.html
418
O’Leary, Rachel Rose, “Ethereum Executes Byzantium Blockchain
Software Upgrade,” CoinDesk, October 16, 2017,
https://www.coindesk.com/ethereum-executes-blockchain-hard-forkbyzantium/
419
Price, Rob, “Someone in 2010 bought 2 pizzas with 10,000 bitcoins –
which today would be worth $100 million,” Business Insider, November 28,
2017, http://www.businessinsider.com/bitcoin-pizza-10000-100-million-201711, ironically this process usually happens the other way with fiat currencies
as central banks inflate away their value during crises (see Venezuela and
Zimbabwe for modern examples)
420
“Tech Visionary George Gilder: ‘Bitcoin is the Libertarian Solution to the
Money Enigma’,” ReasonTV, August 14, 2014,
https://www.youtube.com/watch?v=V9hb0EKAcro
421
Brito, Jerry and Andrea Castillo, “Bitcoin: A Primer for Policymakers 2nd
edition,” Mercatus Center, 2016 https://coincenter.org/wpcontent/uploads/2013/08/Bitcoin-Primer-2ndEd.pdf, p. 9
422
Buterin, Vitalik, “Let’s talk about the projected coin supply over the
coming years,” Reddit,
https://www.reddit.com/r/ethereum/comments/5izcf5/lets_talk_about_the_proj
ected_coin_supply_over/dbc66rd/
423
Although “hard forks” could arguably increase the supply of a
cryptocurrency. The nature of a hard fork creates a separate currency all to its
own. For example, Bitcoin will only have 21 million tokens and the fact that
Bitcoin Cash exists and shares part of the Bitcoin blockchain does not change
that.
424
Zerpa, Fabiola, “Venezuelan Hyperinflation Explodes, Soaring Over
440,000 Percent,” Bloomberg, January 18, 2018,
https://www.bloomberg.com/news/articles/2018-01-18/venezuelanhyperinflation-explodes-soaring-over-440-000-percent
425
Can’t you feel the creativity?
426
“Considering an IPO to fuel your company’s future?”,
PriceWaterhouseCoopers,
https://www.pwc.com/us/en/deals/publications/cost-of-an-ipo.html
427
Grincalaitis, Merunas, “What it takes to create a successful ICO? How
expensive it is? Your complete guide,” Medium, September 29, 2017,
https://medium.com/@merunasgrincalaitis/what-it-takes-to-create-asuccessful-ico-how-expensive-it-is-your-complete-guide-35912722351e

260

428

For podcast: Joint Economic Committee Republicans, “Main Street
Economics” August 17, 2017:
https://www.jec.senate.gov/public/index.cfm/republicans/podcasts/, For
example, Miliard, Mike, “How does blockchain actually work for
healthcare?”, Healthcare IT News, April 13, 2017,
http://www.healthcareitnews.com/news/how-does-blockchain-actually-workhealthcare
429
Joint Economic Committee Republicans, “Main Street Economics” August
17, 2017: https://www.jec.senate.gov/public/index.cfm/republicans/podcasts/
430
Healthnexus, https://token.simplyvitalhealth.com/
431
Robomed Network, https://robomed.io/
432
MediLedger, https://www.mediledger.com/
433
BlockMedx, http://blockmedx.com/index.html
434
O’Leary, Rachel Rose, “Congressional Group Pushes for Blockchain
Security Standards,” CoinDesk, August 22, 2017,
https://www.coindesk.com/congressional-blockchain-group-pushes-medicalsecurity-standards/
435
“Announcing the Blockchain Challenge,” HealthIT.gov,
https://www.healthit.gov/newsroom/blockchain-challenge
436
For more details see, “Blockchain Healthcare & Policy Synopsis,”
Chamber of Digital Commerce, October 2016,
https://digitalchamber.org/assets/blockchain_healthcare_policy_synopsis_cha
mber_2016.pdf, and “Winners Announced!” CCC Innovation Center,
http://www.cccinnovationcenter.com/challenges/block-chain-challenge/viewwinners/
437
Bruno, Debra, “Brooklyn’s Latest Craze: Making Your Own Electric
Grid,” Politico, June 15, 2017,
https://www.politico.com/magazine/story/2017/06/15/how-a-street-inbrooklyn-is-changing-the-energy-grid-215268
438
For Australia: Sundararajan, Sujha, “Australian Government Grants $8
Million for Blockchain Energy Pilot,” CoinDesk, November 20, 2017,
https://www.coindesk.com/australian-government-grants-8-million-forblockchain-energy-pilot/, For Europe: Milano, Annaliese, “European Energy
Firms Trial Blockchain Trading Marketplace,” CoinDesk, October 26, 2017,
https://www.coindesk.com/european-energy-firms-trial-blockchain-tradingmarketplace/, For Japan: del Castillo, Michael, “No More Nuclear: Japan’s
Biggest Utility Turns to Blockchain in Power Pivot,” CoinDesk, October 10,
2017, https://www.coindesk.com/no-nuclear-japans-biggest-utility-turnsblockchain-power-pivot/
439
“BlockCypher And U.S. Department Of Energy’s National Renewable
Energy Laboratory To Provide Blockchain Agnostic Distributed Energy
Solution,” January 23, 2018,
http://www.prweb.com/releases/2018/01/prweb15117801.htm
440
Cuomo, Gennaro, Testimony before the United States House Committee on
Science, Space and Technology, Subcommittee on Oversight & Subcommittee
on Research and Technology on “Beyond Bitcoin: Emerging Applications for

261

Blockchain Technology,” February 14, 2018,
http://docs.house.gov/meetings/SY/SY21/20180214/106862/HHRG-115SY21-Wstate-CuomoG-20180214.pdf, p. 3
441
Yiannas, Frank, Testimony before the United States House Committee on
Science, Space and Technology, Subcommittee on Oversight & Subcommittee
on Research and Technology on “Beyond Bitcoin: Emerging Applications for
Blockchain Technology,” February 14, 2018,
http://docs.house.gov/meetings/SY/SY21/20180214/106862/HHRG-115SY21-Wstate-YiannasF-20180214.pdf, p. 3-5
442
“Kim Nilsson – Cracking MtGox,” TheBitcoinArmy, September 10, 2017,
https://www.youtube.com/watch?v=l70iRcSxqzo&t=3s
443
For more details on Silk Road, see Bearman, Joshuah, “The Rise & Fall of
Silk Road”, Wired, April 2015, https://www.wired.com/2015/04/silk-road-1/
& https://www.wired.com/2015/05/silk-road-2/
444
Foley, Sean, Jonathan Karlsen, and Talis j. Putnins, “Sex, Drugs, and
Bitcoin: How Much Illegal Activity is Financed Through Cryptocurrencies?”,
January 15, 2018,
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3102645
445
The New Palgrave Dictionary of Economics, Palgrave Macmillan, London,
2008
http://www.dictionaryofeconomics.com/article?id=pde2008_S000278&editio
n=current, there are more sentences to this but it captures the thoughts
446
Fox, Justin, “What’s That You’re Calling a Bubble,” Harvard Business
Review, January 8, 2014, https://hbr.org/2014/01/whats-that-youre-calling-abubble
447
Steimetz, Seiji, “Bubbles,” The Concise Encyclopedia of Economics,
Library of Economics and Liberty,
http://www.econlib.org/library/Enc/Bubbles.html
448
Shapira, Arie and Kailey Leinz, “Long Island Iced Tea Soars After
Changing Its Name to Long Blockchain,” Bloomberg Markets, December 21,
2017, https://www.bloomberg.com/news/articles/2017-12-21/crypto-crazesees-long-island-iced-tea-rename-as-long-blockchain
449
Useless Ethereum Token, “The world’s first 100% honest Ethereum ICO,”
https://uetoken.com/, other entertaining quotes from this ICO includes “If I
don’t make enough money to buy at least one flat-screen television, I’ll
probably keep the ICO open longer than initially stated.” and “You’re literally
giving your money to someone on the internet and getting completely useless
tokens in return.”
450
Palmer, Jackson, “My Joke Cryptocurrency Hit $2 Billion and Something
Is Very Wrong,” Vice Motherboard, January 11, 2018,
https://motherboard.vice.com/en_us/article/9kng57/dogecoin-my-jokecryptocurrency-hit-2-billion-jackson-palmer-opinion
451
Data from CoinMarketCap, https://coinmarketcap.com/coins/
452
“The DAO of accrue,” The Economist, May 19, 2016,
https://www.economist.com/news/finance-and-economics/21699159-newautomated-investment-fund-has-attracted-stacks-digital-money-dao

