Conrad Praises Short-Term Tax Relief Measures in Obama Budget

I want to welcome Acting Director Zients back to the Budget Committee. Director Zients testified before the Budget Committee's Task Force on Government Performance in 2009, in a hearing chaired by Senator Warner. He was there in his role as the Administration's Chief Performance Officer. So we want to welcome you back.

Today, we will be examining the President's fiscal year 2013 budget proposal, which was sent to Congress yesterday. I believe the President's budget would continue to move the nation in the right direction.

According to the Administration, under the President's budget, the deficit as a share of the economy would fall from 8.5 percent of GDP in 2012 to 2.8 percent in 2022. That represents real progress.

It is important to remember the economic crisis that the President inherited. I think all of us remember back in 2008 and 2009, when we experienced the worst recession since the Great Depression. The economy actually contracted, it shrunk, at a rate of almost 9 percent in the fourth quarter of 2008. We lost 800,000 private-sector jobs in January of 2009 alone, and unemployment was surging. Those are the conditions the President inherited. They were not of his making. He was asked to come in as the clean-up crew. He also faced a housing market that was in crisis, with homebuilding and home sales plummeting and a record level of foreclosures. And we faced a financial market crisis as well that threatened to set off a global financial collapse. We have a come a long way since then.

The federal response to the crisis -- including actions taken by the Federal Reserve, and to be fair, in the final days of the Bush Administration, they took important action, the Obama Administration did as well, and Congress participated. Those actions successfully pulled as back from the brink. And President Obama, I believe, deserves considerable credit for avoiding what could have been the second Great Depression.

As I noted earlier, in the fourth quarter of 2008, the economy shrunk at a rate of almost 9 percent. Positive economic growth returned in the third quarter of 2009, and we have now had 10 consecutive quarters of economic growth.

We see a similar picture in private-sector job growth. In January of 2009, the economy lost more than 800,000 private-sector jobs. Private-sector job growth returned in March of 2010, and we now have had 23 consecutive months of growth, with the last month over 250,000 jobs being created in this economy. I think all of us would like to see even stronger economic growth, and more job creation, but although unemployment is still too high, it has certainly come down substantially.

The pace of this recovery is somewhat predictable, because the best scientific evidence we have now is after a financial crisis it takes longer to recover and weak unemployment continues for a longer period of time.

Looking forward, I believe we need to remember that we really face two critical problems in this economy: one short-term, one longer-term.

Short-term, we are still recovering from the worst recession since the Great Depression. And that was not the result of the policies of President Obama. He inherited that condition. Although the economy is improving, we still have relatively weak demand for goods and services, which is holding back even stronger economic growth. Longer-term, we face a debt threat.

Job one is to improve economic growth with steps to strengthen demand. Simultaneously, we need to enact a credible plan to bring down our debt.

Our Republican colleagues, I believe, have completely overlooked the first problem of weak demand, and would actively make the problem worse by imposing fiscal austerity right now. They have focused solely on the longer-term debt threat. As a result, their policy proposals of imposing fiscal austerity now would only further weaken demand, which would lower economic growth, kill job creation, and choke off the recovery.

I would just say to my colleagues, I believe they've got it half-right. Absolutely, we have a long-term debt threat. We have to cope with that. But, in the short-term, what we have is weak demand, and we also have to cope with that.

The Republican proposals for immediate fiscal austerity would fit a circumstance in which we have rising interest rates. But we don't have rising interest rates. In fact, interest rates are at a record low. The problem we have right now is weak demand.

Here is how a leading economist, Dr. Joel Prakken, the Chairman of Macroeconomic Advisers, described the problem in his testimony before this Committee, just weeks ago. He stated: "The number one problem that [small businesses] say they have to deal with right now is lack of demand. They do not say access to capital. They do not say burden of regulation. . . . They say their order books are thin."

That is what we hear in every corner. The Chairman of the Federal Reserve has told us that, the head of CBO has told us that. And that's why companies are not hiring as fast as they might otherwise do, even though they have record profit levels and $2 trillion sitting on their balance sheets.

But we do need to address the second problem of rising debt. And this is where I agree with our colleagues on both sides who have made that a critical issue. And, we should not wait to respond -- but not by imposing fiscal austerity right now, but by adopting a plan that phases in fiscal discipline as the economy strengthens.

We really need an economic two-step. First, we need short-term strengthening of demand by investments in infrastructure. That would put people to work and make America more competitive. Second, and simultaneously, we should adopt a credible and serious plan that puts us back on a sounder long-term fiscal course by fundamental tax reform, by reforming the entitlements, and by cutting wasteful spending. All of that is required.

In his testimony before the Senate Budget Committee last week, Federal Reserve Chairman Bernanke addressed the need for this kind of two-step approach. He testified, and I quote: "Even as fiscal policymakers address the urgent issue of fiscal sustainability, they should take care not to unnecessarily impede the current economic recovery. Fortunately, the two goals of achieving long-term fiscal sustainability and avoiding additional fiscal headwinds for the current recovery are fully compatible -- indeed, they are mutually reinforcing."

