116th CONGRESS } SENATE { REPORT 1st Session 116- 116THEth CONGRESS 2019 JOINT ECONOMIC REPORT 1st Session _______ 116th CONGRESS R E P O R T 1st Session OF THE 116th CONGRESS 1st SessionJOINT ECONOMIC COMMITTEE CONGRESS OF THE UNITED STATES ON THE 2019 ECONOMIC REPORT OF THE PRESIDENT U.S. GOVERNMENT PRINTING OFFICE WASHINGTON: 2019 U.S. GOVERNMENT PRINTING OFFICE WASHINGTON: 2019 II JOINT ECONOMIC COMMITTEE [Created pursuant to Sec. 5 (a) of Public Law 304, 79th Congress] SENATE HOUSE OF REPRESENTATIVES MIKE LEE, Utah, Chairman CAROLYN B. MALONEY, New York, Vice Chair TOM COTTON, Arkansas DONALD S. BEYER, JR., Virginia BEN SASSE, Nebraska DENNY HECK, Washington ROB PORTMAN, Ohio DAVID TRONE, Maryland BILL CASSIDY, M.D., Louisiana JOYCE BEATTY, Ohio TED CRUZ, Texas LOIS FRANKEL, Florida MARTIN HEINRICH, New Mexico DAVID SCHWEIKERT, Arizona AMY KLOBUCHAR, Minnesota DARIN LAHOOD, Illinois GARY C. PETERS, Michigan KENNY MARCHANT, Texas MARGARET WOOD HASSAN, New Hampshire JAIME HERRERA BEUTLER, Washington Scott Winship, Ph.D., Executive Director Harry Gural, Democratic Staff Director LETTER OF TRANSMITTAL __________________ July 18, 2019 HON. MITCH MCCONNELL Majority Leader, U.S. Senate Washington, DC DEAR MR. LEADER: Pursuant to the requirements of the Employment Act of 1946, as amended, I hereby transmit the 2019 Joint Economic Report. The analyses and conclusions of this Report are to assist the several Committees of the Congress and its Members as they deal with economic issues and legislation pertaining thereto. Sincerely, Mike Lee Chairman IV V CONTENTS Chairman’s Views .................................................................. 1 Chapter 1: The Economic Outlook ....................................... 4 Overview ...................................................................................... 4 The “New Normal”....................................................................... 5 From the “New Normal” to Just Normal ...................................... 6 Prospects and Challenges Ahead ................................................ 14 CHAPTER 2: MONETARY POLICY ............................................ 16 Overview .................................................................................... 16 Instruments vs. Outcomes .......................................................... 16 Interest Rates Are Not a Good Indicator of the Stance of Monetary Policy .................................................................. 16 NGDP Is a Good Indicator of the Stance of Monetary Policy .................................................................................. 18 Why Was Monetary Policy Tight? ............................................. 19 The Monetary Policy Transmission Mechanism ................ 19 Reasoning from a Price Change .......................................... 20 Interest on Excess Reserves (IOER) ................................... 21 Quantitative Easing (QE) .................................................... 22 “Normalizing” Monetary Policy................................................. 23 A More “Normal” Level of Interest Rates .......................... 24 Balance Sheet “Normalization” .......................................... 24 “Normalization” without Normalizing ................................ 25 Operating System Concerns ....................................................... 26 Diminished Monetary Policy Effectiveness ........................ 26 Smaller Margin for Error .................................................... 27 Unintended Supply Side Consequences of a Large Balance Sheet .................................................................................... 27 Regulatory Concerns ........................................................... 28 No Interbank Lending Market............................................. 29 Legal Concerns ................................................................... 30 Potential Impairment of Federal Reserve Independence .... 31 Conclusion .................................................................................. 32 Recommendations ............................................................... 33 Chapter 3: How Families, Workers, and the Economy Benefit from the Tax Cuts and Jobs Act ........................................... 34 Introduction ................................................................................ 34 How Tax Policy Affects Economic Growth ............................... 34 How Economy-Wide Effects of Tax Policy Are Modeled ......... 37 VI Pro-Growth Provisions in TCJA ................................................ 39 Lower Individual Rates and Other Tax Relief .................... 39 The Myth of “Tax Cuts Only Benefit the Wealthy” ........... 41 Lower Small Business Rates and the Pass-Through Deduction ............................................................................ 43 Faster Cost Recovery Through Expensing.......................... 46 Lower Corporate Tax Rates and a Territorial Tax System . 48 Pro-Family Provisions in TCJA ................................................. 51 Expanded Marriage Penalty Relief ..................................... 52 Expanded Child Tax Credit................................................. 54 Other Family-Based Tax Provisions ................................... 56 Additional Progress Needed on the Alternative Minimum Tax ...................................................................................... 56 “Are We There Yet?” ................................................................. 57 Conclusion .................................................................................. 60 Recommendations ............................................................... 61 Chapter 4: Deregulation ........................................................ 62 Introduction ................................................................................ 62 The Link Between Innovation and Economic Growth ............... 62 Regulation Reduces Innovation .................................................. 64 Financial Regulation Limits Capital Access ....................... 65 Dodd-Frank Act .................................................................. 66 Volcker Rule ....................................................................... 67 Sarbanes-Oxley Act ............................................................ 68 Deregulation Grows the Economy ............................................. 69 Conclusion .................................................................................. 71 Recommendations ............................................................... 71 Endnotes .................................................................................. 73 VII Statement of Vice Chair Carolyn B. Maloney ..................... 83 Chapter 1: Macroeconomic Overview .................................. 88 Overview .................................................................................... 88 State of the Economy.................................................................. 88 Economic Growth ............................................................... 89 The Labor Market ............................................................... 91 Wage Growth ...................................................................... 93 Economic Disparities .......................................................... 95 Assessment of the Tax Cuts ....................................................... 95 Economic Effects of the TCJA ........................................... 95 The Economic Effects of Aggressive Deregulation ................. 103 Research Fails to Find a Link Between Broad Deregulation and Economic Growth ...................................................... 103 Deregulation Results in Winners and Losers .................... 104 The Cost of Trade Wars ........................................................... 105 Uncertainty Weakens Investment ..................................... 107 The Government Shutdown ...................................................... 108 Long-Term Challenges ............................................................. 108 Declining Labor Force Growth ......................................... 109 Low Productivity Growth ................................................. 110 Income Inequality ............................................................. 111 The Climate Crisis ............................................................ 111 Conclusion ................................................................................ 111 Chapter 2: Economic Inequality ........................................... 113 Overview .................................................................................. 113 Aggregate Economic Indicators Do Not Tell the Whole Story 113 Decades of Wage Stagnation ............................................ 114 Rising Income Inequality .................................................. 115 Wage Growth Varies by Education Level ........................ 116 Growing Wealth Inequality ............................................... 117 Decreased Economic Mobility .......................................... 117 Family Economic Security ................................................ 118 Improving Measurement ................................................... 118 Persistent Disparities ................................................................ 119 Employment ...................................................................... 119 Wage and Income .............................................................