262

453

Price, Rob, “Digital currency Ethereum is cratering because of a $50
million hack,” Business Insider, June 17, 2016,
http://www.businessinsider.com/dao-hacked-ethereum-crashing-in-value-tensof-millions-allegedly-stolen-2016-6?r=UK&IR=T
454
del Castillo, Michael, “Ethereum Executes Blockchain Hard Fork to Return
DAO Funds,” CoinDesk, July 20, 2016, https://www.coindesk.com/ethereumexecutes-blockchain-hard-fork-return-dao-investor-funds/
455
Securities and Exchange Commission v. Howey Co., 328 U.S. 283, 1946,
https://supreme.justia.com/cases/federal/us/328/293/case.html
456
Van Valkenburgh, Peter “Is Bitcoin a Security?”, Coin Center, January 25,
2017, https://coincenter.org/entry/is-bitcoin-a-security
457
“SEC Issues Investigative Report Concluding DAO Tokens, a Digital
Asset, Were Securities,” Securities and Exchange Commission, July 25, 2017,
https://www.sec.gov/news/press-release/2017-131
458
“Company Halts ICO After SEC Raises Registration Concerns,” Securities
and Exchange Commission, December 11, 2017,
https://www.sec.gov/news/press-release/2017-227
459
“SEC Emergency Action Halts ICO Scam,” Securities and Exchange
Commission, December 4, 2017, https://www.sec.gov/news/pressrelease/2017-219, “SEC Halts Alleged Initial Coin Offering Scam,” Securities
and Exchange Commission, January 30, 2018,
https://www.sec.gov/news/press-release/2018-8
460
Clayton, John, Testimony before the United States Senate Committee on
Banking, Housing, and Urban Affairs on “Virtual Currencies: The Oversight
Role of the U.S. Securities and Exchange Commission and the U.S.
Commodity Futures Trading Commission,” Securities and Exchange
Commission, February 6, 2018,
https://www.banking.senate.gov/public/_cache/files/a5e72ac6-4f8a-473f9c9c-e2894573d57d/BF62433A09A9B95A269A29E1FF13D2BA.claytontestimony-2-6-18.pdf
461
“Consensus 2017: New Regulatory Challenges for Blockchain
Technology,” Coindesk, August 7, 2017,
https://youtu.be/YTlfXxs5rUY?t=16m17s
462
Batiz-Bent, Juan, Marco Santori, and Jesse Clayburgh “The SAFT Project:
Toward a Compliant Token Sale Framework,” Protocol Labs and Cooly,
October 2, 2017, https://saftproject.com/static/SAFT-Project-Whitepaper.pdf
463
Internal Revenue Service, Notice 2014-21, April 14, 2014,
https://www.irs.gov/pub/irs-drop/n-14-21.pdf
464
Lewis, Troy, “Re: Comments on Notice 2014-21: Virtual Currency
Guidance,” American Institute of CPAs, June 10 2016,
https://www.aicpa.org/advocacy/tax/downloadabledocuments/aicpa-commentletter-on-notice-2014-21-virtual-currency-6-10-16.pdf
465
Treasury Inspector General for Tax Administration, “As the Use of Virtual
Currencies in Taxable Transactions Becomes More Common, Additional
Actions Are Needed To Ensure Taxpayer Compliance,” September 21, 2016,
https://www.treasury.gov/tigta/auditreports/2016reports/201630083fr.pdf

263

466

“Creating tax parity for cryptocurrencies,” Representative David
Schweikert, September 7, 2017, https://schweikert.house.gov/mediacenter/press-releases/creating-tax-parity-cryptocurrencies
467
Schweikert, David, “H.R. 3708 To amend the Internal Revenue Code of
1986 to exclude from gross income de minimis gains from certain sales or
exchanges of virtual currency, and for other purposes,” Congress.gov,
https://www.congress.gov/bill/115th-congress/house-bill/3708?r=4
468
Van Valkenburgh, Peter, “The Need for a Federal Alternative to State
Money Transmission Licensing,” Coin Center, January 30, 2018,
https://coincenter.org/entry/federal-alternative-to-state-money-transmission
469
“Laboratories of democracy,” Wikipedia,
https://en.wikipedia.org/wiki/Laboratories_of_democracy
470
“Regulation of Virtual Currency Businesses Act,” Uniform Law
Commission,
http://www.uniformlaws.org/Committee.aspx?title=Regulation%20of%20Virt
ual%20Currency%20Businesses%20Act , Van Valkenburgh, Peter, “The
Uniform Law Commission Has Given States a Clear Path to Approach
Bitcoin,” Coin Desk, July 27, 2017, https://www.coindesk.com/uniform-lawcommission-given-states-clear-path-approachbitcoin/http://www.uniformlaws.org/Committee.aspx?title=Regulation%20of
%20Virtual%20Currency%20Businesses%20Act
471
Van Valkenburgh, Peter, “The Need for a Federal Alternative to State
Money Transmission Licensing,” Coin Center, January 30, 2018,
https://coincenter.org/entry/federal-alternative-to-state-money-transmission
472
Boring, Perianne, “Protecting blockchain from ‘Mad Hatter’ treatment,”
The Hill, November 21, 2017, http://thehill.com/opinion/technology/361220protecting-blockchain-from-mad-hatter-treatment
473
Clayton, Jay and J. Christopher Giancarlo, “Regulators Are Looking at
Cryptocurrency,” Wall Street Journal, January 24, 2018,
https://www.wsj.com/articles/regulators-are-looking-at-cryptocurrency1516836363

265

1 <

3 =

I am pleased to share the Joint Economic Committee (JEC)
Democratic response to the 2018 Economic Report of the
President. The JEC is required by law to submit findings and
recommendations in response to the Economic Report of the
President (the ERP), which is prepared and released each year by
the Council of Economic Advisers (CEA).
This response focuses, in particular, on the actions Republicans
have taken on taxes, their ongoing efforts to undermine
Americans’ health care, the administration’s belated and
inadequate plan to address the nation’s crumbling infrastructure,
and its dangerous efforts to roll back regulations that protect
consumers and the environment.
As detailed in the pages that follow, the Republican tax law will
explode the deficit, widen the gap between the rich and everyone
else, and ultimately increase taxes on tens of millions of middleclass households. The changes in health care will reduce the
number of insured and push premiums higher. The
administration’s infrastructure plan shifts the burden of
responsibility to state and local governments and fails to meet the
urgent needs identified in the ERP. Its approach to deregulation
picks winner and losers, threatens the health and safety of
Americans, and fails to address increased market concentration
across industries and its negative impacts on growth, productivity
and wages.
In fundamental ways, the 2018 ERP is disconnected from reality.
It devotes a chapter to innovative policies to improving all
Americans’ health while dismissing recent gains in health

266

insurance coverage through the Affordable Care Act (ACA) and
attempting to call into question the link between health insurance
and health outcomes. Such thinking motivated the unsuccessful
Republican attempts to repeal the ACA and animates their
continued efforts to sabotage the health care markets and
undermine Medicaid enrollment, ultimately reducing coverage
and increasing costs for those who need it the most.
The ERP includes a chapter on addressing cybersecurity threats,
somehow ignoring the fact that President Trump has refused to
acknowledge in any meaningful way that Russia interfered with
the 2016 elections, through bots, fake news, manipulation of social
media, and direct infiltration of voting systems, and is preparing
to do so again in the upcoming 2018 midterms. Head of the
National Security Agency Admiral Mike Rogers recently testified
to Congress that the president has not asked him to counter
Russian efforts to influence U.S. elections.1
The ERP lays out the need for enhancing U.S. trade, glossing over
the fact that the trade deficit increased by 12.1 percent in 2017,
reaching its highest level since 2008 as U.S. imports surged,
despite a falling dollar.2 In its discussion of the administration’s
recent imposition of a tariff on all solar panel imports, the ERP
fails to acknowledge that this tariff will actually hurt American
workers and consumers for the benefit of foreign-owned firms.
For an ERP to have lasting value, it should offer objective,
academic analysis, rooted in rigorous examination of the facts and
grounded in economic theory to inform policymaking in the
future. Unfortunately, like the CEA’s analysis last year estimating
that a large cut in the corporate tax rate would boost average
household income by at least $4,000, which is again repeated in
the ERP, much of this report lies far outside of the economic
mainstream.

267

For example, the ERP and the administration’s recent FY 2019
budget make estimates about economic growth that are very
different from those of the Federal Reserve, Congressional Budget
Office, and private forecasters.3 While the administration is
predicting growth of about 3 percent each year for the next decade,
others estimate that growth will be closer to 2 percent.4 Growth of
3 percent would be a significant departure from past performance,
where annual GDP growth has averaged less than 2 percent since
2001.5
President Trump inherited an economy that was continuing to
strengthen in its 8th year of recovery and adding more than 2 million
jobs annually for the six previous years. Wages had begun to move
up. GDP had grown a modest 1.5 percent in 2016, after increasing
by 2.9 percent in 2015.6 Those trends remain largely in place
today, despite the administration’s harmful agenda. But so, too, do
the demographic and structural challenges constraining long-term
economic growth.
Longer-term structural challenges include:
x

An aging population, which will slow labor force growth,
in the absence of immigration reform or efforts that bring
disconnected workers back into the labor force.

