[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
INFLATION: A PREVENTABLE CRISIS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HEALTH CARE
AND FINANCIAL SERVICES
of the
COMMITTEE ON OVERSIGHT
AND ACCOUNTABILITY
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
MARCH 9, 2023
__________
Serial No. 118-9
__________
Printed for the use of the Committee on Oversight and Accountability
Available on: govinfo.gov
oversight.house.gov or
docs.house.gov
_________
U.S. GOVERNMENT PUBLISHING OFFICE
51-630 PDF WASHINGTON : 2023
COMMITTEE ON OVERSIGHT AND ACCOUNTABILITY
JAMES COMER, Kentucky, Chairman
Jim Jordan, Ohio Jamie Raskin, Maryland, Ranking
Mike Turner, Ohio Minority Member
Paul Gosar, Arizona Eleanor Holmes Norton, District of
Virginia Foxx, North Carolina Columbia
Glenn Grothman, Wisconsin Stephen F. Lynch, Massachusetts
Gary Palmer, Alabama Gerald E. Connolly, Virginia
Clay Higgins, Louisiana Raja Krishnamoorthi, Illinois
Pete Sessions, Texas Ro Khanna, California
Andy Biggs, Arizona Kweisi Mfume, Maryland
Nancy Mace, South Carolina Alexandria Ocasio-Cortez, New York
Jake LaTurner, Kansas Katie Porter, California
Pat Fallon, Texas Cori Bush, Missouri
Byron Donalds, Florida Shontel Brown, Ohio
Kelly Armstrong, North Dakota Jimmy Gomez, California
Scott Perry, Pennsylvania Melanie Stansbury, New Mexico
William Timmons, South Carolina Robert Garcia, California
Tim Burchett, Tennessee Maxwell Frost, Florida
Marjorie Taylor Greene, Georgia Becca Balint, Vermont
Lisa McClain, Michigan Summer Lee, Pennsylvania
Lauren Boebert, Colorado Greg Casar, Texas
Russell Fry, South Carolina Jasmine Crockett, Texas
Anna Paulina Luna, Florida Dan Goldman, New York
Chuck Edwards, North Carolina Jared Moskowitz, Florida
Nick Langworthy, New York
Eric Burlison, Missouri
Mark Marin, Staff Director
Jessica Donlon, Deputy Staff Director and General Counsel
Daniel Ashworth, Deputy Chief Counsel for Oversight
Tyler Sanderson, Senior Counsel
Reagan Dye, Professional Staff Member
Mallory Cogar, Deputy Director of Operations and Chief Clerk
Contact Number: 202-225-5074
Julie Tagen, Minority Staff Director
Contact Number: 202-225-5051
------
Subcommittee on Health Care and Financial Services
Lisa McClain, Michigan, Chairwoman
Paul Gosar, Arizona Katie Porter, California Ranking
Virginia Foxx, North Carolina Minority Member
Glenn Grothman, Wisconsin Alexandria Ocasio-Cortez, New York
Russell Fry, South Carolina Jimmy Gomez, California
Anna Paulina Luna, Florida Greg Casar, Texas
Nick Langworthy, New York Becca Balint, Vermont
Eric Burlison, Missouri Summer Lee, Pennsylvania
Jasmine Crockett, Texas
C O N T E N T S
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Page
Hearing held on March 9, 2023.................................... 1
Witnesses
Mr. Douglas Holtz-Eakin, President, American Action Forum
Oral Statement................................................... 4
Dr. John Taylor, Mary and Robert Raymond Professor of Economics,
Stanford University
Oral Statement................................................... 6
Mr. Mike Konczal, Director, Macroeconomic Analysis, The Roosevelt
Institute
Oral Statement................................................... 8
Written opening statements and statements for the witnesses are
available on the U.S. House of Representatives Document
Repository at: docs.house.gov.
Index of Documents
----------
No additional documents were submitted for this hearing.
INFLATION: A PREVENTABLE CRISIS
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Thursday, March 9, 2023
House of Representatives
Committee on Oversight and Accountability
Subcommittee on Health Care And Financial Services
Washington, D.C.
The Subcommittee met, pursuant to notice, at 2:06 p.m., in
room 2247, Rayburn House Office Building, Hon. Lisa McClain
[Chairwoman of the Subcommittee] presiding.
Present: Representatives McClain, Comer, Foxx, Grothman,
Fry, Langworthy, Burlison, Porter, Balint, Lee, Casar, and
Crockett.
Mrs. McClain. The Subcommittee on Health Care and Financial
Services will come to order. Welcome, everybody.
Without objection, the Chair may declare a recess at any
time.
I recognize myself for the purpose of making an opening
statement.
Welcome to the first hearing of the Subcommittee on Health
Care and Financial Services for the 118th Congress. To the
witnesses, thank you very much for your attendance and
participation in today's hearing on the inflation crisis.
I think it is most important to understand how we got here
so we don't make the same mistakes going forward, and we can do
better going forward. We first have to agree that we have a
problem before we can fix it and move forward for the American
people. When the pandemic began in March 2020, Congress and
Federal agencies took quick action to deliver financial relief
to the American people. Congress quickly enacted a series of
five laws providing over $3.1 trillion in Federal funds to
mitigate the economic and public health impact of the COVID-19
pandemic.
President Trump's pro-growth and pro-worker economy,
created by the Tax Cuts and Job Act, and investing in American
manufacturing, combined with the unparalleled response to the
pandemic, created the fastest economic recovery in history. As
a result, only $1.9 trillion of the COVID relief funds were
spent by January 2021, leaving over a trillion dollars for
further relief.
Between the start of the pandemic in March 2020 and March
2021, inflation rose 2.6 percent. The Food Index rose 3.5
percent. Energy services increased by only 4.1 percent, and
gasoline prices increased by $0.67 to $2.89 a gallon. Instead
of allowing these policies to continue supplementing the
successful economic recovery efforts, Democrats jammed through
Congress another $1.9 trillion, claiming it was for pandemic
relief.
I want to remind everyone that we still had at that time $1
trillion leftover from the relief packages that we hadn't spent
yet, and the definition of ``inflation'' is too many dollars
chasing too few goods. Republicans and economic leaders of both
parties, including Larry Summers, Greg Mankiw, and Michael
Strain, warned that this completely unnecessary spending would
put the economy at risk of inflation and possibly recession.
Congressional Democrats simply did not listen to the experts.
They were determined to spend more money. Government clearly
has a spending problem. Then exactly what Republicans and
economic experts predicted actually happened.
In 2020, inflation rose to a 40-year high. The price of
groceries went through the roof, gas prices soared, and
retirement accounts plummeted. Between March 2021 and March
2022, inflation rose 8.5 percent. The Food Index rose 8.8
percent, the largest increase since 1981. Welcome back, Jimmy
Carter. The Energy Services Index rose by 13 percent, more than
triple the rate it did the year prior under Trump despite the
COVID-19 pandemic, and gasoline prices increased $1.43 to
$4.32.
What was the Democrats' response? More spending. They
pushed through the wrongly named, I might add, Inflation
Reduction Act, another $740 billion boondoggle which did
nothing to fight inflation, but it did spend more than $360
billion on climate policies and funded 87,000 IRS agents. I am
not sure how that helps the pandemic, but this is on top of
$3.1 trillion and $1.9 trillion. Democrats decided to spend
even more money, and let me remind you that we still have left
over money to this day from those relief packages.
Democrats' spending spree over last Congress drove the
prices of groceries up by more than 11 percent. Their spending
spree and attack on American energy caused Americans across the
country to pay 27 percent more to heat their homes this winter.
Inflation driven by Democrat policies made Michiganders choose
between heating their homes and buying groceries. I don't know
if you all know, but it gets cold in Michigan, especially this
winter.
Then what was President Biden's solution to the
skyrocketing energy inflation? He told Americans to buy
expensive electric vehicles. Now, mind you, in Michigan, we
didn't have the infrastructure, the charging stations, nor the
money to buy these electric vehicles. But President Biden's
``let them eat cake'' response illustrates just how little he
and congressional Democrats care about the impact of the
reckless spending policies have had on working Americans.
This Committee stood on the sidelines for too long while
Americans across the country were feeling the pressure of
inflation brought on by the Biden administration and
congressional Democrats. Today, we hear from experts to better
understand how inflation could have been prevented and what
this administration and Congress must do to address it. I thank
you and look forward to your testimony.
I yield now to Ranking Member Porter, for her opening
statements. Thank you.
Ms. Porter. Thank you very much, Madam Chairwoman. It is
great to join you at our first Subcommittee hearing together,
and I look forward to working across the aisle to oversee and
strengthen our capitalist economy.
Today, we begin our work by discussing inflation. My
Republican friends titled this hearing, ``Inflation: A
Preventable Crisis.'' So, I think our first task is to dig into
what they think was preventable. Let's rule a few things out.
We all know that Congress couldn't have prevented a once-in-a-
century pandemic or Putin's illegal war in Ukraine. We all know
Congress couldn't have prevented the strain on our supply
chains when people started trading consumption of services for
goods during COVID, and we all know Congress couldn't have
immediately fixed our strained supply chains to reduce
inflation. After all, it took decades for Washington to crack
our supply chains by underinvesting in infrastructure, ignoring
price gouging monopolies, and letting corporations offshore
manufacturing.
So, we have ruled out Congress preventing the economic
shocks and the resulting effects that led to inflation, but
still, our Republican friends are suggesting that something
about inflation was a choice. Well, I suppose it was a choice
to help people suffering the economic impacts of COVID, but to
me, that help wasn't really a choice. It was a necessity, but
it seems like today's hearing could turn into a forum to blame
American fiscal policy for the global phenomenon of inflation.
If American fiscal policy created inflation as a crisis that is
being felt in countries across the globe, then American fiscal
policy should equally be able to solve that crisis.
So, what policies do Republicans think will solve global
inflation? Is it deep cuts to social programs like Social
Security and Medicare that would devastate our seniors and
working families, or maybe it is just the REIN IN Act, which
Republicans passed last week, which requires the President to
consider the inflationary impact of executive orders. The
problem is the REIN IN Act commissions a report. It is not a
comprehensive look at the costs and benefits of executive
orders. Does that really help us make more informed fiscal
decisions, or is it just designed to discourage executive
orders?
Either way, the REIN IN Act still just commissions reports.
