Center for Financial Markets and Policy Conducts Capitol Hill Briefing

November 21, 2011

The Center for Financial Markets and Policy at Georgetown’s McDonough School Business and the Milken Institute’s Center for Financial Markets hosted a Capitol Hill Briefing Oct. 25, 2011, on strengthening the economy through policies to boost growth and job creation.

David A. Walker, John A. Largay Professor and director emeritus of the Capital Markets Research Center at Georgetown University, moderated the discussion. Featured panelists included Milken Institute’s Chief Research Officer, Ross DeVol, as well as fellows Jared Bernstein, former chief economist to Vice President Joe Biden, and Phillip Swagel, former assistant secretary for economic policy at the Treasury Department.

The panelists provided an overview of the state of the economy and offered ideas and policies to promote job creation and sustainable growth. Though there was agreement that infrastructure investment could serve as a catalyst for growth, the panelists differed on whether sustainable economic recovery is best pursued through policies that focus on boosting consumer demand as compared to promoting long-run economic structural reforms to enhance U.S. corporate competitiveness. There also was some agreement that it would be useful to pursue both angles—for policies to support near-term demand while also putting in place a credible approach to long-term economic challenges, notably including the U.S. fiscal imbalance. Though these positions are not mutually exclusive, they do result in differing policy priorities. 

The panelists all concurred that the U.S. economy is in a fragile state marked by low-to-moderate growth and high unemployment. They did not believe, however, that the economy was headed into another recession; DeVol noted that he had predicted in June—when growth forecasts were being slashed—that Q3 GDP would surprise to the up-side despite depressed consumer sentiment triggered by the debt ceiling crisis that raged over the summer. DeVol cautioned, meanwhile, that continued political gridlock could eventually impact the real economy. 

The panelists all said that infrastructure investment could prove to be a relatively effective way to stimulate eventual job growth. Swagel, however, provided two caveats: first, any infrastructure investment would need to be de-politicized in order to avoid inefficient projects, such as high speed trains; second, any short-term job stimulus efforts must be coupled with prudent mid-to-long-term economic structural reforms in order to ensure sustainable growth. On this latter point, he suggested a number of proposals, including tax reform, housing reform that would see the gradual transition from a GSE (government-sponsored enterprise)-based system to one predicated on private capital, and high-skilled and investor immigration reform.

Bernstein stressed that investment into education infrastructure would be an impactful and meaningful job creation measure. He noted that the Fix America’s Schools Today (FAST) program, which calls for a $25 billion investment to repair, retrofit, and insulate thousands of public schools, thereby creating hundreds of thousands of jobs. He also noted that a scaled down version of the plan has secured bipartisan support through endorsements from Senators Warner (D-VA) and Webb (D-VA) and House Majority Leader Cantor (R-VA).

Walker, Swagel, and DeVol agreed on the need for comprehensive tax reform. Walker underscored the need to eliminate uncertainty regarding future tax policy. DeVol stressed the competitiveness and innovation benefits the U.S. economy would enjoy through reforming and reducing corporate taxes, increasing the research and development tax credit, and imposing a territorial tax system.

DeVol proposed enhanced SBA support for small businesses seeking access to foreign export markets. Bernstein supported this proposal, noting that small businesses often lack the knowledge or capacity to exploit export channels and would benefit from the sharing of best practices. DeVol further argued in favor of export control reform given existing barriers to the sale of U.S. dual-use technologies despite the lack of similar restrictions in other NATO countries, and proposed a new visitor visa program for foreigners who purchase a home in the United States for $200,000-$500,000.   

Despite common ground amongst the panelists, there were some areas of disagreement. Bernstein stated that immediate passage of the American Jobs Act was essential to economic recovery, while DeVol and Swagel were more circumspect, arguing that government policy should have a long-term structural focus, particularly now that we are three years removed from the crisis.

Moreover, the panelists’ views diverged regarding the economic impact of reduced marginal tax rates. Bernstein stated that the argument in favor of the growth effect of reduced marginal tax rates amounts to trickle-down-economics and is belied by the higher-tax-higher-growth environment of the 1990s as compared to the lower-tax-lower-growth environment of the early 2000s. Swagel saw lower marginal taxes as boosting overall incentives and lower rates on capital income as especially important. This latter impact was because these constituted taxes on saving and investment, and lower rates would incentivize the capital accumulation that would translate into higher worker productivity over time—he noted that rising productivity was closely linked to rising wages. Bernstein, however, pointed out that productivity and real wage growth had diverged in recent decades, particularly for middle and lower-wage workers. DeVol added that it is illusory to compare the 1990s to the 2000s given significant differences between those decades, including confounding variables such as the “peace dividend” in the 1990s and bursting of the tech-bubble in the early 2000s.