Slow productivity growth as well as slow public and
private sector investment growth.

Increasing concentration in many industries, which limits
innovation and entrepreneurship and leads to lower pay for
workers

High levels of income inequality and low levels of
economic mobility, which threaten the underpinnings of
the economy.

268

The administration is projecting 3 percent growth without taking
any actions to overcome well-known barriers to long-term growth.
Faster economic growth can be achieved by more people working
or people working more productively. The retirement of baby
boomers, along with the plateauing of women’s labor force
participation rates, makes a dramatic increase in hours worked
unlikely. In fact, the Congressional Budget Office estimates that
hours worked over the next decade will increase by 0.4 percent
each year compared to 1.3 percent annually from 1950 to 2016.7
Changes to immigration laws advocated by the Trump
administration to restrict immigration, or to kick out workers
already here, would further limit the size of the labor force and
apply downward pressure on growth. It is not surprising, therefore,
that the ERP is silent on immigration reform.
Recent history suggests strong productivity growth will be
difficult to achieve as well. As noted in the ERP, average annual
productivity growth between 1953 and 2017 was 2.0 percent
(Table 8-2). And more recently, between 2007 and 2016, average
annual labor productivity growth was just 1.1 percent.8 Yet, to
reach its aggressive growth targets, the administration is
predicting annual productivity gains of 2.6 percent over the next
decade (Table 8-2). The sluggish productivity growth over the past
decade is not just a U.S. phenomenon – it’s a worldwide challenge.
In fact, the United States has actually outpaced Japan, Canada,
Germany, and France in productivity growth over the past decade
(Figure 8-41).
One path to increasing the number of hours worked is to
implement policies that enable workers to better meet both their
work and family responsibilities. Instituting a national paid leave
policy, for example, would allow more workers to stay connected
to the workforce after the birth or adoption of a child, reducing

269

turnover rates and boosting labor participation rates.9 More
accessible and affordable child care would help reach the same
objectives. Opioid abuse treatment and prevention could help
more workers stay in the workforce, contributing to their
communities and increasing economic output. Despite campaign
promises in each of these areas, the Trump administration has been
slow to address these challenges.
Similarly, fixing the nation’s infrastructure, as noted in the ERP,
can boost productivity and increase competitiveness. Yet, while it
is not stated in the ERP, the administration failed to present an
infrastructure plan it its first year in office, and when the plan was
finally announced in February, it failed to address the nation’s
urgent needs.
Republicans are counting on businesses to significantly increase
capital investment, which would make workers more productive.
And, certainly, some increase in business investment is expected
following tax reform. But the early signs are concerning. Instead
of investing in their plants and facilities, companies have moved
quickly to initiate stock buybacks, which will benefit shareholders
and wealthy investors but do little to increase productivity or
ultimately boost worker wages. Since January 1st, companies have
announced more than $200 billion in buybacks, more than 30
times the amount companies have announced in bonuses and wage
hikes for workers.10
What’s particularly damaging, over the longer term, is that the
administration and Republicans in Congress have jeopardized the
nation’s fiscal health by passing a tax package that will add nearly
$1.5 trillion to deficits over the next 10 years. Republicans pursued
fiscal stimulus when it wasn’t warranted or needed. They also
elected not to pay for it, instead passing the cost on to the next
generation and to state and local governments. In fact,

270

Republicans are shifting more responsibilities, such as
infrastructure, to the states while simultaneously constraining
states’ ability to raise revenues through a new cap on the state and
local income tax deduction (SALT).
The administration has already taken actions that will harm
consumers and the economy in areas such tax, health care, and
consumer financial protection. Under the mantle of deregulation,
the administration has removed fundamental labor, environmental
and consumer protections. In other areas, including infrastructure,
the administration has unveiled plans, but so far it has not been
successful in persuading Congress of the merits of its approach
and there has been little movement. In still other areas, the
administration has ignored major challenges, such as the opioid
crisis, the rising costs of education, the impact of climate change
already being felt by communities, and others.
To foster strong inclusive economic growth, it is vital that the
United States invest in our nation’s physical and human capital. A
real infrastructure plan that modernizes roads, bridges, schools,
ports, and water systems and improves access to broadband
networks is critical to laying the groundwork for strong future
growth. So too are investments in our children, workers, R&D, and
communities of all sizes and in all regions of this country. Other
than a brief discussion of broadband expansion, which calls out
the supposed “detrimental effects” government intervention can
have on the private market, there is little attention in the ERP paid
to the unique challenges facing rural America. Ignoring these
varied challenges or looking to the private sector to address them,
as the administration regularly advocates, will not achieve
significant progress.
The administration and congressional Republicans spent much of
the past year focused on repealing health care coverage and

271

handing out tax gains to the wealthy and large corporations. They
ignored issues that demand action – from addressing DACA by
the deadline the president created, to reducing gun violence, to
fixing the nation’s broken infrastructure. The same selective
approach to identifying the challenges and opportunities ahead is
evident in the ERP. As we look forward, it is vital that Republicans
and Democrats work together to craft bipartisan solutions to the
nation’s most urgent problems.

272

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In 2017, the Trump administration and congressional Republicans
rushed into law a highly partisan effort to remake the tax code.
Smart reform would have made the tax code more efficient and
fairer, while maintaining sufficient revenue to fund the
government. Instead, Republicans cut taxes for the wealthy, raised
taxes on working families over the next decade, and put the burden
of paying for the cuts on future generations.
The ERP makes bold claims about the impact of the tax law,
claims that are absurdly out of step with nonpartisan experts’
estimates. It claims that the law will result in two to four percent
additional GDP growth, despite nonpartisan scorekeepers
estimating that the economic impact will be a fraction of one
percent.11 It claims that the law will result in thousands of dollars
in wage gains for the average family, despite a large body of
literature demonstrating that this is highly unlikely. It is also worth
noting that the ERP analysis only focuses on a small portion of the
tax changes, namely the statutory corporate rate cut, and ignores
most of the law. It also presents estimates of provisions not even
part of the law, such as permanent full expensing, further inflating
already overly optimistic estimates of the economic impact.
The actual impacts of the new tax law are clear. The wealthy will
get wealthier. Working families see what little relief they get
disappear after a few years. The deficit will soar as revenues
plummet, and Republicans will point to spending as the problem.
Corporations will pocket the gains. And the law will create
confusion and complexity for years to come.

273

THE TAX LAW WILL OVERWHELMINGLY BENEFIT THE
WEALTHY

The ERP portrays the tax plan as tax relief for the middle class and
small businesses, but distributional analyses from nonpartisan
organizations were all in agreement that this is false—the
wealthiest Americans are the big winners from the Republican tax
cut. By the time the law is fully implemented in 2027, 99.2 percent
of the tax benefits will flow to the top five percent of households.
This is largely due to the fact that the tax cuts for middle-class
families are small and temporary, while the biggest cuts, which are
reserved for corporations, are permanent. The benefits of a
reduction in corporate taxes largely go to the owners of capital,
who are overwhelmingly wealthy. The highest ten percent of
earners hold, on average, more than 26 times as much in stock
investments as the bottom half of earners hold on average.12

274

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Note: Shows the tax change once the law is fully implemented in
2027.

Changes to the individual side of the code will also increase wealth
and income inequality. The ERP focuses on limitations to the
mortgage interest deduction and state and local tax deductions,
claiming that it will make the code more progressive. This is
disingenuous, though, as it fails to account for many other pieces
of reform that more than counteract those changes and benefit the
wealthy.
Doubling the estate tax exemption, for instance, only benefits
families bequeathing millions of dollars to their heirs. The impact
will be to further exacerbate intergenerational wealth inequality.
Contrary to Republican claims, the estate tax impacts few small
businesses and family farms, and those that it does impact have
the ability to pay the tax over an extended time period to avoid

275

having to divest such assets.13 The tax law also raised the threshold
for the Alternative Minimum Tax, which will provide $637 billion
in tax cuts over the next ten years that will flow to the wealthiest
Americans.14 Overall, nonpartisan distributional analyses are
clear—the wealthiest Americans get a huge and permanent tax
break in the new law.
WORKING FAMILIES WILL ULTIMATELY SEE A TAX HIKE
The administration touted the doubling of the standard deduction
as a win for American families. In reality, however, the impact of
this change is muted by the removal of exemptions and other
important deductions. For families with multiple dependents,
trading those exemptions for the larger standard deduction could
be a net loss. Further, limiting deductions that many middle-class
families rely on, such as the state and local income tax deduction
and mortgage interest deduction, results in millions of families
seeing a tax hike. This year alone, more than 8.4 million
households will see a tax increase.15
This is all compounded by the fact that the little tax relief provided
to families is scheduled to sunset in 2025. Meanwhile, a permanent
change to how tax brackets are indexed will result in bracket creep,
where inflation eats into the thresholds and families start moving
up in brackets even without gains in real income.16 The end result
is that the plan will actually raise taxes on middle-income families
in the long-run. By 2027, more than half of households will be
paying more than they would have before the GOP tax law.17
The ultimate effect of tax cuts for the wealthy and tax hikes for
working families is that, by 2027, the law will increase after-tax
income inequality. The top 1 percent will receive a 0.9 percent
increase in after tax income, and the top 0.1 percent will receive a
1.4 percent increase in after tax income. Meanwhile, households

