Representative Saxton. And because there was a construction boom that created a demand - would that have created a demand for long-term home mortgages that was excessive?

Dr. Hubbard. Well, as the market works as a whole, there would be many factors that would determine people's demand for owning a home, an important one of which is interest rates. So the interest rate picture both affected and was affected by the demand for mortgages.

Representative Saxton. As I was listening to Mr. Watt's very good questions, it occurred to me - could the argument be that because of the high demand for mortgages, that rates crept back up? Is that a possibility?

Dr. Hubbard. Well, it can. If there is a sudden change in demand - sort of a shifting out of a demand curve for mortgages or for housing, if you will - that would put upward pressure on rates. Just as I was suggesting in answering the gentleman's question, if we expect conditions to improve, we would want to demand more credit, and that would raise interest rates.

Representative Saxton. I have no other questions at this time. I would just like to thank you, Chairman Hubbard and Dr. McClellan and Dr. Kroszner, for your contributions here this morning. It is always good to have you come and share your thoughts with us. We appreciate it very much, and we will look forward to being with you together again.

Dr. Hubbard. Thank you very much, Mr. Chairman. Dr. Kroszner. Thank you very much, Mr. Chairman. [Whereupon, at 11:16 a.m., the hearing was adjourned.]

SUBMISSIONS FOR THE RECORD

PREPARED STATEMENT OF

REPRESENTATIVE JIM SAXTON, CHAIRMAN

It is a pleasure to welcome Chairman Hubbard of the President's Council of Economic Advisers (CEA), and Council members Randall Kroszner and Mark McClellan to this hearing on the Economic Report of the President.

The Council's Report reviews the economic slowdown that began in the middle of 2000, and later turned into a recession. The effects of higher interest rates, surging energy prices, falling stock market, and other factors slowing the economy are explained. The Report notes the damage after September 11 resulting from the terrorist attacks and the serious economic disruption that followed. The Council nevertheless notes the positive effects of an easing of monetary policy by the Federal Reserve, and the reduction of the tax drag on the economy. The Council expects that the economy will rebound and real GDP will expand 2.7 percent over the four quarters of 2002 if appropriate policies are in place.

Recently released economic data do suggest that the economy may have bottomed out. However, much of this improvement is too recent and tentative to be called a trend. The fragility of the economy, reflected in declining investment and employment, remains a concern that justifies consideration of economic stimulus legislation by the Congress. Moreover, the economy is vulnerable to risks from adverse international economic developments, high debt levels, security costs, and other factors.

In the wake of the events of September 11, the prospect of economic recovery in the near future is especially impressive and reflects the remarkable resilience of the American economy and people. In addition, the President's success in weakening the terrorist network has improved domestic security and restored confidence, though much remains to be done. The restoration of domestic security is a key function of government and is an important precondition for a resumption of healthy economic growth. As the President has emphasized, the war against terrorism is hardly over, but we have made a good start. To date the terrorists have been unsuccessful in attaining their objective of seriously crippling the U.S. economy.

Turning to international economic policy, I would like to note the Council's statements endorsing reform of the International Monetary Fund (IMF). According to the CEA Report, IMF liquidity loan "programs would appropriately involve short-term lending at penalty interest rates, to encourage and facilitate the borrower's quick return to private capital markets." This is very consistent with the Congressional mandates for IMF reform developed by this Committee in 1998. A version of these transparency and lending reforms became law in 1998 as conditions attached to the IMF quota increase legislation. Thus,

Congressional actions already taken strongly support the Administration's position on needed reform of IMF lending programs.

In conclusion, the recent signs of economic recovery are encouraging but tentative. The economy has proven itself to be incredibly resilient, but it remains to be seen whether a sustained economic rebound is underway. Congressional enactment of economic stimulus legislation would be a prudent insurance policy against the potential for another dip in economic activity.

OPENING STATEMENT OF

SENATOR JACK REED, VICE CHAIRMAN

Thank you, Chairman Saxton, for this opportunity to discuss the economic outlook and to review the Economic Report of the President, released today. I also want to thank Council of Economic Advisers Chairman Dr. R. Glenn Hubbard and members Dr. Mark McClellan and Dr. Randall Kroszner for their testimony today.

The last time you were here, Dr. Hubbard, the National Bureau of Economic Research (NBER) announced the economy had been in recession since March 2001. Despite some recent hopeful signs, the economy remains weak.

Clearly, the task before us as policymakers is to get the economy out of recession quickly and put us back on a path of strong and sustainable growth. How we get there has been - and will continue to be - the subject of much debate. What's clear, however, is that the President's call to accelerate and make permanent the scheduled personal income tax cuts won't get us there.

Over the next decade, the non-partisan Congressional Budget Office (CBO) projects that the federal surplus will be more than $4 trillion lower than its January 2001 projection. CBO estimates that less than one-fourth this downward projection is attributable to weaker economic conditions, while more than 40 percent is attributable to the tax cut. The true budget outlook is likely to be even gloomier, because the CBO projections do not take into account any new policies, such as those just proposed in the President's budget.

Accelerating or making permanent the Administration's tax cuts is poor economic policy for both the short run and the longer run. In the short run, the tax cut goes disproportionately to the highest-income households who are least likely to spend it. In the longer run, the tax cut severely reduces public saving and would be unlikely to stimulate significant increases in private saving. Thus, national saving and economic growth will fall, just at the time when the budgetary pressures of the aging baby boom start to hit.

The attack on September 11 was a dreadful assault on this country. But the irresponsible tax cuts pressed by this administration had us headed down a road to deficits even before we faced a war on terrorism. Now we have to respond to our national, homeland, and economic security needs bereft of a surplus that was hard-earned over years of effort during the 1990s.

The consequences of not having surpluses to fund our national priorities are severe. For example, the President has proposed cuts in job training programs that help people transition from welfare to work, and an inadequate amount of money for providing prescription drugs to seniors.

Balancing our national priorities is challenging enough without imposing additional and unwise fiscal constraints. We simply cannot afford to accelerate or make permanent tax cuts for only the wealthiest Americans at the expense of immediate needs and investments for the future.

Mr. Chairman, I look forward to the testimony of and discussion with Chairman Hubbard and the other members of the CEA.