The Joint Economic Committee held the first Congressional hearing of 2008 yesterday on the economy and need for an economic stimulus package. Former Treasury Secretary, Larry Summers testified to the need for up to $150 billion in economic stimulus, including tax cuts and spending measures. Fellow panelists from the Economic Policy Institute and the Heritage Foundation and most members of the Committee concurred that economic stimulus was needed. Schumer said yesterday that that the right combination of short-term tax cuts and spending stimuli, enacted quickly, will boost the economic fortunes of middle class families and jumpstart our economy.

Schumer, joined by Sen. Ted Kennedy yesterday, expressed a strong desire that an economic stimulus package be put forward before the President’s State of the Union Address because quick action is required to boost the economy.

All testimony and opening statements from yesterday’s JEC hearing can be found HERE

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SCHUMER: WITH RISING UNEMPLOYMENT RATE AND ANEMIC JOB GROWTH, BUSH'S FAILING ECONOMIC POLICIES ARE LEAVING THE U.S. ECONOMY MUCH MORE VULNERABLE TO RECESSION

BLS Report Indicates Loss of 13,000 Private Sector Jobs and Increase in Unemployment Rate to 5 Percent

Washington, D.C. – U.S. Senator Charles E. Schumer, chairman of the Joint Economic Committee, today reacted to the dismal employment report released this morning by the Department of Labor. The Bureau of Labor Statistics announced that the number of unemployed increased by 474,000 with the unemployment rate rising to a two-year high of 5 percent.  Non-farm payrolls increased by only 18,000 in December, the weakest showing since August of 2003. Sluggish job growth in the service sector was offset by significant job losses in construction and manufacturing.   

“If there were ever a shot across the bow to this Administration to get off its laissez-faire boat and start helping the economy, this is it. It’s about their last chance to avoid tumbling into recession.” Schumer said.  “The president's possible plan for economic stimulus in the eighth year of his presidency will likely be too late, hopefully it isn't too little to stave off a recession in 2008.”

Highlights of Today’s BLS Report

·        Job losses were widespread across the private sector. Private-sector employers shed 13,000 jobs in December, while government added 31,000 jobs. Manufacturing lost 31,000 jobs, for a total of 212,000 for the past year and retail trade lost 24,000 jobs last month. Declining employment occurred alongside a drop in hours for production workers from 40.6 to 40.5 hours per week.

·        The effects of the housing collapse are being felt throughout the labor market. Construction lost 49,000 jobs last month, for a total of 195,000 jobs over the past year. Losses occurred in both residential and non-residential construction. "Credit intermediation," which includes mortgage brokers, lost 7,000 jobs last month, for a total of 75,000 over the past year.

·        The pace of job creation in services has slowed. Over the past year, services typically added 142,000 jobs each month, but in December, only 93,000 jobs were added. Temporary help services, often a leading indicator of employers' willingness to hire, added no jobs in December.

·        December's wage growth was far below the pace of inflation. The annualized quarterly rate of wage growth in December was 3.3 percent, far below the last reported quarterly inflation growth of 5.6 percent in November. Inflationary pressures are not coming from wages, but rather from the higher prices of commodities (food and oil, especially).

·        There are many indications that people are being laid off and having a hard time finding a new job or having to take a part-time job instead of a full-time one. The share of the unemployed who are "permanent job losers," that is, they were fired or laid off and their employer indicated that they have no intention of rehiring them, has increased sharply over the past year, from 35.7 to 40.1 percent. Over the past year, the share of part-time workers who would prefer to work full-time but can only find a part-time job has risen from 64.0 to 68.0 percent.

Senator Schumer discussed the shortcomings of the Bush administration's recent measures to address the subprime mortgage crisis, the myths that have propelled this crisis, and proposed a series of major, alternative steps the federal government should take to protect homeowners from foreclosure and the U.S. economy from recession. Schumer joined former Treasury Secretary Lawrence Summers in the Economic Studies event. 

“The subprime crisis has become a symbol of the Bush Administration’s serious mishandling of so many economic and domestic policy priorities,” Schumer said. “The housing mess, which has hit homeowners and neighborhoods with massive foreclosures, credit markets with mountains of debt, and the economy with weak job and economic growth, is further evidence that this administration is ideologically handcuffed and cannot step up to the plate to solve major problems.”

