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+
+ - LIFTING THE CRUSHING BURDEN OF DEBT
+
+[House Hearing, 112 Congress]
+[From the U.S. Government Publishing Office]
+
+
+
+ LIFTING THE CRUSHING BURDEN OF DEBT
+
+=======================================================================
+
+ HEARING
+
+ before the
+
+ COMMITTEE ON THE BUDGET
+ HOUSE OF REPRESENTATIVES
+
+ ONE HUNDRED TWELFTH CONGRESS
+
+ FIRST SESSION
+
+ __________
+
+ HEARING HELD IN WASHINGTON, DC, MARCH 10, 2011
+
+ __________
+
+ Serial No. 112-6
+
+ __________
+
+ Printed for the use of the Committee on the Budget
+
+
+ Available on the Internet:
+ http://www.gpoaccess.gov/congress/house/budget/index.html
+
+
+ U.S. GOVERNMENT PRINTING OFFICE
+64-797 WASHINGTON : 2011
+-----------------------------------------------------------------------
+For sale by the Superintendent of Documents, U.S. Government Printing Office,
+http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202�09512�091800, or 866�09512�091800 (toll-free). E-mail, [email protected].
+
+
+ COMMITTEE ON THE BUDGET
+
+ PAUL RYAN, Wisconsin, Chairman
+SCOTT GARRETT, New Jersey CHRIS VAN HOLLEN, Maryland,
+MICHAEL K. SIMPSON, Idaho Ranking Minority Member
+JOHN CAMPBELL, California ALLYSON Y. SCHWARTZ, Pennsylvania
+KEN CALVERT, California MARCY KAPTUR, Ohio
+W. TODD AKIN, Missouri LLOYD DOGGETT, Texas
+TOM COLE, Oklahoma EARL BLUMENAUER, Oregon
+TOM PRICE, Georgia BETTY McCOLLUM, Minnesota
+TOM McCLINTOCK, California JOHN A. YARMUTH, Kentucky
+JASON CHAFFETZ, Utah BILL PASCRELL, Jr., New Jersey
+MARLIN A. STUTZMAN, Indiana MICHAEL M. HONDA, California
+JAMES LANKFORD, Oklahoma TIM RYAN, Ohio
+DIANE BLACK, Tennessee DEBBIE WASSERMAN SCHULTZ, Florida
+REID J. RIBBLE, Wisconsin GWEN MOORE, Wisconsin
+BILL FLORES, Texas KATHY CASTOR, Florida
+MICK MULVANEY, South Carolina HEATH SHULER, North Carolina
+TIM HUELSKAMP, Kansas PAUL TONKO, New York
+TODD C. YOUNG, Indiana KAREN BASS, California
+JUSTIN AMASH, Michigan
+TODD ROKITA, Indiana
+FRANK C. GUINTA, New Hampshire
+ROB WOODALL, Georgia
+
+ Professional Staff
+
+ Austin Smythe, Staff Director
+ Thomas S. Kahn, Minority Staff Director
+
+
+ C O N T E N T S
+
+ Page
+Hearing held in Washington, DC, March 10, 2011................... 1
+
+ Hon. Paul Ryan, Chairman, Committee on the Budget............ 1
+ Prepared statement of.................................... 2
+ Hon. Chris Van Hollen, ranking minority member, Committee on
+ the Budget................................................. 3
+ Prepared statement of.................................... 4
+ Douglas Holtz-Eakin, president, American Action Forum........ 5
+ Prepared statement of.................................... 7
+ Carmen M. Reinhart, Dennis Weatherstone senior fellow,
+ Peterson Institute for International Economics............. 13
+ Prepared statement of.................................... 14
+ Maya MacGuineas, president, Committee for a Responsible
+ Federal Budget, the New America Foundation................. 16
+ Prepared statement of.................................... 18
+ Response to question submitted........................... 73
+ John D. Podesta, president and CEO, Center for American
+ Progress Action Fund....................................... 21
+ Prepared statement of.................................... 23
+ Response to question submitted........................... 74
+ Hon. Marcy Kaptur, a Representative in Congress from the
+ State of Ohio, submission for the record:
+ Biographies and reported sources of private funding of
+ witnesses.............................................. 72
+ Hon. Michael M. Honda, a Representative in Congress from the
+ State of California, questions submitted for the record.... 73
+
+
+ LIFTING THE CRUSHING BURDEN OF DEBT
+
+ ----------
+
+
+ THURSDAY, MARCH 10, 2011
+
+ House of Representatives,
+ Committee on the Budget,
+ Washington, DC.
+ The Committee met, pursuant to call, at 10:00 a.m., in room
+210, Cannon House Office Building, Hon. Paul Ryan, [Chairman of
+the Committee] presiding.
+ Present: Representatives Ryan, Campbell, Calvert, Price,
+McClintock, Stutzman, Lankford, Ribble, Flores, Mulvaney,
+Huelskamp, Young, Rokita, Woodall, Van Hollen, Schwartz,
+Kaptur, Blumenauer, Pascrell, Ryan of Ohio, Moore, Castor,
+Shuler, Tonko, and Bass.
+ Chairman Ryan. Let me just say, I am excited about this
+impressive list of witnesses we have. We have well-known, well-
+regarded witnesses on this issue. So I am really excited about
+getting into these details, and I am looking forward to this
+hearing. I will start with a brief opening statement then turn
+it over to my friend, Mr. Van Hollen.
+ This is an important hearing, basically on the future of
+our country. We here in Congress have our differences over how
+to solve our most urgent fiscal challenges, but I don't think
+that there is any serious debate over the urgency of these
+challenges. I doubt anyone here would dispute the fact that if
+we fail to act, we are inviting a debt crisis with potentially
+catastrophic consequences. Those seeking to cling to our
+unsustainable status quo are, quite frankly, putting us at the
+greatest risk.
+ Erskine Bowles, the Co-Chair of the Fiscal Commission,
+former Chief of Staff to former President Clinton, I think said
+it best, quote, The era of deficit denial is over. The failure
+to address the structural drivers of our debt has been a
+bipartisan failure over the years, yet the gusher of government
+spending and the creation of new, open-ended health care
+entitlements turned a fiscal challenge into a fiscal crisis.
+ The White House appears to acknowledge the problem, but
+seems determined to avoid tackling the problem. The latest
+budget proposal from the Obama Administration not only fails to
+address the drivers of our debt, but accelerates us down our
+unsustainable path. It would impose growth-killing tax
+increases and lock in Washington's reckless spending spree. Its
+claimed savings amount to little more than slogans and budget
+gimmicks. The status quo which the President's budget commits
+us to threatens not only our livelihoods, but ultimately our
+way of life. We must work together to lift this crushing burden
+of our debt.
+ The good news is this: We still have time to address the
+drivers of our debt and save our nation from bankruptcy.
+ We have several witnesses; we have experts today who will
+help us get our arms around the problem. I appreciate your
+testifying today before this committee on the difficulty and
+about the climb we have ahead of us. This is going to be a
+difficult climb. Our country is facing perhaps the greatest
+economic challenge in the history of our nation. But we do know
+that we can fix this. We do have time, and we can make this
+climb. The question is whether we have the political resolve to
+do that.
+ So the stakes of this challenge are no less than the unique
+American legacy of bequeathing to our children and
+grandchildren a better America; that is basically the legacy of
+this country. Each generation confronts its challenges in front
+of it, whether it is depression, world wars, or whatnot, so
+that their kids are better off. We know this. We know what is
+coming. The question is: Are we going to do what is necessary
+to prevent that from happening?
+ The way I look at it is, the worst experience that I have
+had in Congress was TARP. And I think most of us would probably
+agree with this. That is an economic crisis that caught us by
+surprise. We had all these meetings with the Federal Reserve
+Chair and the Treasury Secretary, talking about a deflationary
+spiral, a depression, bank failures were coming, and caught
+everybody by surprise. And I always ask people, What if your
+President and your member of Congress knew what was coming, saw
+it ahead of time, knew what they needed to do to prevent it
+from happening, but chose, instead, not to do anything about it
+because it was bad politics? Think about that.
+ This debt crisis is the most predictable economic crisis we
+have had in the history of our country. And if we actually
+don't do anything to prevent it from happening, shame on us.
+And this is the moment of truth. We have got to start talking
+about this stuff. And I hope that we can get there. I believe
+we can. Ultimately, the parties are going to have to come
+together to fix this problem, and I for one believe that the
+key is to go after spending. Spending is the driver of it. And
+if we do this, then our kids will have a better future. Then we
+will preserve the American legacy of leaving the next
+generation better off.
+ With that, I want to yield to my friend, the Ranking
+Member, Mr. Van Hollen.
+ [The prepared statement of Paul Ryan follows:]
+
+Prepared Statement of Hon. Paul Ryan, Chairman, Committee on the Budget
+
+ Welcome all, to this important hearing on the future of our
+country.
+ We here in Congress have our differences over how to solve our most
+urgent fiscal challenges.
+ But I don't think there is any serious debate over the urgency of
+these challenges.
+ I doubt anyone here would dispute the fact that, if we fail to act,
+we are inviting a debt crisis with potentially catastrophic
+consequences.
+ Those seeking to cling to our unsustainable status quo are, quite
+frankly, putting us at the greatest risk.
+ Erskine Bowles, the co-chairman of the President's fiscal
+commission, said it best: ``The era of deficit denial is over.''
+ The failure to address the structural drivers of our debt has been
+a bipartisan failure over the years, yet the gusher of government
+spending and the creation of new open-ended health care entitlements
+turned a fiscal challenge into a fiscal crisis.
+ The White House appears to acknowledge the problem, but seems
+determined to avoid tackling it.
+ The latest budget proposal from the Obama Administration not only
+fails to address the drivers of our debt, but accelerates us down our
+unsustainable path. It would impose growth-killing tax hikes and lock
+in Washington's reckless spending spree. Its claimed savings amount to
+little more than slogans and budget gimmicks.
+ The status quo, which the President's budget commits us to,
+threatens not only our livelihoods, but also our way of life. We must
+work together to lift this crushing burden of debt.
+ The good news is this: We still have time to address the drivers of
+our debt and save our nation from bankruptcy.
+ We have several expert witnesses here today who will help us get
+our arms around the problem. I appreciate your testifying today before
+this committee on the difficulty of the climb ahead and the
+consequences of inaction.
+ It will be difficult, but it is a climb we must make.
+ The stakes in this challenge are no less than the unique American
+legacy of bequeathing to our children a more prosperous nation than the
+one we inherited.
+ With that, I will yield to Ranking Member Van Hollen for an opening
+statement.
+
+ Mr. Van Hollen. Thank you, Mr. Chairman. And I want to join
+Chairman Ryan in welcoming our distinguished witnesses today. I
+am very pleased we are having a hearing on this important
+subject, and I think we can all agree that the long-term debt
+trajectory is unsustainable and unacceptable. And I believe we
+all agree that it is important to come together now, as the
+Chairman said, to develop and enact a sensible plan to reduce
+that debt in a steady and a predictable fashion. We should have
+a healthy discussion on what such a plan would look like.
+ What we should not be doing is taking actions that would
+hamper our fragile economic recovery. While last month's jobs
+numbers were promising, millions of Americans remain out of
+work. Enacting measures that would slow down job growth would
+not only impose additional and unnecessary economic pain on
+American families, it will harm the goal of deficit reduction.
+That is why the House Republican plan to make additional, deep,
+and immediate cuts in various investments in order to hit an
+arbitrary number is such a mistake.
+ Say what you will about Goldman Sachs, they know a little
+bit about the impact of investments, and their analysts predict
+that the House Republican plan will cost 700,000 Americans
+their jobs. Mark Zandy of Moody's Analytics, who, like Mr.
+Holtz-Eakin, was an advisor to the presidential campaign of
+Senator John McCain, reached a similar conclusion, as did the
+Economic Policy Institute.
+ Now, I see in Mr. Holtz-Eakin's testimony that you dispute
+some of those figures, and we can discuss them, but I would
+point out that the Chairman of the Federal Reserve, Ben
+Bernanke, testified just very recently that slashing the budget
+that way would, quote, Translate into a couple hundred thousand
+jobs, so it is not trivial, unquote. In fact, that would wipe
+out all the job gains from just last month. So the question is
+this: Whether the number of jobs lost is 200,000 or 700,000,
+why in the world would we be doing anything right now to cost
+thousands of Americans their jobs? That is a reckless and
+senseless approach that does virtually nothing to address long-
+term debt. And that is why the bipartisan fiscal commission
+that was charged with reducing our deficits specifically warned
+against that action right now.
+ Yesterday, the members of this committee had an opportunity
+to meet with Erskine Bowles and Alan Simpson. Here's what the
+bipartisan commission wrote in its report, quote, In order to
+avoid shocking the fragile economy, the commission recommends
+waiting until 2012 to begin enacting programmatic spending
+cuts, and waiting until fiscal year 2013 before making large
+nominal cuts, unquote. That is also what Bowles and Simpson
+said in their testimony before the Senate Budget Committee the
+other day, and that is what the bipartisan Rivlin-Domenici
+Commission recommended. They issued a similar warning.
+ So, Mr. Chairman, I am glad that, today, we are going to
+take a more comprehensive look at the budget situation, rather
+than focus only on the 12 percent sliver of the budget that
+includes critical investments in education, in scientific
+research and innovation, and transportation and energy
+infrastructure: investments that are critical to growing jobs
+in America, and winning in the competitive global marketplace.
+ As the bipartisan commission observed, a serious debt
+reduction plan will require a combination of spending cuts in
+discretionary and mandatory programs, as well as revenue
+increases. So I hope, Mr. Chairman, that this will provide an
+opportunity to take a, a serious and comprehensive look, rather
+than what many of us see as a short-term approach to hit an
+arbitrary number that will cost Americans their jobs. Thank
+you.
+ [The prepared statement of Chris Van Hollen follows:]
+
+ Prepared Statement of Hon. Chris Van Hollen, Ranking Minority Member,
+ House Committee on the Budget
+
+ I join Chairman Ryan in welcoming our witnesses today. I am pleased
+we are having a hearing on this important subject. We all agree that
+our current long term debt trajectory in unsustainable and
+unacceptable. And I believe we all agree that it is important to come
+together now to develop and enact a sensible plan to reduce that debt
+in a steady and predictable manner. We should have a healthy discussion
+on what such a plan would look like.
+ What we should not do is take actions that would hamper our fragile
+economy recovery. While last month's jobs numbers were promising,
+millions of Americans remain out of work. Enacting measures that would
+slow down job growth will not only impose additional and unnecessary
+economic pain on American families; it will harm the goal of deficit
+reduction.
+ That is why the House Republican plan to make additional deep and
+immediate cuts in various investments in order to hit an arbitrary
+number is such a mistake. Say what you will about Goldman Sachs, they
+know a little bit about the impact of investments, and their analysts
+predict the House Republican plan will cost 700,000 Americans their
+jobs. Mark Zandi of Moody's Analytics, who like Dr. Holtz-Eakin was an
+advisor to the presidential campaign of Senator John McCain, reached a
+similar conclusion, as did the Economic Policy Institute. Now I see
+that Dr. Holtz-Eakin disputes these figures in his testimony. But the
+Chairman of the Federal Reserve, Ben Bernanke, testified last week that
+slashing the budget that way ``would translate into a couple hundred
+thousand jobs. So, it's not trivial.'' That would wipe out all the job
+gains from last month. So the question is this: Whether the number of
+jobs lost is 200,000 or 700,000, why in the world would we be doing
+anything now that would cost Americans their jobs? That is a reckless
+and senseless approach that does virtually nothing to address the long
+term debt. And that is why the bipartisan Fiscal Commission that was
+charged with reducing our deficits specifically warned against such
+action. Yesterday, members of this Committee met with the co-chairs of
+the Commission, Erskine Bowles and Alan Simpson. Here is what the bi-
+partisan Commission wrote in its report: ``In order to avoid shocking
+the fragile economy, the Commission recommends waiting until 2012 to
+begin enacting programmatic spending cuts, and waiting until fiscal
+year 2013 before making large nominal cuts.'' That is also what Bowles
+and Simpson said in their testimony before the Senate Budget Committee
+last week. The bipartisan Rivlin-Dominici commission issued a similar
+warning.
