The Economy In America
Mr. Speaker, we have an interesting topic that we're going to be talking about and developing over the next hour. I'm here representing the Republican Study Committee, and we would like to talk about the subject of our economy and the…
Mr. Speaker, we have an interesting topic that we're going to be talking about and developing over the next hour. I'm here representing the Republican Study Committee, and we would like to talk about the subject of our economy and the nature of the problems that we are facing but also what kinds of solutions are possible. I'm going to be joined by a number of other congressmen this evening, and I'm going to invite them to jump into our discussion. And, Mr. Speaker, I hope that you find the hour interesting and enjoyable.
Now, one of the problems with having Congressman Akin here is I'm a former engineer and I get a little pedantic sometimes and I think it's important to exercise some discipline. And the discipline in this case is to define the nature of the problem in the economy in America.
So before you go offering legislation or try to fix something, it's good to know what it is you are trying to fix, and that will allow you to answer the important question whether or not it's going to work, which is not exactly a small question. Unfortunately, we have spent an awful lot of money without really defining the problem on solutions which have not worked. And so that's why we need to take a little bit of time to talk about what's going on.
As perhaps many people are aware, there are two quasi-governmental organizations called Freddie and Fannie, Freddie Mac and Fannie Mae, and they, of course, have home mortgages which they take care of financially for more than half of the different people in America that have homes. So these are huge organizations, but they are not quite government, and they are not quite private. They are sort of in a gray zone, and they were created, ostensibly, to try to provide decent home loans for American citizens.
The problem, though, with Freddie and Fannie, because they are not really government, they were also outside of the administration's authority to be able to deal with them.
So Freddie and Fannie started to get more and more innovative over the past years, and they started to make all kinds of loans to all kinds of people. As those loans were made, what happened was there was not good control to make sure that the loans were being given to people that could actually afford to pay the loans.
In fact, we had, intentionally, Congress started to pass laws and put pressure on these organizations, as well as banks, to encourage them to make loans to people who could not afford to pay. Now, how that would be called compassionate, I am not quite sure, but Congress did that.
So what started to happen, in combination, as this was going on, you have the Federal Reserve lowers the interest rate, so money is easy to get, and all kinds of people jump on the housing bandwagon, and you create this real estate bubble, people taking out loans, which they don't have jobs or the finances to pay off these loans. And pretty soon, as we got toward the more recent years, this bubble explodes and all of these loans, people are starting to default on them.
Now, those loans had been packaged up and cut in pieces by Wall Street, sold all over the world. And now you have got one whale of a mess on your hands. Now, the question should be asked, then, well, didn't somebody see this coming, didn't somebody know that Freddie and Fannie were doing things that they shouldn't have done?
Well, in fact, in the New York Times, the President, President Bush, the headline on the article in the New York Times, in case anybody wants to look it up, it's on September 11, 2003, well before any of this came down. It says here the Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.
So here you have the President saying Freddie and Fannie are out of control, we need to get regulations on
them. Now what concerns me is people are saying, they are saying, well, this is a failure of free enterprise. There's no failure of free enterprise here, this is a failure that starts right here in Congress, a failure of Congress to regulate these institutions which we created, and which went haywire by making all kinds of loans to people who shouldn't have had those loans, and now we are starting to pay the piper on it.
So this is the President, in 2003, The New York Times, not exactly a right-wing oracle, you follow the article through, and we come toward the end and it says these two entities, Freddie and Fannie Mae, are not facing any kind of financial crisis, said Representative Barney Frank of Massachusetts. Now this is interesting, because what this article is saying is that the Democrats were opposed to the further regulation of Freddie and Fannie.
They were opposed to it, and the man from this Chamber, who was on the floor no more than an hour ago, is quoted as saying, now, catch this, these two entities, this is Barney Frank talking, Fannie Mae and Freddie Mac are not facing any kind of financial crisis, said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee.
So it wasn't that people didn't know, the President knew, but what it was, in the Senate, the legislation to try to regulate Freddie and Fannie was never passed. So we have, in a sense, a repeat of other financial crises because we in Congress did not do our homework, did not regulate and allowed these loans to be made.