Schumer offered seven policy solutions that would help address the subprime mortgage crisis:

1. To alleviate the current crisis, ensure that there is someone on the ground to help out struggling borrowers. Through their relationships within the community and with lending organizations, housing counseling agencies are able to bring troubled borrowers and their lenders together to begin working out mortgage problems. Senator Schumer, with Senators Brown and Casey, and with critical help from Senator Murray, got $180 million in the omnibus appropriations bill that passed last night in the Senate, over the Administration’s objections, for foreclosure prevention counselors. However, more resources are needed.

2. Provide additional flexibility to Fannie Mae and Freddie Mac to provide liquidity to the markets. Senator Schumer introduced legislation that would temporarily raise the portfolio caps for Fannie and Freddie by 10%, with 85% of the increase targeted towards refinancing subprime borrowers. Schumer also introduced legislation that would raise the conforming loan limits for the GSEs. Secretary Paulson, as well as Chairman Bernanke, has supported an increase in the GSE’s conforming loan limits. This kind of targeted help, although potentially more risky for the GSEs, is why they were created in the first place. These measures would increase liquidity to the troubled subprime and jumbo loan markets and make more refinancing options available for subprime borrowers.

3. Introduce new legislation to provide additional liquidity to the markets. This legislation will increase private activity bond cap and temporarily allow states and localities to use single-family tax-exempt bonds—known as Mortgage Revenue Bonds or MRBs—to refinance subprime loans at risk of foreclosure. Currently, mortgage refinancing is not permitted under the MRB program. The legislation will also allow states to use this increase in the bond cap for affordable multifamily rental housing, an important resource for families who have already lost their homes to foreclosure. The Schumer legislation would double the amount of increased bond cap that the Bush Administration has proposed; make a portion of the increased cap permanent, and give states and localities the flexibility to respond to a wide range of mounting housing needs.

4. Amend the bankruptcy code to make primary home loans eligible for the same remedies that are available on other, less important debts. Judicially mandated loan modifications could be a highly effective tool for helping families recover from subprime loans, but today’s bankruptcy code prevents courts from providing relief on mortgage loans. In fact, the law singles out the home mortgage loan as the one debt the courts are not permitted to modify. Senator Schumer supports a measure that would amend the bankruptcy code to temporarily exclude primary home loans from the remedies that are available on other, less important debts. This would allow borrowers to pay the fair market value of their home and to keep that home, rather than seeing the home sold to a third party for its liquidation value.

5. Enact major reforms to the rules that govern the mortgage lending industry, improving the regulation of mortgage brokers and non-bank lenders. Federal laws are needed to impose new standards of care for mortgage originators, create a requirement that originators consider a borrower’s ability to repay a loan, prohibit appraisal fraud, reduce or eliminate “liar loans”, eliminate prepayment penalties and create effective remedies so that borrowers who do receive predatory or fraudulent loans have some recourse to restore their financial health. In May, Senator Schumer introduced the first legislation to do just that—the Borrower’s Protection Act. Schumer also co-sponsored Senator Dodd’s recently introduced bill, which preserves many of the original proposals in the Borrower’s Protection Act.

6. Create an easy-to-read one-page disclosure form with all of the information that a borrower needs to make an informed decision on their mortgage. Senator Schumer introduced legislation to require the banking regulators to create such a one-page mortgage disclosure form with all of the critical information on payments and fees that would impact the borrower. This information will give borrowers a clearer picture of the agreement that they’re signing and allow them to more easily compare loans to ensure that they get the best deal.  

7. Closely examine the role of that the rating agencies played in the explosive growth, and subsequent problems of the secondary mortgage market. The risks associated with subprime mortgages and the related securities were drastically underestimated by the credit rating agencies.  One reason for this, which merits closer examination: most rating agencies are paid by the companies they rate rather than by the investors who use the ratings. A more reliable rating system that provides accurate information about the value of securities will greatly reduce the fear and uncertainty that are creating the current credit crisis.

Schumer presented the four myths that have propelled the Bush Administration’s inadequate response to the subprime mortgage crisis:

MYTH: Vastly expanded home ownership from subprime lending: Subprime lending led to millions of brand-new, first-time homeowners in America .  