+ So I am glad that today we will take a more comprehensive look at
+what it will take to seriously tackle deficits and the debt rather than
+focus only on the 12% sliver of the budget that includes critical
+investments in education, scientific research and innovation, and
+transportation and energy infrastructure--investments that are critical
+to growing jobs in America and winning in the competitive global
+marketplace. As the bi-partisan Fiscal Commission observed, a serious
+debt reduction plan will require a combination of spending cuts in
+discretionary and mandatory programs as well as revenue increases.
+ I will close with this observation. In his recent testimony here,
+Jack Lew, the Director of the Office of Management and Budget, pointed
+out that when he had last appeared before this Committee as President
+Clinton's Budget Director, we were projecting a $5.6 trillion surplus.
+Today, we have with us John Podesta, who was Chief of Staff to
+President Clinton at that time. When President Obama was sworn in 8
+years after Bill Clinton left office, he inherited a record annual
+deficit of $1.3 trillion and an economy in total freefall with more
+than 700,000 Americans losing their jobs every month. I make this
+observation to make this point--during the intervening eight years of
+the Bush Administration, some terrible decisions were made that wreaked
+havoc on the fiscal stability of our nation. If we are going to chart a
+fiscally responsible course, we are going to have to do many things,
+including reversing some of those fiscally reckless actions.
+
+ Chairman Ryan. Thank you, Mr. Van Hollen. I would simply
+just ask the witnesses, in the interest of time, because we
+have lots of members who have questions, if you could keep your
+opening remarks to five minutes, paraphrase your statements,
+and your written statements will be included in the record. I
+think we are just going to go left to right, right? So, Mr.
+Holtz-Eakin, why don't we start with you and then we will go on
+down the line.
+
+ STATEMENTS OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, AMERICAN ACTION
+ FORUM; CARMEN REINHART, DENNIS WEATHERSTONE SENIOR FELLOW,
+ PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS; MAYA
+ MACGUINEAS, COMMITTEE FOR A RESPONSIBLE FEDERAL BUDGET AT THE
+ NEW AMERICA FOUNDATION; AND JOHN PODESTA, PRESIDENT AND CEO,
+ CENTER FOR AMERICAN PROGRESS ACTION FUND
+
+ STATEMENT OF DOUGLAS HOLTZ-EAKIN
+
+ Mr. Holtz-Eakin. Chairman Ryan and Ranking Member Van
+Hollen, members of the committee, thank you for the privilege
+of being here today. You have my written statement, I will be
+brief; I will make three points.
+ First is to echo the remarks of the Chairman about the
+seriousness of the situation, and the implications of the
+outlook for rising debt.
+ Second is to concur that the problem is spending, by almost
+any metric that has got to be the focus.
+ And the third is to address the concerns of the Ranking
+Member about the implications of cutting spending for near-term
+economic growth and jobs.
+ Everyone has a different way of saying this, but I believe
+we are at a juncture when America's prosperity and freedom is
+at stake. As I said in my testimony, there is a good news
+version of continuing down our current path. And in the good
+news version, massive federal borrowing is displacing
+investments in workers, in equipment, in innovation,
+productivity stagnates, wages don't grow, and we don't see the
+standard of living rise for a prolonged period, but we somehow
+muddle through and leave our children a diminished economy and,
+as the Pentagon folks would say, A diminished ability to
+project our values on the globe. That has been the core of our
+ability to protect our freedoms. That is the good news version.
+ The bad news version is one in which we actually get
+something that is 2008 or worse. We get a cataclysm in
+financial markets, we see sharp freezes in credit, main street
+economy collapses, and in the aftermath of that we still have
+the same problem to fix. So it is unacceptable, in my view, to
+continue down the path.
+ We have to change direction. We have lots of indicators
+that this is coming. Carmen's much more versed in the
+implications of rising debt to GDP levels, but ours is much too
+high. Moody's has put out an advisory on how they rate
+sovereign debt; and if you just take their technical criteria
+at face value, we are on track to be downgraded as a sovereign
+borrower in a matter of three or four years. And we have seen
+the borrowing around the globe.
+ So this is literally, as the Chairman of this Commission
+called it, a moment of truth, and a time to stop deferring the
+tough decisions that are necessary to get us on the right
+track. Those decisions are about spending. As the Congressional
+Budget Office's long-term budget outlook has said, again, and
+again, and again, for a decade, if you look at current policy
+in the United States, current law, spending rises under current
+law, above any sensible metric of the potential to tax. It
+rises to 35 percent of GDP or higher. It is driven by, largely,
+the entitlement programs, and especially the health programs.
+There is one, and only one, solution to that problem. You will
+not grow your way out of it, you will not tax your way out of
+it, you simply must modify those programs; entitlement reform
+is at the heart of getting this right. And we have done very
+little, in recent years, to do that. We wasted the decade we
+had before the baby boomers started to retire; they are now
+retiring. We went the wrong direction with the Medicare
+Modernization Act and Affordable Care Act, to add more health
+programs, not fix the ones we had. And now we are both out of
+time, and in the financial crisis, we have lost our cushion.
+The GDP has gone up by 20 percentage points.
+ The time is now to control spending. Now there are these
+concerns that somehow this is going to be bad for the economy,
+and I want to close with that. If you are a businessman in the
+United States right now, you are an international business
+trying to figure out where to locate, and you look at a country
+where the good news scenario is a future of higher interest
+rates, or higher taxes, or both, and the bad news scenario is a
+future that has a financial crisis followed by higher interest
+rates, higher taxes, or both. Why would you locate in that
+country, or why would you expand in that country? Why is that a
+good thing for the economic outlook? It is simply not.
+ So fixing that problem, undertaking control of the debt, is
+the single most pro-growth policy that Congress and the
+administration could undertake. And that will be at the heart
+of getting the economy going again, now, and in the future.
+ The kinds of studies we have seen, from Goldman Sachs and
+the man I made famous, Mark Zandy, have, at their heart,
+several problems.
+ Problem number one is that they get the magnitudes all
+wrong. The Congressional Budget Office estimates that out of
+HR-1, we would see a reduction of $9 billion in actual outlays
+in fiscal year 2011 from that bill, in a $14 to $15 trillion
+economy, this is peanuts; it will do nothing, with all due
+respect to the other economists.
+ Second is that not all outlays are purchases of goods and
+services. They make that mistake. A lot of them are transfer
+payments. And if you look around the globe at the evidence that
+has been accumulated, the successful strategy for growing and
+fixing a fiscal problem is to keep taxes low and cut transfer
+payments and government payrolls. That is the strategy that
+works; this is part and parcel of that strategy.
+ The third, and most importantly, the analyses are devoid of
+any capacity to change the outlook of individuals in the
+economy. They rule out anything that has to do with sentiment
+and optimism, and they, thus, rule out the very reason you are
+doing this. You couldn't possibly get another answer. So they
+are stacked against finding a beneficial conclusion. And I find
+it ironic that they are called Keynesian analysis, because John
+Maynard Keynes was a very sophisticated student of human
+nature, and put animal spirits and optimism at the heart of his
+economic theories. And so I disagree with the bottom line those
+analyses have. Thank you, Mr. Chairman. I look forward to your
+questions.
+ [The prepared statement of Douglas Holtz-Eakin follows:]
+
+ Prepared Statement of Douglas Holtz-Eakin, President,
+ American Action Forum*
+
+ Chairman Ryan, Ranking Member Van Hollen and Members of the
+Committee thank you for the privilege of appearing today. In this short
+statement, I wish to make the following points:
+---------------------------------------------------------------------------
+ * The opinions expressed herein are mine alone and do not represent
+the position of the American Action Forum. I am grateful to Sam
+Batkins, Ike Brannon, Cameron Smith and Matt Thoman for assistance.
+
+ The outlook for deficits and debt threatens the Nation's
+prosperity and freedom. Changing the fiscal course should be our top
+national priority.
+ Controlling the growth of future federal spending should
+be the central objective of policymakers in pursing this goal.
+ Effectively controlling spending, reducing deficits, and
+eliminating future debt accumulation can aid near-term economic growth.
+ Let me discuss each in turn.
+
+ THE THREAT OF FUTURE DEBT
+
+ The Fiscal Outlook. The federal government faces enormous budgetary
+difficulties, largely due to long-term pension, health, and other
+spending promises coupled with recent programmatic expansions. The
+core, long-term issue has been outlined in successive versions of the
+Congressional Budget Office's (CBO's) Long-Term Budget Outlook.\1\ In
+broad terms, over the next 30 years, the inexorable dynamics of current
+law will raise federal outlays from an historic norm of about 20
+percent of Gross Domestic Product (GDP) to anywhere from 30 to 40
+percent of GDP. Any attempt to keep taxes at their post-war norm of 18
+percent of GDP will generate an unmanageable federal debt spiral.
+
+ \1\ Congressional Budget Office. 2010. The Long-Term Budget
+Outlook. Pub. No. 4130. http://www.cbo.gov/ftpdocs/115xx/doc11579/06-
+30-LTBO.pdf
+---------------------------------------------------------------------------
+ This depiction of the federal budgetary future and its diagnosis
+and prescription has all remained unchanged for at least a decade.
+Despite this, action (in the right direction) has yet to be seen.
+ Those were the good old days. In the past several years, the
+outlook has worsened significantly.
+ Over the next ten years, according to the Congressional Budget
+Office's (CBO's) analysis of the President's Budgetary Proposals for
+Fiscal Year 2011,\2\ the deficit will never fall below $700 billion.
+Ten years from now, in 2020, the deficit will be 5.6 percent of GDP,
+roughly $1.3 trillion, of which over $900 billion will be devoted to
+servicing debt on previous borrowing.
+ As a result of the spending binge, in 2020 public debt will have
+more than doubled from its 2008 level to 90 percent of GDP and will
+continue its upward trajectory.
+---------------------------------------------------------------------------
+ \2\ Congressional Budget Office. 2010. An Analysis of the
+President's Budgetary Proposals for Fiscal Year 2011. Pub. No. 4111.
+http://www.cbo.gov/ftpdocs/112xx/doc11280/03-24-apb.pdf
+---------------------------------------------------------------------------
+ The President has now released his budget for Fiscal Year 2012.
+While CBO has yet to have the opportunity to provide a non-partisan
+look its implications, my reading of the budget is that it is largely
+replicates the previous year's outlook.
+ The ``Bad News'' Future under Massive Debt Accumulation. A United
+States fiscal crisis is now a threatening reality. It wasn't always so,
+even though--as noted above--the Congressional Budget Office has long
+published a pessimistic Long-Term Budget Outlook. Despite these gloomy
+forecasts, nobody seemed to care. Bond markets were quiescent. Voters
+were indifferent. And politicians were positively in denial that the
+``spend now, worry later'' era would ever end.
+ Those days have passed. Now Greece, Portugal, Spain, Ireland, and
+even Britain are under the scrutiny of skeptical financial markets. And
+there are signs that the U.S. is next. The federal government ran a
+fiscal 2010 deficit of $1.3 trillion--nearly 9 percent of GDP, as
+spending reached nearly 24 percent of GDP and receipts fell below 15
+percent of GDP.
+ What happened? First, the U.S. frittered away its lead time. It was
+widely recognized that the crunch would only arrive when the baby
+boomers began to retire. Guess what? The very first official baby
+boomer already chose to retire early at age 62, and the number of
+retirees will rise as the years progress. Crunch time has arrived and
+nothing was done in the interim to solve the basic spending problem--
+indeed the passage of the Medicare prescription drug bill in 2003 made
+it worse.
+ Second, the events of the financial crisis and recession used up
+the federal government's cushion. In 2008, debt outstanding was only 40
+percent of GDP. Already it is over 60 percent and rising rapidly.
+ Third, active steps continue to make the problem worse. The
+Affordable Care Act ``reform'' adds two new entitlement programs for
+insurance subsidies and long-term care insurance without fixing the
+existing problems in Social Security, Medicare, and Medicaid.
+ Financial markets no longer can comfort themselves with the fact
+that the United States has time and flexibility to get its fiscal act
+together. Time passed, wiggle room vanished, and the only actions taken
+thus far have made matters worse.
+ As noted above, in 2020 public debt will have more than doubled
+from its 2008 level to 90 percent of GDP and will continue its upward
+trajectory. Traditionally, a debt-to-GDP ratio of 90 percent or more is
+associated with the risk of a sovereign debt crisis.
+ Indeed, there are warning signs even before the debt rises to those
+levels. As outlined in a recent report,\3\ the credit rating agency
+Moody's looks at the fraction of federal revenues dedicated to paying
+interest as a key metric for retaining a triple-A rating. Specifically,
+the large, creditworthy sovereign borrowers are expected to devote less
+than 10 percent of their revenues to paying interest. Moody's grants
+the U.S. extra wiggle room based on its judgment that the U.S. has a
+strong ability to repair its condition after a bad shock. The upshot:
+no downgrade until interest equals 14 percent of revenues.
+---------------------------------------------------------------------------
+ \3\ Moody's determines debt reversibility from a ratio of interest
+payments to revenue on a base of 10 percent. Wider margins are awarded
+to various governments to indicate the additional ``benefit of the
+doubt'' Moody's awards. The US finds itself on the upper end at 14
+percent. The ratios are ``illustrative and are not hard triggers for
+rating decisions.'' See: Aaa Sovereign Monitor Quarterly Monitor No. 3.
+Moody's Investor Service. March 2010.
+---------------------------------------------------------------------------
+ This is small comfort as the 2011 Obama Administration budget
+targets 2015 as the year when the federal government crosses the
+threshold and reaches 14.8 percent. Moreover, the plan is not merely to
+flirt with a modest deterioration in credit-worthiness. In 2020, the
+ratio reaches 20.1 percent.
+ Perhaps even more troubling, much of this borrowing comes from
+international lending sources, including sovereign lenders like China
+that do not share our core values.
+ For Main Street America, the ``bad news'' version of the fiscal
+crisis occurs when international lenders revolt over the outlook for
+debt and cut off U.S. access to international credit. In an eerie
+reprise of the recent financial crisis, the credit freeze would drag
+down business activity and household spending. The resulting deep
+recession would be exacerbated by the inability of the federal
+government's automatic stabilizers--unemployment insurance, lower
+taxes, etc.--to operate freely.
+ Worse, the crisis would arrive without the U.S. having fixed the
+fundamental problems. Getting spending under control in a crisis will
+be much more painful than a thoughtful, pro-active approach. In a
+crisis, there will be a greater pressure to resort to damaging tax
+increases. The upshot will be a threat to the ability of the United
+States to bequeath to future generations a standard of living greater
+than experienced at the present.
+ Future generations will find their freedoms diminished as well. The
+ability of the United States to project its values around the globe is
+fundamentally dependent upon its large, robust economy. Its diminished
+state will have security repercussions, as will the need to negotiate
+with less-than-friendly international lenders.
+ The ``Good News'' Future under Massive Debt Accumulation. Some will
+argue that it is unrealistic to anticipate a cataclysmic financial
+market upheaval for the United States. Perhaps so. But an alternative
+future that simply skirts the major crisis would likely entail
+piecemeal revenue increases and spending cuts--just enough to keep an
+explosion from occurring. Under this ``good news'' version, the debt
+would continue to edge northward--perhaps at times slowed by modest and
+ineffectual ``reforms''--and borrowing costs in the United States would
+remain elevated.
+ Profitable innovation and investment will flow elsewhere in the
+global economy. As U.S. productivity growth suffers, wage growth
+stagnates, and standards of living stall. With little economic
+advancement prior to tax, and a very large tax burden from the debt,
+the next generation will inherit a standard of living inferior to that
+bequeathed to this one.
+
+ CONTROLLING SPENDING TO REDUCE DEFICITS AND DEBT
+
+ The policy problem facing the United States is that spending rises
+above any reasonable metric of taxation for the indefinite future.
+Period. There is a mini-industry devoted to producing alternative
+numerical estimates of this mismatch, but the diagnosis of the basic
+problem is not complicated. The diagnosis leads as well to the
+prescription for action. Over the long-term, the budget problem is
+primarily a spending problem and correcting it requires reductions in
+the growth of large mandatory spending programs and the appetite for
+federal outlays, in general.
