Jan.Senate Budget Committee discusses the outlook for the U .S. and global economy

At a Senate Budget Committee hearing on January 26, members heard testimony on the state of the U.S. and global economy as well as future projections for gross domestic product (GDP) growth, employment, and entitlement burdens. 

In his opening remarks, Chairman Kent Conrad (D-N.D.) was cautiously optimistic about the recovery and recent employment data, pointing out that unemployment figures have been declining for an extended period of time and real GDP growth is expected to be 3.1 percent this year. Despite his optimism, Conrad said there are still real threats to the economy, including the struggles of the housing market, unemployment and underemployment, the EU debt crisis and Congressional gridlock. He also indicated that an air of uncertainty was restraining the recovery and said he believes a “serious deal on U.S. debt would be the tonic for our [U.S.] market woes.” 

Ranking Member Jeff Sessions (R-Ala.) agreed with the chairman that reaching a workable debt deal is imperative, and said he would support Budget Committee efforts to facilitate such a deal. Changing tact, Sessions said the employment situation is not improving quickly enough and described the Obama Administration’s “free spending plans” to help spur job growth as ineffective.  

Conrad also announced a number of future hearings with a strong focus on the economy and the tax code, including a hearing with Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner and a hearing dedicated to tax reform. 

In his opening statement, Alan Blinder, a Professor of Economics and Public Affairs at Princeton University, said the recovery has been weak to this point, and he expects only moderate GDP growth this year. He praised the policy response to the crisis, saying that all of the policies enacted directly after the crisis saved “about 10 million jobs,” but, those policies are beginning to expire and our economy will be negatively affected. Blinder also said it is a “myth” that the U.S. deficit requires a quick and drastic response, telling members that government spending has been a boon to an otherwise struggling economy. In closing, he said greatest threat to the economy is Europe’s debt crisis, followed by rising oil prices, adding that if a run on EU financial institutions occurs it will spark a second global recession and negate all U.S. GDP growth in 2012. 

In his opening statement, Joel Prakken, Senior Managing Director of Macroeconomic Advisors, also expressed guarded optimism regarding the recovery and the United States’ economic outlook. He said his firm expects 2.25 percent GDP growth this year, but they have also forecasted a modest increase in the unemployment rate as the year progresses. Prakken said the recovery has been constrained by a number of factors, most notably fiscal policy and the struggling housing market, but the uncertainty regarding new regulation, the deficit, the budget and the tax code has been the biggest drag on growth. Contributing to the slow recovery and modest growth, Prakken said the number of temporary policies and “short-term fixes” to key initiatives has kept private and international investors on the sidelines. In closing, Prakken agreed that the EU debt crisis is the greatest danger to the U.S. recovery, calling it the “slow moving train wreck that could push us into a double-dip recession.” 

In his opening statement, Ike Brannon, Director of Economic Policy at the American Action Forum, said there are several threats to the U.S. economy including the debt crisis in Europe, rising oil prices and tension with Iran, and the deficit. He told members they cannot keep relying on fiscal policy to protect the U.S. economy because policy responses are not “nimble enough” to thwart economic threats or promote long-term growth. In closing, Brannon said real entitlement reform and comprehensive tax reform are both necessary before the U.S. is “back on the right track.” 

Question and Answer   

The question–and-answer session was relatively short, constrained by a mandatory vote on the Senate floor, but most questions revolved around healthcare costs, the FY2013 budget and entitlement reform.  

Senators Ben Cardin (D-Md.), Mark Begich (D-Alaska) and Jeff Merkley (D-Ore.) asked for the panel to the comment on what Congress can do policy-wise to repair the housing market. Blinder said ideally he would like to see some type of mass refinancing program, but realistically, he said changing the Federal Housing Finance Agency’s charter so that the conservator is responsible to taxpayers rather than preserving Fannie and Freddie, would be helpful. Prakken said there is no silver bullet to alleviate the housing market’s woes, but a number of easy adjustments could rejuvenate the market. Specifically, Prakken said loosening the standards for acceptance into loan modification programs, selling Fannie’s and Freddie’s significant stock of foreclosed properties, and creating a floor for housing prices would prevent strategic foreclosures and spur a robust housing recovery. 

Following up on Prakken’s response, Senator Sheldon Whitehouse (D-R.I.) asked Brannon to share his thoughts on principle reduction. Brannon said principle reduction would provide “great value” to homeowners that are underwater and struggling to keep up with payments and would effectively prevent strategic foreclosures. He also advocated for allowing homeowners who are being overwhelmed with their mortgage payments to file for Chapter 13 Bankruptcy. 

For testimony and a webcast of the hearing, please click here.