276

in the bottom 80 percent of income will have no net change to after
tax income or will even see a decrease, as taxes rise.18 This comes
at a time where income inequality has been on the rise for decades
and is likely already having negative effects on economic
growth.19
THE LAW WASTES $1.5 TRILLION THAT COULD HAVE BEEN
INVESTED IN PEOPLE AND COMMUNITIES

Economists have long called for leveling out the corporate income
tax by eliminating loopholes and using that revenue to lower the
topline rate. The opportunity for this type of deficit-neutral reform
could be seen in the gap between effective tax rates and statutory
tax rates. Under this approach, the corporate tax rate could have
been lowered to the mid to high twenty percent range, without
incurring huge deficits or raising taxes on individuals.
Instead, Republicans became fixated on getting the corporate tax
rate to as close to 20 percent as possible and in the process ended
up blowing the deficit wide open. In the end, they cut it from 35
to 21 percent, a 40 percent reduction. For eight years under the
Obama administration, congressional Republicans and other party
leaders decried the increase in the deficit and national debt that
followed the recession. Those concerns were nowhere to be found
in the tax debate, though. Republicans eventually landed on
passing $1.5 trillion in unfunded tax cuts.
Deficit spending is not always bad for the economy. During
economic downturns, running federal deficits can stimulate the
economy and reduce the impact and duration of recessions. But
most mainstream economists tend to advocate for either lowering
deficits as the economy recovers or at least holding them steady as
the economy grows, thereby reducing the deficit-to-GDP ratio.
Few advocate for large stimulus spending this far into a recovery.
Larger deficits now could potentially result in higher levels of

277

inflation, and spur the Federal Open Market Committee to raise
interest rates faster than they had otherwise planned.
That $1.5 trillion also represents a missed opportunity. While the
tax plan is unlikely to generate much additional economic growth,
it will reduce revenues that could have been used on more
productive programs. Republicans could have used that money to
expand the Earned Income Tax Credit, which has been proven to
increase labor force participation and reduce poverty.20 They
could have sent every child in America to a high-quality early
education program and expanded access to affordable college.21
Or they could have put a serious dent in America’s infrastructure
gap. Research by the CBO has shown that spending on
infrastructure or other direct spending by the government has
substantially more stimulative impact on the economy than tax
cuts for the wealthy.22
THE TAX PLAN IS UNLIKELY TO LEAD TO LARGE WAGE GAINS
The administration and congressional Republicans pitched the tax
cuts as a boon for the middle class, arguing that the corporate tax
cut will lead to massive wage gains. Their most highly-cited figure
of an increase in average household income of $4,000 was met
with skepticism and doubt by experts. Even authors cited in the
Council of Economic Advisers’ research claimed that the
administration misused their findings to come to an implausible
result.23 The ERP repeats this unlikely claim and doubles down on
it by suggesting that the gains will likely even be larger.
Economists largely agree that a small portion of the corporate
income tax falls on workers. The Joint Committee on Taxation
estimates that 25 percent of the tax falls on labor, while the Tax
Policy Center assumes 20 percent.24 But the vast majority of the
benefits go to capital, the shareholders and owners of the

278

companies. Expecting corporate tax cuts to largely trickle down to
workers does not align with past research or history. The United
Kingdom presents an apt example—when the country cut their
corporate tax rate from 30 percent to 20 percent, wages actually
declined.

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And recent company announcements already provide early
evidence that shareholders will be the big winners of the tax cut.
Companies have made many announcements about what they plan
to do with their tax windfalls. A small share is going to bonuses
and direct raises—although there should be doubt that these raises
and bonuses are entirely due to the tax cut and not due to tightening
labor markets. And a small share is going to capital spending –
again, though, without a plausible counterfactual it is difficult to

279

give entire credit for this spending to the tax plan.25 Meanwhile,
companies announced more than twice as much in share buybacks
through the first week of February as they had through the same
point in the prior year.26
The administration’s claims on wage gains from the tax cut also
fail to factor in the inequality within labor income. The share of
gains that go to labor because of the tax cut will not be evenly
distributed. In fact, there is increasing divergence between
productivity gains and the earnings of the median worker.27 This
is likely due to a myriad of factors, such as declining bargaining
power for workers and increasing market concentration enhancing
monopsony effects (where workers have fewer options for
employers, and therefore employers are under less pressure to
share productivity gains with them in the form of wage
increases).28 Without addressing these other factors, simply
boosting productive investments will not solve the problem of
stagnating wages for most American families.
COMPLEXITY AND LOOPHOLES ABOUND IN THE NEW TAX LAW
Over time, the tax law tends to increase in complexity, as Congress
creates new credits and deductions to incentivize some activity,
and businesses and industries change over time. Republicans
talked about simplifying the tax code. They said it was a primary
motivation behind reform and even promised that individuals
would be able to file their taxes on a postcard. The goal was to
clear out deductions and credits that were no longer justified, fix
loopholes that allowed businesses and individuals to avoid paying
taxes, and make it easier for people and businesses to file taxes.
On this account, the Republican tax law fails unequivocally.
To pass the law through on a partisan basis, without Democratic
input or votes, Republicans used budget reconciliation, which

280

requires bills to be deficit neutral after the ten year budget window.
This meant putting in sunsets on many of the changes. Because the
GOP’s goal was to enact permanent corporate tax cuts, they sunset
most of the changes to the individual side (with the major
exception being the permanent change in inflation measure that
raises taxes on families in the long run). Their talking points,
though, told Americans that they can expect Congress to extend
those provisions once the deadline is near.29 This sets up a
situation where Americans will not be sure how they will be taxed
in the long-run, making it difficult for them to make decisions on
home purchases, moves, medical expenses, and other major life
expenses whose tax implications will be unknown.
If Republicans intended to close loopholes in the tax code, they
failed on that account as well. Tax experts identified dozens of
potential loopholes before the law was even implemented.30
Corporate attorneys and accountants will be spending the next
several years identifying many more. Absent uncertain fixes, this
could further undermine tax revenue and cause deficits to be even
higher. Further, it will create imbalances where contractors and
workers in similar positions are paying different rates, and where
business owners will have a tax incentive to actually not work. It
will be years before we fully know all of the distortive and
revenue-decreasing impacts of the new tax law, but the early
indications are that there will be plenty.
BIPARTISANSHIP WOULD HAVE BEEN A GOOD PLACE TO START
FOR TAX REFORM

Undertaking tax reform was a worthwhile objective. The corporate
tax code was rife with loopholes, allowing companies in the same
industry or of the same size to pay vastly different tax rates and
allowing multinational corporations to stash trillions of dollars in
profits in overseas accounts that let them off without paying taxes.

281

Further, the individual side of the code was overly complex
leading to confusion and high compliance costs for many tax
payers.
Enacting bipartisan and deficit-neutral tax reform would have
been a significant accomplishment for the administration and
Congress. But Republicans decided to take another track in 2017,
never trying to engage congressional Democrats and instead
opting to use arcane budget procedures to jam through an illconceived bill. The result was a deficit-busting tax cut for the
wealthy with few redeeming qualities. The legacy of this tax law
will be a boon to the wealthy and a burden on future generations.

282

; %=)

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)

Nowhere has the Republican assault on American families been
more sustained and harmful than in the area of health care.
Throughout 2017, the president and congressional Republicans
launched many attacks on our health care system, attempting to
take coverage away from millions of Americans and threatening
to destabilize nearly one-sixth of our economy.31
PROGRESS FROM THE ACA
First, it is useful to recall the important progress made by the
Affordable Care Act (ACA) in expanding access to affordable,
quality health care. In 2016, 26.3 million more people had health
coverage than before the passage of the ACA.32 The uninsured rate
has more than halved, from 18.2 percent to 8.8 percent.33 These
important gains are dismissed in the ERP, though, by questioning
the link between health insurance and health outcomes.
Prior to the implementation of the ACA, the individual market was
in disarray. People were regularly denied coverage due to preexisting conditions, and there was very little competition. One
study estimated that 62 percent of pre-ACA individual market
plans did not cover maternity care, nearly 20 percent did not cover
mental health, and 34 percent did not cover substance abuse
treatment services.34 Information provided by insurers was unclear
on what any given plan did or did not cover, leaving families to
navigate murky benefits language and ultimately play guessing
games with their health. The ACA guaranteed that insurers could
no longer discriminate against Americans for having pre-existing
conditions, for being a woman, or for being older, and it
guaranteed coverage for essential health benefits.