It takes no real action. If that was House Republicans' secret
plan to fight inflation, it is going to be a long two years for
American families. Either Republicans don't have a plan to
address inflation while making life better for families, or
they are too afraid to admit that their plan is to take away
deeply popular and needed programs from the American people.
Let's contrast that with what Democrats have been up to. We
passed the Inflation Reduction Act, which would cap the price
of insulin for seniors, allow Medicare to negotiate drug
prices, lower the cost of health insurance, and lower the cost
of renewable energy, all while reining in inflation by paying
down the national debt. We passed the Bipartisan Infrastructure
Law to invest billions in our ports and airports to stop the
supply chain bottlenecks that have spiked prices during the
pandemic. We passed the CHIPS for America Act that will bring
back domestic manufacturing that Washington let move overseas
for decades, injecting competition and resiliency into our
markets that lowers prices. And perhaps most importantly, we
have had a President who has taken executive action to break up
monopolies, chipping away at the power big corporations have
enjoyed to gouge huge profit margins and raise prices on
consumers. These are the kinds of actions that contain
inflation, make life better for families, and shore up our
economic resiliency.
Today, I am calling on House Republicans to please put
forward your own plan to fight inflation that is at least as
detailed as the Inflation Reduction Act. It is time the
American people see where you stand, not see you grandstand. I
yield back.
Mrs. McClain. Thank you, Ms. Porter. I am pleased to
introduce our three witnesses today, who are experts in fiscal
and monetary policy and can speak to the causes and long-term
consequences of the current inflation crisis. Dr. Douglas
Holtz-Eakin is the president and founder of the American Action
Forum. From 2003 to 2005, he was the sixth Director of the
nonpartisan Congressional Budget Office, which provides the
budgetary and policy analysis to the U.S. Congress. He has a
Ph.D. in economics from Princeton University. Welcome.
Dr. John Taylor is the Mary and Robert Raymond Professor of
Economics at Stanford University and George P. Shultz Senior
Fellow in economics at the Hoover Institute. He is known for
his research on the foundations of modern monetary theory and
policy, which has been applied by central banks and fiscal
market analysts around the world. He has a Ph.D. in economics
from Stanford University.
And Mr. Michael Konczal--did I say that correct? I am
always struggling with names, so I apologize in advance--is the
director of macroeconomic analysis at the Roosevelt Institute.
A former financial engineer, he holds a B.A. in math and
computer science and an M.S. in finance from the University of
Illinois at Urbana Champaign.
Pursuant to the Committee Rule 9, the witnesses will please
stand and raise their right hands.
Do you solemnly swear or affirm that the testimony that you
are about to give is the truth, the whole truth, and nothing
but the truth, so help you God?
[A chorus of ayes.]
Mrs. McClain. Let the record show that the witnesses all
have answered in the affirmative.
We appreciate all of you being here today, and we look
forward to your testimony. Let me remind the witnesses that we
have read your written statements, and they will appear in full
on the hearing record. Please limit your oral statements to
five minutes. And as a reminder, please press the button on
your microphone in front of you so that it is on and the
Members can hear you. When you begin to speak, the light in
front of you will turn green. After four minutes the light will
turn yellow. When the red light comes on, your five minutes is
expired, and we would ask that you please try and wrap it up as
soon as possible.
I recognize the first witness to begin their opening
statement.
STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT AND FOUNDER,
AMERICAN ACTION FORUM
Mr. Holtz-Eakin. Well, thank you, Chair McClain, and
Ranking Member Porter, and Members of the Committee for the
privilege of being here today. You have my written statement.
Let me say three things briefly, and then I look forward to
answering your questions.
Point No. 1 is that inflation really took root in 2021. At
the beginning of 2021, in January, year-over-year CPI inflation
was 1.4 percent. One year later, in January 2022, it was 7.5
percent. This marks one of only three years in which CPI
inflation grew by six percentage points in a single year in the
postwar United States. So, what are the sources of this sharp
run up in 2021? Well, the Chair alluded to some of them in her
opening remarks. One was excessive monetary stimulus. The
Federal Reserve responded aggressively to the arrival of the
pandemic recession, cut rates to zero, made an open-ended
commitment to provide liquidity to markets, and, importantly,
started buying $90 billion a month of Treasuries and mortgage-
backed securities, and it continues to do so in 2021. Even as
inflation started to creep up, it maintained this pace through
the entire year.
In addition, there was excessive fiscal stimulus, the
American Rescue Plan, $1.9 trillion in stimulus, was enacted in
March 2021 at a time when the U.S. economy was growing at 6.5
percent. It was plain in the data, things like GDPNow at the
Atlanta Fed showed that. At a time when the measured output gap
between what GDP was running at and what its potential was, as
calculated by my old shop, the Congressional Budget Office,
that budget gap was $400 billion to $600 billion. You don't
need a $1.9 trillion bill to close a $400 billion to $600
billion output gap, so it was just much too big and destined to
cause macroeconomic disruptions.
And there were, as well, supply chain constraints from
around the globe, but to the extent that you recognize supply
constraints, you should be even more restrictive in your fiscal
stimulus because it is only demand relative to supply that
matters. So in 2021, inflation really, really ramped up, and
that, I think, is the period that was most crucial and where
the biggest policy errors were made.
Point No. 2 is that once inflation gets embedded in the
economy, policymakers have essentially no good choices. Choice
No. 1 is live with the inflation. When it got to 10 percent,
that was clearly unpalatable. American households were deeply
dissatisfied and being harmed by the inflation. The alternative
is to live with the things necessary to bring it back into
control, and that is a steady stream of bad news in the terms
of house prices start going down, retail sales declining,
slower growth in jobs in the labor market. And as a result,
that initial policy, it gets compounded into further costs down
the line as you deal with taking the inflation out of the
system.
Point No. 3 is we are hardly done with this episode. In the
most recent readings, CPI inflation was 6.4 percent year-over-
year, well above two-percent target. The core, taking out the
volatile food and energy components, was still at 5.6, but for
me, the really striking numbers are food, energy, and shelter
are 50 percent of the CPI. That is because they are about 50
percent of the typical family budget, and food, energy, and
shelter still rising at 8.5 percent year-over-year. Go to the
gasoline station, go to the grocery, go home and be reminded
that your paycheck is nearly 10 percent less valuable than a
year before.
And inside that, shelter is really the poster child for the
inflation problem. Shelter is a third of the CPI. Year-over-
year inflation, shelter inflation is 7.9 percent. It has risen
every month since February 2021. We have yet to see a peak, and
shelter isn't something that has a supply chain. It is in the
United States. Shelter is a service, and services are the U.S.
inflation problem right now. Goods price inflation has been, in
fact, addressed to some extent, and the Federal Reserve, in
particular, will need to do more to address the inflation
problem.
I will just close with something which I find sort of
slightly depressing on the inflation front. The Fed's preferred
measure of inflation is a geeky thing called the market-based
Price Index for personal consumption expenditures. We don't
want to talk about that in public, but I will be happy to
answer questions later. But it is really just indicative of
what transactions are actually happening in the economy right
now. When they started their tightening in April 2022, year-
over-year market-based core PCE was 4.9 percent. In January
2023, it was 4.9 percent. That is very little progress on the
underlying inflation, which means that as the tightening the
Fed has done so far gets into neutral, there is more to do to
really address the inflation.
So, I thank you for the chance to be here today, and I
would be happy to answer your questions.
Mrs. McClain. Thank you, sir. I appreciate your opening
statement. I now recognize Dr. Taylor.
STATEMENT OF JOHN B. TAYLOR, MARY AND ROBERT RAYMOND PROFESSOR
OF ECONOMICS, STANFORD UNIVERSITY, AND GEORGE P. SHULTZ SENIOR
FELLOW IN ECONOMICS, HOOVER INSTITUTE
Mr. Taylor. Thank you, Chairwoman McClain and Ranking
Member Porter, for inviting me to this important Subcommittee
meeting. Inflation is such an important topic. I am going to
focus most of my remarks on that, in particular, the monetary
policy aspects of that.
For several years, starting back in 2017, the Fed began to
move to a more rules-based monetary policy, and it worked well
for the United States in 1980's, 1990's, and in other years.
Many papers were written at the Fed and other places showing
the benefits of the so-called rules-based policies. In July
2017, when Janet Yellen was the Chair of the Fed, a whole
section on rules-based monetary policy was put in the monetary
policy report. The target inflation rate was only two percent.
Many monetary policy experts made favorable comments about
the rules-based policy. J. Powell, for example, said, ``I find
these rule prescriptions helpful.'' Evidence was that with the
move toward rules-based policy was beneficial, economic
performance improved. Unfortunately, this moved toward monetary
policy rules was interrupted when the pandemic hit in 2020.
First, rules were removed from the Fed's report. They were put
back in in February 2021. Then rules were taken out again in
February 2022. But Chair Powell, in answer to complaints from
Members of Congress about rising inflation, said he would put
the rules back in. And in the report released on June 17, 2022,
policy rules were back.
This approach of including rules in the report has
continued, and it appeared last Friday, in the March 3, 2023
report. A copy of the table is in my prepared testimony, but
let me just mention the Taylor rule was first on the list. And
the Fed admitted that throughout 2021 and 2022, the target
range for the Federal funds rate was below the prescriptions of
most simple rules. I think it is good that rules are back in
the Fed's monetary policy report. It would be more helpful if
the Fed formally incorporated rules into its actual decisions
and apparently has been trying to do this recently. At first,
only small changes were seen in actual monetary policy as
inflation rose sharply, as you just heard. This was the case of
the Fed and other central banks who are behind the curve. So,
we are still living in a high inflation era, unless monetary
policy actions are taken.
Events in Ukraine raised inflation, but not the basic
story. Figure 1 in my prepared testimony shows the effective
Federal funds rate through late 2022 through the present. The
rate moved from 25 basis points to 4-and-a-half percent, but
that is still probably too low. While the gap between the rules
and the effective rate has narrowed, the huge discrepancy still
exists.
During March 2022, the actual Federal funds rate was well
behind the curve. Why? If we use the Taylor Rule, which is in
the Fed's report, the most recent monetary policy report in
particular, you plug in an inflation rate over the past four
quarters of only four percent, a target inflation of two
percent, which the Fed says we are still taking it to, an
equilibrium interest rate of one percent, which is a consensus
at this point, lower than I assumed originally, and the gap
between real GDP and its potential of zero--we are pretty close
to zero, low unemployment--then you get a Federal funds rate of
six percent. These are mild assumptions. So, even with these
mild inflation numbers, the Fed is still behind the curve,
though, as Chair Powell indicated this week in testimony, they
are still trying to catch up, so we will see.