Now, I am joined by some of my colleagues here and I am looking forward to chatting with them here. Just one thing I think that would also be helpful to know, we have defined the problem, and that is all of these loans that have been made and people got loans. That wasn't responsible, they couldn't pay the loans off. And so now these loans are being defaulted on.
That is happening enough. It is creating problems. The question is, how big a crisis is it? Well, just to give you some sense, about half of the loans that we expect are going to default have already happened. That says we have drunk about half the cup of poison and it has made the world's financial system sick, and we have got another half to go. Kind of an interesting thing.
I am joined by Congressman Lamborn from Colorado, a very wise and helpful influence in Congress, and I yield to the gentleman.
That was a very important point that you raised. That is if we are going to propose solutions, the question is does the proposed solution actually solve the problem or does it just make people politically happy. Are we really trying to specifically tailor the solution to something that is going to work.
Before we get into the specifics of various solutions, let's just talk for a minute. You know, the question is, a lot of times people think Congress has some sort of a magic lever here in the Chamber. And when we pull this lever, it just makes the economy accelerate or something. You know, they say we are going to stimulate the economy, whatever that is supposed to mean.
Really what Congress can do is we can either tax people or not tax people. We can take the revenue and slop it around in different ways. That's about all we can do. We don't create any wealth at all.
So when it comes to the economy, the tools we have are, to some degree, limited just because of the fact that Congress really doesn't create anything. What happens is it's the economy that either pulls itself forward or stagnates because we have created some set of laws that's messing it all up. So as we talk about solution, we have got to be careful, don't we.
It seems like to me, gentlemen, what you are recognizing is an inherent problem with this whole bailout concept. The whole idea of the bailout seems to be reward the person who did the wrong thing economically at the expense of the person who did the right thing.
With all due respect, gentlemen, I don't think you are being quite fair in that. What you are really saying is when you don't have a credit card you can pay off, you are saying I am going to use your credit card and take it. I mean, why should people from the State of Missouri or Colorado pay for California?
I just noted that the gentleman, Congressman Jordan from Ohio, is here, and I yield to him.
What you have just said seems to make a whole lot of common
sense. Just repeating what you said, the thing that's going to get us out of the recession is going to be the economy. It's going to be the small business people, the entrepreneurs, the hard working Americans. They are the ones who are productive, they create wealth, and they pull us up. You are saying that should be the direction of our solution.
So I think what I am hearing you say is we just can't spend our way out of this with a whole lot of government spending. That would be a little bit like grabbing your shoe laces and try to fly around the Chamber.
I see my good friend from Georgia is joining us for the discussion as well, Congressman Gingrey.
You are referring to the same guy that said there is no financial problem with Freddie and Fannie; is that correct?
Is a tranche and a slurp sort of the same, $350 billion, you are just kind of trancheing?
That does seem like something that's a little upside down, doesn't it.
The person that runs their household responsibly, the State that runs its budget responsibly, now we are supposed to be bailing out the banks instead. It is sort of an odd concept, but I didn't mean to interrupt you.
Before we list off a whole lot of these different specific solutions, if I could just cut in for a moment and sort of let's step back a little bit and be a little more professorial.
You know, we have this tranche, it sounds like something on an ACT test or something. You are a medical doctor, you are probably smart at knowing all the meanings of these words. But there are two general theories, aren't there, in economics.
One of them was basically called ``Keynesian'' because of this Little Lord Keynes that came up with this idea. It was something that FDR used to turn a recession into the Great Depression. Obviously it didn't work very well, and yet there are some people that still want to say, well, FDR got us out of the Great Depression using Keynesian economics. And the theory of Keynesian economics is take a whole lot of money away from all the taxpayers and go spend it all on a whole bunch of pork- type government projects. Maybe some are good, some are bad, dams across certain rivers to build hydroelectric plants, or building schools and stuff. It was politically popular stuff, but it didn't help. It made the Depression worse, and we ended up getting out of the Depression by getting into World War II.
Now, I would just as soon that we don't use that approach to get out of our depression this time around and get into another world war.