283

The ACA slowed the rise in costs for both patients and providers
and improved care across the board. For families with employersponsored insurance, total premiums and out-of-pocket costs rose
half as fast in the six years after the passage of the ACA, compared
the prior decade.35 The ACA’s Medicaid expansion was
particularly important to hospitals: from 2013 to 2015, the burden
of uncompensated care declined by more than a quarter as a share
of hospital operating costs.36 It especially helped rural hospitals:
in Medicaid expansion states, rural hospitals improved their
operating margins more than those in non-expansion states.37
COVERAGE GAINS IMPROVE LIVES
The ERP attempts to downplay the importance of having health
care coverage and the importance of the ACA and Medicaid.
Health coverage increases access to care and improves health
outcomes. This has borne out recently in several studies evaluating
health outcomes after health care expansions. A study of
Massachusetts’ 2006 health care expansion found significant
reductions in mortality compared to similar counties nationwide.38
A study of Medicaid expansions in Maine, Arizona, and New York
found that expansions were associated with a reduction of 6.1
percent in mortality and decreased rates of delayed care due to
costs by 21.3 percent.39 A study conducted in Oregon
demonstrated greater access to preventative screening and
treatment via increases in diabetes diagnoses and use of diabetes
medications as well as improvements in depression cases—
although it did not provide a large enough sample to make a
definitive conclusion on the impact to mortality.
Health insurance also provides families greater financial security
by protecting against the risk of insurmountable debt due to
unexpected medical bills. In a study of Medicaid’s effects in
Oregon, insured families had a $390 average decrease in medical

284

bills sent to collection after gaining coverage.40 Another study
found that those who gained coverage through Medicaid
expansion decreased their debt in third-party collection by
$1,140.41 When families are able to better manage their finances,
they maintain upward economic mobility.
Access to adequate health care should be a right for all people.
Returning to a broken system where the uninsured can depend
only on emergency care and families must file for medical
bankruptcy is untenable for both patients and providers. This cost
can be borne through emergency visits and rising debt or, more
effectively, through an integrated health system that balances costs
and care equitably across patients. Instead of working with
Democrats to build upon the ACA’s successes, however,
Republicans continue to try to throw away all progress.
WORKING TO TAKE INSURANCE FROM MILLIONS
Republicans’ attempts at repealing the ACA would have taken
away health care from over 20 million people across the country,
forced consumers in the individual market to pay more for less,
and gutted the Medicaid program.42 If passed, TrumpCare would
have allowed insurers to discriminate against those with preexisting conditions again, increased the cost of maternity care, and
unraveled efforts to combat the opioid epidemic.

Millions of Uninsured

285

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2 2

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Source: Congressional Budget Office (CBO), Kaiser Family
Foundation and CPS ASEC
Note: Number of individuals without health coverage under age
65; 1999-2015 data from CPS; 2016 data from Kaiser Family
Foundation; 2017-2026 data from 2017 CBO projections; BCRA
is Republican Senate Plan and ACA is Affordable Care Act

Under TrumpCare, states would have been allowed to let insurers
charge more for people with pre-existing conditions, including
cancer patients.43 A 40-year-old with metastatic cancer could have
seen a premium increase of $142,650.44 Unravelling essential
health benefits would have removed guaranteed coverage of
maternity care and mental health and substance use disorder
services. Hospitals across America would have faced greater
uncompensated costs, threatening vulnerable rural hospitals in
particular.
SABOTAGING HEALTH CARE MARKETS
Although Republicans failed to pass TrumpCare, they have taken
multiple steps to undermine health care in America. They started
off by filling administration positions with officials actively
hostile to the ACA, such as former Health and Human Services

286

Secretary Tom Price and current Centers of Medicare and
Medicaid Services Administrator Seema Verma, who have
sabotaged the ACA by rolling back provisions that keep markets
working and costs down.
The Trump administration’s decision to end cost-sharing
reduction (CSR) payments will hike 2018 premiums by 20
percent, or $2,289 for a family of three.45 Republicans refuse to
take sensible, bipartisan steps, including restoring CSRs, to stop
further cost increases. Unable to repeal the Affordable Care Act,
the Republican tax bill repealed the ACA individual shared
responsibility provision, effectively cutting coverage for 13
million people over the next decade and hiking individual market
premiums by 10 percent.46
In addition, in its attempt to curb enrollment, the administration
has undermined individual market stability by cutting the open
enrollment period in half and slashing the ACA outreach budget
by 90 percent.47 Although federal signups during open enrollment
for 2018 were fairly robust—11.7 million signups despite these
issues—enrollment across states varied. States with their own
marketplaces saw enrollment increase by 0.2 percent, while states
where the federal government administers the marketplace
through healthcare.gov saw enrollment decrease by 5.3 percent.48
These actions, along with continued ACA repeal efforts, produce
uncertainty for insurers, providers, and consumers. Without
certainty, businesses weigh the risks of the worst-case scenario,
leaving consumers with higher prices and no insurers in some
high-risk areas.49
On top of this, the Trump administration and Republican
leadership have refused to adopt a bipartisan solution to stabilize
markets. Analysis from Blue Cross Blue Shield shows that passing

287

a stabilization measure would reduce premiums in 2019 by 27
percent, providing much relief to American families.50 If this
applied across all insurers, people insured through the
marketplaces would save an average of $1,772 in 2019.51
In addition, the Trump administration has continued to erode the
ACA’s consumer protections through its executive orders on
Association Health Plans and short term limited duration plans,
which allow for skimpier junk plans to be sold. These orders allow
insurers to once again discriminate against people with preexisting conditions and allow plans that exclude coverage for
maternity care, prescription drugs, mental health, and substance
use disorder services. If these junk plans substantially cut into
marketplace enrollment, they could cause a death spiral where
sicker people are left in the marketplaces while healthy people
leave, causing more insurers to pull out and premiums to
skyrocket.
SABOTAGE OF MEDICAID
While the ERP’s thematic shift from insurance to health behaviors
reflects Republican attempts to deflect attention from the success
of the ACA and importance of insurance, the ERP is noticeably
silent on its actions to undermine Medicaid and Medicare.
Medicaid and Medicare, two programs millions of American
families rely on, continue to be sabotaged as part of this effort.
TrumpCare would have slashed Medicaid by 35 percent in the
long term. This reduction would end Medicaid as we know it.52
Severe cuts to Medicaid would force states to make tough choices
between maintaining Medicaid coverage and cutting important
programs such as education or infrastructure. Despite the failure
of TrumpCare in Congress, the administration has continued to
trumpet replacing Medicaid with draconian caps and block grants,

288

including it in its FY 2019 proposed budget. In fact, the White
House FY 2019 budget cuts Medicaid and related health spending
by $675 billion.53
Despite the failure of TrumpCare, the Trump administration is
sabotaging Medicaid by giving states the green light to implement
work requirements and other disastrous policies through waivers.
Evidence from other programs show that work requirements
simply do not work—they fail to increase employment in the long
run and instead kick off the people who need it the most. Most
people who can work already do; in fact, more than 90 percent of
adult Medicaid recipients are working, ill or disabled, taking care
of home or family, or going to school.54

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Source: JEC calculations based on Kaiser Family Foundation analysis
Note: Includes non-elderly, non-SSI recipients

Other waiver provisions that are currently under review have
similarly devastating effects. Some proposals request the authority
to charge premiums, when research shows even small increases in
cost-sharing can disincentivize coverage.55 Others add more
bureaucratic red tape by locking enrollees out of coverage for

289

missing paperwork and other deadlines or forcing enrollees to take
a health or financial literacy course to re-enroll. Other proposals
include dropping coverage of non-emergency transportation—
especially difficult for those in rural America who lack a car—or
imposing drug tests even though enrollees heavily rely on
Medicaid to seek treatment for substance use disorders such as
opioid addiction. Altogether, these proposals run counter to the
purpose of the Medicaid program and would only impose larger
barriers to people getting the health care they need.
ATTACKS ON WOMEN, CHILDREN, AND RURAL COMMUNITIES
Republicans continue to undermine the health coverage and
consumer protections that millions of families depend on. For
months, congressional Republicans endangered children’s health
coverage by delaying reauthorization of funding for the Children’s
Health Insurance Program (CHIP), allowing the program to
remain in limbo for months and leaving states scrambling to
prevent dropping children from coverage.
The administration also rolled back protections guaranteeing
access to no-cost contraception for 62 million women, which
could increase annual contraceptive costs by $600 per person.56 In
addition, women are disproportionately threatened by Medicaid
work requirements, as women—who comprised over 60 percent
of non-elderly Medicaid enrollees who were not working in
2016—are more likely to be taking care of children or aging
parents and more likely to have a disability, two of the most
common reasons Medicaid enrollees do not work outside the
home.57
Republicans’ attempts to repeal the ACA would have
disproportionately harmful impacts on rural communities.
Medicaid covers one out of every four rural residents under the