My written testimony shows that the Fed got way behind the
curve in detail compared to the rules-based monetary policy,
and it says this is why inflation rose so much. The Fed has
started on a method to get inflation back down. By reviewing
the years leading up to the present situation, the formal
testimony provides the background needed for analyzing the
current and future monetary policy decisions.
There are now more reasons than ever for central banks,
including the Fed, to use the more rules-based policy, to keep
inflation at the two-percent target range. Central banks should
start now on procedures or rules that markets understand. The
policy interest rate would increase as inflation rises, as has
now just begun to happen. It would, of course, be a contingency
plan, as are all rules. This would greatly reduce the chances
of a large, damaging change later. Thank you.
Mrs. McClain. Thank you. I appreciate your testimony. I now
recognize Mr. Konczal.
STATEMENT OF MICHAEL KONCZAL, DIRECTOR OF MACROECONOMIC
ANALYSIS, ROOSEVELT INSTITUTE, WASHINGTON, D.C.
Mr. Konczal. Chair McClain, Ranking Member Porter, and
distinguished Members of Subcommittee, thank you for inviting
me to testify at this hearing. My name is Mike Konczal, I am
the director of macroeconomic analysis at the Roosevelt
Institute.
Today I am going to speak about the causes of inflation
that have been unique to this recovery, the progress we have
made so far, and what policymakers can do to bring down
inflation further. But first, it is important to remember this
recovery has been remarkable. The economy has added more than
500,000 jobs each month for the past two years. There are now 4
million more jobs in the February 2021 CBO projection of what
would have happened without the American Rescue Plan. In
contrast to previous recessions, real GDP is recovering to
projections of where it would have been without the pandemic,
but we have also experienced inflation has been higher and more
sustained than financial markets and the Federal Reserve
projected.
There has been four key contributors to inflation during
the past two years, and we have heard stories about people
canceling gym memberships and buying home gym equipment
instead. And the first contributor, the shift in demand from
services to goods, has been aggregated across the entire
economy. Second, vulnerabilities in our supply chains, many of
which already lacked resiliency pre-COVID, led to skyrocketing
prices for goods in summer of 2021, yet during this time, the
prices for services did not fall. As the economy reopened,
inflation and services picked up even as supply chains were
still normalizing. This all mechanically increases inflation.
Third has been the change in demand for housing resulting
from remote work, which now covers over a quarter of the work
force. One study by the San Francisco Fed found that these
shifting patterns of demand for housing explain half of the
overall increases in house prices and rents during the past two
years, all of which has been a major contributor to inflation.
And fourth, Russia's invasion of Ukraine in February 2022 also
increased inflation, especially through energy and food prices.
Thanks to U.S.-led domestic and international efforts,
especially the financial commitments in deploying and
restocking the U.S. Strategic Petroleum Reserve, the CPI for
inflation has come down to rates near the beginning of the war
in recent months.
Now, what we don't see is if these explanations are
sufficient to explain most of the shifts in inflation over the
past two years. But if inflation was primarily the result of
the Biden administration's policy, we would have expected to
see certain things in the data, but we see the opposite. First,
if too much demand was the main contributor of inflation, we
would expect to see potential output, real GDP, or real
consumption exceed pre-pandemic projections or trendlines.
Where we would expect the big difference is the composition of
them have changed.
Second, we would expect the United States to be globally
unique, but instead, we see inflation increasing across the
globe. All of the 40 countries the OECD collects data on saw
higher core inflation across 2022 than in 2019. Of those 40, 28
of those 40 had higher inflation increases relative to 2019
than the United States. United States' increase in inflation
has been lower than many European countries, like the U.K. and
Germany, but also lower than countries not in Europe, such as
Canada and Israel. Our inflation increase has been about the
same as South Korea. This inflation is truly a global
phenomenon. Now, our inflation picked up earlier in 2021 than
peer countries, driven by price breaks and automobiles
particularly, but our reopening growth started earlier and
stronger as well. The IMF estimates that the U.S. growth will
be twice the average of the Eurozone from 2020 to 2023.
A third thing is instead of seeing people not working, we
have seen a rapid recovery in the labor force. Prime age
employment to population ratios are near pre-pandemic levels
and still growing. There are more workers working today than
the CBO projected in 2019 that there would be at this point.
Fourth, if unemployment was below a natural rate of
unemployment, we expect nominal wages to be increasing and
increasing fast. Instead, wages decelerated across 2022 to
rates that, while still especially strong, are more consistent
with lower inflation.
Now, there has been a lot of progress. Inflation is down
almost half across the past three months compared to the first
half of 2022 across a variety of metrics, roughly six percent
to four percent, depending on what you are looking at. However,
inflation is still higher than we want it to be, and there are
still policy options we can use to speed its decline.
First is to raise or eliminate the debt ceiling. A
financial crisis would be devastating to this economy, I don't
need to say much more about that. Second is to recognize that a
lot of tightening has taken place. Federal Reserve raised
interest rates rapidly in 2022, almost five percent, close to
the six percent, as the Taylor rule might suggest, and
economists agree that these hikes slow the economy in long and
variable lags. We don't want to administer too much medicine if
we think we haven't seen all the effects of the previous around
yet. Measures of housing inflation, in particular, which we
know will fall from private sector analysts, take a long time
to be incorporated in the official statistics.
Third is to look at corporate profit margins. Non-financial
profits as a percent of GDP are at record levels. If corporate
profits fall, it means we can have lower inflation while still
keeping a strong job market. Fourth, we need to build more. Our
infrastructure needs to become more resilient through
successful deployment of the Inflation Reduction Act. And also,
we need more housing, which was a challenge even before the
pandemic. And fifth, we need to expand the labor force from
everything, through higher immigration to expanded childcare.
There are many job openings available, and this would make our
economy stronger.
Thank you for your time, and I look forward to your
questions.
Mrs. McClain. Thank you very much for all of your testimony
and opening statement.
I am going to recognize myself for five minutes.
Dr. Holtz-Eakin, yes or no. Did the American Rescue Plan
increase inflation?
Mr. Holtz-Eakin. Yes.
Mrs. McClain. Was it predictable that the American Rescue
Plan would drive inflation so significantly?
Mr. Holtz-Eakin. Yes. People said so at the time, notably
Larry Summers, former Secretary of the Treasury, also an
economist. History has given us examples just like the American
Rescue Plan. In 1951, the U.S. economy was growing at 10.5
percent, quite rapid growth. Federal spending was increased by
about 50 percent. That is roughly the American Rescue event, $2
trillion on a $4 trillion race, and inflation jumped by six
percentage points that year. So, you get the big fiscal
stimulus, and an accommodative Fed, and the high growth
environment, you get inflation.
Mrs. McClain. Thank you. Were the Democrats warned about
these risks?
Mr. Holtz-Eakin. Yes, there were public comments made by
people about how undesirable this was and how large it was.
There was testimony. I testified at the Senate Banking
Committee about the risks of the American Rescue Plan and made
the points I made today about how it is the wrong time for
stimulus. We are growing rapidly. It is too big compared to the
problem. I had some issues with the design. It wasn't really
focused on COVID-related fallout in the economy. And so, there
were lots of people who had expressed some concern over the
scale and composition of the bill.
Mrs. McClain. So, Democrats passed the legislation they
knew would likely drive the country into its worst inflationary
period in 40 years?
Mr. Holtz-Eakin. I don't have any idea what the motivation
is. The bill passed, and we have now seen the policy error.
Mrs. McClain. And it is good to learn from our past
mistakes.
Mr. Holtz-Eakin. It would be nice if we did.
Mrs. McClain. In your opinion, I would like to understand
your definition of inflation.
Mr. Holtz-Eakin. Inflation is a broad-based increase in the
price level so that the dollar price of goods and services
broadly in the economy rising.
Mrs. McClain. OK. Thank you. In 2021, President Biden's
then chief of staff, Ron Klain endorsed a tweet saying,
``Inflation is a high-class problem.'' From Jason Furman, a
Democrat who was President Obama's Chair of the Council of
Economic Advisers, inflation is a high-class problem. Doctor,
doesn't inflation affect middle-income and low-income Americans
as well?
Mr. Holtz-Eakin. You got a couple of doctors.
Mrs. McClain. I got a couple of doctors. We will start with
you.
Mr. Holtz-Eakin. Yes, certainly. In my written testimony, I
pointed out that if you look at the median income in the United
States and you say 50 percent, it is going to food, energy and
shelter. That is a $3,000 tax on food, energy, and shelter at
current inflation rates. It is a real loss in purchasing power
for other purposes because you have to devote it to those core
elements.
Mrs. McClain. Dr. Taylor, would you agree?
Mr. Taylor. Yes. I think the effects of inflation on a
broad population are completely understated. That is why this
two percent or whatever, I thought it should be 1.5 percent
before they chose two. That is why I think it is so important.
Mrs. McClain. Thank you, and a follow-up. In fact,
according to several research institutions in the Fed, the
inflationary crisis brought on by the Biden and congressional
Democrats' reckless spending has disproportionately impacted
low-income individuals. Shouldn't the Biden administration be
forcing more help on Americans in need by actually addressing
the inflationary crisis rather than minimizing the real pain
inflation caused by their reckless actions? We can't fix a
problem unless we first admit we have a problem.
Mr. Holtz-Eakin. I think we all know we have an inflation
problem. The question now is what is the best route to fixing
it. My own opinion is that the Federal Reserve is, in fact,
correct when Chairman Powell said that this is the Fed's
problem. We have a mandate for price stability and full
employment, and the only way to get to full employment is to
restore price stability.
Within the Fed's strategies, I want to just note what Dr.
Taylor said about the fact that their discretionary decisions
thus far have left them way behind the curve. There was a large
discussion about the uptick in inflation in the first half of
2021. They continued with the foot on the gas through the whole
year and didn't begin tightening until early in 2022, and
tightened too slowly.
Mrs. McClain. I agree. Dr. Holtz, the Biden administration
continues to claim that 70 percent of the increased inflation
was due to Russia's invasion of Ukraine. Is that true? Big
percentage?
Mr. Holtz-Eakin. You can find a window where you can make
that true, and they did. It was one month earlier last year.
But broadly, the inflation problem really did take root in
2021, prior to the invasion, and I don't think explanations
that point toward an invasion of Ukraine as the problem of
inflation are correct.