MYTH: Borrowers can easily understand all the terms of their mortgage loans. When market participants have full knowledge about transactions, the results are efficient. And subprime borrowers had all of the information about their mortgage terms and payments at their fingertips before they signed their loan documents.

FACT: Mortgage documents seem to be designed to hide information from the borrower.  The truth is that almost no one reads their entire mortgage document’s fine print, few hire special real estate lawyers to walk them through the home purchase, and given the complexity of mortgage documents, many borrowers can be easily manipulated into bad loans by unscrupulous brokers and lenders.

MYTH: The free market, left alone, will fix everything: Left alone, free market forces will correct the disruptions caused by the subprime crisis.

FACT: The market did not contain this problem within the subprime segment. In fact, the crisis has spread into the global economy. In August of this year, a severe credit crunch in the U.S. credit markets began, forcing financial institutions to limit the amount of loans that they offered to individuals and companies. As the administration looked on, the credit crisis trickled into the Alt-A and prime mortgage markets, pushing up mortgage rates for borrowers with even the best credit. The tightening of lending and lack of confidence in credit quality has led to shrinking investment and consumption, a slowdown in domestic economic growth, and even threatens a slowdown in the global markets.

Senator Schumer's entire speech, as prepared for delivery: “A Call to Action on the Subprime Mortgage Crisis: Putting Common Sense Ahead of Ideology”

The Joint Economic Committee, established under the Employment Act of 1946, was created by Congress to review economic conditions and to analyze the effectiveness of economic policy.

www.jec.senate.gov

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Washington, D.C. – Senate Majority Leader Harry Reid (D-NV) along with Joint Economic Committee (JEC) Chairman Sen. Charles E. Schumer, JEC Vice-Chair Rep. Carolyn Maloney, and House Majority Leader Steny Hoyer released a new report exposing the hidden costs of the war in Iraq. The Joint Economic Committee report entitled, “War at Any Price? The Total Economic Costs of the War” details the high hidden economic costs of the war in Iraq beyond the direct budgetary appropriations, including interest costs of borrowing these funds, lost investment, long term veteran’s health care, and oil market disruptions. The JEC estimates these costs could total $3.5 trillion depending on how long President Bush pursues the same course of action in Iraq.

The JEC estimates the total costs of the war to the American economy and the key findings are:

• The total economic costs of the wars in Iraq and Afghanistan so far have been approximately double the total amounts directly requested by the Administration.

• Even assuming a moderate drawdown in troop levels, total economic costs of the wars in Iraq and Afghanistan (with the vast majority of funds going to the war in Iraq) would amount to $3.5 trillion between 2003 and 2017. This is over $1 trillion higher than the recent Congressional Budget Office (CBO) federal cost forecast for the same scenario, which counted only direct spending and interest paid on war-related debt.

• The total economic cost of the war in Iraq to a family of four is $16,500 from 2002 to 2008. When the war in Afghanistan is included, the burden to the American family is $20,900. The potential future impact on the family of four skyrockets to $36,900 for Iraq and $46,400 for Iraq and Afghanistan from 2002 to 2017.

Reid stated, "Today’s report by the Joint Economic Committee is jarring. It is yet another reminder of how President Bush’s stubborn refusals to change course in Iraq – and Congressional Republicans’ willingness to rubberstamp his failed strategy – has real consequences at home for all Americans. The full costs of this war to our economy are manifested in ways that have never been accounted for by this Administration – we are funding this war with borrowed money, Americans are paying more at the gas pump and it will take years for our military to recover from the damage of the President’s failed war strategy. And if President Bush gets his way and we do not significantly drawdown our troops, the total costs of this war will reach astronomical heights. Democrats are committed to ensuring this does not happen.”

“I would like to thank the Joint Economic Committee, especially Chairman Schumer and Vice Chair Maloney, for compiling this important report,” said Hoyer. “This report is more evidence that the war in Iraq has extracted a tremendous price on our nation while not making us safer. It shows the American people again why it is so important that we responsibly redeploy our troops and refocus our strength and resources.”

Schumer said, “The backbreaking costs of this war to American families, the federal budget, and the entire economy are beyond measure in many ways. While we in Congress have been fighting for a significant change of course in the President’s Iraq policy, the JEC report estimates that we are already set to incur economic costs double what the Administration has spent on this Iraq war – nearly $1.3 trillion through 2008. And if the President’s stay-the-course strategy prevails through 2017, the total economic costs for the war will top $3.5 trillion. What this report makes crystal clear is that the cost to our country in lives lost and dollars spent is tragically unacceptable.”

