This is the text of my testimony before the Joint Economic Commitee on December 10, 2009. It differs from the text in the Congressional Record that was submitted in advance. This is the actual text I delivered. Video of my testimony (along with Joseph Stiglitz’s testimony, opening statements by the committee members, and the Q and A) is available here. My testimony starts at 58:15.
A man once asked his doctor how much weight he’d lose if he skipped his daily breakfast of a bagel with butter, about 350 calories. The doctor said if you can do that every day for a month, you’ll lose three pounds.
After ten days of skipping breakfast, the man came in to see how he was doing. To the doctor’s surprise, the man’s weight was unchanged. The doctor said good thing you stopped eating breakfast. Otherwise you’d have gained a pound. When I made my prediction, I didn’t realize how bad your situation was.
Unfortunately, the doctor’s analysis was flawed. He didn’t realize the man was eating a bigger lunch because he was hungry after skipping breakfast.
I think about that doctor when I think about the CBO estimates of the impact of the American Recovery and Reinvestment Act of 2009, the stimulus package. The CBO estimates that there are between 600,000 and 1.6 million extra jobs in the economy compared to what would have happened in the absence of the stimulus.
That’s an embarrassingly imprecise estimate. But it’s not really an estimate at all. It’s just a repeat of the forecast that the CBO made at the beginning of the process, like the doctor who predicts that skipping breakfast reduces your weight.
We have no idea of how many jobs have been created or lost because of the stimulus. As the CBO admits, to know the real impact of the stimulus, we’d have to know the path of the economy in the absence of the stimulus. And that is unknown to the CBO just as the lunch habits and metabolism of the patient might be unknown to the doctor.
What we do know is that since March, the economy has lost another 2.7 million jobs. When the stimulus was passed, we were told that without it, unemployment would reach 8.8%. Well, with the stimulus, unemployment went over 10%.
There is no reliable way of knowing whether the stimulus has averted a worse situation or whether it’s part of the problem. There’s no consensus in the economics profession on this question and no empirical evidence to settle the dispute.
But it wouldn’t be surprising to discover the stimulus has had little or no effect, or even made things worse.
Of the $235 billion spent to date, more than a third of that has been a temporary tax rebate. Just as with the Bush Administration tax rebates in February 2008, most of the money was saved rather than spent and had little impact.
The direct spending component has been $145 billion. Of that $145 billion, the four government agencies receiving the most money—the Departments of Health and Human Services, Department of Labor, Department of Education, and the Social Security Administration, account for over 80% of the spending.
Those agencies don’t have many shovels.
The money has gone to increase funding for Alzheimer’s research, to bolster the tax revenues of states so that teachers can continue to be paid, to digitize medical records and to continue paying unemployment benefits. Some of the money went to give raises to workers. Pleasant for them, but not so helpful for job creation.
Roughly one half of the job losses since December of 2007 are in construction and manufacturing. A better understanding of Alzheimers and more efficient medical record-keeping are good things. But they do little or nothing for the bulk of the workers looking for work.
Some argue that it doesn’t matter what we spend the money on. People will spend the money they receive which creates jobs and puts more money into people’s hands and so on. Ironically, this Keynesian story works best when the economy is healthy.
But consumer spending is down because people are rightfully worried about the future. When people are scared, they’re going to save more and spend less compared to when they are optimistic about the future. So fiscal policy that counts on the multiplier doesn’t work any better than monetary policy in that famous liquidity trap. This is particularly true of temporary increases in income. So both fiscal and monetary policy are constrained by the anxiety people have about the future.
Unfortunately, policy makers have been doing a lot to create anxiety rather than dispel it.
The deficit last year was $1.4 trillion.
People know that tax increases are coming but they do not know how big their share will be. The prospect of tax increases discourages spending and offsets some or all of the stimulus.
The size of the debt is creating worries about default or inflation.
The government continues to intervene in ad hoc ways in the auto industry and the financial sector. Major changes are on the table for how the government regulates health care and energy.
We need new businesses to start and old businesses to expand. But if their owners can’t be sure of what the rules of the game are going to be—the tax rates they might face, the interest rates they might face, the inflation rate they might face, the health care mandates they might face, the emissions regulations they might face—then it’s not surprising that business are likely to sit on the sidelines to see how things will turn out.
In a recent survey of employers released this week by Manpower, Inc., 73% said they plan no change in staffing for the first quarter of 2010. That is the highest level of “no change” since 1962. Employers are sitting on the sidelines waiting to see what the rules of the game are going to be.
So what is to be done?
Most people presume that there is something that can be done, something to get people back to work faster. That may not be possible. Government policy induced an unnatural expansion of the housing sector. We built way too many houses. That naturally drew a lot of people into construction. Fully 25% of the job losses have been in construction. The workers who no longer hold those jobs need to find other things to do. They will want to take time deciding what they should do instead. Unfortunately, it is natural that unemployment lingers.
If you must do something, look for effective ways to spend money and reduce policy uncertainty.
Stop giving away money to states with no strings attached. Why has a major goal of policy so far been to preserve state employment while the private sector takes a beating? Let the states deal with their past recklessness by cutting spending.
Don’t treat any unspent TARP funds as free money. It isn’t. Don’t waste it the way the stimulus money was wasted.
Instead of spending randomly, cut the payroll tax. Cutting the payroll tax makes workers less expensive, at least in the short run. Cut it by 25% for the next five years. That will reduce revenue by about $250 billion per year, but at least it has a chance to create jobs.
To reduce uncertainty and fear, stop fiddling with every aspect of the economy. Maybe this is not the best time to be trying to radically change the health care system and the energy market while propping up banks and the auto industry and borrowing trillions of dollars.
• Stop issuing short-term debt. That’s what got Wall Street in trouble. The government rescued Wall Street. There is no one to rescue us.
• Reduce some aspect of government spending to show that the grown-ups are in charge. Get rid of corporate welfare. Cut tariffs and quotas which are a silent tax on the consumer.
• Stop propping up losers. Let people who were reckless go out of business. Otherwise, we are throwing good money after bad and setting the stage for future recklessness.
F. A. Hayek said that “the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” It would be good to recognize our limits about what we imagine we can design. We cannot steer the economy. Or the labor market. Recognizing our limitations is a step in the right direction.