Mrs. McClain. Well, I am just looking at the facts. So, if
I understand the facts correctly, and please correct me if I am
wrong, when the President took office in January 2021,
inflation was at 1.4 percent. By December of that year,
inflation had risen, right, to seven percent, six percent jump,
kind of a big jump in my opinion, but the war in Ukraine didn't
start till the following February. So, those are the facts,
right? I am not distorting the reality, and I am looking at the
global picture.
Mr. Holtz-Eakin. That is right, and that was in my written
testimony as well.
Mrs. McClain. So, how much of the inflation is due to
Biden's policies versus how much is caused by Putin's invasion
of Ukraine? I mean, we have to start talking about facts.
Mr. Holtz-Eakin. So, a crude decomposition, as you put
aside the invasion, which happens later, you compare Europe to
the United States, as many people want to do. In 2021, European
consumer price inflation rose about a percentage point each
quarter, went from zero percent to four percent. That is
because they shared the same supply chain problems the U.S.
had. U.S. inflation got well above seven percent, and so there
is part which is attributable to the impact of supply chain
difficulties, but there is another part that is unquestionably
excessive demand stimulus in the U.S.
Mrs. McClain. Thank you. The Chair would like to recognize
Mr. Casar. Did I say that right, Casar?
Mr. Casar. Yes, thank you. Thank you so much. There is this
false presumption that I think is talked about here in Congress
that government spending always necessarily equals inflation,
and my understanding is that that is just wrong. I want to go
back to some basics here that we heard today. Prices can go up
for a variety of reasons--supply demand mismatch, corporate
greed, supply chain issues, war--and when prices go up, smart
government interventions can have a role in bringing those
prices down.
And I want to talk about one example, for example,
investing in childcare when there is a smart investment by the
Federal Government or local government to make sure that there
is more childcare available for people, something I hear from
my constituents, they need all the time, if we bring people
back into the childcare work force, raise their wages, make
sure that there is more small childcare operators available.
Mr. Konczal, can you talk to us about whether smart, targeted
government investments like this one to provide people more
childcare options could actually bring prices down as opposed
to driving them up?
Mr. Konczal. Yes, absolutely. So, a strong characteristic
of this recovery has been a lot of job openings. Though the
labor market has recovered quite rapidly to pre-pandemic
levels, we knew pre-pandemic, we were still missing millions of
people who could be working as a result of lack of access to
childcare and lack of other kinds of care infrastructure, and
that problem is still with us even after the pandemic. We also
know that declines in immigration are probably putting pressure
on labor markets and making it harder for employers to find
workers that they could be filling the jobs.
Mr. Casar. So, on top of potentially bringing childcare
costs down by the government, subsidizing childcare, and
helping open more childcare centers, what you are saying is
also by having folks send their kids to that childcare, they
could reenter the work force, increase productivity overall,
overall increase supply, and, therefore, also drive prices
down?
Mr. Konczal. Yes, absolutely. We knew this was a problem in
2019, and it still remains with us.
Mr. Casar. And then long term, when you have those children
participate in high-quality childcare, we know that their
overall productivity goes up, their ability to innovate and
find the career of their choice goes up in their adult life,
and long term, that also increases our overall productivity,
the overall strength of our economy, and that is anti-
inflationary as well?
Mr. Konczal. In the long and medium term, it allows us to
be much more productive and have a much higher level of output.
Mr. Casar. I think that is really important because the
false narrative that I think needs to not be constructed is
that we shouldn't help folks when they are in need. The
government shouldn't intervene and spend in smart ways, because
the answer to any time congressional Democrats or the Biden
administration want to do something good is that it is going to
further inflation, then the answer is let's just not do much at
all. But I, as a city council member, saw how the American
Rescue Plan not only created millions of jobs, but saved
people's lives. And if we make sure we make smart investments
that actually support the American worker and bolster our
economy, we can make those kinds of investments in ways that
actually bring prices downward, and I think that your testimony
makes that really clear. I appreciate that.
Mr. Konczal. Thank you.
Mr. Casar. Thank you, and I yield my time back to
Representative Balint.
Mrs. McClain. Thank you, Mr. Casar. OK. The Chair
recognizes Dr. Foxx for five minutes.
Ms. Foxx. Thank you very much, Madam Chair, and thanks for
our panelists being here, particularly Doug Holtz-Eakin. We
haven't seen you in a little while. It is nice to see you, Dr.
Taylor. Thank you very much to all of our panelists.
Dr. Holtz-Eakin, Federal officials and members of academia
have used the term ``transitory'' to describe the current trend
of inflation. Now, they have been saying that lately, but do
you want to explain a little bit more about what you think they
mean by that?
Mr. Holtz-Eakin. Early in 2021, as inflation started rising
from that 1.4 percent, I noted it. At the start of the year,
there was a discussion about whether this was something that
was transitory, would take care of itself and return toward 1.4
percent within the year, or if this was part of a longer trend
that was more permanent and something the Fed would have to
actively lean against to get back to the two percent target.
For at least six months, perhaps longer, many Fed officials and
analysts stuck to the notion that it was transitory and that no
change in Federal reserve policy was necessary. By the second
half of 2022, essentially, everyone had been in this notion.
Inflation was clearly high, rising, and not a transitory
phenomenon.
Ms. Foxx. Thank you. Dr. Taylor, last Congress, I
introduced the Spending Safeguard Act, which would tamp down
mandatory spending increases by establishing specific caps for
new or reauthorized programs. How would legislation like this
affect America's inflation?
Mr. Taylor. I think it would be a step in the right
direction. This is in focus on the budget deficit. In my
testimony, I focus on monetary policy, which I have looked at a
lot, but the deficit is an issue. And you can wish it away, but
it is there, and it is a very, very important factor, so
actions like this are very important to take. Monetary policy
is complicated. The tendency is, it is always easy to think
about fiscal policy, but it is such a difference now in terms
of monetary policy. That is why I focused on that.
Ms. Foxx. And you mentioned the deficit just now, so I will
follow up. Do you think that really could be effective in
lowering the deficit and the debt as well?
Mr. Taylor. Oh, yes. I think a policy is monetary, is
fiscal, is regulatory, is international. We are focusing a lot
on fiscal now because it is such a mess. We are focusing on
monetary because it is such a mess, but don't forget the
regulatory stuff. Don't forget the international stuff. It is
very important. But I always say, yes, the fiscal side is so
important, and it has exploded and needs to be brought back to
normal.
Ms. Foxx. Yes. For my colleagues, we have agencies that
have money that they can spend under mandatory spending, and an
estimate comes from CBO, it is going to cost $100 million, and
then they go out and spend $200 million because there is no
cap. And so, my bill put a cap on it saying if it goes above 10
percent, you have to come back to us to get approval for it. It
may not be trillions, but pennies add up. So, Dr. Taylor, in
your opinion, is allocating trillions more in spending toward
liberal initiatives like the Green New Deal an effective
approach to addressing inflation?
Mr. Taylor. I don't think it is an issue really. It would
be counterproductive to do this. In fact, it doesn't really
matter too much of what you are spending on. It is a deficit
itself, and it has caused a lot of problems. I think it is too
big by any stretch of the imagination. It interferes with other
kinds of policy, so that should be the focus, and I think what
you describe, limits mandates, is an important part of this. We
used to have thought about a balanced budget amendment at one
point, so this is in that direction.
Ms. Foxx. OK. For both you and Dr. Holtz-Eakin, when do you
anticipate inflation to return to pre-COVID levels, and what
actions should the Biden administration, Congress, and the
Federal Reserve be taking to meet that timeline?
Mr. Taylor. So, we can't predict inflation very well, but
the stated goal of the Fed is to get it back to two. They will
probably raise rates a little bit more. I know that has
concerned people, but it is the best thing that I know that
they could be doing. If they do that, then inflation will come
down gradually, and that could be instantly--be lucky to be
instantly--but come back to this two percent, which is the
target we shouldn't give up on.
Mr. Holtz-Eakin. At the time that the Fed launched this
tightening cycle, Chairman Powell addressed the National
Association for Business Economics and said it would take three
years to get back to the two-percent target. In the interim,
inflation has proven more stubborn than he had anticipated, and
the terminal rate are going have to get to higher than they had
anticipated. So, I think it will probably take longer than he
anticipated.
Ms. Foxx. Thank you, Madam Chair. I apologize for going
over. I yield back.
Mrs. McClain. Thank you. The Chair recognizes the
gentlelady from Pennsylvania, Ms. Lee.
Ms. Lee. Thank you, Madam Chair. So, we have all seen
personally back in our communities, right, how they are
hurting. I have never seen eggs costing you $7 at Giant Eagle.
Rents are rising, housing costs are only getting worse, but we
know why. Inflation is hurting everyone globally because the
pandemic was global. A war in Europe is impacting everyone. We
know the reasons, but today, we really want to focus on
solutions. So, Mr. Konczal, what policies could Congress pursue
to further tackle inflation, in your opinion?
Mr. Konczal. I believe things that help us build more and
expand our capacity would be very helpful, particularly in the
housing sector. I think things that might raise taxes on rich
people, in particular, to bring down the deficit to pay for
important targeted investments, I think, would be very useful.
I think letting the tightening that has already happened,
seeing the impacts of it, I think that is actually quite
important. And things that increase our labor force supply,
such as childcare, immigration, other things I think would
really help our work force.
Ms. Lee. Yes. Similarly, I think that listening to
testimony and about the different causes of inflation, I think
the one thing that we didn't maybe hear a lot about is
corporate greed and price gouging. Gasoline prices now average
more than $5 a gallon in Pittsburgh, and oil companies posted
record profits this year, leading me to suspect price gouging
at the pump. Pennsylvania has among the weakest laws in the
Nation when it comes to investigating and preventing price
gouging. What actions do you believe we can take at the Federal
level to address corporate greed impacting my constituents?
Mr. Konczal. I think broadly speaking, we had a competition
problem in 2019, and I think that competition problem is here
now. It is important to remember that the labor share has
fallen during this recovery; that is, workers' wages have gone
up less than the prices. Workers are not driving the inflation.
The inflation has been reflected in corporate profits. And so,
I think things like competition coming online, that would bring
down margins. Particularly we see prices that businesses pay
have increased less than the prices consumers pay, which has
shown up in these corporate profits. I think competition
bringing that down and increasing the labor share, I think
could do a lot to help alleviate inflation at the margins.
