CBO Testifies Before the Joint Economic Committee about Increasing Economic Growth and Employment in the Short Term

Posted on
February 23, 2010

I testified this morning before the Joint Economic Committee about policies to increase economic growth and employment in 2010 and 2011. This hearing was originally scheduled for several weeks ago but then canceled because of the snow. My prepared remarks today were essentially the same as those released a few weeks ago and were based on CBOs January report on this topic and a follow-up letter to Senator Casey.

My comments emphasized three points:

First, although the economy is starting to recover from the most severe recession since the 1930s, CBO and most private forecasters expect a slow rebound in output and employment. In particular, CBO projects that the unemployment rate will average slightly above 10 percent in the first half of this year, fall below 8 percent only in 2012, and return to near its long-run sustainable level of 5 percent only in 2014. As a result, more of the pain of unemployment from this downturn lies ahead of us than behind us.

Second, fiscal policy actions, if properly designed, would promote economic growth and increase employment in 2010 and 2011. However, despite the potential economic benefits in the short run, such actions would add to the already large projected budget deficits. Unless offsetting actions were taken to reverse the accumulation of additional government debt, future incomes would tend to be lower than they otherwise would have been.

Third, different policies that have received public attention would have quite different effects on output and employment per dollar of lost tax revenue or additional government spending. To be sure, significant uncertainty attends any quantitative estimates of the effects of particular policies, and CBO has emphasized that uncertainty by reporting ranges of estimates that we believe encompass most economists views about the effects of each type of policy. Still, we think there would be significant differences in the cost-effectiveness of different policies (as measured in our analysis by years of full-time-equivalent employment per million dollars of total budgetary cost).

Policies that would have the largest effects on output and employment in 2010 and 2011 per dollar of budgetary cost would be those that could be implemented relatively quickly or targeted toward people whose consumption tends to be restricted by their income---for example, reducing payroll taxes for firms that increase payroll or boosting aid to the unemployed. The following figure summarizes the estimated effects of various policies on employment in 2010 and 2011.

Cumulative Effects of Policy Options on Employment in 2010 and 2011,
Range of Low to High Estimates