But that was called Keynesian economics. The idea was you just spend a whole lot of money and, wallah, something is going to happen. Well, if you think about that logically, we have got trillions of dollars in deficit, and if Keynesian economics worked we would be in a great economy right now. We have already spent much more money than we have. And yet that is one approach, and it has traditionally been something the Democrats do. It is politically popular, but it hasn't worked very well.
The other approach is what you are talking about, which is more commonly called ``supply side.'' It is the idea of not taking money, but allowing the businessmen and the people who create the jobs to invest and let that small business engine through productivity pull us out. That is what the gentleman from Ohio, Mr. Jim Jordan, a fantastic lineup of some different proposals to try to solve the problem of where we are in the economy.
But we have a gentleman from Louisiana. I would yield to you if you would like to comment on this.
So the responsible people are saving money, yet the people in this Congress are talking about spending it when we don't have it. Go ahead. I yield.
Could you imagine if you were the Governor and you talked to your State of Louisiana and you said, hey, we are in economic hard times, so I have decided we are just going to spend a whole lot more billions of dollars. What would people do to you? Would they lock you up?
Do you know what happened to the first $350 billion? Is it your sense that in the last month or two that that has really given a whole lot of value for that $350 billion?
So we came up with a solution that cost a whole lot of money, when there was actually a much lower cost way to solve the problem. And we are in danger of doing the same thing again in the near future if we don't use the right kind of tools to turn things around. I hear what you are saying.
The gentleman from Ohio.
Unchartered waters.
So the gentleman, what you are saying is from the time this country was founded to the 1980s, we had not accumulated as much debt-- --
As we have done in the last 2 years. And you are talking $2 trillion.
If you allow me to interrupt you just a minute, let's put that in perspective. How much did the war in Iraq cost, that everybody was complaining about for the last 6 or 7 years?
It was about $800 billion. It is not even $1 trillion. So we got about $800 billion or $900 billion for the war in Iraq, and we are talking about just in a period less than a year, $1 trillion? This is an uncharted kind of area we are getting into.
Well, I really appreciate the Congressman. I know that you are disciplined in the wrestling sport. You understood that there are some rules that life works by, you work out hard, you wrestle a good match, and there are rules of economics as well.
We have a gentleman joining us tonight also, I think he is from Iowa, as I recall, just a bit to the west of Missouri, and Mr. King, Congressman King, I would recognize you if you want to talk a little bit along the same lines.
We have been talking about what you shouldn't do. The gentleman from Ohio is talking about the inherent unfairness, the injustice of basically taxing somebody to fix a problem they didn't create, of bailing out a big company when the little one doesn't get bailed out, this whole bailout fever, everybody with their hands out.
Now, is there a better kind of solution? What would a supply side kind of model be? What would you recommend? We don't want to sit here and criticize people that are proposing things without giving them an alternative that is better, and I think that is what you would like to talk about.
You put that in context, that is a lot more than the Marshall Plan adjusted for inflation. That is more than the War in Vietnam adjusted for inflation. It is more than the Louisiana Purchase. I mean, it is more than anything we have bought before.
That is a very interesting proposal that you have and one that a lot of economists are taking a very serious look at and one that is really rising in popularity I think with a lot of scholarly people, Congressmen, and I appreciate your doing it.
I would like to dig into one little detail of what you said.
What we're not talking about is a lot of fancy theory here. This is stuff that's been tried. And we know that excessive government spending, way beyond our budget, has created a Great Depression and all kind of other trouble.
But what we're talking about, instead, is allowing small businesses to invest. And so, when we did that, we actually did that in the first quarter of 2003. And I have a series of graphs here that show the result of doing that.
Let's just take a look at this: The black vertical line on this graph is the first quarter, or part way into 2003.
The second quarter. I stand corrected. The second quarter of 2003 is the black line that you see here. And this first chart is Gross Domestic Product of the United States.
Now, if you take a look at the things on the left side of the chart that are in red, this includes a bunch of kind of nice tax cuts, which give better deductions for having kids and a lot of feel good kind of stuff. So it's not just any tax cut that makes a difference.