Ms. Lee. Thank you. In the wake of historic pandemic,
ideally war, inflation rates now, is not the time to simply
point fingers. I want to ensure we are doing work to get money
back into the pockets of all the people in this country. I
yield back, Madam Chair.
Mrs. McClain. The gentlelady yields.
Ms. Balint. If I may, Madam Chair? One of the premises of
this hearing is that the Biden policies have been reckless,
that the policies of the Biden Administration have added to the
deficit. And I just want to really be rooted in fact here,
which is that the new budget that has been proposed will
actually cut the deficit by nearly $3 trillion over the next 10
years. And that is really a stark contrast to what I am hearing
from my colleagues, the Republicans' proposal, which would
actually increase the national debt by $3 trillion over the
next 10 years, and would continue to give big handouts to the
rich, to big corporations, to special interests. And I just
want to make sure that we are always keeping that fact at the
center of this. We are here to try to work toward solutions,
and I think it is really important that we are rooted in
reality. I yield back.
Mrs. McClain. Thank you. The Chair now recognizes the
gentleman from Wisconsin, Mr. Grothman.
Mr. Grothman. Thank you. I am going to kind of follow up on
some of the things Ms. Foxx said. Could you comment on the
current Federal deficit or the total amount of Federal debt as
to where it is historically as far as percentage GDP? Whichever
one of you guys. You seem pretty bright. We will give you
another shot.
Mr. Holtz-Eakin. We are at roughly 100 percent of GDP, and
we will shortly exceed the highest level relative to GDP in the
history of the country.
Mr. Grothman. Right, and I don't think people realize how
much we are exceeding it. We were near 100 percent, I think,
only for like one year, but have we been anywhere near 100
percent, say, for the last 75 years?
Mr. Holtz-Eakin. The only comparable period was World War
II, and so we are now even going to surpass the levels in World
War II.
Mr. Grothman. Right. We are around 100 percent, you are
right. For most people on this panel, for most of our life,
what were we around, 40 to 50 percent through the 1970's and
1980's?
Mr. Holtz-Eakin. About 35 coming into the financial crisis,
jumped to about 70 after the financial crisis. We are now at
100.
Mr. Grothman. Right, so easily the most. Next thing I want
to comment about GDP itself. We calculate that GDP is supposed
to be a measure, I guess, of the wealth in society, OK? But if
the government spends money on something, say that government
spends money on childcare, the government spends money on some
green initiative, something that not by itself is increasing
the wealth of American society, or the government just spends
more money on government bureaucrats, the government spends
more money on IRS agents, what effect does that have on GDP?
Mr. Holtz-Eakin. So, GDP is actually not a wealth measure.
It is a measure of the----
Mr. Grothman. I mean----
Mr. Holtz-Eakin [continuing]. Production and goods and
services in a year.
Mr. Grothman. Right.
Mr. Holtz-Eakin. It is an income----
Mr. Grothman. Measure of income, right?
Mr. Holtz-Eakin. It is an income measure, and one way to
measure the income is to add up how it is spent. And so, if it
is spent on government bureaucrats, or childcare, or something,
that is one way to get a measure of it. Another way to get a
measure of it is to look at all the people who are contributing
to producing it, look at their wages, and their profits, and
their rents, and things like that. So, those measures are just
accounting classification.
Mr. Grothman. Right. I guess the point I am trying to make
is, normally when you say a country's GDP is expanding, you
think of more cars, more houses, more dinners out or something,
not just expanding government bureaucrats, but for the purpose
of GDP, we are including things like hiring new bureaucrats,
that sort of thing.
Mr. Holtz-Eakin. Correct.
Mr. Grothman. OK. Well, just kind of question here for you
on just the Fed in general and something that the press has not
adequately reported. When this COVID thing broke, we met with
the Fed, or at least with Powell, and we were encouraged to
spend as much as we could. And we were told that that would not
lead to inflation, which I thought was preposterous at the
time, but that is what we were told. Could you comment on that
philosophy that spending recklessly, at least when we are in
a--what do they call it, depression, recession, whatever--could
not lead to inflation?
Mr. Holtz-Eakin. I think that reflects two things. One was
really the, I think, the recent history of the Fed coming out
of the financial crisis where it felt that fiscal policy was
not being used, and that all of the responsibility was up to
the Fed to generate growth. And it simply can't do that, and it
was unable to do that, and so it wanted some help in the face
of a downtrend. That is point No. 1. Point No. 2 is, the Fed
had publicly been quite celebratory of its tactic of keeping
monetary policy quite accommodative, in like 2019, late in the
cycle, and having unemployment get to record-low levels without
generating inflation. And I think it believed that it was going
back to a war world inflation, just wasn't going to where it
said, but it was an error, and they have since admitted it was
an error in judgment.
Mr. Grothman. OK. Quick other things. In this budget, we
have an increase in a variety of taxes, so I am going to ask
you to comment on two things, first of all, because capital
moves about. When we raise marginal rates in this country
compared to other countries, what effect does that have on GDP?
Mr. Holtz-Eakin. We lose capital to produce goods and
services, and so it diminishes future GDP on the supply side.
Mr. Grothman. So, it affects growth, right?
Mr. Holtz-Eakin. Yes.
Mr. Grothman. Rates, marginal rates and affects growth.
Next thing along those lines, if we increase marginal rates,
what effect does that have on wealth within the country? In
other words, say, on an individual, and I am just kind of
speaking the Laffer Curve here, that sort of thing. I wonder if
you could comment on the effect of increased rates, be it on
corporate business level or individual level?
Mr. Holtz-Eakin. Well, I would be happy to get back to at
length on the individual pieces, but I would just point out the
corporate rate reverses something which is an undisguised
success. Getting the U.S. rate down has changed the situation
formula. We lost 10 headquarters a year on average in the
decade leading up to 2017. We haven't lost a single U.S.
headquarters since, and, indeed, the one company that was
leaving then came back. So, these do affect location decisions,
and we should be cognizant of that.
Mr. Grothman. Thank you.
Mrs. McClain. Thank you. I want to thank my colleagues for
pointing out that the President's budget reduces the deficit by
$3 trillion. Another interesting fact I would like to add is
the President's budget actually increases taxes by 4.5
trillion. Interesting, it only reduces the deficit by 3
trillion. But with that said, I would like to recognize the
gentlewoman from Texas, Ms. Crockett.
Ms. Crockett. Thank you so much, Madam Chair, and thank you
so much to all of you for being here. You definitely make me so
happy that I did not do the economist side of things as I was
supposed to do as a business major. So nevertheless, I just
want to be clear about a few things because I feel as if the
conversation is veering off in a couple of different ways. Can
I have each of you agree with me or just say you disagree that
inflation is a multifaceted issue? Yes or no.
Mr. Holtz-Eakin. I am not even sure I understand the
question, but I will say yes.
Ms. Crockett. OK. Dr. Taylor?
Mr. Taylor. It is multifaceted, but there are a few things
that we know is a big factor in inflation, is the Fed.
Ms. Crockett. OK.
Mr. Konczal. Multiple causes to our current inflation.
Ms. Crockett. OK. Perfect. Along with that, would you all
agree with me that the inflation that we are experiencing in
the United States is not solely because of one person being in
the White House, but this is inflation that has affected the
entire world? Yes or no. I will start it this way.
Mr. Konczal. As of 2022, U.S. is not an outlier. There is
an increase in inflation.
Ms. Crockett. Thank you so much.
Mr. Taylor. So, I think it is the Federal Reserve, and they
have been followed now too slowly by the ECB and the other
countries in Latin America. It is a global phenomenon.
Ms. Crockett. Thank you so much.
Mr. Holtz-Eakin. It is global.
Ms. Crockett. Thank you so much, and I would agree with you
that it is global. And I had the privilege of traveling on our
last district work weekend, and I left the country, and I had
some conversations about what they were experiencing
economically, as well as conversations about how, say, those
that threatened not to raise the debt ceiling, which I know we
are not here to talk about that. But we have conflated the
budget with debt ceiling conversations continually, so I just
decided I will go ahead and conflate, continue on with the
tradition of this House.
But in talking to them, I was curious to know, what did
inflation look like to you, and surprisingly, it looked a lot
like what it looked like here. They talked about supply chain
issues as it relates to food. They talked about the war in
Ukraine. I will admit that they did not talk about healthcare
as much because, you know, in fact, I believe, in your opening
statement, you mentioned Europe. Europe actually has universal
healthcare. So, when you look at, say, a pandemic, we didn't
have as many people that did not have health coverage. And I
know about lacking in health coverage because in the great
state of Texas, we have over 5 million people that are not
covered. That tends to drive costs up when we increased the
demand so much on the system that was really already on the
brink and we weren't providing coverage, but that is yet
another issue for another day.
I know there was just mention about tax cuts, and I will go
to you. I am not going to slaughter your name. So, I am going
to just go like this, right? So, the Trump tax cuts not only
devastated this country's finances with deficits, but it also
set the stage for inflation even before the pandemic. Would you
agree with this statement or disagree?
Mr. Konczal. I am not sure. I need to know more context. It
did not provide any kind of increase in investment that
economists have found, which have left us in a worse position
for our infrastructure and for our ability to produce.
Ms. Crockett. Absolutely. Thank you so much, and you would
agree with me that it is important to invest. And let me ask
you all this again because I like having all three of you all
participate. You would agree with me that no one had a playbook
for what to do in the midst of a pandemic, correct, in order to
make sure we didn't suffer from the inflation that we are
seeing?
Mr. Holtz-Eakin. I guess I would tend to disagree. I think
that in March 2020, what the Fed saw very clearly was across
the economy--cash-flow crunches, liquidity crunches in the
lingo--because the customers disappeared while hiding from the
virus. And the Fed knows how to deal with liquidity shortages,
and it dealt with them, and that was a playbook they ran from
the financial crisis.
Ms. Crockett. I didn't want to get into it back and forth.
I guess I am not going to get to you all because we only got 40
seconds. But for instance, I live in Dallas, and I believe that
there is housing crisis all over the country. There are plenty
of people we know right now. Commercial businesses are still
complaining about the fact that people aren't going into the
businesses, right? And so, we know that our work force has
actually morphed into something else.
There are people that saw an opportunity to be able to take
care of their children, and stay at home and work, and save
that money. Would you not agree that there had been actually a
shift? Right now, what I hear from small business owners is
they don't have a work force, so I don't think that the Fed can
fix that or fix that person that, say, has a preexisting
condition and decides, I don't want to risk my life by going to
work. Do you think that changing the Fed rate can fix those
types of things that were going on, which is why my first
question was? Do you not agree that this was a multifaceted
issue?