To address the short-term lack of demand, the President's budget includes a number of proposals, that include: one, extending the payroll tax cut and unemployment insurance benefits through 2012 -- I welcome the fact that we seem to have a breakthrough at least on the payroll tax cut front; second, providing $50 billion in upfront infrastructure investment for the construction of roads, bridges, rail, and airports; third, extending the 100 percent business depreciation deduction for new investments -- I could just say as a small business participant myself I can testify to the value of that; provide $30 billion for school modernization; provide $30 billion to help states and localities retain and hire teachers and first responders; establishing Project Rebuild to create jobs by restoring distressed communities; and, finally, creating a new tax credit for small businesses that add jobs and increase wages.

So, my own evaluation of this budget is it moves in the right direction. It does substantially reduce the deficit, as a share of GDP, cutting it by two-thirds over the budget period. It reduces discretionary spending to the lowest level as a share of our economy in 50 years, actually in 60 years. You can see, discretionary spending, the previous high was 13.6 percent, this brings it down to 5 percent of our national income. That is a substantial change.

This budget also indicates the need for additional steps. But for additional steps to be taken, it is going to take all of us to find some way to come together. I very much hope that even though this is an election year, we will come together on the longer-term challenge that we confront.

Chairman Conrad Q&A w/Acting Director Zients:

Conrad: Thank you Director Zients for that testimony. Let me start out by saying I've seen the President criticized for not cutting the deficit in half in his first term. What was the deficit as a share of GDP that he inherited? Do you recall?

Zients: It was over 9 percent.

Conrad: I believe that first year it was 10.1 percent. In 2013, what will the deficit be as a share of GDP?

Zients: 5.5 percent.

Conrad: So, that is pretty close to cutting in half. What will it be in 2014?

Zients: It will achieve the cutting in half -- the exact percent I can get for you -- but by 2014 we will have cut it in half.

Conrad: Alright. Second question I'd have is a question of revenues. Under the President's plan, revenues will average what share of GDP over the budget period?

Zients: A little below 20 percent.

Conrad: A little below 20 percent. I would just say the Fiscal Commission, which has been lauded for reaching a bipartisan agreement, had a level of 20.3 percent at the end of its budget period. During the Clinton years, revenue averaged about 19.4 percent. So the level of revenue that the President is calling for is completely in keeping with what the bipartisan Fiscal commission members recommended and what we saw during the Clinton years, which was the longest period of uninterrupted economic growth in the nation's history.

Let me ask a third question. The Ranking Member has said that the President, over the 11 years that is included in his calculation, increased spending 62 percent. Do you know how much President Reagan increased spending in the 8 years of his administration?

Zients: I believe that was 69 percent across the eight years from '81 to '89.

Conrad: And can you tell us how much President Bush increased spending in his eight years. I'm talking about Bush 44?

Zients: Yes. From 2001 to 2009 -- 89 percent.

Conrad: So the fact is, those Republican presidents, over shorter periods of time, increased spending much more than this president is proposing. So I just think those facts are important. Again, President Reagan, in just eight years, increased spending 69 percent. President Bush, George W. Bush, increased spending 89 percent over eight years. This president is being criticized for increasing, over 11 years -- a longer period -- 62 percent, which is less than either of the others.

With respect to the question of Mr. Lew's statement of a budget requiring 60 votes. I assume he was referring to the Budget Control Act that we passed last year, that did require 60 votes. Is that your understanding?

Zients: Absolutely.

Conrad: You know, that's different than a budget resolution. A budget resolution does only require a simple majority. But a budget resolution never goes to the president for signature. Last year, we passed a Budget Control Act that's a law. That passed not only the House and the Senate, and of course required 60 votes in the Senate, but was signed by the President. So it's the law.

Let me ask one other question if I could, because I'm running out of time. The hard reality here is budgets, and what we do with fiscal policy is inextricable linked to the economic outcomes that this country experiences. And if we look back at what this president walked into, isn't it true that the economy was shrinking at a rate of almost 9 percent in the final quarter of the previous administration?

Zients: Yes it was.

Conrad: And isn't it a fact that the economy is now growing in the most recent quarter at a rate of about 2.5 percent?

Zients: Yes.

Conrad: So that is a turnaround. It's really quite remarkable. From the economy shrinking at a rate of 9 percent to an economy growing at a rate of 2.5 percent. I believe the President deserves some credit for helping engineer that turnaround. The same is true with respect to jobs. Isn't it true that in the first month of 2009 that we lost 800,000 jobs private sector?

Zients: Unfortunately, yes.

Conrad: Of course that wasn't a result of this president's policies. He didn't take office until two-thirds of the way through that month. And now, in the most recent monthly report, we gained 250,000 jobs in the private sector. Isn't that the case?

Zients: Yes.

Conrad: So it appears to me the President should be able to ask the American people to support a policy that has brought us back from the brink. And I assume that it's his intension with this budget to try to further the economic recovery and further help create jobs in the private sector. Is that the underlying strategy?

Zients: I think you captured it well in your opening statement, that it is a two-step. It is to make sure we continue this recovery, starting with making sure we extend the payroll tax holiday so 160 million Americans don't have a tax increase. Doing the types of investments -- the $50 billion you mentioned in infrastructure, the $30 billion to modernize our schools. And, at the same time, start to put ourselves on a path toward deficit reduction that by 2018 has debt as a percent of GDP stabilized with our deficits coming in each year.

Coming back to the figure for 2014 that you mentioned, by 2014 we're down to 3.9 percent, which is not where we want to go, but a heck of a lot better than the ten and a half percent that you referenced that the President inherited up front.

Conrad: I thank you.