290

age of 65. Further, rural hospitals often have operating margins of
less than 1 percent, with Medicaid making up more than 10 percent
of net revenue for rural hospitals. Gutting Medicaid would put
rural hospitals at risk of closure, endangering quality of care,
good-paying jobs, and the economic sustainability of rural
communities.58
LACK OF ACTION ON THE OPIOID EPIDEMIC
Although the ERP correctly identifies the opioid epidemic as a key
challenge for the nation—estimating that the country lost $504
billion in economic activity in 2015 alone—the Trump
administration has done little to help struggling families and
communities.59 In fact, the administration has made matters worse:
after the president’s opioid commission fizzled out with very little
impact, and his public emergency announcement led to very little
additional funds, the administration continues to threaten states’
best tool against the epidemic, Medicaid.
One estimate shows that the total cost of coverage for people
receiving treatment for opioids could reach $220 billion over the
next decade.60 The bipartisan budget deal passed in February 2018
took an important step in the right direction—including $6 billion
for addressing the epidemic—but there is much more to be done.
TrumpCare would have set our nation many steps back on
combatting the opioid crisis through its drastic Medicaid cuts,
reversal of Medicaid expansion, and removal of guaranteed
coverage of mental health and substance abuse disorders.
Medicaid covers about a quarter of life-saving medication-assisted
treatment for people with opioid and heroin addictions.61
Repealing the ACA could put 1.3 million people at risk of losing
their behavioral health coverage. Medicaid expansion also reduced
the unmet need for substance use disorder treatment among low-

291

income adults by 18 percent.62 Rolling back funding for those
impacted by the opioid and heroin epidemic to get treatment steers
this nation in the exact opposite direction.
Medicaid state waiver requirements would especially threaten
coverage for those that rely on Medicaid for treatment. Some states
have submitted waivers that would implement drug screening and
testing, a clear impediment for those struggling with addiction. For
those who have had trouble going to work due to their addiction
or chronic pain, work requirements can be especially onerous.63
Evidence from work requirements in the Temporary Assistance
for Needy Families program have been shown to particularly
negatively impact people struggling with mental health and
substance abuse.64
FAILING TO LOWER DRUG PRICES FOR EVERYDAY AMERICANS
The ERP also accurately diagnoses the importance of reducing the
costs of prescription drugs for both consumers and taxpayers. List
prices for drugs in other developed countries are 41 percent lower
on average for the 15 companies that sell the 20 top-selling drugs
in the U.S.65
In order to achieve a reduction in drug prices, the ERP suggests
we should primarily rely on an unrestrained free market that will
increase corporate profits, crossing its fingers that such profits will
result in greater innovation. Experience, however, shows that
companies overwhelmingly distribute their profits to shareholders
instead of reinvesting those funds into innovative research. From
2006-2015, U.S. pharmaceutical companies distributed 99 percent
of their profits to shareholders through buybacks and dividends.66
Just since the GOP tax bill passed, pharmaceutical companies have
announced $50 billion in buybacks.67

292

The administration would also exacerbate a key market failure.
The ERP suggests that consumers make their choices for
prescription drugs largely on the basis of price and that consumers
have perfect information about the prices and effectiveness of
drugs. Relying upon this premise, the ERP argues that altering
government reimbursement structures can shift pricing decisions
and therefore potentially costs of drugs onto consumers and
providers, driving prices down. For the ERP’s conclusions to hold,
health care consumers would need to have access to clear,
complete information about medication costs, evaluate how
different medications lead to different outcomes, and weigh the
costs against the outcomes—all the while in the midst of a personal
medical crisis or while managing the medical crisis of a loved one.
Policymakers should be helping consumers afford the medicines
that best meet their health needs, not making their decisions more
costly and difficult.

293

; %=)

* * 1 *

* = ) .

A / *

The ERP’s chapter on infrastructure aligns closely with the
administration’s recently released infrastructure plan. The
administration’s long-awaited plan, finally announced on
February 12, 2018, shifts responsibility for funding infrastructure
onto the private sector and cash-strapped state and local
governments.68 It fails to make the necessary investments, is
counteracted by proposed cuts to existing infrastructure programs
in the president’s budget, and will not fix our nation’s crumbling
infrastructure.
The administration plan rests on top of the ERP framework, which
argues that the fundamental source of the nation’s infrastructure
problem is a mismatch between supply and demand, since the
United States has not relied enough on price signals to moderate
the consumption and provision of infrastructure. Infrastructure is
often underpriced, or even free, the argument goes, which leads to
excess demand and under supply.
The ERP stipulates that relying more on price signals and the
private sector to provide a greater share of infrastructure, in
response to these signals, will allocate resources to where
infrastructure needs are greatest. However, this assumes a massive
and unrealistic increase in the private provision of infrastructure.
It also ignores the reality that some projects and communities will
not be able to attract private investments despite great need, due
to small populations, limited traffic, and other constraints that will
limit private returns. Even residents in communities lucky enough
to attract new infrastructure projects, in the Trump scheme, will
likely face new tolls and other user fees that eat into family
earnings.

294

Despite the administration characterizing its plan as a $1.5 trillion
investment, a figure which is used throughout the ERP, it invests
just $200 billion in federal dollars and proposes in its FY 2019
budget to offset these investments with cuts to existing
infrastructure programs, including Community Development
Block Grants, the Army Corp of Engineers, and the Highway Trust
Fund.69 The administration counts on the private sector and state
and local governments to do the actual investing. Even assuming
the $200 billion represents additional federal infrastructure
spending—a generous assumption—the Penn Wharton Budget
Model estimates that the administration’s plan will result in net
new infrastructure investment of between $20 billion and $230
billion, nowhere the $1.5 trillion promised.70
In addition, the plan rolls back environmental protections, shifting
environmental review away from the Environmental Protection
Agency to other agencies, and gives the private sector
unprecedented control over the process.71 Finally, by ignoring
climate change, the administration’s infrastructure plan risks
building infrastructure that will not withstand the increased
demands of a changing climate, which will lead to higher costs
down the road.72
NEED FOR FEDERAL INVESTMENT IS CLEAR
Each day, Americans feel the effects of the nation’s aging
infrastructure. Congestion on the nation's roads and highways is
wasting people's time, costing money, and harming the
environment.73 Households lose $3,400 a year in disposable
income due to the impact of deteriorating infrastructure on
productivity and economic growth.74 Unsafe drinking water from
aging water systems jeopardizes the health of millions.75 And
outdated schools fail to provide students with a modern learning
environment.76

295

There is near universal agreement that the nation needs a major
investment in upgrading and maintaining our infrastructure, and
that current funding levels are not sufficient to meet the need. The
United States invests less than it used to and less than its
competitors. Public infrastructure investment has declined as a
share of GDP – from 3.0 percent in 1959 to 2.4 percent in 2014.77
Our nation’s competitors now spend a much greater share of GDP
on infrastructure, with China investing more than four times as
much as the United States.78
Overall, more than $2 trillion above current spending levels is
needed to restore our nation’s infrastructure to good condition by
2025.79 Surface transportation alone requires more than $1 trillion
in investment.80
BENEFITS OF INVESTING IN INFRASTRUCTURE
There are significant economic benefits from investing in
infrastructure, from lower transportation costs for businesses and
consumers, to the creation of good-paying jobs and increased
economic growth. In rural areas which are still recovering from
the recession, the short-term positive economic impacts of
infrastructure investments could help close gaps with the large
cities that have been prospering.
Reduced transportation costs
The principal direct benefit of an effective transportation system
is that it reduces transport costs for businesses and consumers.
Those reduced costs, in turn, allow firms easier access to new
markets, foster competition, spur innovation, raise productivity,
relieve price pressures, and lead to increases in living
standards.81 The benefits from infrastructure investment are
particularly pronounced for the manufacturing sector, which relies
heavily on transportation networks for both raw material supply

296

lines and distribution networks to get products to customers.82
Allowing transportation infrastructure to continue to fall into
disrepair, on the other hand, in addition to harming businesses,
places a significant debt on future generations through a backlog
of deferred maintenance.83
Good-paying jobs
Investments in infrastructure create new jobs in manufacturing and
construction, sectors that pay good wages and which were hit
especially hard during the recent recession. Nearly 70 percent of
jobs created from infrastructure investment are in construction,
according to one analysis.84 These jobs are governed by the DavisBacon Act, which ensures fair wages on federal construction
contracts. It should be noted, however, that the administration’s
plan would exempt projects from Davis-Bacon, eroding wages on
infrastructure projects.85
The 6.0 percent annual unemployment rate in construction in 2017
remains above the overall national rate of 4.4 percent, suggesting
there is more room to increase jobs in the sector.86 Creating jobs
that pay good wages—the typical hourly wage for a construction
worker is $30—would help both the employed workers and their
local communities, as those wages will be plowed back into their
local economy.87 The ERP backs this up, noting that workers in
occupations most likely to be involved in infrastructure projects
have an unemployment rate well above the national rate.
Stimulating economic activity
Infrastructure investments can stimulate activity elsewhere in the
economy. A survey of recent econometric estimates finds that
infrastructure investments generate $1.40 to $1.80 in additional
economic activity for every dollar invested. 88 The stimulative