+ As an example, using the President's 2011 Budget, the CBO projects
+that over the next decade the economy will fully recover and revenues
+in 2020 will be 19.6 percent of GDP--over $300 billion more than the
+historic norm of 18 percent. Instead, the problem is spending. Federal
+outlays in 2020 are expected to be 25.2 percent of GDP--about $1.2
+trillion higher than the 20 percent that has been business as usual in
+the postwar era.
+ Just as some would mistakenly believe that the federal government
+can easily ``tax its way out'' of this budgetary box there is an
+equally misguided notion in other quarters that it can ``grow its way
+out.'' The pace of spending growth simply must be reduced.
+ The Need for Rapid Action. The potential for a U.S. fiscal crisis
+is rising each day. This, it makes sense to quickly adopt reductions in
+annual discretionary spending to reduce future deficits. Discretionary
+spending is appealing as a starting point because it is the spending
+most easily and quickly modified by Congress. Any successful strategy
+will likely be built on three pillars:
+ Rolling back spending to the ``normal'' funding levels
+preceding the financial crisis in 2008 and economic downturn;
+ Adhering to a disciplined vision for a small, contained
+government. Such a vision would provide a demarcation between those
+things the government is uniquely equipped to undertake and those that
+are best not funded and left to the private sector; and
+ Relying on strict oversight to defund those programs that
+do not effectively meet the government's service obligations.
+ At the same time, mandatory spending programs cannot be left to
+evolve as dictated by current law. It is equally important to quickly
+undertake entitlement reform. To see the need for urgency, consider
+first Social Security.
+ Social Security contributes to the current deficit. At present,
+Social Security is running a modest cash-flow deficit, increasing the
+overall shortfall. As the years progress, these Social Security
+deficits will become increasingly larger. They are central to the
+deficit outlook. More importantly, the stream of future outlays is
+heavily driven by demography. In particular, if the future benefits of
+the baby boom generation are exempted from reform, either by design or
+a failure to move quickly, then the outlay ``problem'' will have been
+effectively exempted from reform. This would be a fundamental policy
+failure.
+ For this reasons, an immediate reform and improvement in the
+outlook for entitlement spending would send a valuable signal to credit
+markets and improve the economic outlook.
+ Naturally, it would be desirable to focus on the larger future
+growth in outlays associated with Medicare, Medicaid, and the Patient
+Protection and Affordable Care Act (ACA). These share the demographic
+pressures that drive Social Security, but include the inexorable
+increase in health care spending per person in the United States. From
+a policy perspective, it would be desirable to replace the ACA with
+reforms that raised the efficiency of health care spending and slowed
+the growth of per capita health care outlays. At the centerpiece of
+such reforms would be reforms to the Medicare and Medicaid programs.
+However, in the absence of a political consensus to revisit the ACA,
+Medicare and Medicaid reforms will remain paralyzed and the most
+promising area for bipartisan entitlement reform is Social Security.
+ The Role for Tax Policy. While it will not be possible or desirable
+to rely on pure revenue increases to address the looming debt
+explosion, there is a role for improved tax policy to support economic
+growth. What is needed now is a tax policy that has incentives for
+businesses and entrepreneurs to locate in America and spend at a faster
+rate on innovation, workers, repairs, and new plants and equipment.
+ The place to start is the corporate income tax, which harms our
+international competitiveness in two important ways. First, the 35
+percent rate is far too high: when combined with state-level taxes,
+American corporations face the highest tax rates among our developed
+competitors.\4\ The rate should be reduced to 25 percent or lower.
+---------------------------------------------------------------------------
+ \4\ Some defend the high corporate tax rate by arguing that the
+effective corporate tax rate is much lower. This misses an important
+point. Every country's effective tax rate is also lower than its
+statutory rate. A recent study by two economists at the University of
+Calgary (http://www.cato.org/pubs/tbb/tbb--64.pdf) concludes that the
+marginal tax rate in the U.S on new investment is 34.6 percent, higher
+than any other country in the OECD.
+---------------------------------------------------------------------------
+ Second, the United States remains the only developed country to tax
+corporations based on their worldwide earnings. Our competitors follow
+a territorial approach in which, say, a German corporation pays taxes
+to Germany only on its earnings in Germany, to the U.S. only on its
+earnings here, and so forth. If we were to adopt the territorial
+approach, we would place our firms on a level playing field with their
+competitors.
+ Proponents of the worldwide approach argue that because it doesn't
+let American firms enjoy lower taxes when they invest abroad, it gives
+them no incentive to send jobs overseas. Imagine two Ohio firms, they
+say: one invests $100 million in Ohio, the other $100 million in
+Brazil. The worldwide approach treats the profits on these two
+investments equally, wisely giving the company that invests in Brazil
+no advantage over its competitor.
+ But this line of reasoning ignores three points. First, because
+firms all over the world will pay lower taxes than the two Ohio
+companies, the likeliest outcome of the scenario is that both firms
+will fail, unable to compete effectively with global rivals. Second,
+when American multinational firms invest and expand employment abroad,
+they tend also to invest and expand employment in the United States. In
+the end, healthy, competitive firms grow and expand, while
+uncompetitive firms do not, meaning that our goal should be to make
+sure that American companies don't end up overtaxed, uncompetitive, and
+eventually out of business. And finally, because the U.S. is the
+holdout using a worldwide approach, it is at a disadvantage as the
+location for the headquarters of large, global firms. As the U.S. loses
+the headquarters, it will lose as well the employment, research and
+manufacturing that typically is located nearby.
+ The corporate tax should be reformed further. At present, companies
+must depreciate their capital purchases over time. Instead, they should
+be allowed to deduct immediately the full cost of all investments,
+which would provide a dramatic incentive for spending. We should also
+consider phasing out the tax-deductibility of the interest that
+companies pay on their borrowing. Because this interest is deductible
+and the companies' own dividends are not, firms have an incentive to
+borrow excessively. Removing that incentive--making a firm's tax
+liability dependent not on its financial decisions but on its real
+economic profitability--would discourage financial engineering and
+focus corporations on their core mission.
+ A more competitive corporate-tax system would be a good start in
+our effort to encourage private-sector growth. But a lot of private-
+sector economic activity in the U.S. isn't affected by the corporate
+tax at all. Activity that takes place in sole proprietorships,
+partnerships, and other ``pass-through entities''--organizations whose
+income is treated solely as that of their investors or owners--is
+instead affected by the individual income tax. Congress' Joint
+Committee on Taxation projects that in 2011, $1 trillion in business
+income will be reported on individual income-tax returns.
+ It's important to note that nearly half of that $1 trillion--$470
+billion--will be reported on returns that face the top two income-tax
+rates. A conservative estimate is that more than 20 million workers
+would be employed by firms directly affected by those two tax rates.
+Tax reform should avoid higher marginal tax rates in favor of lower
+rates and a broader base. Marginal tax rates and the taxation of
+dividends and capital gains directly affect companies' decisions about
+innovation, investment, and savings.
+ Americans--from homeowners to small businesspeople to the millions
+of unemployed--are in desperate need of faster and prolonged economic
+growth. Congress should therefore evaluate tax proposals based on
+whether they're likely to trigger and support that growth. Tax policy
+can play a key role in spurring an economic recovery--but not without
+sustained reform of both the corporate and individual income-tax
+systems.
+
+ THE ECONOMICS OF SPENDING CONTROL
+
+ The top issue facing Americans is the need for robust job growth.
+According to the National Bureau of Economic Research the recession
+began in December 2007. Their data show that there were 142.0 million
+jobs in December of 2007--the average of payroll and household survey
+data. In June 2009, NBER's date for the end of the recession, the same
+method showed 135.3 million jobs, for a total job loss of 6.7 million
+attributed to the recession. These numbers are quite close to those
+using the Bureau of Labor Statistics non-farm payroll data, which
+showed a loss of 6.8 million.
+ There are glimmers of promise. Since December 2009, 945,000 payroll
+employment jobs have been added. However at the same time, there are
+14.5 million unemployed persons in the economy and many more
+discouraged workers. Since the start of the recession the labor force
+has fallen by nearly 500,000.
+ For these reasons, the current unemployment rate of 8.9 percent
+likely understates the real duress. Using the BLS alternative
+unemployment rate (U-6), one finds that unemployed, underutilized and
+discouraged workers are 15.9 percent of the total. As evidence of the
+difficulties, the number of long-term unemployed (27 weeks or more) is
+currently 5.9 million and accounts for 43.9 percent of all unemployed
+persons.
+ The fiscal future outlined above represents a direct impediment to
+job creation and growth. The United States is courting downgrade as a
+sovereign borrower and a commensurate increase in borrowing costs. In a
+world characterized by financial market volatility stemming from
+Ireland, Greece, Portugal, and other locations this raises the
+possibility that the United States could find itself facing a financial
+crisis. Any sharp rise in interest rates would have dramatically
+negative economic impacts; even worse an actual liquidity panic would
+replicate (or worse) the experience of the fall of 2008.
+ Alternatively, businesses, entrepreneurs and investors perceive the
+future deficits as an implicit promise of higher taxes, higher interest
+rates, or both. For any employer contemplating locating in the United
+States or expansion of existing facilities and payrolls, rudimentary
+business planning reveals this to be an extremely unpalatable
+environment.
+ In short, cutting spending is a pro-growth policy move at this
+juncture. As summarized by a recent American Action Forum the research
+indicates that the best strategy to both grow and eliminate deficits is
+to keep taxes low and reduce public employee costs and transfer
+payments.\5\
+---------------------------------------------------------------------------
+ \5\ See http://americanactionforum.org/news/repairing-fiscal-hole-
+how-and-why-spending-cuts-trump-tax-increases
+---------------------------------------------------------------------------
+ Keynesian Arguments and Reducing Spending. Recent analyses of H.R.
+1, the continuing resolution that called for $61 billion in reduced
+federal spending, by Goldman Sachs\6\ and Economy.com\7\ have been
+touted by some as evidence that it is not feasible to engage in
+spending reductions. I believe these arguments miss several key points.
+---------------------------------------------------------------------------
+ \6\ http://blogs.abcnews.com/thenote/2011/02/goldman-sachs-house-
+spending-cuts-will-hurt-economic-growth.html
+ \7\ Zandi, Mark. 2011. A Federal Shutdown Could Derail the
+Recovery. Moody's Analytics. http://www.economy.com/dismal/article--
+free.asp?cid=197630&src=wp
+---------------------------------------------------------------------------
+ The first thing to note is that while Members are aware that a
+reduction of $61 billion in budget authority does not translate into an
+immediate $61 billion cut in outlays, many analysts appear to not
+understand these budgetary facts. Indeed, on average, a $1 cut would
+translate into only 52 cents during the current fiscal year.
+ To generate their estimates, Goldman Sachs assumed outlay
+reductions of $15 billion in the 2nd quarter and $30 billion in the 3rd
+quarter of calendar 2011. Naively interpreted, this could produce
+noticeable impacts on quarter-to-quarter GDP growth. But this is a
+misleading and highly overstated estimate of the likely impact because:
+ The CBO estimates an outlay reduction of only $9 billion
+in fiscal 2011, or an impact of at most 0.3 percentage points;
+ The calculation assumes full dollar-for-dollar reduction
+in GDP as spending declines. This is too large, especially because;
+ Not all outlay reductions are actual cuts in the purchases
+of goods and services to contribute to measured GDP. Instead, some are
+transfers payments to states or individuals that will have a more muted
+impact. Indeed, while FY 2010 showed outlays of $3,456 billion on a
+budget basis, the National Income and Product Accounts\8\ showed under
+30 percent ($1,030 billion) as consumption purchases;
+---------------------------------------------------------------------------
+ \8\ Congressional Budget Office. 2011. CBO's Projections of Federal
+Receipts and Expenditures in the Framework of the National Income and
+Product Accounts. Pub. No. 4250.
+---------------------------------------------------------------------------
+ Not all of the budget authority cuts are from new
+spending. Instead, some are rescissions of the authority for spending
+that never occurred and might never occur; and
+ Most importantly this is a static calculation that assumes
+no beneficial offset in private sector spending because of the improved
+budget outlook and prospect of lower future taxes and interest rates.
+Put differently, the criticisms ignore the rationale for making these
+beneficial cuts to begin with: to clear the way for private sector jobs
+and growth.
+ A different way to make the last point is to note that these
+``Keynesian'' arguments invoke a sterile, mechanical view of his
+economic views. In fact, Lord Keynes placed considerable importance on
+the role of expectations and optimism regarding the economic
+environment--so-called ``animal spirits''. Policies that enhance the
+willingness and desirability of businesses to invest fit neatly in to
+his view of business cycles and economic growth.
+ Importantly, recent movements in indexes of economic confidence
+ranging from small businesses, to CEOs, to households have shown
+considerable improvement (See Table).
+
+ MEASURES OF ECONOMIC CONFIDENCE
+----------------------------------------------------------------------------------------------------------------
+ Sept
+ Jul '10 Aug '10 '10 Oct '10 Nov '10 Dec '10 Jan '11 Feb '11
+----------------------------------------------------------------------------------------------------------------
+NFIB Small Business Optimism Index\1\... 88.1 88.8 89 91.7 93.2 92.6 94.1 NA
+Chief Executive CEO Confidence Index\2\. 4.7 5 4.9 5.1 5.8 5.8 6.3 6.4
+Reuters/Michigan Survey of Consumer 67.8 68.9 68.2 67.7 71.6 74.5 74.2 77.5
+ Sentiment\3\...........................
+----------------------------------------------------------------------------------------------------------------
+\1\ http://www.nfib.com/Portals/0/PDF/sbet/sbet201102.pdf
+\2\ http://www.chiefexecutive.net/ME2/Audiences/Default.asp?AudID=328DCF73ACA1493ABBD34BF8AB37D74A
+\3\ https://customers.reuters.com/community/university/
+
+ No definitive explanation of month-to-month movements in measures
+of confidence will emerge from this hearing. However, I find it
+supportive of the basic argument that confidence improved markedly as
+the election and Congressional debate shifted toward control of future
+spending, deficits, and debt.
+ Two final aspects of the recent, Keynesian-based opposition to
+controlling spending are perplexing. Often those who make the claim
+that a $61 billion cut in spending will endanger the recovery are
+equally willing to argue that tax increases are needed to close the
+deficit. However, in a Keynesian model tax increases and transfer
+decreases enter in exactly the same manner. If the latter endanger the
+recovery, so must the former!
+ More importantly, entitlement reform--the repeal of the Affordable
+Care Act, Medicare reform, Medicaid reform, or Social Security reform--
+is likely to have no immediate impact on federal outlays. Instead, they
+are commitments in the present to reduced spending in the future. By
+construction, they can have no negative, Keynesian impacts on recovery.
+Instead, they carry only beneficial impacts on the expectations of
+employers and other market participants.
+
+ CONCLUSION
+
+ At this juncture, the United States needs a keen focus on enhancing
+the rate of economic growth. Workers and economy as a whole will
+benefit from pro-growth policies. Central aspects of a pro-jobs and
+growth agenda are controlling federal spending growth; eliminating the
+potential for debt accumulation that generates a fiscal crisis, or
+higher taxes and interest rates; and improved tax policy.
+ I look forward to answering your questions.
+
+ STATEMENT OF CARMEN REINHART
+
+ Chairman Ryan. Thank you. Ms. Reinhart.
+ Ms. Reinhart. Thank you, Chairman Ryan, and other members
+of the committee, for this opportunity.
+ Chairman Ryan. Please pull your mic right in front of you.
+ Ms. Reinhart. The first part I would like to address is
+just put where we are a little bit in historic perspective, and
+then talk about the growth implications of where we are. As
+regard to where we are, historically, I would like to highlight
+that whether you look at gross debt, gross debt right now is 94
+percent of GDP, the peak debt in 1946 was 121. But let's move
+on.
+ Let's look at what the Federal Reserve, the flow of funds
+include debts of the State and local government, and also
+federal enterprises, which now include Fannie and Freddie. That
+ratio of debt to GDPS of the third quarter is 122 percent,
+which surpasses the peak that we established in 1945.