Mr. Holtz-Eakin. So, the Fed can't control supply issues,
and labor force participation is part of the aggregate supply
issues. It can only control demand issues through the
quantitative tightening, buying back the bond, selling off the
bonds, and raising rates.
Mrs. McClain. Thank you. The Chair recognizes the gentleman
from South Carolina, Mr. Fry.
Mr. Fry. Thank you, Madam Chair, for having this hearing
today. Thank you to the panel for your time and your testimony.
I really appreciate that. I am glad that we are having this
hearing. I think it is really important.
I am a freshman and when we are running, we talk to people
in our districts about what they face, and they are seeing 40-
year high inflation. They are seeing gas prices are up, grocery
prices are through the roof, pantry staples such as eggs,
butter, milk, chicken, have skyrocketed. And what is even
worse, I think, is that in the district that I represent, that
is home to 163,000 retired seniors, 1 in 6 seniors in America
are considering returning to work because they can no longer
afford the rising cost of living. I think about that. I think
about the middle-income Americans on fixed incomes. I think
about seniors who are on fixed incomes. Dr. Holtz-Eakin, you
previously testified in February 2021 that the American Rescue
Plan injected too large of a stimulus into the American
economy. Can you elaborate on that?
Mr. Holtz-Eakin. Certainly. The bill, when proposed, came
at a time when the weekly and monthly data that we received
suggested the economy is growing quite rapidly. A good summary
of this is something produced by the Atlanta Fed known as
GDPNow, which sort of gives you an estimate of what is the
current growth rate is in the quarter for GDP, and it was at
6.5 percent. So, this was not the same as March 2020 when the
economy was falling at a rate that ultimately contracted by
nearly 10 full percentage points in a single quarter, was
extraordinary. So, we are in a completely different situation.
We are growing quite rapidly, and we are getting close to full
employment. We are getting close to potential GDP, and there is
no reason to have a nearly $2 trillion stimulus. It is way too
big for whatever problem you might have imagined remained, and
so it was going to be a big macroeconomic error.
Mr. Fry. Do you still two years later maintain that same
assessment that the American Rescue Plan overstimulated the
economy?
Mr. Holtz-Eakin. Absolutely.
Mr. Fry. Is there anything from your original assessment to
now that has changed in that?
Mr. Holtz-Eakin. Oh yes, I got one piece badly wrong. I
thought the biggest fallout would be to repeat what we had seen
in 2020. We passed the CARES Act, $2.5 trillion spending, and
in May 2020, the U.S. savings rate went to 33 percent. That is
positively un-American. We do not save a third of every dollar,
and that then flowed into asset classes, and we saw, broadly,
equities were up. Housing was up. That is when crypto first
became a big deal. Every asset class got inflated. Saw the same
phenomenon after the December 2020, $900 billion stimulus.
And so, I was afraid, on the heels of that, with all of
this money flow into asset price inflation, the Fed would take
a look at a whole bunch of asset bubbles, and have to just pull
the plug on them and raise rates sharply, and we would have a
recession in the immediate aftermath of a terrible pandemic
downturn. I thought that was sort of lining up to do that. I
was wrong because the economy opened up at roughly the same
time, the vaccines came online, and the money came out of the
asset classes and into the consumer purchases and became
consumer price inflation instead.
Mr. Fry. Do you think that the Inflation Reduction Act, in
fact, reduced inflation?
Mr. Holtz-Eakin. No single act reduces inflation. Its
contribution was minimal. At best, it was $300 billion in
deficit reduction backloaded, so it was going to be five years
off, and we hope the Fed has got us at two percent well before
that. At the same time the Inflation Reduction Act was being
considered, Congress passed the CHIPS and Science Act, $300
billion of pure deficit-financed spending, the PATH Act, up to
$600 billion dollars by CBO's estimate of pure deficit finance
spending. It is the cumulative spending and tax cuts by the
Congress that matter for inflation, and in 2022, it continued
to produce inflationary pressures.
Mr. Fry. So, will the subsidies--you are testifying, your
testimony is that the subsidies included in those packages
increase those inflationary pressures?
Mr. Holtz-Eakin. They pale in comparison to doing $2
trillion in a month, but they are of the same type.
Mr. Fry. Right, but all three of those collectively and
even individually cause that inflationary pressure?
Mr. Holtz-Eakin. Continually. No question.
Mr. Fry. Madam Chair, thank you, and I yield back the
balance of my time to you.
Mrs. McClain. Thank you. The Chair recognizes the
gentlelady from Vermont, Ms. Balint.
Ms. Balint. Thank you, Madam Chair. Last year, as so many
Vermont families like mine saw their grocery bills, their gas
bills skyrocket, we know that many American companies were
posting record profits. And according to a staff analysis by
the Subcommittee on Economic and Consumer Policy this past
fall, there is clear evidence that shows record price hikes,
record profits, profit margins that not only helped to drive
inflation, but are also continuing to keep prices high.
So, from 1979 to 2019, profits contributed to only 11
percent--11 percent--of price growth in the United States, but
from the second quarter of 2020 through the end of 2021,
profits accounted for roughly 54 percent of price increases.
Four of the largest meatpacking companies saw profits increase
by 134 percent between 2019 and 2021. The two largest public
companies and the rental car industry enjoyed a 597 percent
increase in profits. Three of the biggest shipping companies
saw profits raise by--wait for it because I couldn't believe
it, had to go back and check--nearly 30,000 percent--nearly
30,000 percent. I know that the Vermonters, because Vermonters
watch C-SPAN--Vermonters watch this, they are howling at 30,000
percent. It is not in their minds that they are being fleeced.
They are absolutely being fleeced. The Subcommittee analysis
detailed numerous instances in which companies were using
inflation as an excuse to justify jacking up their prices and
forcing consumers to pay more to pad their profit margins.
So, Mr. Konczal, am I pronouncing your name right? Mr.
Konczal, why did we see such a significant unconscionable
increase in excess corporate profits in this time period?
Mr. Konczal. I think inflation was reflected in corporate
profits for a couple of different reasons. One was the shift
from services to goods. I think when you have the kind of
supply chain problems we have that ends up with higher prices,
it is moderated through prices. I think there is some evidence,
or at least there is certainly something worth looking at more
formally, about whether or not firms have used the opportunity
of this crisis and reopening to raise prices a little bit
higher than they would have otherwise.
I think a lot of economists and certainly a lot of
financial analysts are a little surprised that the margins,
corporations, their profit margins have not declined throughout
2022 and still seem like they might not even decline for quite
some time. Even a little bit of a decline in those margins
through competition, through proper regulatory scrutiny, would
allow inflation to come down while the labor markets still stay
strong. I think it is in general, and also, I think it is worth
noting that we don't see workers or wages really leading this
inflation, like some argue that happened in the 1970's. This is
really being reflected on the corporate side.
Ms. Balint. I really appreciate that. I have to bring up
what I hear when I travel around Vermont. We have a lot of
general stores in Vermont. These are little mom-and-pop shops.
They are trying to sell groceries in these tiny rural
communities. And I talked to them, and they say what is
happening at the corporate level is disgusting. These are not
necessarily Democrats that are saying this. There are people
across the political spectrum who are trying to feed the people
in their communities.
And so, I wanted to go back to something that I saw. Again,
it is really hard to believe some of this stuff. The
Subcommittee analysis also found examples of corporate
executives essentially admitting to using inflation as a cover
for massive price hikes. We had one executive, make sure I get
this right, executive from Kroger saying, ``Hey, a little bit
of inflation is always good in our business.'' We had another
one saying, this one was from industrial sealants, ``We don't
reduce prices on the back of these increases. We are going to
see what the consumer will bear.'' Other people said that. I
could go on and on.
So, the question to you is when we are trying to convey to
our constituents back home why it is that they are still seeing
incredible inflation right now, like, how do you articulate for
them, regular people, because that is why I ran for office, to
show up as a regular person here. How do I explain to them a
30,000 profit increase? How do I explain that?
Mr. Konczal. I think it is very hard to explain. I mean, in
that specific case, I would explain that the ports have been
disinvested in for decades, that our infrastructure is not the
capacity it needs. And that is why we needed to make important
investments to be able to have the access to ports and capacity
that we need to handle those specific problems. More generally,
people are going to debate why inflation went up, but the fact
that corporate profits remained so high and so elevated, it is
part of the reason inflation is not going to come down as
quickly as it should.
Ms. Balint. Thank you. I yield back.
Mrs. McClain. Thank you. The Chair recognizes the gentleman
from New York, Mr. Langworthy.
Mr. Langworthy. Well, thank you so much, Madam Chairwoman,
and thank you so much for our witnesses and the testimony that
you have presented here today.
One of the great areas of concern in my district, in the
23d congressional District in New York, which is large swaths
of agricultural territory in the New York-Pennsylvania line
along with the suburbs of Erie County and in Buffalo, is the
high cost of energy. And, Dr. Holtz-Eakin, are you aware that
the prices of American home heating this year rose by more than
27 percent?
Mr. Holtz-Eakin. Sounds about right, yes.
Mr. Langworthy. It has been something that people across
upstate New York have been gravely concerned about while they
are struggling with some of the proposals at the state and
Federal level of reforms and changes to the way we heat our
homes. The other concern is mandates on electric vehicles into
the future. I have questions. Do you think that President
Biden's recommendation to Americans that one of their ways to
reduce energy prices is for them to go out, buy an electric
car? Do you think that that is a legitimate solution for most
Americans?
Mr. Holtz-Eakin. A, the price point on electric cars is
well above mass penetration. It is not going to happen that
fast, so the magnitudes are all wrong. It is not going to do
anything substantial. It is a single price. Again, the
inflation phenomenon is prices across the economy, all goods
and services rising at the same time. And so, picking out
individual items and focusing on them, which is something
people do a lot, misses the larger point. We have prices going
up everywhere.
Mr. Langworthy. Right. I think you bring up a great point.
I mean, estimates have the cost of an electric vehicle between
$45,000 and $50,000, on average. A median household income is
$50,000 to $55,000, and that is with Federal subsidy involved.
Instead of recommending that Americans spend almost every
single penny of their income on an electric vehicle, do you
believe that the Biden administration should instead be focused
on increasing American energy production at all different
levels?