297

effect on the economy would be especially important in rural
communities, many of which are still recovering from the
recession. The Center for American Progress estimates that
increasing infrastructure spending by a total of $500 billion over
10 years would add 3.6 million new jobs, lower the unemployment
rate by 1 percentage point, and increase the size of the economy
by 3 percent.89 However, the plan detailed by the administration
would have “little to no impact on GDP,” according to the Penn
Wharton Budget Model, due to its negligible impact on total
infrastructure investment.90
IT IS UNREALISTIC TO EXPECT STATES AND CITIES TO FOOT THE
BILL

Despite the well-established benefits from federal investment in
infrastructure, the Trump administration is seeking to shift the
burden of investing in and maintaining infrastructure onto state
and local governments.91 On the one hand, the ERP acknowledges
the investment and spending challenges facing state and local
governments, reporting that state and local investment remains 20
percent below its peak in 2003.92 On the other hand, the
administration’s plan assigns most of the responsibility for new
infrastructure investments to these same state and local
governments.
State and local governments are resource-constrained
State and local governments will be hard pressed to take on more
infrastructure responsibilities. Already, state and local
governments account for more than three-fourths of all
transportation and water infrastructure spending.93 And states are
not awash in cash. Twenty-two states faced revenues shortfalls in
2017, partly a result of declining oil prices in energy-producing
states and tax cuts in others.94

298

States also face about $1.1 trillion in unfunded pension liabilities,
including three states with net liabilities exceeding $100 billion.
This gap between assets in state pension funds and benefits owed
to workers is expected to increase by $350 billion over two years.95
States which face growing pension funding gaps may find it harder
to issue debt to finance a range of projects, including
infrastructure.96
The Republican tax bill adds new fiscal pressures
The Republican tax legislation will present new fiscal challenges
for states in 2018, as deductions for state and local sales, income,
and property taxes are capped at $10,000 in the new tax law. This
will make it difficult for states to levy new taxes for increased
infrastructure investments.
In addition, the Republican legislation increases the costs on states
and municipalities of raising money for infrastructure through taxexempt municipal bonds. By lowering the tax rate for wealthy
individuals and corporations, both of whom are large investors in
municipal bonds used to finance infrastructure projects, the
legislation reduces the value of these tax-exempt bonds. States will
have to pay higher rates to attract the same investment.97
Federal investment is key to modernizing infrastructure
Some states and communities are still recovering from the recent
recession and are not well- positioned, by themselves, to make
needed infrastructure investments. This is especially true in rural,
less populated regions that have neither the resources nor the
traffic to boost infrastructure investments.98 As the economic gap
between large and small communities continues to widen, relying
on state and local governments to fund the overwhelming majority

299

of infrastructure may contribute to these communities falling
further behind.
At the same time, all states face difficulties funding infrastructure
during economic downturns because of balanced budget
requirements and other fiscal constraints. Even if a state is able to
increase funding for infrastructure when the economy is going
well, this funding is often at risk during recessions when tax
revenues fall and spending needs, such as unemployment
insurance, increase.99 Revenue fluctuations are especially
challenging for the 22 states that fund infrastructure on a pay-asyou go basis rather than using a separate capital account that is
exempt from balanced budget requirements.100
States and localities would underinvest because they do not
capture all infrastructure benefits
Relying on state and local governments to drive investment could
result in fewer interstate projects and investments that have broad
regional benefits. The positive effects of an infrastructure project,
including less congestion, more economic development, and
higher tax revenues, often extend beyond municipal and state
lines. One study found that only 20 percent of the total effects of
public investment in U.S. highways occur in the state where the
highway is located.101 States and municipalities may be unwilling
to foot the majority of the bill on a project where the benefits
accrue mostly to other areas’ residents, leaving many important
projects unfunded in the Trump plan.
States and local governments are already investing heavily in
infrastructure
State and local governments accounted for 77 percent of spending
on transportation and water infrastructure in 2014, as noted in the

300

ERP, with the federal government’s share of spending at 23
percent. State and local governments fund the overwhelming
majority of operations and maintenance—88 percent in 2014—
and their operations/maintenance spending was almost twice as
great as their capital spending: $208 billion vs. $112 billion.102
The federal government’s investments are concentrated in capital
investments (investment in new equipment and structures or
rehabilitation of existing structures/equipment). In 2014, the
federal government spent more than twice as much on capital
expenditures ($69 billion) as it did on operations and maintenance
($27 billion). Overall, the federal government accounted for 38
percent of capital investment in infrastructure in 2014.103
As infrastructure needs have grown over the past 35 years, federal
investment in infrastructure has barely budged while state and
local spending has nearly doubled. If the federal government
invested the same amount as a share of GDP in 2014 as it did in
1980, it would have invested an additional $158 billion.104
Spending on infrastructure has also started to decline at the state
and local levels over the past decade. From 2003 to 2014, state and
local spending on infrastructure, after adjusting for inflation,
declined by 5 percent and federal investment fell by 19 percent.105
Reversing the federal decline, rather than asking the states to do
more, should be a top priority.

301

Billions of dollars

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Source: Congressional Budget Office
Note: 2014 dollars. Includes investment in water and
transportation infrastructure

PUBLIC-PRIVATE PARTNERSHIPS
The Trump infrastructure plan relies heavily on public-private
partnerships (P3s). Relying on a massive influx of new P3s is risky
and ignores the significant gap between investors’ motivations in
financing infrastructure projects and the public interest. Even
President Trump recently expressed reservations about relying on
P3s according to a White House official who said, “He doesn’t
think they will work.”106
P3s can make available additional resources to finance
infrastructure, which is especially important when state and local
budgets are strained. But there is a tension between the
government’s interests and those of private investors or operators.

302

The government wants to provide good transportation options,
reduce congestion, and ensure that its infrastructure supports
economic development, among other objectives. The private
entity wants to maximize its profit. These interests sometimes
overlap, but not always. And often, as seen in examples below, it
is taxpayers who end up squeezed, paying new tolls, higher fees,
and other charges levied by private companies.
There has been limited P3 success in United States
While the ERP highlighted a few P3s which have met their
objectives, it’s a small universe. Only 14 highway projects were
completed using public-private partnerships between 1990 and
2014, according to the Congressional Budget Office. Three of the
14 declared bankruptcy.107 One of the other completed projects,
the Dulles Greenway, failed to meet revenue projections when
fewer cars used the new road than had been projected. The contract
had to be renegotiated.108 Including all P3 highway projects either
completed or underway during the past 25 years accounts for less
than one percent spent on highways during this period, according
to CBO.109
Previous analysis by JEC Democrats shows that financing
infrastructure through tax credits to private investors can also cost
nearly 55 percent more than traditional infrastructure financing.110
In fact, because states are able to finance infrastructure projects
relatively inexpensively through tax-exempt municipal bonds, the
P3 market has been slower to develop in the United States than in
other countries.
While there may be room to increase the usage of P3s in the United
States, it is unrealistic to expect a large enough increase in projects
to account for the level of investment that the economy needs or
the administration is promising. It takes time for state and local

303

agencies to develop expertise and processes for bidding out,
selecting, implementing, and operating a partnership.111 As the
ERP notes, about one-third of states do not even have legislation
on the books authorizing the use of P3s for transportation
infrastructure. As past projects have demonstrated, they are only
successful in particular circumstances, as well.
Many important projects would be ignored by the private sector
Relying on private investors to address the nation’s growing
infrastructure needs means that many important projects that do
not deliver returns attractive to investors simply would not happen.
For example, a highway serving rural areas with little traffic would
not be able to generate the toll revenue needed to attract private
investment. Urgent repairs and maintenance are also unlikely to
satisfy investors’ demand for high returns and would go unfunded.
Yet, as CBO has reported and the ERP acknowledged, these repair
projects often do best in cost/benefit analyses. 112 It is estimated
that close to $200 billion annually is needed just to maintain the
nation’s road and bridges.113 Adding tolls to existing roads in order
to draw in private entities willing to repair and maintain them
would be an unpopular approach.
In addition, P3s are not well suited to the smaller scale projects
that states target as priorities. The average state project is less than
$20 million and often is focused on repairs and fixes of existing
infrastructure. For example, Arkansas’s average cost of highway
and transit projects is $5.6 million.114
P3s are often anti-competitive
The long terms of some P3 agreements, sometimes up to 99 years,
can limit the options of policymakers well into the future. These
agreements may include non-compete clauses which limit