Your point is you're investing in productivity. When you get to the second quarter of 2003, we did one major tax cut, and that was dividend and capital gains, which immediately put money back into the pockets. It's not really put money back in. We just never took it out of the pockets of the small businessmen who made investments and took risk.
And take a look at what happens on the average. This is going all the way out to 2007. The average Gross Domestic Product, 1.1 percent before that tax cut, after it you see that the averages jumped a couple of percent on Gross Domestic Product. Now, that's an interesting chart.
Let's take a look at the next one. What happens to go along with Gross Domestic Product?
Let's take a look at jobs. This is job creation. Everything below the line means we're losing jobs, as we are right now in the economy. The second quarter of 2000--oh, you were right, May 2003. You take a look and you see all of this job growth. An average loss of 99,000 jobs in the first couple of years, as we inherited the recession in 2001, and a gain of 147,000 jobs following. That is the effect of letting small business, turn them loose and let them be productive.
Now, here's the thing that I find most amazing, and that is the fact that when you do this, the government cuts taxes; and guess what happens to the money we have, the revenue?
Well, take a look at the third chart. There again, May of 2003, a low point in Federal revenue. As the economy gets going, Federal revenue takes off like a skyrocket. So what do you solve?
Everybody is more wealthy. There are more jobs, and not only Federal, but State governments have more money to spend.
To your point, gentlemen, I thought some specifics though. This isn't theory. This is what JFK did, this is what Ronald Reagan did, and this is what happened under the Bush administration with that key tax cut, not just any tax cut, but the one that empowers Americans and gets the government's big fist out of their pocketbooks.
I yield to the gentleman. Continue.
I don't want to be any kind of socialist, gentleman.
Congressman King, I think you've just given us a rather eloquent description of just basically saying, free enterprise does work, doesn't it?
We have a fantastic doctor from Georgia, and I would yield to you if you had a thought on the subject here.
I'll yield to you, and then we'll go to the gentleman from Louisiana.
You know, we like to get into these numbers a little bit because we have to study it and live with it day by day. But let's try to make this practical for the average person on the street.
What we're talking about is, instead of treating a recession, we're talking about, if we don't do this right, we're going to create another depression. We're talking about an extremely serious condition for our country; is that correct?
I think I'm the one supposed to do that. Congressman Scalise from Louisiana, we'd love to hear your thoughts too along the same lines.
And thank you very much. I appreciate that, Congressman Lamborn.
Congressman Scalise, did you say that basically we have already gone from 700,000 now to a trillion? Is that already that high?
So it's our grandchildren's money we're starting to spend.
Now, Congressman Scalise, you made a point that I think, and I think it is, it almost seemed counter-intuitive to me when I first heard this before I came to Congress, the idea that the government could actually cut taxes and raise more revenue. Doesn't that seem like making water go uphill?
Congressman Scalise, I don't know if you were aware of it, but did you ever hear the story of what the Irish did? Their economy was in trouble about 15, 20 years ago, and they decided they were going to cut their corporate taxes really to the bone. They really cut the corporate taxes.
Now, in America we have the second highest corporate tax rate in the world. The Irish went the other way, cut their corporate taxes, and their economy took off like a skyrocket. And they've got more businesses starting and jobs, and their Gross Domestic Product has done fantastically.
There's a perfect case study of somebody who used this odd principle that by cutting taxes you can actually are increase revenue. Here's a chart of it. You can see we cut the taxes. Everybody said oh, the Republicans have ruined the economy because we cut taxes. But take a look at what happens to revenue.
Here is the way I was thinking about this. Tell me where it makes sense to you.
Let's say you're king for a day and your job is to put a tax on a loaf of bread. So you start thinking. You say, ``I can put a penny on it. Well then, I'd have to sell a lot of bread to get a bunch of money or I could charge $100 for a loaf of bread, and then maybe nobody would buy any.''
Well, wouldn't commonsense say that there is something between a penny and $100 that's sort of the optimum at which you can tax it? When you increase the tax, you actually get less money. I think that is what's going on here, which is, if we cut the taxes, the economy takes off, and we end up with more government revenue. That's exactly your point, and that's the whole idea of supply side economics.