Mr. Holtz-Eakin. I think the strategy which they have
undertaken on the climate front is an extremely unwise one and
quite risky. I mean, it basically says we are going to have the
cleanest electricity sector on the globe. And we are going to
send that electricity across the grid that doesn't exist to
power every home, industrial plant, vehicle in the United
States, and that is betting the ranch on one solution, which
isn't smart. If you let markets decide things, they will
diversify and come up with lots of solutions, so I think it is
not a wise strategy.
It is also quite troubling from a sort of matching it up to
the research literature, in any serious study of the economics
of climate change. Natural gas is the bridge fuel, and natural
gas is a focus for decades during the transition to cleaner
energy portfolio. So, to take it off the table in 2021, 2022,
makes no sense whatsoever.
Mr. Langworthy. I am glad that you brought up natural gas
because in my state of New York, in my actual congressional
district, the Marcellus Shale runs right under the ground in
the southern tier counties of New York and Pennsylvania does
safely----
Mr. Holtz-Eakin. As a native of Pittsburgh, we want to
thank New York for their policies.
Mr. Langworthy. But, unfortunately, you are right. In 2015,
our former Governor, Andrew Cuomo, announced a moratorium on
the safe pumping of natural gas, making New York as the first
state with this significant shale resources to do so. In your
opinion, could ending bans on fracking in states like New York,
could that increase American energy production?
Mr. Holtz-Eakin. It would. We have actually already seen
this from about 2008 to 2012. The hydraulic fracturing and
horizontal drilling revolution generated a North American
energy supply expansion that made us the preeminent source on
the globe, and it was also an enormous source of economic
growth at that time.
Mr. Langworthy. That is right. Do you believe that the jobs
created by domestic production of oil and natural gas could
benefit Americans in the economy as a whole, and can it
actually bring down inflation?
Mr. Holtz-Eakin. Now, again, it is energy. It is energy
prices, not oil prices, but it is a crucial input. When we see
global oil prices go up, we see fertilizer costs go up, we see
all sorts of cost pressures that have to get passed along to
consumers, so it can contribute.
Mr. Langworthy. OK. Do you believe that the anti-fossil
fuel, political leaders that are restricting the supply of oil
by opposing oil investment, oil production, oil transport, that
they are causing energy prices to rise?
Mr. Holtz-Eakin. Global oil markets are always tightly
balanced, and so small variations in supply and demand produce
big price swings. And so that certainly has had an impact over
the past several years.
Mr. Langworthy. Very good. Thank you very much, and I yield
back.
Mrs. McClain. Thank you. The Chair recognizes the gentleman
from Missouri, Mr. Burlison.
Mr. Burlison. Thank you, Madam Chair. Thank you for coming.
I really appreciate it.
I think that when we are looking at this situation with all
this unbelievable inflation that we are experiencing, right,
and consumers are suffering, the question is, what do we do
about it? To me, the answer is, how do we grow our way out of
this, right? How do we increase productivity, increase the
production of eggs so that the price per egg drops? I mean,
this is simple supply and demand economics, right? So, the
question is what do we need to do as policymakers to figure out
how to motivate, whether it is a farmer that wants to invest in
more chicken production or someone who wants to invest in more
energy production? What kind of things can we do as a policy to
ramp up productivity?
Mr. Taylor. First of all, you don't increase taxes. That is
maybe the first thing and that will----
Mr. Burlison. Wait. Wait. Can you repeat that?
Mr. Taylor. You don't increase taxes.
Mr. Burlison. OK. And elaborate on that?
Mr. Taylor. Well, taxes are a drag. It reduces
productivity. It is not a good thing to do, especially in a
situation we are now. We have a productivity problem.
Mr. Burlison. So, if we were to decrease taxes, then all of
those evil companies that have profit, they would, instead of
investing that profit into future production, future mining
operations, future chicken farms, they would hoard the money,
right, hoard the profits, or they are more likely to do that,
right?
Mr. Taylor. They are interested in making profit, so use
the money most effectively.
Mr. Burlison. Right.
Mr. Taylor. Let me say because you began by saying
inflation is a problem, and so many of your colleagues have
said inflation is a problem. It is a problem, but it is not
necessarily related to these profits. It is a different
subject.
Mr. Burlison. Right.
Mr. Taylor. It is monetary policy.
Mr. Burlison. Right.
Mr. Taylor. I mean, you can see it, such as the U.S. is all
over the place. So, this Congress used to have efforts to try
to have the Fed report more on what it is doing. That seemed to
disappear. I think it should come back because in a sense, I am
not the best person to answer your questions. I am not at the
Federal Reserve Board. Those are the people who can answer your
questions, and if you had a specific requirement that they say
what they are doing, it will be much easier for you.
Mr. Burlison. But going back to my question, though, is
other policies. Mr. Konczal?
Mr. Konczal. That was right.
Mr. Burlison. How do we increase productivity?
Mr. Konczal. There are a lot of ways. To increase overall
growth, I think increasing the labor force, that is through
immigration, through bringing more people into the work force.
There are a lot of different ways to do that. I think housing
has been a real lag on productivity, so ways that we can
intervene to make it easier to build more housing, particularly
in places that are pretty housing constrained.
Mr. Burlison. So, what would that mean? Reducing
regulations, reducing the tax burden on people who are
developing?
Mr. Konczal. I mean, it is fundamentally a local zoning
issue, so it is very hard to do at the Federal level, but I
know a lot of policymakers who are thinking very hard about
this.
Mr. Burlison. OK. Dr. Holtz-Eakin, your comments on that?
How do we ramp up productivity in the United States?
Mr. Holtz-Eakin. You don't, but firms have every interest
in being more productive.
Mr. Burlison. I guess I should ask, how do I, how do we
incentivize private actors to ramp up productivity?
Mr. Holtz-Eakin. You want to have an environment which has
good incentives for the deployment of risky capital into
innovation, physical capital accumulation, human capital
accumulation. That means setting the tax rules and keeping
them, not moving around. Having sunsets is a bad idea.
Mr. Burlison. Creating certainty.
Mr. Holtz-Eakin. The regulatory burden, I think, is an
underappreciated issue, and at AF, we keep track of the cost of
every regulation issued by the Federal Government, and there
have been some remarkable changes over the years. In the Obama
Administration, the average cost to regulation, $1.1 per day
every day for eight straight years, $890 billion of self-
reported regulatory costs. That is a $900 billion still tax
increase. Trump administration, essentially zero over four
years. First year, the Biden administration, $200 billion
regulatory costs. That cost goes somewhere, and it goes into
inflation. It comes at the expense of productive investments.
So, having a more sane regulatory environment, having a stable
set of tax rules all would help firms decide what will be
productive, and the productivity will take care of itself.
Mr. Burlison. I appreciate it. Thank you.
Mrs. McClain. Thank you. The Chair recognizes the Chairman
of the full Committee from Kentucky, Mr. Comer.
Chairman Comer. Thank you, Madam Chairman. Dr. Holtz-Eakin,
do you agree that inflation is reflected more in corporate
profit or corporate greed, as some of our friends on the other
side of the aisle would refer, than it is for labor cost?
Mr. Holtz-Eakin. No, I don't agree with that. We have done
some work at AF on the sort of favorite measures of
concentration and do they lead to higher prices. They do not.
Do they lead to reduced competition in the form of entry? They
do not. So, this line is at odds with the data.
Chairman Comer. Can you explain why corporate profits are
increasing in recent decades?
Mr. Holtz-Eakin. I haven't done a specific study on that. I
would be happy to get back to you.
Chairman Comer. Would there be repercussions for reducing
corporate profits for the sake of reducing inflation?
Mr. Holtz-Eakin. Yes. The profit motive drives business
decisionmaking, so you would be interfering with a lot.
Chairman Comer. Dr. Taylor, would you advise the Fed to
take a wait-and-see approach raising interest rates because of
the tightening labor market?
Mr. Taylor. No, I think it is pretty clear they need to
move ahead. They began to talk about it recently. The question
is how far. I say six percent in my testimony. I think that is
a place to go, and it would be beneficial to the economy. It
will increase growth and reduce the chances of a serious
recession later.
Chairman Comer. So, what would you say the most important
way to fight inflation would be? What is the silver bullet
there because the media wasn't as interested in inflation
during the last administration, and they came to the summary,
many in the media, that the Inflation Reduction Act actually
would reduce inflation. Obviously, it has not. So, what would
you say the most important way to fight inflation would be?
Mr. Taylor. So, I think that the problem is the Federal
Reserve. And globally, you have the European Central Bank, you
have other central banks around the world, which are tending to
follow the Fed to some extent as they have in the past. That is
an important thing, so the focus should be the Fed. And as I
mentioned, this Congress used to have policies that will
require more reporting. That is why the Fed has reported a
little bit more, but that could go further so you would get
explicit answer from them. Why did you have the interest rate
zero for so long? It was the feeling, that kind of thing, and
they haven't answered that.
Chairman Comer. I couldn't agree more. I couldn't agree
more. So, last question, just to follow up, does investing in
infrastructure and housing reduce inflation because I think
that is something the President has implied. Like if we invest
more money in housing and infrastructure, will that reduce
inflation?
Mr. Taylor. So, it will reduce inflation for some goods,
but it might increase otherwise. I think you have to think
about inflation, as Doug indicated, it is a measure of all
prices, and this two percent just doesn't choose a few. And so,
all the things that have been mentioned in this hearing are
hoping there is one particular issue, but it is a broader set
of issues.
Chairman Comer. And talking about having to raise interest
rates, obviously, one reason you raise interest rate is to
fight inflation. But when you raise interest rates, that
reduces new home builds, new housing starts. That makes housing
less affordable as opposed to more affordable just simply by
supply and demand. I think that is something to point out. Go
ahead, Dr. Taylor, you can finish, and then Dr. Holtz, you can.
Mr. Taylor. What we have learned about monetary policy, if
it is clear what is happening, it doesn't have to be these
crunches. People realize that interest rates will be a little
higher, but that will be good because inflation comes down, so
they think about this whole process. The more communicative the
Fed can be, the more you can participate in this discussion,
the better this will work, and you wouldn't have the bad
circumstance you are referring to.
Mr. Holtz-Eakin. So, I want to agree with that. I mean, the
idea is to have them look past what is happening right now
toward a rule that will show a path of future interest rates,
and they can plan the whole lifecycle, the construction, and
the sale, and all of that. In the absence of that, the idea
that right now, if the Federal Government just goes out and
engineer a residential construction boom, that will somehow be
effective in fighting inflation, misses the fact that the Fed
is trying to stop residential construction.
