Hearing of the Senate Budget Committee - U.S. Economic Outlook

Statement

I want to welcome everyone to the Senate Budget Committee this morning. I especially want to welcome Senator Sessions. Senator Sessions has not formally been recognized as Ranking Member of the Budget Committee, but that's just a formality. He will be as soon as the organizing resolution is adopted.

And so I intend to treat Senator Sessions as the Ranking Member here today, and I think that's the appropriate thing to do. I very much welcome Senator Sessions as my partner on this committee. He has considerable knowledge of the budget and the budget process. And I very much look forward to working with him as we confront the significant challenges facing the country.

I also want to welcome Federal Reserve Chairman Ben Bernanke back to the Budget Committee. This is Chairman Bernanke's third appearance here. And we've always benefited by his wise counsel. I believe when the history of this period is written, that you will be one of the heroes of the piece in averting what could have been a financial collapse.

I was in the meetings with the former secretary of the treasury and with you when you warned us of how serious the financial circumstances were in late 2008. Those moments will be forever riveted in my memory, I'm sure in yours as well. I personally believe you and then Secretary of the Treasury Hank Paulson, followed by this administration, have taken steps that were critically important to averting a financial collapse, not only here, but globally as well.

Still, our nation faces very serious challenges. We know we are on an unsustainable course with the budget borrowing about 40 cents of every dollar that we spend. Clearly, that cannot continue for very long.

On the other hand, we also face a fragile economy. With one in every six workers in this country either unemployed or under-employed. That requires our immediate attention as well. My own belief is that we need to put in place the plan this year to get our fiscal house back in order. And that plan needs to be phased in over a period of time along the lines of what the
Fiscal Commission proposed.

I think we also understand where we have come. This has been an extraordinary period in the country's economic history. I'd like to just go over a brief history of what we've experienced.

I personally believe the federal response did avert what could have been a financial collapse. I believe it was that serious. In the meetings that I was in with then Secretary of the Treasury Hank Paulson and you, Mr. Chairman, the risks were very clear.

We have seen some progress made, in fact, important progress made. Private sector job growth has returned, although not as much as we would have liked. We heard the numbers this morning, something over 100,000 jobs created in the private sector, a dramatic improvement from where we were back in January of 2009 when we were losing 800,000 private sector jobs a month. Now we have had 12 consecutive months of private sector job growth.

And economic growth, the pattern is the same, although actually somewhat better. In the fourth quarter of 2008, the economy actually contracted, actually shrunk by 6.8 percent. More recently, in the third quarter of 2010, we saw positive growth of 2.6 percent, again a dramatic improvement, while not as strong as we would hope. We have now had five consecutive
quarters of growth.

We've also seen a dramatic rebound in the stock market after falling to a low of just about 6,500 in March of 2009. But now the Dow is over 11,500.

And two of the most respected economists in the country, Mark Zandi, who was a consultant to the McCain campaign, and Alan Blinder, the former deputy chairman of the Federal Reserve, did an analysis that measured the impact of federal actions, the TARP and stimulus and also included the Fed's monetary policy actions. And they concluded as follows: "We find that its effects on real GDP, jobs and inflation are huge and probably averted what
could have been called great depression 2.0. When all is said and done, the financial and fiscal policies will have cost taxpayers a substantial sum, but not nearly as much as most had feared and not nearly as much as if policy makers had not acted at all. If the comprehensive policy responses saved the economy from another depression, as we estimate, they were well-worth the cost."

This next chart shows Dr. Blinder and Dr. Zandi's estimate of the number of jobs we would have without the federal response. It shows we would have had 8 million fewer jobs in the second quarter of 2010 if we had not had the federal response, the TARP and the stimulus.

We see a similar picture with the unemployment rate. The unemployment rate averaged 9.7 percent in the second quarter. According to Dr. Blinder and Dr. Zandi, if we had not had the federal response, the unemployment rate would have been 15 percent in the second quarter and would have continued rising to over 16 percent in the fourth quarter of 2010. So clearly, the federal response to the economic crisis has had and continues to have a significant positive impact on the economy.

But we are not out of the woods. We can't forget that, as I mentioned before, one in every six of our fellow citizens are either unemployed or under-employed. The unemployment rate in December, which was also announced this morning, was 9.4 percent. This is still far too high. And Federal Reserve projections show the rate is likely to come down only slowly, averaging still in the high 8 percentage point range by the fourth quarter of 2012.

But as I noted, we must now also pivot to addressing the long-term fiscal imbalances that the country confronts. I believe we are at a critical juncture. We have been borrowing, as I mentioned earlier, 40 cents of every dollar that we spend. That cannot continue much longer. Spending is at the highest level as a share of our national income in 60 years. Revenue is at its
lowest level as a share of our national income in 60 years. I believe that indicates you've got to work both sides of that equation if we are to make progress.

Gross federal debt is already expected to reach 100 percent of GDP this year, well above the 90 percent threshold that many economists see as the danger zone. A leading economist came before our commission and has come before this committee, Dr. Carmen Reinhart, who has studied 200 years of fiscal crises around the world. She concluded that when government debt as a share of the economy exceeds 90 percent -- and she's referring here to gross federal debt -- that economic growth tends to be about 1 percentage point lower than it would be if debt levels were not so high. If that association replied to the United States today, it would translate into a
potential economic loss of hundreds of billions of dollars and substantially fewer jobs for Americans.

I believe the deficit and debt reduction plan assembled by the fiscal commission could provide a blueprint and a way forward. The plan would stabilize the publicly-held debt by 2014. And then lower it to 60 percent of GDP by 2023 and roughly 30 percent by 2040. I emphasize that's the publicly-held debt, not the gross debt.

The bipartisan commission who voted for the plan, 60 percent of us supported it, interestingly enough, five Republicans and five Democrats and one independent. I think that demonstrates that we can reach across the aisle to do things that are critically important for the country. Facing up to the debt threat is something we must do, and we must do it together.

With that, we'll turn to Senator Sessions for his opening remarks. And, again, I want to welcome him as Ranking Member of the Budget Committee.

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