304

improvements to existing infrastructure near a P3-operated road or
prohibit the construction of additional transportation options.115
The lack of competition allows the operating company to raise toll
rates substantially once the project is up and running. This has
already played out in the relatively limited U.S. experience with
P3s. For example, costs on the Indiana Toll Road, operated under
a P3 agreement, jumped from $4.65 to $8.00 for a car travelling
the whole road.116 Federal taxpayers can also be exposed to risk.
Since many P3s receive federal loans through the Transportation
Infrastructure Finance and Innovation Act (TIFIA), federal
taxpayers can be on the hook if the private entity is unable to
service the loans.117
Despite the limited experience with P3s, challenges already
encountered are instructive. To minimize risks, investors often
negotiate deals that leave the public exposed to the costs of any
hiccups, involve punitive non-compete clauses, or constrain the
decision making of future elected officials. P3s have led to tolls
and higher taxpayer expenses on projects in a number of states,
including Illinois, California, Indiana and Virginia.118
Roll back of environmental protections
The Trump infrastructure plan also poses dangers for the
environment. In fact, the ERP dismisses environmental reviews,
as well as prevailing wage and Buy America provisions, as simply
“potential costs.” It fails to consider the benefits of protecting the
environment, paying workers a fair wage, and requiring that steel,
iron, and other products used in infrastructure are made in the
United States.
With its one-agency review proposal, the administration would
eliminate the Environmental Protection Agency’s ability to review
environmental impact statements from other agencies. The EPA

305

has the knowledge in the federal government to protect water,
wetlands and air quality but it won’t be able to put that knowledge
to work. In addition, the administration’s plan makes it more
difficult to file challenges to permitting decisions by limiting the
statute of limitations to 150 days. Most egregiously, developers
will be able to pay for the environmental review of their projects
and select the firms that conduct those reviews.119

306

)

9; % 3%)
** A 1

The ERP chapter “Deregulation that Frees the Economy” points
out, correctly, that regulation can benefit the economy and the
American people, but poorly designed or outdated regulation can
cause harm, particularly when regulated industries gain control of
the regulatory process and use it to discourage competition.
Unfortunately, the chapter goes on to defend the administration’s
overly simplistic approach to deregulation, which seems more
driven by the influence of special interests than by a proper
consideration of costs and benefits to all Americans, often
ignoring the interests of workers and consumers.
The ERP appears to agree with the findings of the previous
administration’s CEA on the detrimental impacts of overly
restrictive local zoning laws and state occupational licensing, but
bizarrely attempts to connect these problems with the current
administration’s haphazard dismantling of unrelated federal
regulations. It also concedes that the evidence on regulation and
jobs is ambiguous. The ERP also highlights a central issue facing
the American economy, decreased competition, but it connects the
problem to overregulation without presenting any robust evidence
linking regulation and increased market concentration.
Strengthening existing policies to guarantee competitive markets
and to mandate unbiased review of regulations will address the
underlying problems in our economy in ways that a blind and
corruptible process of arbitrary deregulation cannot.

307

THE ADMINISTRATION’S REGULATORY AGENDA HURTS
WORKERS

Favored industries are clearly the winner in the Trump
deregulation agenda. On the other side of the coin are working
families, who are seeing protections erode in critical areas. For
example, the administration worked to reverse an increase in the
overtime threshold. With the increase, 4 million workers would
have seen a collective $1.2 billion in additional wages per year—
a raise that is sorely needed at a time when wages are barely
rising.120 More recently, the administration has proposed to end
protections that ensure workers earning tips get to keep them,
opening up the possibility for higher-paid management to take
those tips.121 The administration even withheld from the public a
Department of Labor analysis that reportedly showed workers
could lose billions of dollars as a result of the proposed rule
change.122
Congressional Republicans and President Trump have also
undone worker safety protections, including rules assuring miners
of a safe workplace, allowing OSHA to cite employers for not
tracking injuries, and preventing exposure to toxic chemicals.123
The administration put a stop to a change that would have required
large employers to provide information on pay by gender, race,
and ethnicity, making it harder to combat illegal wage
discrimination.124
THE ADMINISTRATION IS FAILING TO ENFORCE THE LAW OF
THE LAND

In addition to trying to undo important protections for workers, the
administration is failing to enforce regulations that are the law of
the land. From the very beginning, the administration has filled
key regulatory posts with individuals hostile to the agencies that
they are now leading. For example, Jay Clayton was appointed as

308

the chair of the Securities and Exchange Commission (SEC). His
prior experience was as a Wall Street lawyer known for battling
the SEC, and his appointment has stifled the enforcement and
oversight action that historically has protected investors from
reckless behavior.125
The appointment of White House Budget Director Mick Mulvaney
to lead the Consumer Financial Protection Bureau at first created
confusion at an agency he has consistently condemned and has
quickly led to delayed implementation of rules, such as payday
lending regulation, and a shift from the agency’s stated mission in
order to emphasize deregulation.126 The appointment of
Mulvaney, which bypasses the 2010 Dodd-Frank Wall Street
Reform and Consumer Protection Act rules, undermines the
Bureau’s independence and hampers its supervisory authority and
enforcement actions against predatory lending practices.
INCREASING MARKET CONCENTRATION IS A PROBLEM IN NEED
OF REAL SOLUTIONS

The ERP frames the president’s attacks on federal regulation in
the past year as an attempt to solve a real problem of the American
economy: the increase in market concentration since the 1980s.
Increasing market concentration has been identified as one of the
causes of the decades-long stagnation in business dynamism,
productivity and wages.127 The administration’s regulatory actions
are unlikely to solve this problem, though, and, more likely, will
exacerbate it.
Without a doubt, the last few decades have witnessed an alarming
rise in market concentration in the U.S. economy. Researchers
have found that industries across the board are seeing less
competition and increasingly are being dominated by just a few
large companies. This is concerning because increased

309

concentration allows firms to exercise monopolistic tendencies to
capture economic rents, meaning that they can charge higher
prices and pay workers less than they would in a competitive
market.128
While many factors, including technological change, have
contributed to the pervasive increase in market concentration, the
most obvious culprit is the movement in the 1970s and 1980s away
from using federal antitrust laws to prevent market concentration.
Instead of focusing broadly on competition in a market, antitrust
efforts moved towards a narrow view that homed in on impacts to
consumers. Under this new approach, as long as firms could show
that their market share would not result in higher consumer prices,
they would generally avoid regulatory intervention. This allowed
firms to gain substantial market share as long as they pledged to
keep prices down, even if it hurt overall competition.129
ROBUST AND IMPARTIAL COST-BENEFIT ANALYSES ARE KEY TO
SMART REGULATION

Fortunately, better solutions already exist, and can be further
strengthened to deal with the challenges of today and tomorrow.
The keys to efficient and fair regulatory policies are to weigh the
costs and benefits of regulation in a complete and impartial way,
and to maintain the flexibility necessary to learn from experience
and adapt to changing economic conditions. One of the solutions
to this challenge can be found in the Better Deal plan, which
addresses the lessons of the last few decades of antitrust policy and
outlines a proposal to restore the original emphasis on
concentration rather than just consumer prices. The American
people have interests not just as consumers, but also as workers
and potential entrepreneurs, in the guarantee of free, fair, and
competitive markets.

310

Another part of the solution is the previous administration’s
executive orders mandating regulatory review for all agencies and
regulations. An impartial and standardized process for reviewing
regulations in an unbiased manner is the only way that regulation
or deregulation will result in a more efficient interaction between
the federal government and the U.S. economy.
In addition to ex-ante analysis of proposed regulations, conducting
a follow-up review on a specified timeframe to ensure that the
regulation remains relevant and effective and that the costs and
benefits have turned out to be as expected is a sensible solution. In
this way, the process of minimizing compliance costs and avoiding
duplication or outdated regulation could proceed on a continuous
basis, without depending on the favoritism or political interests of
the current executive branch.
By learning from the past and making reasonable assumptions
about the future, the process of regulating and deregulating
economic activity in the United States can be made to work in the
interests of competition, efficiency, and the wellbeing of all
Americans. Increased growth in an economy that is both freer and
fairer can be achieved, and the way to get there is not through
simply pursuing “more” or “less” regulation, but instead through
an impartial and intelligent approach towards both proposed and
existing regulatory actions which puts the interests of the
American people first.

311

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17
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18
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313

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23
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24
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25
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27

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29
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314

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33
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34
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36
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49
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51
JEC Democratic Staff analysis based on data from the Kaiser Family
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52
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316

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55
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56
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57
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58
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59
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4F4DC3&_=1512751526251 ; Medicaid share of MAT refers to Medicaid
share of payments for Buprenorphine, a commonly used drug for the treatment
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62
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