You know, the Congressman from Louisiana is fortunate to have somebody who understands that basic idea, and that is the proposal that we're making. We're not trying to dump on somebody else. We're just saying, look, this massive spending bailout fever just is not going to solve the problem. Anybody who runs a household knows that if you're in trouble financially that you don't just start spending money.
As Ronald Reagan said, it's not fair to say it's like a drunken sailor, because a drunken sailor is spending his own money.
I will.
The little trouble with what you're saying is that it requires people to be responsible, doesn't it?
I mean, in politics, it's nice just to tell somebody, It's okay to be irresponsible. We'll just bail you out. The only trouble is that, when you allow that to grow to a certain level, the whole country crashes.
So we're basically saying that there are two courses before us. We're standing at a crossroads.
One of them is the old Keynesian theory that we're just going to spend a ton of money and slop it into everybody's pockets. The people who get the money may like us, but the whole economy is going to go down, not just into a recession but into a depression.
The other alternative is to get the government out of the way and allow the small businessman to make the investment to drive the economy.
Those are the two choices before us. We're not trying to criticize the Democrat Party for the past things--for creating the problem by making loans to people who shouldn't have gotten the loans, for refusing to regulate Freddie and Fanny--but now it is their responsibility because the voters have put them in charge, and they're going to have to take one of these two courses. We're standing here today, saying: You need to choose the responsible course, which is empowering small business to create those jobs.
I will.
Congressman Scalise, that is a great summary. We appreciate the wisdom that you've brought for us from Louisiana.
I am going to yield to a gentleman who ran his own small business successfully for many years, the gentleman from Iowa and my very good friend.
Do you have some sense from a small businessman's perspective, Congressman King?
They were politically popular, weren't they?
Congressman King, we're kind of coming down the final stretch here.
We've had a chance to talk in some very broad terms about, first of all, what created the problem. The problem was created by this silly legislation, largely, that came from this floor over a period of different generations of politicians who encouraged people to be irresponsible and to take out debt that they couldn't pay.
Now, I don't know if that might have been sold as compassion, but I don't think it's compassionate to sell a man a loan that he can't pay back, that puts his whole family under stress as they labor under the economics of not being able to pay a loan.
So what happens is you get more and more people taking these loans, and the people who are writing the loans don't care because it used to be that a bank had to live with the bad loans they made, but these loans are just passed on to Freddie and Fanny, and you know the government takes care of all of those loans. So we make all of these loans that don't work, and pretty soon these things start sliding down the wall. The tragedy is half of them are still due. So that then throws the whole world economy into a shock.
So we're left here today at a crossroads. We are left at a fork. What are we going to do about this?
The irony is that the people who largely created this mess, particularly the senior Democrat on the Financial Services Committee, say Freddie and Fanny don't have any problems. Now the whole world economy is on its knees, and they're in charge of fixing it. They've got a choice. They can continue to spend a whole lot of money, which we've already spent a lot of money. If that were going to work, we would be in a great situation. The other thing is that they're going to have to trust the American economy to pull us out.
I see we have my distinguished friend from Colorado, Congressman Lamborn. Did you have a thought?
Well, I appreciate your joining us, and I also appreciate the gentleman from Iowa. I think we've just got about a minute or so left.
I think the thing that we have to walk away with is that the cost of going from a recession to a depression could be severe. In the days of Jimmy Carter, things were a whole lot worse than they are right now. They had double-digit inflation, and they had double-digit unemployment. We aren't quite that far yet.
I would like to thank my friend from Iowa, Congressman King, Congressman Lamborn, also Dr. Gingrey from Georgia, Congressman Scalise from Louisiana, and also Congressman Jordan from Ohio, who have all joined us here this evening.
Congressman King, the last word.
Well, it sounds to me a little bit like what the French philosopher Bastiat wrote. He was a legislator. He called it ``institutionalized theft.'' If a thug hits you on the head and takes your wallet, we call it ``stealing,'' but what happens when the government takes money that legitimately it should not be taking? We call that ``institutionalized theft'' or sometimes ``socialism.''
Thank you very much, gentlemen, for joining me. I really hope that this has been informative.
Thank you, Mr. Speaker.