And if you start trying to build it, they will raise rates
more because when they reduce residential construction, that
transmits monetary policies to a big swath of the economy. You
don't buy refrigerators to put in the houses, you don't buy
furnaces to put in them, you don't carpet them, and that is a
traditional route for the Fed to influence the demand for
goods, especially in the economy. So, to fight the Fed, when
you are asking it to deal with inflation is not good policy.
Chairman Comer. Right. Exactly. Madam Chair, I yield back.
Thank you for this very substantive Committee hearing.
Mrs. McClain. Thank you, and now the Chair recognizes the
gentlewoman from California, Ms. Porter.
Ms. Porter. Thank you very much.
If we want to understand the multifaceted root causes of
inflation, it is important we lay out some basic economics. You
all know this, but I want to make sure the American people do,
and we have a great panel to help us learn.
So, Mr. Konczal, I am going to have you help me with this
basic economics 101, supply and demand situation. So, here is
the basic model on economics that helps us determine how much
real GDP an economy produces, and at what price level. So, what
are these lines on the graph? The supply line, long-range
aggregate supply shows us how much real GDP an economy can
supply at different price levels. And the demand curve,
aggregate demand right here, shows us how much real GDP people
are willing to consume at different price levels. Where these
curves intersect, that shows how much real GDP our economy
generates and what prices people are going to face. So, what
causes inflation? What happens when we change this
intersection? Let's demonstrate. So, Mr. Konczal, what does
increased government spending do to the demand curve?
Mr. Konczal. It would increase. It would move it to the
right.
Ms. Porter. It would move it over here, so this is what
happens when you increase government spending. Everyone see?
Prices go up. All right. What happens to the demand curve if
the government, say, increases taxes on wealthy Americans?
Mr. Konczal. It would move the demand curve to the left and
decrease the price level.
Ms. Porter. Prices would go down. OK. So, let's combine
these two effects. What would happen if you increased
government spending, but you paid for it all with taxes on the
wealthy?
Mr. Konczal. In general, it would not have an effect.
Ms. Porter. So unclear, but indeterminate, could balance
each other out depending on the scope and size of those
spendings. So, when you have legislation that puts money in the
hands of people who need it, say, during a pandemic, but you
make sure you are getting at least that much back from taxes on
rich people, you should not see much aggregate meaningful
inflation. Now, it is even more promising for inflation when
the legislation generates surplus tax revenue that might even
be able to help cool inflation. Can you raise your hand, all
three of you, if you agree that the Inflation Reduction Act
followed the basic anti-inflationary principle of putting money
in people's hands, but raising taxes on the wealthy? Anybody?
One. Mr. Konczal.
So, Mr. Holtz-Eakin, you are here to advise Congress about
how to contain inflation, and the best hint I got from your
testimony is on page one. You said, ``Congress should not
further exacerbate inflation through excessive spending,'' and
you said there is no good option. When we get to inflation, it
is all tough. So, what is next? How are we going to reduce
inflation without inflicting pain on working families and
seniors?
Mr. Holtz-Eakin. So, I say this lovingly, but please don't
try. I think that this is the Fed's problem that you have
delegated to the Fed and given it a mandate for full employment
price stability, and you should let them pursue that mandate,
review their efforts with oversight hearings. That is exactly
the right thing to do. And you should think about setting the
parameters for fiscal policy, the tax structure, the tax
levels, the kinds of spending programs we have to maximize
long-run economic growth, and not move them back and forth
quickly to try to respond to whatever is going on this year,
next year. Congress is not well suited for that. It is much
more suited for the long-run growth potential for the economy,
and so that is an allocation of roles, I think, would be
preferable.
Ms. Porter. So, for example, investing in things like
infrastructure, that is a long-term growth?
Mr. Holtz-Eakin. Where appropriate, yes. Where appropriate,
yes.
Ms. Porter. Where appropriate to invest in that. So, I
think as we sort of wrap up this, I think, really productive
hearing with an amazing all-star, and let me just say,
intimidating witness panel. I want to sort of go through what I
think are the key takeaways. It doesn't cause inflation to make
paid-for investments in working families. If you pay for them,
if you take the money out of the economy with taxes, and you
put it back in other places, that is allocative, but on
aggregate, if you get it right, it shouldn't cause inflation.
That is what that curve, that chart was showing. It is a good
idea to make wealthy pay their fair share, to pay off the
national debt, and help cool inflation. We take some of that
surplus tax revenue, we can actually use it to cool inflation.
Democrats' Inflation Reduction Act, you two didn't agree,
but I think it basically met that basic principle of doing
those two things: making investments in families and making the
wealthy pay their fair share. And the fourth thing is, I don't
think, and I really appreciate your honesty, Dr. Holtz-Eakin,
there really isn't a secret Republican plan or Democratic plan
for that matter, to fight inflation. There is no easy way to do
this without punishing hardworking American families, so the
solution here isn't to cut spending programs that people rely
on. The solution here is to try to support families as we get
through this really difficult economic period and let our
economy try to find its way back to a level of inflation. That
is less painful than where we find each other today. So, I
yield back and thank the Chairwoman for her indulgence.
Mrs. McClain. I thank my colleague for her comments, and
right now, I will recognize the Ranking Member, Ms. Porter, for
her closing statement.
Ms. Porter. Thank you again, Madam Chairwoman, and thank
you again, for all of our witnesses. I think you probably know
that I don't flatter witnesses unnecessarily. You really are an
all-star panel, and we really are grateful for you being here
today.
Look, I am a single mom with three school-aged kids, and
like all of you, I am tired of what is happening at the grocery
store. It used to be fun, and now it is just tough to go in
there. I am tired of feeling the sticker shock and putting the
cereal back on the shelves because we can't afford it. I am
tired of searching for coupons and finding that there aren't
any to help me bring down prices. I am deeply invested in
trying to rein in inflation for constituents and for my own
family. But when we talk about inflation, we need to do it
justice by not oversimplifying. And today, what many Democrats
have tried to do is demonstrate that calling inflation a
preventable crisis is an oversimplification.
Now, it is our job in Congress to set aside the partisan
games and try to get to work. Inflation is complex. It is
multifaceted, and there are certainly tools that government,
sometimes Congress, but, as you suggested, often not Congress,
can use to try to address inflation. We can keep making our tax
code more fair. We can crack down on tax cheats so that we
increase tax revenue, can pay down debt, can cool inflation. We
can keep fighting corporate monopolies so that our markets can
be more competitive and can deliver lower costs. That is really
the promise of a capitalist economy. We can keep shoring up
supply chains, bringing manufacturing back home, and helping
smooth the transport of goods to market. We can invest in long-
term structural investments that will do right by our economy,
things like infrastructure, things like renewable energy,
because these investments pay off in the long run with lower
costs for families and a stronger, more stable, more resilient
economy that is less vulnerable to inflationary shocks.
It is possible to do all of these things together, but we
can't use inflation as a convenient scapegoat to cut programs
that seniors and kids and families rely on. Wherever Committee
Republicans land, and I hope the chairwoman will address that,
the American people should know that Committee Democrats are
going to continue to work tirelessly toward thinking about how
to navigate this inflationary period while honoring our
commitment to make life better for the American people. I yield
back.
Mrs. McClain. Thank you, Ms. Porter, and thank you for
conducting my first oversight hearing with me. I appreciate it.
I look forward to working with you in the future to come up
with some commonsense solutions to help the American people
move forward.
I now recognize myself for the closing statements.
I would agree that we are not here to talk about cuts. That
is not our plan, but I first feel that we need to start talking
about the causes of what got us in this situation. So, we are
not going to repeat the same thing over and over again because
if we can learn from the past, we can have a brighter future,
and I think that is what both sides of the aisle are trying to
do for the American people. I can assure you that is what I am
trying to do, but we must learn from our mistakes so we are not
deemed to repeat them in the future.
Today's hearing has illustrated how important actually
facts are over fiction, and we need to stop with the messaging
and take a look at the facts. When the pandemic hit in March
2020, inflation was 1.5 percent as compared to the prior year.
When Biden took office in January 2021, inflation was at 1.4
percent, compared to the previous year. That is just a fact. On
March 11, 2021, Democrats jammed through $1.9 trillion American
Rescue Plan. By April, inflation had risen from 1.4 percent to
4.2 percent. By December, inflation was at seven percent. By
June 2022, inflation was at 9.1 percent. The Biden
administration and congressional Democrats did not stop there.
On August 16, 2022, the $740 billion Inflation Reduction Act
was signed into law, again, inflation. Too many dollars chasing
too few goods.
We are just doubling down on the American people, yet
Democrats have spent this entire hearing denying that inflation
exists, claiming inflation is a high-class-only problem and
blaming the corporations, who I might add, those corporations
pay massive, massive amount of taxes. And what would happen to
the taxes if corporations, because there is a third option, the
corporations could just stop producing? And then who would pay
the massive amount of taxes that the corporations pay because
there is another option. We just don't ever want to talk about
that.
We cannot fix a problem of inflation until our colleagues
recognize what all hard-working Americans recognize and what we
are dealing with, and that is, inflation exists. The truth is
Democrats' reckless spending caused the dramatic inflation,
hurting millions of Americans. This isn't an opinion, this is a
fact, and we need to learn from this fact, to not double down
and make the same mistakes again.
The data clearly illustrates that despite the destructive
economic impacts of the pandemic, President Trump had the
economy on a rapid path to recovery, 1.4 percent inflation,
with his pro-growth and pro-economic policies. Yet Democrats
choose to flood the economy with unnecessary--unnecessary--
remember, we passed, we infused money into the economy. We
didn't spend it all, and we passed two more policies that put
more money into the economy. I mean, we flooded the economy
with unnecessary and wasteful spending, causing inflation to
spike at a 40-year high and put the economy, I might add, on
the brink of recession, no matter how you want to change the
definition of a recession. My colleagues across the aisle must
acknowledge that it is their inflationary crisis and recognize
that Congress needs to immediately address it.
So, I thank the witnesses for your time. You have been
remarkable, all three of you. The wealth of knowledge that you
three bring is amazing.
And without objection, the Members will have five
legislative days to submit materials and to submit additional
written questions for the witnesses which will be forwarded to
the witnesses for their responses.
Mrs. McClain. If there are no further business, without
objection, the Subcommittee stands adjourned. Thank you so
much.
[Whereupon, at 3:45 p.m., the Subcommittee was adjourned.]
[all]