+ Let me highlight that hidden debts are a big issue. And
+what do I mean by hidden debts? I mean contingent liabilities,
+and not just of the Social Security variety. There are huge
+contingent liabilities in the financial industry that we have
+to be aware of. If you don't think contingent liabilities
+matter, think of Ireland.
+ Let me proceed, very quickly, by saying that the march from
+financial crisis, to high public debt, to a public debt crisis,
+is the one that we are seeing unfolding in Europe. And that is
+what one could call debt with drama. And it is not over, and it
+has consequences for the U.S. Spain was downgraded overnight.
+The presumption that we are exempt from that pattern is a
+dangerous one, I would point out. It can happen.
+ But let's not go there just yet. Let's talk about where we
+are now and implications for growth. I have done work with Ken
+Rogoff that did a very simple exercise that looked at various
+levels of debt, and how it related to growth. We have found
+that years in which growth that is above 90 percent of GDP,
+median growth rates are about one percentage point lower. And
+this is based on post-war analysis. It includes 44 economies;
+it is robust, whether you look at emerging markets, whether you
+look at advanced economies alone, whether you look at the post-
+war, whether you look at longer periods. In effect, I want to
+highlight that the ECB and the IMF have done subsequent studies
+which actually clarify some of the areas, because our analysis,
+we do not pretend to do causality in our analysis. But the
+subsequent studies have taken that issue up. And there are two
+findings worth highlighting.
+ One is there is a strong negative causal relationship from
+high debt to lower growth. And secondly, those studies suggest,
+particularly the ECB study, which is for 12 European economies,
+ours is much broader, does suggest that the debt levels, the
+thresholds in which we placed at 90 percent, may be, actually,
+somewhat lower in the vicinity of 70 to 80 percent.
+ The bottom line is we have passed those thresholds, I
+think, without talking about drama, or default, or anything
+like that. I think the growth consequences are in the here and
+now.
+ Let me say something in what time I have left, that the
+contingent liability issue is a huge one. Right now, states
+also have what we call in the IMF ``below the line financing.''
+This is financing through arrears. Illinois, of course: six
+billion. None of these things are embedded in those debt
+figures, which are in the public domain. By the way, all the
+analysis that we have done, all this data is in the public
+domain.
+ So, without any melodrama, the debt numbers are
+considerably worse than the official estimate because we do
+have a lot of off balance sheet items that we need to be
+thinking about.
+ Let me conclude, then, on the same note as my testimony
+about a year ago before your Senate counterparts. At that time,
+I cautioned, it was premature to start cutting, because I was
+concerned about a frail recovery from a very severe financial
+crisis. But we are now, 2001, the crisis began in the summer of
+2007, the clock has been running.
+ Let me conclude, then, the sooner our political leadership
+reconciles itself to accepting adjustment, the lower the risk
+of truly paralyzing debt problems down the road. Although most
+governments still enjoy strong access to financial markets at
+very low interest rates, market discipline can come without
+warning. Countries that have not laid the groundwork for
+adjustment will regret it. This time is not different.
+ [The prepared statement of Carmen M. Reinhart follows:]
+
+ Prepared Statement of Carmen M. Reinhart, Dennis Weatherstone Senior
+ Fellow, Peterson Institute for International Economics
+
+ Thank your, Chairman Ryan and the other members of the Committee
+for the opportunity to comment on the U.S. economy and the risks for
+the federal budget and debt. I am currently Dennis Weatherstone Senior
+Fellow at the Peterson Institute for International Economics. I suspect
+that I was invited to this hearing titled Lifting the Crushing Burden
+of Debt because, for more than a decade, my research has focused on
+various types of financial crises, including their fiscal implications
+and other economic consequences. Specifically, some of this work has
+focused on the historical and international evidence on the links
+between public debt and economic growth.
+ The march from financial crisis to high public indebtedness to
+sovereign default or restructuring is usually marked by episodes of
+drama, punctuated by periods of high volatility in financial markets,
+rising credit spreads, and rating downgrades. This historic pattern is
+unfolding in several European countries at present. That situation is
+far from resolved and remains a source of uncertainty for the United
+States and the rest of the world. However, the economic effects of high
+public indebtedness are not limited to turmoil in financial markets.
+Quite often, a build-up of public debt often does not trigger
+expectation of imminent sovereign default and the associated climb in
+funding costs. But in the background, a serious public debt overhang
+may cast a shadow on economic growth over the longer term, even when
+the sovereign's solvency is not called into question.
+ In a paper written over a year ago with my coauthor Ken Rogoff from
+Harvard University, we examined the contemporaneous connection between
+debt and growth. I summarize here some of the main findings of that
+paper and as well as our recent related work and relevant studies from
+the IMF and European Central Bank.
+ Our analysis was based on newly-compiled data on forty-four
+countries spanning about two hundred years. This amounts to 3,700
+annual observations and covers a wide range of political systems,
+institutions, exchange rate arrangements, and historic circumstances.
+The annual observations were grouped into four categories, according to
+the ratio of gross central government debt-to GDP during that
+particular year: years when debt-to-GDP levels were below 30 percent;
+30 to 60 percent; 60 to 90 percent; and above 90 percent. Recent
+observations in that top bracket come from Belgium, Greece, Italy, and
+Japan.
+ The main finding of that study is that the relationship between
+government debt and real GDP growth is weak for debt/GDP ratios below
+90 percent of GDP. Above the threshold of 90 percent, however, median
+growth rates fall by one percent, and average growth falls considerably
+more. The threshold for public debt is similar in advanced and emerging
+economies and applies for both the post World War II period and as far
+back as the data permit (often well into the 1800s).
+
+ DEBT THRESHOLDS: THE 90 PERCENT BENCHMARK
+
+ Mapping a vague concept, such as ``high debt'' or ``over-valued''
+exchange rates to a workable definition for interpreting the existing
+facts and informing the discussion requires making arbitrary judgments
+about where to draw lines. In the case of debt, it turns out that
+drawing the line at 90 percent was critical one detecting a difference
+in growth performance.
+ A hint about how important is that cutoff comes from the fact that
+countries rarely allow themselves to enter that high-debt range.
+Pooling the debt/GDP data for the advanced economies over the post-
+World War II period reveals that the median public debt/GDP ratio was
+36.4. Fully three-quarters of the observations were below the 60
+percent criteria in the Maastricht treaty governing the European Union.
+About 92 percent of the observations fall below the 90 percent
+threshold. If debt levels above 90 percent are indeed as benign as some
+suggest, one has to explain why they are avoided so often over the long
+sweep of history. (Generations of politicians must have been
+overlooking proverbial money on the street).
+ We do not pretend to argue that growth will be normal at 89 percent
+and subpar at 91 percent debt/GDP, any more than a car crash is
+unlikely at 54 mph and near certain at 56 mph. However, mapping the
+theoretical notion of ``vulnerability regions'' to bad outcomes by
+necessity involves defining thresholds, just as traffic signs in the
+U.S. usually specify 55 mph. Subsequent work suggests that we were
+generous in putting the threshold so high. An analysis at the European
+Central Bank, for instance, presents evidence that the negative impact
+of debt on growth may start at a lower 70-80 percent threshold for
+European countries.
+
+ DEBT AND GROWTH CAUSALITY
+
+ Our analysis looked at contemporaneous relationships between
+average and median growth and inflation rates and debt. Temporal
+causality tests are not part of the analysis. But where do we place the
+evidence on causality? For low-to-moderate levels of debt there may or
+may not be one. For high levels of debt, the evidence suggests
+causality runs in both directions.
+ Our analysis of the aftermath of financial crisis presents
+compelling evidence for both advanced and emerging markets on the
+fiscal impacts of the recessions associated with banking crises. There
+is little room to doubt that severe economic downturns, irrespective
+whether their origins was a financial crisis or not, will, in most
+instances, lead to higher debt/GDP levels contemporaneously and or with
+a lag. There is, of course, a vast literature on cyclically-adjusted
+fiscal deficits making exactly this point.
+ A unilateral causal pattern from growth to debt, however, does not
+accord with the evidence. Public debt surges are associated with a
+higher incidence of debt crises. In the current context, even a cursory
+reading of the recent turmoil in Greece and other European countries
+can be importantly traced to the adverse impacts of high levels of
+government debt (or potentially guaranteed debt) on county risk and
+economic outcomes.
+ There is scant evidence to suggest that high debt has little impact
+on growth. Kumar and Woo (2010) highlight in cross-country analysis
+that debt levels have negative consequences for subsequent growth, even
+after controlling for other standard determinants in growth equations.
+For a dozen European countries a study from the European Central Bank
+(Chechrita and Rother, 2010) provides further evidence of negative
+causality from debt to growth.
+ I will conclude on the same note of my testimony of about a year
+ago before your Senate counterparts. The sooner our political
+leadership reconciles itself to accepting adjustment, the lower the
+risks of truly paralyzing debt problems down the road. Although most
+governments still enjoy strong access to financial markets at very low
+interest rates, market discipline can come without warning. Countries
+that have not laid the groundwork for adjustment will regret it.
+ This time is not different.
+
+ STATEMENT OF MAYA MACGUINEAS
+
+ Chairman Ryan. Thank you. Ms. MacGuineas.
+ Ms. MacGuineas. Thank you. Chairman Ryan, Congressman Van
+Hollen, members of the committee, thank you for having me here
+today. You all know better than most the tremendous threats the
+United States faces due to our high debt load. In my written
+testimony, I go over a number of the numbers, including a
+realistic baseline that we put out that shows the problem is
+worse than you often see it looking at current assumptions.
+ Bottom line, our debt is unsustainable. Interest payments
+will be nearly $950 billion by the end of the decade, more than
+all domestic discretionary spending on its current path. And if
+we do not make changes, we will, at some point, face a fiscal
+crisis.
+ The solution is a multi-year, comprehensive fiscal plan
+that tackles each area of the budget. And the sooner we enact
+such a plan, the better. We face two paths. Under one, fiscal
+consolidation is used as part of an economic strategy that also
+includes preserving, and, in many cases, increasing, productive
+investments, and a sound safety net, and also fundamentally
+reforming our tax code to enhance competitiveness. The economy,
+the U.S. standard of living, and our well-being would benefit
+from having taken thoughtful preemptive actions.
+ On the other course, we delay due to the difficult policy
+choices and the political stalemate, and it causes the debt to
+continue to grow, which pushes up interest rates and payments,
+squeezes out our important priorities, chokes off economic
+growth, and it affects working families, and ultimately, it
+leads us to a vicious debt spiral which damages the entire
+economy, and the country. And under that scenario, we still
+have to make the same difficult spending and tax choices we
+face now, but they would be much larger and more painful.
+ So I will dig a little bit deeper into some of the areas
+that are threatened by high debt levels. There are five major
+ones: economic, budget, fiscal, psychological, and inter-
+generational. In terms of the economy, increased federal
+borrowing and debt will eventually crowd out private investment
+and lead to a smaller capital stock, lower incomes, a lower
+standard of living, and a lowering of our global
+competitiveness.
+ In terms of the budget, higher debt levels necessitate
+higher interest payments--which crowd out room for other
+spending priorities--and tax cuts. This will make our current
+battle over limited resources seem easy when compared to what
+we would be facing in the future.
+ The fiscal risk is that higher debt levels lead to reduced
+budget flexibility as interest payments grow to consume larger
+portions of the federal budget, and they compromise our ability
+to respond to future crises and opportunities as they come
+along. High debt levels are also psychologically damaging,
+contributing to business and household uncertainty, and harming
+our willingness to invest in ways that would spur the recovery.
+They also make planning difficult.
+ And I will just talk about one policy challenge. We know,
+in no uncertain terms, that changes need to be made to Social
+Security. We know that the sooner they are made, the better.
+And yet, for years and years of delay, it means that we are not
+letting current retirees, workers, or taxpayers know what the
+future holds for the program and its sustainability; and thus,
+they cannot plan accordingly. It is a terrible disservice to
+all participants of Social Security. The same level of
+uncertainty, of course, is there with regard to other needed
+policy changes that affect business owners, students, and
+normal families trying to plan for their future.
+ So finally, high debt levels not only threaten current
+standards of living, but the well-being of future generations.
+Higher borrowing today pushes the costs onto our children and
+grandchildren. So basically, we should just look our kids in
+the eye and say, Sorry we wanted to spend more today, and we
+didn't want to pay for it, so we are passing the bills onto
+you.
+ Ultimately, if changes are not made, the country will
+experience some kind of a fiscal crisis. And under such a
+scenario, creditors would demand spending or tax changes to set
+the new fiscal course. We would be doing it on their terms, not
+our own. No one knows exactly when this will happen, what it
+will look like, or what will set it off, but we know this: that
+the problem will not fix itself, and that without changes there
+will be some kind of painful crisis. It will be the worst of
+all worlds in terms of what it does to our economy, and all of
+our policy priorities.
+ So, in terms of a solution, I believe we need to adopt a
+multi-year, comprehensive budget plan to put the country on a
+glide path to stabilize the debt at a sustainable level. We
+probably want to bring the debt back down to around 60 percent
+of GDP over a decade, still significantly higher than our
+historical levels of below 40 percent, and then continue on
+that path to get us closer to historical levels.
+ While the debt threat is serious, it is also an opportunity
+to restructure our budget and tax system. In order to be
+competitive down the road, we must strengthen critical
+investments. By shifting our budget from a consumption-oriented
+to an investment-oriented budget, we could lay a new foundation
+for growth. Entitlement reform must be at the center of any
+turnaround plan. The largest programs in our budget that are
+growing faster than the economy: Social Security, Medicare, and
+Medicaid, must be reformed.
+ Finally, our tax code is simply a mess. There is over a
+trillion dollars of tax expenditures, which are truly more like
+spending programs in disguise. And we should look at reducing,
+if not eliminating, many of them, so that we can reduce tax
+rates, and more effectively encourage work and investment,
+while also helping to fuel growth and reduce deficits.
+ So while the policy choices involved in tackling and
+controlling the debt are not easy, they are far easier than
+what we will face if we continue to delay. It is our hope that
+we will spend this year developing specific options for
+tackling the debt, discussing the trade-offs, making the
+necessary compromises, and ultimately passing a multi-year plan
+to change course. This will reassure markets, provide families
+and businesses with the stability they need, and set us on a
+course for a much brighter economic future. Continuing to delay
+is obviously a very risky strategy. So thanks again for having
+me today.
+ [The prepared statement of Maya MacGuineas follows:]
+
+ Prepared Statement of Maya MacGuineas, President, Committee for a
+ Responsible Federal Budget, the New America Foundation
+
+ Chairman Ryan, Congressman Van Hollen, Members of the Committee,
+thank you for inviting me here today to discuss the problems presented
+by our large and growing federal debt.
+ I am Maya MacGuineas, president of the bipartisan Committee for a
+Responsible Federal Budget and the director of the Fiscal Policy
+Program at the New America Foundation. I am also a member of the
+Peterson-Pew Commission on Budget Reform, which recently released two
+reports--Red Ink Rising and Getting Back in the Black, which focus on
+the need to adopt multi-year budgetary targets and automatic triggers
+to help improve the budget process, and which we believe can be a
+helpful part of fixing our budgetary challenges.
+ You all know better than most, the tremendous threats the United
+States' debt situation poses. Not only is our debt higher than it has
+ever been in the post-war period as a percentage of our economy, we are
+on track to continue adding to this debt indefinitely.
+ This year, public debt--the amount the U.S. government owes to
+domestic and foreign investors, and ignoring sums that the government
+owes to itself via intergovernmental accounts--is set to grow from $9.0
+trillion, or 62 percent of GDP at the end of last year to $10.4
+trillion, or 69 percent of GDP at the end of this year, according to
+the most recent projections from the Congressional Budget Office. By
+the end of the 10-year period, the debt will have grown to an
+astronomical $18.3 trillion, or 77 percent of GDP. Interest payments
+will be nearly $800 billion in that last year, or more than all
+domestic discretionary spending.
