It gives me great pleasure to welcome Council of Economic Advisers (CEA) Chairman Joseph Stiglitz before the Joint Economic Committee (JEC) today. As sister organizations established under the same statute, we deal with many of the same issues. I hope you will accept my expression of best wishes as you move on to other challenges.
The economic history of the U.S. is one of cyclical swings in economic activity, and recent history is no exception. The economic expansion that began in 1991 is now almost 6 years old. This cyclical upswing has been associated with a moderate rate of economic growth, an expansion of employment, a lower unemployment rate, and improvement in a number of other cyclical indicators. Though the pace of economic growth during this expansion is below the average for postwar economic expansions, the long term slowdown in trend labor force growth may be part of the explanation for this. However, productivity and wage growth has been relatively weak.
However, we politicians in Washington have our own way of addressing cyclical movements in the economy. By now everyone knows the drill: the party in the White House claims that the typical upward movement in the business cycle is due to its policies, while those in the other camp claim the expansion is some sort of statistical illusion, or is about to end in some grim disaster. All this political posturing proceeds despite the fact that in the near term we in Washington, whether in the executive or legislative branch, can have only a modest impact on the economy under most circumstances.
However, especially when tax rates are cut deeply from very high levels, as in 1964 and 1981, one can expect significant positive effects to result in the near term. But in most cases, our $8 trillion economy simply dwarfs the effects of the laws we pass in the short and medium term. Over the longer term, of course, our tax and spending decisions can and do have a significant impact on economic growth.
It is the policies of the Federal Reserve that most affect the economy in the short run. By lowering inflationary expectations, Federal Reserve policy produced lower interest rates in 1991, 1992, and 1993, and produced a sound and stable foundation for the expansion. Under normal circumstances the influence of Federal Reserve policy dominates the effects on fiscal policy in the near term. It is in the longer term that the weight of our fiscal policies can make a cumulative difference.
This business cycle expansion does not belong to Washington politicians in either party. Let's give credit where credit is due, to the many millions of hard-working American citizens outside of this city. The workers, entrepreneurs, and farmers, across the country know that it is they, not Washington, D.C., that is making the economy grow. They deserve the credit for the economic expansion, and all the posturing in Washington cannot take it away from them. The American people know that the tax increase of 1993 has as much to do with the current cyclical upswing as the tax increase of 1990 offered by the Bush Administration. The 1990 Bush tax increase is not the reason the economy turned around in 1991, any more than the 1993 tax increase determines current economic conditions.
Obviously a growing economy makes addressing economic policy issues easier for government. Just as a recession pushes up the budget deficit, an upswing holds down federal spending and boosts federal revenues. Employment rises and unemployment falls, making implementation of policies such as welfare reform easier. There is also less pressure from desperate industries for bail outs and subsidies. Without distraction from problems caused by recession, a mature expansion is a good time to address long term structural issues, such as reducing barriers to saving, investment, and long term productivity and economic growth.
The relatively low economic growth rates of roughly 2 percent projected by the Administration and CBO into the foreseeable future are not very encouraging. We need to closely examine our current tax code and identify the ways it undermines incentives for savings, investment, and long term economic growth.
I would like to conclude by suggesting that the Administration's current approach to economic policy in general and tax policy in particular seems rather narrow and depends heavily on specifically targeted measures. In recent weeks news articles in the New York Times, the Washington Post, and other major publications have quoted many economists and policy analysts from across the political spectrum raising very serious doubts about the efficacy of the employment tax credit and narrowly targeted junior college tax credit especially. I'd like to turn to the economic issues raised by these proposals during the question period.
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