“The cost of this war has been too great, and the human toll too high. We know that a rapid redeployment will save countless American lives. The Joint Economic Committee estimates that a sharp drawdown in U.S. forces, much like the plan the House is advancing, could also save the American economy up to $2 trillion dollars over the next ten years. Democrats in Congress are committed to bringing our troops home and charting a new, more responsible direction in Iraq," said Maloney.

The key costs beyond the direct fiscal spending include the following:

• Borrowed money to finance the Iraq War has displaced productive investment. Sincetaxes have been cut and other spending has increased since the beginning of the Iraq war, it seems clear that the war has been and continues to be funded using borrowed money. The increase in government borrowing displaces substantial amounts of productive investment by U.S. businesses, thus reducing productivity in the economy over many future years. Interest costs paid by taxpayers are only a subset of these costs.

• Substantial Iraq-related costs have been borrowed from foreigners. The interest payments on this debt constitute a flow of funds from Americans to those foreigners who have bought our tremendous debt.

• The war in Iraq has disrupted world oil markets leading to increased prices. The Iraq war has occurred in a context of greatly increasing world demand for oil, as well as declining excess production capacity. Both the direct effect of the war in reducing Iraqi oil production, and the indirect effect of creating greater instability in the Middle East can act to increase oil prices. Moreover, relatively small increases in oil prices can have substantial economic effects.

• Other economic and budgetary costs have grown due to the Iraq war. These expenditures include the costs of treating the wounded and disabled, lost productivity from those injured, potential future expansions in the size of the military made necessary by the war, the costs of repair and refit for military equipment, increases in recruitment and retention costs or the military, and economic disruptions created by the deployment of the Reserves. The sum of the costs listed above raises the economic costs of the war from $607 billion in direct funding for the Iraq war to $1.3 trillion and could reach $1.6 trillion by the close of FY 2008 if spending in Afghanistan is included.

Total Economic Costs 2002-08 (if President’s supplemental is passed):

$1.3 trillion for Iraq alone $1.6 trillion for Iraq and Afghanistan

True Cost of the War has been Double the Administration’s Spending (through 2008):

• To date, the President has requested $607 billion for the Iraq war alone since 2003, and a combined $804 billion including Afghanistan.

• This is over ten times higher than the $50 to $60 billion estimated by the Administration prior to the start of the war and costs have increased every year since 2003.

• The funds requested for these wars through 2008 would have been sufficient to provide health insurance coverage to all of America’s uninsured for the 2003-2008 period. (There were approximately 45 million uninsured Americans at the start of the war and this number rose to 47 million by 2006, which is the latest figure available).

Total Economic Costs 2002-2017 (CBO’s considerable drawdown scenario)

$2.8 trillion for Iraq alone $3.5 trillion for Iraq and Afghanistan

The Cost of the War Could Balloon to $3.5 Trillion or More

The report forecasts a scenario, using the same CBO, 10-year window, corresponding to the recent statement by Secretary of Defense Robert Gates that a protracted “Korea-like” presence would be required in Iraq. This scenario involves a considerable drawdown in Iraq troop levels of 66 percent by the year 2013, and a smaller drawdown of 33 percent in Afghanistan forces. The scenario also assumes that some active conflict with insurgents continues over the period. These CBO estimates of $2.4 trillion are used as a base for the analysis in this report. The total economic cost of the wars in Iraq and Afghanistan rise by over $1 trillion to $3.5 trillion.

Costs could far exceed these projections if the significant drawdown assumed in this scenario does not materialize. This CBO budgetary scenario projects that appropriations for the Iraq war will begin to drop in 2009, and by FY 2013 Iraq appropriations are projected to be less than half FY 2007 levels. But historically appropriations for the Iraq war have increased every year since the invasion, by between 12 and 40 percent annually.

Maintaining post-surge troop levels in Iraq over the next ten years would result in costs of $4.5 trillion. If a rapid withdrawal takes place, future costs of these wars to the U.S. economy over the next decade could be reduced by almost $2 trillion.