+ Yet even these assumptions are probably too optimistic. The
+Committee for a Responsible Federal Budget recently released its
+``Realistic Baseline'', which includes more realistic assumptions about
+future tax and spending policies than the current law assumptions CBO
+is directed to follow.\1\ Our baseline shows deficits growing to over
+$1.3 trillion, or 5.7 percent of GDP by the end of the ten-year window;
+debt growing to $21.8 trillion, or 91.5 percent of GDP; and interest
+payments reaching $947 billion in that final year.
+---------------------------------------------------------------------------
+ \1\ Projections based on CRFB Realistic Baseline, which assumes the
+2001/2003/2010 tax cuts are fully extended, war costs slowly decline,
+scheduled reductions to Medicare payments to physicians continue to be
+waived for remainder of the decade. After 2021, projections follow CBO
+Alternative Fiscal Scenario, except that revenues are allowed to rise
+slowly.
+
+ FIGURE 1.--CRFB REALISTIC BASELINE
+--------------------------------------------------------------------------------------------------------------------------------------------------------
+ 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 10-Year
+--------------------------------------------------------------------------------------------------------------------------------------------------------
+ BILLIONS OF DOLLARS
+
+Net Interest.............................. $264 $329 $406 $484 $569 $652 $727 $800 $880 $947 $6,058
+Deficits.................................. $1,103 $896 $821 $870 $1,006 $1,000 $1,037 $1,170 $1,267 $1,347 $10,516
+Debt...................................... $11,601 $12,581 $13,479 $14,427 $15,507 $16,596 $17,726 $18,990 $20,353 $21,798 N/A
+--------------------------------------------------------------------------------------------------------------------------------------------------------
+ PERCENT OF GDP
+
+Net Interest.............................. 1.7% 2.0% 2.4% 2.7% 3.0% 3.3% 3.5% 3.7% 3.9% 4.0% 3.0%
+Deficits.................................. 7.0% 5.5% 4.8% 4.8% 5.3% 5.0% 5.0% 5.4% 5.6% 5.7% 5.4%
+Debt...................................... 73.9% 76.7% 78.1% 79.3% 81.0% 82.8% 84.7% 86.9% 89.2% 91.5% N/A
+Memorandum:
+ CBO Baseline Interest.................... 1.7% 2.0% 2.3% 2.5% 2.8% 3.0% 3.1% 3.2% 3.3% 3.3% 2.8%
+ CBO Baseline Deficits.................... 7.0% 4.3% 3.1% 3.0% 3.4% 3.1% 2.9% 3.2% 3.2% 3.2% 3.6%
+ CBO Baseline Debt........................ 73.9% 75.5% 75.3% 74.9% 75.0% 75.2% 75.3% 75.8% 76.2% 76.7% N/A
+--------------------------------------------------------------------------------------------------------------------------------------------------------
+
+ I believe it is highly unlikely we would even make it to that point
+without experiencing some type of a fiscal crisis.
+ Under realistic assumptions, debt will continue to grow throughout
+and beyond the decade, rising to over 100 percent of the economy in the
+mid-2020s, to over 200 percent in the 2040s, and eventually to over 500
+percent by 2080. Driving the growth in debt will be the aging of the
+U.S. population, rising health care costs, and of course, spiraling
+interest costs.
+ Clearly, no country could sustain debt levels at such heights
+without destroying economic growth, eliminating vital investments, and
+slashing standards of living. But even at heightened levels of debt,
+like those the U.S. is currently experiencing in the short-term and
+increasingly into the medium- and long-terms, the economy and society
+at large can suffer.
+ The solution to all of the risks of higher debt is a multi-year,
+comprehensive fiscal plan that tackles each area of the budget. The
+sooner we enact such a plan, the better.
+ We face two paths. Under one, fiscal consolidation is used as part
+of an economic strategy that also includes preserving--and in many
+cases, increasing--productive public investments and a sound safety net
+and fundamentally reforming our tax code to enhance competitiveness.
+The economy and U.S. standard of living would benefit from having taken
+thoughtful preemptive actions. Under the other, we delay due to the
+difficult policy choices and political stalemate, which causes the debt
+to continue to grow, pushing up interest rates and payments, squeezing
+out more important priorities, choking off economic growth and
+affecting working families, and ultimately leading to a vicious debt
+spiral, which damages the entire economy and country. And under that
+scenario we still have to make the same difficult spending and tax
+choices we face now--but they would have to be larger and more painful.
+ I'd like to dig a little deeper into the problems caused by high
+debt levels:
+ 1. Economic: Many noted economists and respected organizations,
+including the International Monetary Found (IMF) and the Congressional
+Budget Office (CBO), have conducted analyses on the effects of
+heightened debt on interest rates; inflation; incentives for workers,
+businesses, and investors; and economic growth in general. They have
+found that higher levels of debt do not bode well for continued
+economic strength or living standards.
+ Increased federal borrowing and debt would eventually crowd out
+private investment in potentially more productive ventures via higher
+interest rates for government debt. Down the road, the nation would
+face a smaller capital stock. This need not be the case if increased
+federal borrowing was directed toward investments on public capital
+with returns greater than or equal to returns on forgone private
+investments.\2\ Examples of such investments could include
+infrastructure, research and development, and education. However, the
+U.S. budget is primarily a consumption oriented budget, with spending
+on health care and retirement costs far out stripping investments, and
+oftentimes, our public investments are not well-directed.
+---------------------------------------------------------------------------
+ \2\ Other complicating factors are that larger budget deficits tend
+to increase private savings, for several reasons, and can help increase
+foreign investment, both of which can mitigate the negative effects of
+increased borrowing. However, CBO states that, overall, these factors
+do not reverse the conclusion that increased borrowing would crowd out
+private investment.
+---------------------------------------------------------------------------
+ A smaller capital stock down the road would eventually cause
+incomes to fall, making future generations worse off. Lower incomes
+would reduce people's incentives to work. The combined effects of a
+lower capital stock and labor supply would harm economic output in the
+long-term and decreases U.S. global competitiveness.
+ Economists Carmen Reinhart, who is here today, and Ken Rogoff of
+Harvard University have estimated that debt levels of roughly 90
+percent of the economy--looking at a broader measure of debt, which
+incorporates debts the government owes to itself--are correlated with
+lower annual economic growth of about 1 percentage point.\3\ Likewise,
+economists at the IMF have estimated that a 10 percentage point
+increase in debt lowers potential output growth by 0.15 percentage
+point in advanced economies.\4\
+---------------------------------------------------------------------------
+ \3\ Reinhart and Rogoff. Growth in a Time of Debt, January 2010.
+ \4\ Kumar and Woo, Public Debt and Growth, July 2010.
+---------------------------------------------------------------------------
+ Higher debt can also contribute to higher inflation, whereby
+deficits add too much to aggregate demand in a given time frame, lead
+monetary authorities to try to reduce the real value of debt by
+printing more money (often referred to as ``monetizing'' the debt), or
+lead some people to believe that monetary authorities could
+deliberately increase inflation.\5\ Such outcomes would have obvious
+negative implications for business and investor confidence and economic
+growth, as well as many savers in society--in particular, the elderly.
+---------------------------------------------------------------------------
+ \5\ Sargent and Wallace (1981), Barro (1995), Cochrane (2010),
+cited in Kumar and Woo.
+---------------------------------------------------------------------------
+ 2. Budget: Higher debt levels necessitate higher interest payments
+on existing debt. Last year, interest payments on our $9 trillion debt
+totaled $197 billion. By 2021, however, interest payments are projected
+to jump fourfold to $792 billion, according to CBO. If policymakers
+enact legislation that increases deficits and debt over the next ten
+years, interest payments will also increase by even larger factors. All
+of these scenarios assume rather favorable interest rates. As interest
+payments rise, they will squeeze out room for other spending priorities
+and tax cuts. This will make the current battle over limited resources
+seem easy when compared to what is looming in the future.
+ 3. Fiscal: Higher debt levels lead to reduced budget flexibility as
+interest payments grow to consume larger and larger portions of the
+federal budget, and compromise our ability to respond to future crises
+and opportunities.
+ Policymakers would have limited resources to respond to unforeseen
+events, such as wars, humanitarian crises, and economic downturns. In
+2008, public debt stood at about 40 percent of the economy, affording
+us the fiscal space to significantly increase spending and cut taxes to
+support an economic turnaround. Larger debt would have hindered such
+efforts, and threatens our ability to respond to the next emergency. By
+nature, these budgetary costs are unpredictable, both in timing and in
+magnitude. Living at our fiscal limits is an immensely dangerous way to
+operate the government given the many uncertainties the nation faces.
+ 4. Psychological: Uncertainty surrounding the country's fiscal path
+is eroding confidence among businesses and individuals. They don't know
+what spending and tax policies to expect in the future, and thus cannot
+plan accordingly. If businesses and individuals do not know what
+spending cuts and/or tax increases they might face in the future, or
+even if the country might face a fiscal crisis of some form or another,
+they will be less willing to make longer-term investment decisions in
+our economy. As the economic recovery continues to lag, uncertainty
+contributes to the problem of how to encourage businesses to be the
+engine of growth.
+ A lack of confidence or certainty can stem not only from economic
+expectations, but also from policy uncertainty. Whether large spending
+cuts or tax increases, uncertainty over which spending programs
+lawmakers might eliminate or which taxes they might create or increase
+are not optimal for growth.
+ Just as one example, we know in no uncertain terms that changes
+need to be made to Social Security. We know that the sooner they are
+made, the better. And yet the years and years of delay means that
+current retirees, workers, and taxpayers, don't know what changes will
+be made to make the program sustainable, and thus, cannot plan
+accordingly. It is a terrible disservice to all participants of Social
+Security. The same level of uncertainty with regard to other needed
+policy changes affects business owners, students, and normal families
+trying to plan for their futures.
+ 5. Intergenerational: Higher debt levels not only threaten current
+standards of living, but the wellbeing of future generations of
+Americans. Higher borrowing today pushes the costs onto our children
+and grandchildren. Each generation of Americans has passed on improved
+opportunities and standards of living to the next generation. But for
+the first time, our fiscal course threatens to burden our children and
+grandchildren with enormous debt and reduced opportunities for the
+future, as well as a lack of fiscal flexibility as we lock them into
+certain programs and large interest burdens.
+ Basically we should all just look our kids in the eye and say,
+sorry, we wanted to spend a lot but not pay for it, so we are passing
+the bills onto you. Good luck with that.
+
+ A FISCAL CRISIS
+
+ Ultimately, if changes are not made, the country will experience
+some type of fiscal crisis. Under such a scenario, creditors would
+demand spending and/or tax changes to set a new fiscal course. No one
+knows exactly when this will happen, what it will look like, or what
+will set it off. But we know this problem will not fix itself and that
+without changes, there will be a fiscal crisis.
+ A year ago, we held a conference on what a tipping point might look
+like. At this cheery gathering economists and budget experts in
+attendance noted that a crisis could take many forms, including
+scenarios ranging from a gradual rise in interest rates and slowing of
+economic growth, to a rapid crisis where investors pull the plug on an
+economy--with triggering events ranging from a credit rating warning,
+to state budget problems, to a totally unforeseen factor. There was
+general concern that markets were underestimating how soon such a
+crisis might hit, and that the greatest risk was that our economy is
+already negatively affected by high debt levels, and that a crisis
+could hit in the next few years.
+ Under an abrupt fiscal crisis scenario, the U.S. would not have the
+luxury of spreading fiscal adjustment out among a larger group of
+federal spending programs or taxes, or across more generations.
+Investors would force immediate spending cuts and/or tax increases,
+threatening our ability to protect the programs on which the most
+vulnerable in society rely. A fiscal crisis would surely exacerbate all
+the negative economic, fiscal, psychological, and intergenerational
+effects of high debt.
+ For older generations, a fiscal crisis would hurt job security and
+incomes, and threaten retirement security if federal spending on
+retirement programs or taxes had to be altered abruptly. For younger
+generations, a crisis would also threaten job opportunities, incomes,
+and affordability of big ticket items. Workers would have to expect to
+work much longer than their parents and grandparents' generations.
+ We can never be sure when we might confront such a scenario, but we
+know for sure that we would ultimately face some type of crisis. It is
+far better to make fiscal changes on our accord than have markets force
+changes on us.\6\
+---------------------------------------------------------------------------
+ \6\ CRFB, Fiscal Turnarounds: International Success Stories,
+February 2010.
+---------------------------------------------------------------------------
+ THE SOLUTION: A FISCAL PLAN
+
+ We need to adopt a multi-year, comprehensive budget plan to put the
+country on a glide path to stabilize the debt at a sustainable level.
+We probably want to bring the debt down to around 60 percent of GDP
+over a decade--still significantly higher than the historic average of
+below 40 percent, and continue on a path that leads us back down closer
+to historical averages beyond that.
+ All areas of the budget should be on the table. Spending caps on
+discretionary portions of the budget--including both defense and non-
+defense programs--, entitlement reform, and fundamental tax reform are
+critical for tackling the magnitude of future deficits.
+ The debt threat is serious, but it is also an opportunity to
+restructure our budget and tax system for the 21st century. In order to
+be competitive down the road, we must strengthen critical investments
+in infrastructure, high value research and development, and education.
+By shifting our budget from one based more on consumption to
+investment, we can lay a new foundation for growth.
+ Entitlement reform must be at the center of any turnaround plan.
+The largest programs in our budget that are growing faster than the
+economy--Social Security, Medicare, and Medicaid--must be reformed.
+Their open-ended growth is already squeezing out other parts of the
+budget, threatens to push up tax rates to truly damaging levels, and
+their automatic nature removes the critical oversight and evaluation
+processes that should be a central part of budgeting.
+ And finally, our tax code is simply a massive mess. It is littered
+with over 250 special credits, deductions, exemptions, and exclusions
+that cost us nearly $1.1 trillion a year. These ``tax expenditures''
+are truly just spending by another name. By reducing, if not
+eliminating, many of them, we can reduce tax rates to more effectively
+encourage work and investment, while also helping to reduce deficits.
+Fundamental tax reform is key in turning our fiscal situation around
+and strengthening our economic well-being.
+ A comprehensive fiscal plan that stabilizes debt and then reduces
+it thereafter must be center to any economic recovery and growth
+strategy. The economy and private investment would become unburdened by
+debt, the country would have the budget flexibility to respond to
+emergencies and to invest in critical areas for long-term prosperity,
+investors would remain confident in our ability to repay our debts, and
+businesses and consumers would have certainty over future spending cuts
+and tax changes. Most importantly, we would be handing down even better
+opportunities to the next generation.
+ While the policy choices involved in tackling our out of control
+debt are not easy, they are far easier than what we will face if we
+continue to delay. It is our hope that we will spend this year
+developing specific options for tackling the debt, discussing the
+trade-offs, making the necessary compromises, and ultimately passing a
+multi-year plan to change course. This will reassure markets, provide
+families and businesses with the stability they need, and set us on a
+course for a much brighter economic future. Continuing to delay is a
+very risky strategy.
+ Thank you to the Committee for all your work on this and the
+opportunity to appear here today.
+
+ STATEMENT OF JOHN PODESTA
+
+ Chairman Ryan. Thank you. Mr. Podesta.
+ Mr. Podesta. Thank you, Mr. Chairman, and Mr. Van Hollen,
+members of the committee, thanks for inviting me back to the
+committee. Mr. Chairman, you will be surprised to know that I
+agree with your goal in your opening statement. I, of course,
+disagree a little bit with the analysis of how we got here, so
+let me just start there and do it very briefly.
+ I was fortunate, as you know, to serve as President
+Clinton's Chief of Staff. When our administration came to a
+close, the budget outlook was very different than it is today.
+Although President Clinton did inherit a budget deficit of 4.6
+percent of GDP and growing, by 1998 we had a balanced budget.
+We left the incoming administration with a balance sheet that
+was $236 billion in the black, the largest surplus since 1948.
+And CBO projected that by 2008, the federal government would
+essentially be debt-free on the policies then in place. By the
+time President Obama was sworn in, the deficit had already
+reached $1.2 trillion, a remarkable swing of 11 percent of GDP
+since our administration left office.
+ How did we get from record surpluses to record deficits?
+First, deep tax cuts especially for high earners in 2001 and
+2003 dramatically affected the federal balance sheet. The wars
+in Iraq and Afghanistan, and a major new entitlement program,
+Medicare Part D, were enacted without being paid for. The
+predictable result was a swift return to massive deficits and a
+growing debt. By 2007, instead of being nearly debt-free, the
+federal government's publicly held debt had nearly doubled.
+ Second, near the end of President Bush's second term, the
+onset of the Great Recession made a bad fiscal situation worse.
+Tax revenues plummeted, and this is the point where I disagree
+with you, Mr. Chairman. In fiscal year 2009, they dropped to
+their lowest level since 1950, where they have stayed. In fact,
+decline in tax revenues between 2008 and 2009 were four times
+larger than the new spending passed during President Obama's
+first year in office. We are left with a serious mid-term
+deficit problem, as well as an acute deficit and debt outlook,
+and on that, I agree with the panelists.
+ The only way to improve our long-term budget outlook is to
+combine fiscal discipline, as we did in the 1990s, with
+policies that create robust economic growth. So while we must
+reduce wasteful spending and take bold steps toward fiscal
+balance, both today and in the long run, it is also clear that
+sudden drastic spending cuts to government programs to keep the
+wheels of our economy turning will cost jobs, stall the fragile
+economic recovery, and that is why we both supported at cap
+[spelled phonetically], targeted investments, but have also
+listed specific cuts.
+ We look for savings in every part of the budget because it
+is impossible to balance the budget by cutting non-security
+discretionary spending alone. Not only is this one area of
+spending decidedly not the source of our deficit problems, it
+is also home to the most important public investments that are
+fundamental to our future economic growth. And it adds, as Mr.
+Van Hollen noted, at less than 15 percent of the budget, there
+are just not enough non-security discretionary dollars to fill
+the budget gap.
+ Rather than limiting the spending discussion to one part of
+the budget, we should broaden it to include mandatory spending,
+defense spending, government efficiency improvements, and
+especially tax expenditures, as Ms. MacGuineas noted. Every
+year we are spending twice as much on tax expenditures, more
+than a trillion dollars, as we do on non-security discretionary
+spending. Yet many of these tax expenditures are wasteful
+giveaways. They provide the biggest tax breaks to those who
+need them the least. They are subject to much less scrutiny and
+oversight than spending. And some are so specific and targeted
+on such a few number of people, that I think it is fair to call
+them tax earmarks.
+ Finally, new revenue absolutely must be part of the
+solution. There is little hope for deficit reduction, no matter
+what the size in spending cuts, without looking to revenue side
+of the ledger. With so many challenges facing our country
+today, we have to continue to invest in infrastructure, in
+clean energy, and science, and innovation, and education, to
+keep our economy competitive, to support the middle class, to
+create jobs, and to get wages growing again.
+ As I go into in some detail in my written testimony,
+limiting federal revenue to the historical average, or some
+level slightly above that, is going to be insufficient to
+address the challenges of the day. In fact, the last time the
+historic level of revenue would have actually balanced the
+budget was in 1966. And both the country and the budget looked
+quite a bit different 45 years later, after we passed Medicaid
+and Medicare in particular.
+ So I urge the committee to scrutinize and realize savings
+from every part of the budget, including in entitlements
+alongside strategic investments in revenue. We have identified
+specific cuts in non-security discretionary spending, in
+unneeded Pentagon spending, in wasteful tax expenditures, in
+mandatory spending, in restrained health care costs, in
+addition to targeted revenue increases.
+ Our plan, and hopefully I think, the blueprint for this
+committee that you will put forward soon would bring the budget
+into primary balance where federal revenues equal program
+spending by 2015. I hope that you can meet that mark, and put
+us on a firm footing to fully balance the budget in the future.
+It enforces fiscal discipline through the proven mechanisms of
+hard but realistic discretionary caps, and a real and
+comprehensive PAYGO system. And will bring the budget closer to
+balance without the weighing or reversing the fragile economy
+we have fostered over the past two years. So, again, thank you,
+and I look forward to your questions.
+ [The prepared statement of John D. Podesta follows:]
+
+ Prepared Statement of John D. Podesta, President and CEO,
+ Center for American Progress Action Fund
+
+ Chairman Ryan, Ranking Member Van Hollen, and members of the
+committee, thank you for the opportunity to testify concerning
+America's deficit and debt challenges.
+ The broad contours of our long-term deficit challenge are well-
+known. Over the next several years, the eye-catching deficits during
+the Great Recession will subside, but deficits will not disappear. Over
+time, if nothing is done, those deficits will widen, causing us to take
+on an unsustainable debt burden, and forcing us to put an ever-
+increasing share of our national income toward servicing that debt,
+rather than making important investments in our economy and our people.
+This is clearly a future we must avoid.
+ But our long-term deficit dilemma is not, as is so often claimed,
+purely a ``spending problem.'' There is no question that current
+projections of federal spending are alarming and clearly unsustainable.
+It is not the case, however, that all federal spending is contributing
+equally to that trajectory. In fact, most federal spending is actually
+expected to remain steady or even fall, as a share of the economy, over
+the next 10 years and beyond. The exception, however, is federal health
+spending, and to a much smaller degree, Social Security. This suggests
+that, far from being a ``spending problem,'' what the United States
+actually faces is an aging population, and a ``rising cost of health
+care'' problem.
+ That is why it is so important that Congress and the administration
+work diligently to implement the cost containment strategies and
+delivery reforms that were part of the Affordable Care Act. These
+reforms, along with the rest of the bill's provisions, are projected to
+reduce the deficit by more than $230 billion over the next 10 years and
+begin to restrain the growth in health care spending.
+ We also have a problem on the other side of the balance sheet.
+While rising health care costs and an aging population will combine to
+drive up government spending, at the same time a stubborn devotion to a
+tax code riddled with inefficiencies and loopholes will ensure that the
+country takes on ever more debt to pay for even the most basic of
+public services. Those who would limit federal revenue to the
+``historical average'' of 18 percent of gross domestic product are
+ignoring an important, inescapable reality: The challenges we face
+today and will face in the future are different from those we faced 50
+years ago.
+ They are also ignoring the simple fact that this historical average
+level of revenue has always been inadequate, even by historical
+standards. In 45 out of the past 50 years, the federal budget was in
+the red. I am proud to have served as chief of staff to President Bill
+Clinton, who oversaw three of those five elusive budget surpluses. The
+last time that 18 percent of GDP in revenue would have been sufficient
+to balance the budget was 1966. The budget and the country looked quite
+a bit different 45 years ago than they do today.
+ Forty-five years ago, Medicare and Medicaid had just passed and
+total federal health care spending was less than 0.3 percent of GDP. We
+spent about one-fourth as much on veterans' hospitals and medical care,
+in real dollars, as we do today. We spent about one-tenth as much on
+law enforcement. There was no school breakfast program, no Children's
+Health Insurance Program, no Transportation Safety Administration, to
+name a few. These programs and services arose to meet new needs, like
+the need for greater airport safety, or as ways to address enduring
+problems like childhood and elderly poverty.
+ The underlying demographics of the country have also shifted
+dramatically and will continue to do so. In 1966, just 9 percent of the
+population was over the age of 64. Today, 13 percent of the population
+is. By 2030, that proportion is expected to rise to almost 20 percent.
+How could we realistically expect to meet the needs of a population in
+which one out of every five people is a senior citizen using revenue
+levels from a time when less than 1 out of every 10 was? Remember, too,
+that programs like Social Security, Medicare, and Medicaid have been
+remarkably successful. In 1966, nearly 30 percent of all senior
+citizens lived in poverty. Today less than 10 percent do. Unless we
+decide, as a society, that we no longer have a responsibility to ensure
+a secure retirement and adequate health care for all older Americans,
+that we would be willing to go back to the senior poverty levels of the
+early 1960s, then we will, necessarily, be required to spend more over
+the next several decades than we have over the past several.
+ Higher spending to meet new challenges is clearly nothing new.
+Neither is raising more revenue. Citing the postwar average of federal
+revenue makes it appear as if that level of revenue was constant during
+that period. It was not. In the 1950s, average annual federal revenue
+totaled 17.2 percent of GDP, but then increased in every subsequent
+decade of the 20th century. In fiscal year 2000, revenue peaked at 20.6
+percent of GDP. Far from being constant or stable at 18 percent, there
+is a clear pattern of higher revenue in each new decade. The pattern
+held for five straight decades, and it was only broken by the massive
+tax cuts implemented by President George W. Bush.
+ Even slightly higher levels of revenue--the chairman, for example,
+has suggested 19 percent of GDP as a target--have been and would
+continue to be inadequate. Only five times in the past 40 years would
+19 percent of GDP be sufficient to balance the budget. And that is
+before taking account of the major demographic and health care cost
+challenges we are now facing.
+ Unfortunately, there is no magic level of revenue or spending that
+will balance the budget now and forever. Fundamentally, we need to make
+budget decisions based on our current and future circumstances, not on
+our past ones. We must grapple with the real underlying causes, and
+offer real and specific solutions, to address our growing federal debt.
+ The Center for American Progress, since our founding eight years
+ago, has been consistent in calling for a national effort to address
+these long-term challenges. When we began, the fiscal discipline of the
+Clinton administration had been recently abandoned in favor of massive
+tax cuts skewed heavily toward the wealthy. These were enacted during a
+time of war with its attendant spending increases. Adding to the fiscal
+damage was a new domestic entitlement program, Medicare Part D, which
+was passed without adequate funding. The predictable result was a
+return to large deficits and an unprecedented run-up of debt. This was
+the fiscal situation before the onslaught of the Great Recession, which
+itself had a dramatic effect on the nation's bottom line. The combined
+effect of the recession and the poor fiscal stewardship prior to it was
+to pull our long-term deficit problems closer toward us and create an
+intermediate deficit problem to go along with the long-term one.
+ Over the past few years, the Center for American Progress has
+offered several specific plans for spending cuts and revenue increases
+that would put the country on a path back toward fiscal stability. We
+have also been glad to see others start producing similar plans that,
+importantly, have started to be as specific and detailed as ours. There
+appears to be a growing recognition of something that we have long
+believed: Once you get past political rhetoric, solving the deficit
+problem is going to be extremely difficult. There are simply no easy
+answers or magic bullets. Solving this problem will require careful
+consideration of all the options, a fair weighing of the costs and
+benefits, and compromise.
+ There is one additional prerequisite to achieving our shared goal
+of a more sustainable federal budget: a strong and growing economy. We
+should not labor under the illusion that we can grow our way out of our
+budget woes. But neither should we ignore the fact that without a
+strong economy, solving our fiscal problem will go from being merely
+very difficult to being truly impossible. Given this reality, we
+strongly believe that every care must be taken in the near term not to
+disrupt the fragile recovery. While we strongly believe in getting the
+budget back to full balance eventually, our initial steps must be
+measured.
+ The shock of vastly constrained government spending, in the
+immediate, would have undeniably deleterious effects on the wider
+economy. Analysts from Goldman Sachs recently estimated that the cuts
+contained in H.R. 1 would slice 1.5 to 2 points from economic growth in
+the second and third quarters of this year. Moody's chief economist
+Mark Zandi estimated that the cuts in the House bill would lead to a
+loss of about 700,000 jobs. Federal Reserve Chairman Ben Bernanke
+agreed that H.R. 1 would result in a ``couple of hundred thousand
+jobs'' lost.
+ Though estimates clearly vary on the magnitude, there is wide
+consensus on the general impact. And given the crucial moment that we
+now find ourselves in--with private sector job growth just beginning to
+expand--it would be counterproductive to deliberately undertake
+contractionary policies of this magnitude in the near term.
+ Instead, we should be focusing on putting in place policies that
+will bring the federal deficit down to sustainable levels in the medium
+term and full balance over the long term. During normal economic times,
+there is no good reason to take on debt to pay for the ordinary, day-
+to-day operations of the federal government. There is no need, however,
+to try to solve the entire budget deficit at one enormous stroke.
+Steady, clear, step-by-step progress toward the eventual goal is both
+more likely to ultimately produce success and has the great advantage
+of requiring less dramatic change in the intermediate period.
+ Eventually, balancing the budget is going to require some difficult
+spending cuts and tax increases that neither Republicans nor Democrats,
+nor the American public for that matter, seem ready to embrace. We
+commend the efforts of the bipartisan group of senators who are even
+now trying to develop a framework for solving our long-term budget
+problems. We are hopeful that their effort, building on the general
+framework of the Bowles-Simpson proposal, will yield results that will
+be acceptable to both parties and both chambers of Congress. But even
+if it proves impossible to achieve a consensus right now on all the
+elements of a long-term deficit budget plan, that does not absolve us
+of the responsibility to start down the path toward fiscal
+sustainability. That is why we should also agree to adopt an
+intermediate goal somewhere between here and full balance.
+ We suggest a path to put the federal budget into primary balance by
+2015 as that intermediate goal. Primary balance is when total
+government revenues equal total government expenditures, with the
+exception of net interest payments on the debt. This equates to a
+deficit of about 3 percent of GDP. At that level of deficits, publicly
+held debt, as a share of GDP, ceases to rise. Getting to primary
+balance by 2015 will not be easy. With the deficit currently standing
+at just under 10 percent of GDP, reducing it all the way down to 3
+percent will require not just a restored economy but some substantial
+policy changes.
+ Nevertheless, we can reach primary balance without the kind of
+dramatic, fundamental shifts in public services and the tax code that
+will likely be required to achieve full balance. And by doing so, we
+will stabilize the debt-to-GDP ratio, demonstrate our resolve, and buy
+ourselves some much-needed fiscal breathing room.
+ There are four basic steps that we must take over the next several
+years to reach that intermediate goal. First, Congress and the
+executive branch should focus intently on making government work more
+effectively, more productively, and more efficiently. Don't
+misunderstand. Eliminating so-called, ``waste, fraud, and abuse,'' will
+not, by itself, solve our deficit problems. Not even close. Nor is it a
+simple matter to even determine what constitutes wasteful spending.
+Improving the productivity of the government, and identifying and
+rooting out inefficiency, will take a serious commitment and effort.
+The recent report from the General Accounting Office that identified
+dozens of areas of potential duplication in the federal government is a
+good starting point.
+ The real work of figuring out exactly which programs and services
+are successful and which are not begins now. At the Center for American
+Progress we have an entire project that we call Doing What Works, which
+is devoted this effort. Our premise is that the American people deserve
+a government in which every tax dollar is spent wisely, every program
+is held to clear standards, and everyone is accountable for achieving
+goals in an efficient manner. We believe that these efforts also have
+the potential to save billions, perhaps even hundreds of billions.
+We've already identified the potential for up to $16 billion in annual
+savings from modernizing government informational technology systems
+and another $40 billion from federal contracting and procurement
+reforms.
+ Though improving government efficiency and rooting out waste will
+save money, we cannot pretend that it will dramatically alter the
+trajectory of government spending. To do that, we need to take a hard
+look at all parts of the federal budget and not merely limit our
+attention to one small sliver. The recent focus on nonsecurity
+discretionary spending is badly misplaced. Nonsecurity discretionary
+spending makes up less than 15 percent of the entire budget, and it is
+actually projected to decline over time. These are not the programs and
+services that are driving up our long-term deficits.
+ On the contrary, this category is home to most of the vital
+investments that are the keys to our future economic growth: education,
+transportation and infrastructure, science and technology research, and
+services that foster competiveness and innovation. H.R. 1 would cut all
+of these substantially including $1 billion from Head Start, which
+would force 200,000 children out of the program; $700 million from
+grants to local school districts; and $500 million from teacher quality
+grants. It would slash $6 billion from science and technology research
+including reductions to the National Science Foundation, the National
+Laboratories, and more than third from the National Institute of
+Standards and Technology. It would even cut the Small Business
+Administration and the International Trade Administration--offices that
+seek to bolster American businesses and American exports.
+ The misguided limitation of spending cuts to just this one category
+forces these kinds of cuts to investments that are fundamental to our
+future economic growth. Not only will these cuts cause job losses right
+away, but they will drag down our economy for years to come.
+ And despite the name of the category, we also end up cutting a
+variety of services designed to keep every American safe as they go
+about their daily lives. H.R. 1 would mean cuts to meat inspections, to
+the Centers for Disease Control and Prevention, to poison control
+centers, to law enforcement grants to cities and towns, to the Consumer
+Product Safety Commission, and to the Federal Aviation Administration.
+Meat inspections and poison control are not the reason we face a budget
+deficit. But they are fundamental services that the American people
+expect out of their government.
+ By concentrating only on this one category of spending, we ignore
+the potential for savings in all other parts of the budget. The
+Department of Defense, for example, is certainly not immune from waste
+and excess. Over the past several years, the Center for
+ American Progress has released several reports detailing specific
+savings that could be had from the Pentagon's budget without weakening
+our national defense.
+ There is also no reason to exempt mandatory programs from scrutiny.
+The Center for American Progress has identified several programs that
+could be streamlined or scaled back. For instance, in a time of
+exceedingly high commodity prices and high net farm income, should we
+continue paying high direct agriculture subsidies? The Government
+Accountability Office recently reported that billions of dollars are
+wasted in improper payments in Medicare. Restricting our attention to
+nonsecurity discretionary spending leaves these inefficiencies in place
+and leaves savings on the table.
+ Similarly, we should not ignore those spending programs that
+operate through the tax code. These tax expenditures are economically
+equivalent to their direct spending counterparts, but they are
+generally subject to less scrutiny and evaluation. Some of them are so
+specific and target such a tiny number of people or industries that
+they are best thought of as ``tax earmarks.'' A balanced approach to
+cuts should include close examination of all spending programs,
+including tax expenditures, to make sure they are achieving their goals
+efficiently and effectively. The days of hiding special spending
+programs deep in the bowels of the tax code have to come to an end.
+ We also need to return to the successful budget processes of the
+1990s, which will help ensure that any steps taken in the coming years
+to restrain the deficit are not undermined by future Congresses. These
+processes include statutory PAY-GO, which the 111th Congress
+successfully reinstated, as well as meaningful caps on both defense and
+nondefense discretionary spending, enforced through sequestration. The
+lesson of the 1990s is that caps such as these can work, so long as
+they are not arbitrary or punitive. Successful budget enforcement
+processes should also include congressional rules that make it
+difficult to pass legislation that would increase the deficit. The
+Senate has such rules, and in the previous Congress, so too did the
+House. Unfortunately, the current House leadership has chosen to
+abandon those rules in favor of something they call ``Cut-Go,'' whereby
+spending increases must be offset by spending cuts, but tax cuts do not
+need to be offset at all. This is a recipe for fiscal disaster.
+Allowing tax cuts to not be paid for will inevitably result in massive
+deficits, as President Bush's economic policies convincingly and
+repeatedly proved.
+ We must remember that the word ``deficit'' is not a synonym for
+``spending.'' The deficit is actually a product of a mismatch between
+spending and revenue. While improving government efficiency and
+subjecting all parts of the federal budget to close scrutiny will help
+in addressing one half of the deficit equation, we simply cannot afford
+to ignore the other side of the balance sheet.
+ This year, for the third year in a row, federal revenues will be at
+their lowest level, as a share of GDP, in nearly 60 years. While the
+effects of the recession explain much of the dramatic drop in revenues,
+the other culprit is repeated tax cuts. Going forward, the obvious
+first step must be to jettison the bonus tax cuts for the wealthy put
+in place under President Bush. During the last decade and before the
+Great Recession, average income for the richest 1 percent grew by more
+than 20 percent, while at the same time median household income
+actually fell. Those at the top also weathered the recent economic
+storm far better than the middle class, and they are recovering faster
+as well.
+ The enormous tax cuts bestowed on the very rich in 2001 and 2003
+were a mistake then, as they were an important contributor to the
+unnecessary deficits of 2002 through 2007. Maintaining them is an $800
+billion mistake now.
+ In our plan for reaching primary balance, we also recommend
+implementing a millionaires' surtax. This would be 2 percent on
+adjusted gross income over $1 million and an additional 3 percent on
+AGI over $10 million. This surtax would raise about $30 billion a year.
+Ideas like these should be part of the discussion, not least because a
+tax on millionaires is, as evidenced by a recent Wall Street Journal
+poll, the single most popular way to reduce the deficit.
+ Balancing the budget and reducing our debt burden is going to
+require making hard choices. But by approaching the issue in a balanced
+and measured way, it does not have to mean sacrificing our future
+economic prosperity or a robust safety net for the vulnerable. If we
+dedicate ourselves to scouring the government for efficiencies, to
+subjecting the entire federal budget to scrutiny, not just one sliver
+of it, and to raising the revenue that the 21st century requires of us,
+then we will be able to balance the budget and leave the next
+generation with a fiscal inheritance that we can be proud of.
+
+ Chairman Ryan. Thank you. First, let me just start off. You
+know, we obviously don't agree on everything, but I want to
+thank you for having been a member of the fiscal commission.
+Your think tank, Center for American Progress, actually gave us
+ideas. You know, you actually did a lot of work and a lot of
+research and you are contributing to the debate, and for that,
+I thank you. And some of them, believe it or not, I agree with.
+So, thank you for that.
+ I want to bring up the chart on the bond markets.
+
+
+
+ I want to ask the economists, and there is a lot of members
+here, so give me the five minute deal, is that all right? So,
+let's do that for ourselves, because I want to get to people.
+ This is what the, PIMCO calls the ring of fire. This is
+rating our countries in this very dangerous debt zone. And the
+U.S.A. is right up there with France, Italy, Japan, Greece,
+Ireland, the U.K., Spain. Ms. Reinhart, do you see it this way?
+I understand PIMCO, which gives us this chart, dumped their
+Treasury bills in their major bond fund the other day. I am
+very worried this thing is starting to accelerate. And Doug,
+because you are an economist as well, what does this look like?
+What does a debt crisis look like? I mean, everybody says, debt
+crisis is coming. What does that mean, exactly? What form does
+it take place? What does it look like? And I am going to have
+to ask you the question which I know no one likes to answer:
+How much time do you think we actually have? I hear speculation
+from bond traders and economists. What is your speculation? And
+then I want to get to the non-economists. Not that that is a
+bad thing, but go ahead.
+ Ms. Reinhart. [inaudible] was, was using some of our data.
+So, that tells you something about highlighting some of the
+same problems I was in my remarks. In terms of the timing: I
+tried to reiterate that you don't know when bond markets will
+turn, but I think the perception that we have, a five nice year
+window in which we can do things, we can wait for oil prices to
+be in the right place, is not in the cards.
+ How do debt crises build up? They build up with a lot of
+hidden debts, and if they were not hidden, we would know about
+it. That is part of the problem. When you see the build-up of a
+debt crisis coming, you also see build-up of arrears, which we
+are seeing, certainly, at the municipal level; we are seeing it
+at the state and local level. We see now, then, also, that the
+closer you get to surpassing any historic benchmark, which we
+have already done, when we take into account state enterprises,
+the closer you move to a downgrade.
+ Japan, which is a lender to the rest of the world, has
+already been downgraded several times. You don't get to a debt
+crisis with very predictable, unless you are shut out of the
+credit market, like Argentina was; we are not Argentina. But
+where we see it is in these hidden debts in which contingent
+liabilities continue to build up. The bottom line is that at
+the current pace, we do not have a five year window in which we
+can wait for the right opportunity.
+ Chairman Ryan. Dr. Holtz-Eakin.
+ Mr. Holtz-Eakin. I concur with this analysis. The
+horizontal axis is what I talk about, prosperity, right? The
+more you public debt you have, you are crowding out the ability
+of people to get educations and do investments; so as you go
+out that way, you are imperiling your prosperity. As you go
+down the vertical axis and you are borrowing from abroad, that
+is, that is our freedoms. We are not going to negotiate with
+our bankers. And some of our bankers don't share our values. So
+that analysis is right.
+ What would it look like when it hits? Well, you know, you
+would see a spike overnight in Treasury borrowing costs. We
+have an enormous amount of Treasury financing this very short-
+term right now, and so essentially we are borrowing at teaser
+rates. They would bounce right up, we would have to refinance
+at much higher rates that would flow right through into every
+mortgage, every car loan, every interest rate in the economy,
+and you would see just a collapse in the economy.
+ So it would be a very painful, very shocking experience.
+And we have been through something like that. We don't want to
+do it again.
+ The last thing I would say is, people always want to say
+that the U.S. is different. You know, we are not being
+disciplined by bond markets, we are exempt, and I want to echo,
+you just can't believe that. I mean, Rudy Penner, who was the
+former director of the CBO, always says, We are the best-
+looking horse in the glue factory, and that doesn't mean we
+won't turn out to be glue. And it is very important that we not
+even test the notion that, somehow, as the world's largest
+economy or its reserve currency, we are exempt. We control our
+future. The indicators say trouble arrives soon, within five
+years, so let's not go there, and let's not find out if we
+really are different.
+ Chairman Ryan. Let me ask the two, because I want to be
+respectful of time, if neither political party, if neither the
+House, the Senate, or the administration proposes in the next
+year or two to fix this problem, does that send the signals to
+the credit markets that the Americans are done? That the
+Americans don't have this figured out, that the Americans
+aren't serious? And does that, therefore, accelerate a debt
+crisis?
+ Mr. Holtz-Eakin. In my opinion, yes. I am terribly worried
+about this.
+ Chairman Ryan. I mean just showing political leadership
+buys us time. Is that your assessment?
+ Mr. Holtz-Eakin. Absolutely. I want to echo what Maya said
+in her opening remarks. Fiscal security. A, it is the right
+thing to do for everyone now and in the future. B, it is
+analytically not hard. C, it sends the right message to bond
+markets: that we are willing to take the country in a different
+direction. Do it, and do it tomorrow.
+ Ms. MacGuineas. I am going to first give a non-economist
+answer to your economics question. But when you are walking on
+thin ice, right, lots of things can cause it to crack. And so
+we are at risk for so many things right now, whether it is
+sovereign debt contagion, or something that goes wrong in the
+States, any of these landmines in the budget, the contingent
+liabilities that are there. PIMCO, when they start to get out
+of Treasuries, that sends major signals. Right? Everybody on
+Wall Street is looking; everybody around the world is looking
+at this right now. So suddenly, anything can make a change
+very, very quickly.
+ And the bottom line is even though our bond markets have
+looked like there is not a problem, and people keep saying,
+Look, rates are so low, what are you worrying about? As soon as
+you start to see the problem in the markets, it is too late to
+do this on our own terms. There is no excuse for not getting
+ahead of a crisis which you know is coming your way.
+ In terms of policy and politics, we know the policies are
+incredibly difficult, and we also know what is involved in
+them, and we can do it. And I encourage, you know, as many
+roadmaps, let's get them out there, as possible. We need to get
+to specifics. We are now past the point of just talking about
+this is a problem, and kind of worrying about it. We need to
+know we get the specifics on the table and figure out how to
+fix the problem, and we need to do enough this year, hopefully
+a comprehensive plan, but enough to make markets more confident
+in the political process.
+ When I talk to folks from Wall Street, and someone who runs
+the Committee for the Responsible Federal Budget, Wall Street
+people didn't used to care, really. It wasn't like the people
+who called all the time. And they do now. The markets are
+paying a whole lot of attention, and they really are worried
+about our political process in all of this.
+ So, I think there is no question that, particularly with
+the Fiscal Commission having come out with a solution, that if
+this all dies on the vine and nothing happens politically, the
+next two years is not okay. We can't delay until after the
+election; something has to happen before then to reassure
+markets, other countries, and everybody who is watching this,
+that we have the political ability to face up to these
+problems.
+ Chairman Ryan. I know we have gone over, but John, I do not
+want to stifle you, so please, go ahead.
+ Mr. Podesta. Well, Mr. Chairman, I would note that I am
+more used to the fire than the ellipses on that chart. But I
+would say this: This is the year where we have to show, on a
+bipartisan basis, a determination to stop our debt from going
+up. And that has to be in the midterm. I suggested 2015, you
+may have a different year in mind, but I think if we can do
+that on a bipartisan basis and lock that in, get on a path so
+that our debt does not continue to grow, and then we could
+begin the tough path of bringing it down, bringing the debt
+down, hopefully getting on a path back to balance. We would
+have accomplished a lot. And that is going to require a
+balanced plan, and as I said in my opening comments, it can't
+just be in one narrow part of the budget. It is going to have
+to work across the entire federal budget.
+ Chairman Ryan. Thank you. Mr. Van Hollen.
+ Mr. Van Hollen. Thank you, Mr. Chairman. I want to join the
+Chairman in thanking all of you for your testimony. And, as I
+said in my opening remarks, this is a very important hearing.
+And I agree that we need to come together on a bipartisan basis
+now, to come up with a plan that shows we are going to reduce
+the deficits and debt in a predictable, sustained manner. So I
+think there is agreement on that.
+ As I said in my opening remarks, also, I do think it is
+risky to do anything that could weaken the economy during this
+very fragile time. And Chairman of the Federal Reserve, of
+course, Mr. Holtz-Eakin is the guy who is supposed to be expert
+in interpreting the animal spirits, in fact, every time he
+makes a comment, he has got to be thinking of the confidence
+levels. And when he says that he thinks that a reduction of the
+magnitude we are talking about in the Republican plan, in the
+time period that we are, would cost a couple hundred thousand
+jobs, and makes the point it is not insignificant. I do think,
+when we are measuring confidence in the economy in part by the
+month-to-month job numbers, if we start to see any dip in that
+it is a big problem for confidence; it is also a big problem
+for the people who have lost their jobs.
+ But here is what I would like to focus on for a minute. I
+want to accept the premise, absolutely accept the premise that,
+in order to get the deficit and debt down, we have got to
+reduce spending. We are going to have to reduce spending in
+discretionary programs, and we are going to have to do it in
+mandatory programs. So let's accept that premise, for many of
+the reasons we have talked about here. And we should come up
+with a plan to do that now.
+ But I do want to pick up on some of the remarks that Mr.
+Podesta made. Because it is absolutely true that when he and
+the Clinton Administration left office, they left with large
+projected surpluses, and now when President Obama was sworn in
+he inherited a $1.3 trillion deficit. The day he put his hand
+on the Bible, he had already had a record deficit for that
+year.
+ So, if I could start with you, Mr. Holtz-Eakin. Because
+when you left the Bush Administration and went to become the
+Director of the Congressional Budget Office, there were many
+who wanted you to do analysis that showed that the Bush tax
+cuts in 2001, at that time, actually paid for themselves. And
+you rejected that analysis. And as recently as last August,
+August 2010 you stated, and I am quoting, I have never been in
+the camp that believes that, quote, `tax cuts pay for
+themselves,' unquote, there is no serious evidence to support
+that. I assume it is safe to say that you hold that same
+opinion today that you did in August.
+ Mr. Holtz-Eakin. Yes.
+ Mr. Van Hollen. Okay. Now, so on pages two and three of
+your testimony, you say that, for the past eight years, nine
+years, we have frittered away our time without addressing the
+problem. And you list three things that made the problem worse.
+Three things. You mentioned the financial crisis: no dispute
+there. You mentioned the prescription drug bill that was signed
+by President Bush, that was not paid for: no dispute there,
+that makes things worse. You mentioned the Affordable Care Act;
+I am not going to get into a big debate about that, other than
+to say, we have had this discussion in this committee, the CBO
+scored that it is 2010 in deficit reduction, and a trillion
+over 20 years, we throw that in.
+ No mention of, of the wars that we didn't pay for, and
+continue to pay interest on. But most importantly, as Mr.
+Podesta pointed out, no mention of the 2001 and 2003 tax cuts
+during the Bush Administration, which, of course, your former
+boss, Senator McCain, voted against, because of his concern
+about the impact on the deficit.
+ Now, in today's CBA, they just issued in January, they
+estimate that if you continue all the tax cuts--I am not
+proposing that we stop all the tax cuts, but just make the
+point here, they say in their analysis, if you were to return
+to moving from Clinton era tax rates to the Bush tax rates, we
+are adding $3 trillion to the deficit over the next 10 years,
+if you include the debt service: two and a half trillion
+dollars just because of the tax cuts, another half trillion
+dollars debt service.
+ So, my question is this: You have a reputation as a
+straight shooter. Seriously, now, how can you have testimony
+that doesn't even address the revenue side? And again, I
+understand we have got to get it, there is no dispute. This
+hearing is entitled, Lifting the Crushing Burden of Debt.
+ Mr. Holtz-Eakin. Right.
+ Mr. Van Hollen. How can you not even address that issue in
+your testimony?
+ Mr. Holtz-Eakin. Right. Because I am not interested in
+relitigating history. I think the central problem we face is
+that, if you look forward 10 years, using the President's
+budget, or, or any other projection, those projections have the
+following character: They say, we are out of Iraq and
+Afghanistan; the financial crisis is a distant memory; we are
+back to full employment; and we are raising revenue that is
+well above historic norms, 19, 20 percent of GDP, and despite
+that we have enormous deficits, trillions of dollars, much of
+which is interest on previous debt, and so it is the future
+accumulation of debt, driven by that characteristic that
+concerns me. And at the heart of that is spending issues. And
+the additions to spending that have been most threatening have
+been those in the health area. We did the Medicare
+Modernization Act, and we did the Affordable Care Act. So that
+is how I got to that conclusion, it is very straightforward.
+ Mr. Van Hollen. Well, let me just to follow up on that. And
+again, I am accepting the premise that we have got to deal with
+the spending side. What I find interesting is that even when
+you were at CBO, and you issued these reports, you showed that
+the consequences of going from the Clinton era tax rates to the
+Bush era tax rates had serious consequences on the deficit. And
+I just point out, in 2004, when you were here in a non-partisan
+capacity, testifying and making comments on the budget, you
+said, you weighed these two things. You weighed the positive
+aspects of the tax cuts, and then you counterbalanced that with
+the concerns with respect to the deficit.
+ And here is what you said. I am quoting: The cumulative
+corrosive impacts of sustained deficits in the face of a full
+appointment economy, would unbalance, make the extension of the
+tax cuts a, quote, `modestly negative policy choice'?
+ Now, that was at a time when projected deficits and debt
+were a lot lower than they are now. And so we have the Fiscal
+Commission. The Fiscal Commission said we have got to look at
+these tax expenditures. By the way, the Fiscal Commission's
+baseline, the baseline assumes that we return, with respect to
+the high-income individuals, assumes that we return to the
+Clinton era tax cuts.
+ So, I guess my question is that, we are not disputing that
+spending is part of it. What accounts for this total reversal
+from 2004, when that was a, a modestly negative choice. In
+other words, continuing them, even though the projected
+deficits and debt were not as bad, and today.
+ Mr. Holtz-Eakin. So, I don't remember the context; I was
+probably asked. I believe that it is important to identify the
+top priorities. And those are on the spending side, I won't
+repeat that. The second point, which I think, the Fiscal
+Commission has said very clearly, is that should it be the case
+that, collectively, we decide we are going to raise more
+revenue: the route is tax reform. Our tax system is deeply
+broken. I have a long discussion in my written testimony; I
+encourage you to read it. Simply raising tax rates, going back
+to the, to the Clinton era tax rates, is not a good solution to
+raising more revenue.
+ And the third thing I would say, a personal opinion in my
+judgment, is I am deeply concerned about the following
+phenomenon: We have a rising projection of spending that is
+undisputed. And we have this concern that the international
+community is going to just cut us off, and we will have a
+fiscal calamity. Well, suppose you raise taxes a little to run
+off concerns out there in the bond markets, but you don't deal
+with the spending problem. Well, everyone calms down for a
+couple years. You go forward, same problem arises, you bounce
+tax rates up a little bit, problem goes away for a little
+while. You go a couple more years, you bounce taxes up again.
+Pretty soon, you are jacking taxes up right along that
+projected spending route, and that takes you to 30, 40 percent
+of GDP. And you will, you don't have to be a crazy
+[unintelligible] setter, you will kill the economy.
+ So, I am just trying to lobby, in an undisguised fashion,
+for, A, good tax policy; I am all for that. But B, dealing with
+the fact that if you don't control spending, you are going to
+have enormously higher taxes come, one way or another, and that
+is a bad thing.
+ Chairman Ryan. Thank you. Mr. Campbell.
+ Mr. Campbell. Thank you, Mr. Chairman, and thank you,
+panelists. Let me try and summarize what I think I heard a
+little bit from all four of you, and, frankly, from the
+Chairman and Ranking Member, too, that there is some
+disagreement as to how we got here, and that there is some
+disagreement on the weighting of the different elements of the
+solution. But that there is no disagreement that the solution
+has to involve basically all of the above: has to involve
+mandatory spending, discretionary spending, tax reform, and the
+revenue side, in one form or another. And that there is no
+disagreement that we are heading towards a debt crisis which,
+when the Chairman asked his question, What does it look like? I
+think I heard you all pretty much say, It looks really ugly.
+And maybe, this is my words, not yours, but maybe like
+September, October of 2008, only a lot worse. And that it is
+probably coming--we have five years or less to solve the
+problem. Did I misstate anything?
+ Okay. If that is the case, that we are facing a really
+ugly, ugly economic scenario, for anything that any of us in
+this room care about, and we have five years or less to deal
+with it. And the entitlements, mandatory spending, have to be
+part of the solution because they are such a large chunk of
+spending. Can we solve this without reducing costs of Social
+Security, Medicare, Medicaid, and the other entitlements,
+within the next five years? In other words, not changing things
+that might affect five years, or 10 years, or 15 years out, but
+reducing the costs of those programs within the next five
+years. And whoever wants to comment on that can comment. Yes.
+ Mr. Holtz-Eakin. If I could, I mean, there are two kinds of
+urgency involved. Number one is the urgency I think we have
+conveyed about the debt crisis and the fact that reducing
+spending is going to have to be a comprehensive effort, so that
+would include the entitlement programs. The second urgency I
+try to describe this way: think of Social Security. I am 53
+years old. I am the trailing edge of the baby boom generation.
+It has been conventional in Social Security reform proposals to
+exempt those in, for good reasons, or near retirement. And 55
+has been the industry standard for near retirement. If we
+continue to do that, that means you have two years before I get
+grandfathered. If you grandfather me, you grandfather the baby
+boom, which means you have grandfathered the problem.
+ So yes, in the next five years, it is absolutely essential
+that we move, and move quickly.
+ Mr. Campbell. Okay. Other comments on it, Mr. Podesta, did
+you, go ahead, oh sorry.
+ Ms. Reinhart. Very briefly on the five years. I think there
+is a second scenario that I would like to put on the table,
+which is death by a thousand cuts. And it is still death. And
+that doesn't involve a big blowout crisis, but a stalling. And
+so, my own view is that when it comes to the budget we really
+should leave no stone unturned because of the orders of
+magnitude. And the need to act quickly, I think, is in my view,
+imperative. But your point about no stone unturned is, I think,
+called for, by the order of magnitude.
+ Lastly, let me say that the prospect of a delay does not
+necessarily mean that we are going to have a crisis tomorrow.
+And I don't know whether I am more worried about not having a
+crisis tomorrow or muddling through, in Japanese style, for the
+next 10 years.
+ Mr. Campbell. Thank you. Mr. Podesta.
+ Mr. Podesta. Mr. Campbell, I think the big numbers really,
+are on the health care side, and particularly in Medicare. So I
+think that continuing and accelerating, the President has some
+ideas in his current budget, on how to do that. Cost
+containment, on the health care side, both in the public
+programs and in the overall health care system, including in
+the private sector system, by changing the way we deliver
+health care, and reducing the overall costs. It is really, I
+think, the thing that is the most needed and it is going to do
+the most to contain the big surge in the projections that Mr.
+Holtz-Eakin talked about.
+ I don't think anybody anticipates that tax rates are going
+to climb to those levels. They never have, they never will. But
+they need to be consistent with the commitments we have at a
+time by 2020, 20 percent of our population is going to be over
+65. And, as I noted in my testimony, in 1965 when Medicare and
+Medicaid was passed, nine percent was over 65. We are going to
+have to have revenue to do that, but we are going to have to
+have deep restraint.
+ With respect to Social Security, just very briefly, I don't
+think, in the short term, it really compounds this problem. It
+is a solvable problem. We have thrown out a full-blown plan to
+get to 75 years, at my center, have thrown out a full-blown
+plan to get to 75 years of actuarial integrity, and strengthen
+the bottom, restrain the top. It has some near-term effect on
+the deficit and debt, but not much.
+ Chairman Ryan. Thank you. Ms. Schwartz.
+ Ms. Schwartz. Thank you, Mr. Chairman. And thank you,
+panelists. I think, pretty much, we have all talked. And I want
+to thank some of you, particularly, for the important work that
+you have done in helping to put out very clear ideas out there,
+about how we can, and must, reduce this deficit.
+ Let me just disagree, if I may, with the previous question,
+at least as a beginning premise that there is disagreement
+about how we got here. I think, except possibly for the first
+speaker, there has been pretty clear agreement about how we got
+here. The only reason to go back over that at all is that we
+don't repeat negative history, that we don't actually believe
+that tax cuts pay for themselves, which there is some agreement
+on. Or that it doesn't matter if we actually have two, three
+trillion dollars of unpaid-for war, or tax cut, or additional
+health benefits. I mean, it is really clear. I think all of you
+would agree, you are all nodding, that in fact the way we got
+here was, and the way this President inherited an enormous
+deficit, and a terrible recession that reduced revenues, were
+expenditures that were not paid for by the previous
+administration.
+ I know the other side doesn't want to hear that, but that
+is the reality. So we have inherited that problem. Tax cuts of
+a trillion dollars for the wealthiest two percent of Americans,
+that they want to continue unpaid for. The Part D prescription
+drug benefit for Medicare, which was the largest growth in the
+entitlement of Medicare: a trillion dollars, unpaid for; they
+don't want to talk about. We think we ought to do Part D, but
+we ought to pay for it. And, and of course the wars that cost
+us a trillion dollars.
+ So I think we have agreement on that. And we also have
+agreement that we have to tackle spending. And that includes
+the current year, which we have already offered and passed $50
+billion this current year, almost $50 billion in cuts. So the
+issue really is going forward. Can we, and this is going to be
+a debate that is pretty clear, so they all want to know what
+your answer is. Can we solve the problem, the serious, serious
+problem of the debt this country is in, and the cost of the
+interest payments on that debt, simply by tackling twelve
+percent of our budget on spending cuts in non-defense
+discretionary?
+ That is, so far, the only action that the other side has
+taken, is to say we have got to have dramatic cuts in twelve
+percent of our budget. Not defense. Not on the tax side, tax
+expenditures, apparently, are not expenditures, as far as the
+other side is concerned. That is serious from our point of
+view. So my two questions are: Is it true that we can actually
+tackle this problem long-term by simply, and it is a big deal,
+cutting education, cutting infrastructure, cutting investments
+that the government makes today, in a fragile economy? Will
+that get us there.
+ And secondly, my question is: What if, in fact, we do
+nothing on investments for the future? Mr. Ryan talks a lot
+about investments for our children. We all make investments for
+our children; it is usually called education, helping them go
+to college, helping them be able to be prepared. What if our
+nation does nothing? What if the other side continues to reject
+the President's proposal that we not only cut, but we make
+investments for the future so we can grow economically in a
+global marketplace, that we can be economically competitive?
+Can we be the great country that we have always been,
+economically and politically, if in fact, we do nothing about
+investments for our future, to grow the economy?
+ So my questions are simple, and I am going to start with
+Maya, because you, I think, were very clear in articulating the
+importance of everything being on the table: tax expenditures,
+and spending, includes DOD, and making the investments. And I
+would like Mr. Podesta, also, to speak. So Ms. MacGuineas.
+ Ms. MacGuineas. Great. Thank you. I mean certainly when we
+think about where we have come from there is so many
+contributing problems to where we are, right? We ran deficits
+for a decade when we should have been running surpluses. You
+want to balance the budget over the business cycle, or
+something like that. So we came into this problem in a weakened
+fiscal state. We then were hit with a terrible economic
+downturn which caused us to enlarge our deficits, both because
+of the economy and the policy responses.
+ And now, the biggest problem that we face has always been
+there: the long-term spending problem fueled by health care and
+aging, which was a long-term problem, we delayed taking action,
+it is now at our doorstep. So we sort of are getting hit with
+all the fiscal problems you could have.
+ Ms. Schwartz. I only, I only have a couple seconds left,
+but I wanted John Podesta to answer as well.
+ Ms. MacGuineas. Okay, well then let me quickly just agree
+with you in terms of investments, that absolutely, we should
+not be shortchanging the piece of our investment budget. We
+should expand this discussion beyond the twelve percent of the
+budget to the entire budget. But I also think we want to think
+about reorienting our budget. Because so much is focused on
+consumption; we need to think about retargeting inefficient
+spending and spending on consumption, and move it towards
+investment so those dollars are better spent in a time of
+fiscal austerity.
+ Mr. Campbell [presiding]. Okay. Next. Mr. Calvert.
+ Ms. Schwartz. Thank you.
+ Mr. Calvert. Thank you. And I am an optimist by nature, but
+being on this committee, it is difficult.
+ You know, we talk about revenue and, of course, spending
+and I would remind the gentle lady that we may have cut $60
+billion, but the United States Senate has not determined yet
+that we are cutting anything. So as Mr. Rayburn used to say,
+Our friends on the other side are our adversaries. The Senate
+is the enemy. So that is where we are at. I think we can all
+agree with that.
+ One thing I was looking at on the chart, the ring of fire:
+Italy, Japan, France, Ireland, U.K., Greece, and of course
+U.S.A. in the middle. One thing that you notice, or at least I
+notice on that chart, is that the one thing that U.S. has
+different than the rest of these countries is we have
+resources. And I look at the chart, the countries outside that
+chart, for the most part, Norway, the Netherlands, and
+Australia have resources. And the United States, you know, we
+are a country that puts extension cords out everywhere, you
+know, into the Middle East, and our friends in Canada and
+Mexico. And we extract resources from them, rather than from
+ourselves. And we have significant resources within our own
+country, and certainly in Alaska and in the upper State.
+ If, in fact, we are talking about revenues, and I just had
+a hearing the other day, I am an appropriator, I confess. But
+we were having a meeting the other day about the former MMS
+left $50 billion on the table in not collecting revenues from
+metal resource extraction. If, in fact, the United States went
+out after its own resources, extracting those resources, and
+the revenue that brings to the country, and obviously, national
+security benefits and the rest, don't you think that would be a
+significant part of turning this country around? I know the
+entitlement spending part is the biggest issue that we have got
+to deal with. But when you say everything is on the table,
+don't you think when we are paying $4 a gallon for gasoline,
+that that is a tax? That every consumer out there right now is
+paying a considerable tax because we don't face up to the
+problems in our own country, and developing our own resources?
+So with that, I will just leave it to the committee.
+ Mr. Podesta. Well Mr. Calvert, I think that you put your
+finger on something that is really quite important, which is
+the interrelationship between our dependence on oil and the
+fact that 50 percent of our trade deficit comes from importing
+oil, and the ability to move to a different kind of energy base
+in this country, and what that would do for the economy. How it
+would spur innovation, job growth, and business formation.
+ I think the biggest place to look right now, in that
+regard, is both, clean technology, the kinds of things that are
+going to make the economy more efficient, including in the
+building sector as well as in the transportation sector; and
+then utilizing the vast resources we have of natural gas that
+are available to us, need to be done in a smart way. The New
+York Times has been writing a bunch of articles about what is
+happening in Pennsylvania right now. They need to be done in a
+smart way, but if we could move more of our transportation
+fleet to natural gas it would have a dramatic impact, I think,
+on our transportation sector, in particular.
+ And the problem with keeping, down the track, of just
+drilling for oil even in the Gulf, which you know, I think we
+need to do, is that it just keeps that dependence alive on
+foreign oil, which is at 60 percent now. So I think we need a
+comprehensive strategy to use all the resources that we have in
+our country.
+ Mr. Calvert. I agree on all the above, I agree with you.
+Let's kind of move across here.
+ Mr. Holtz-Eakin. I think two points. I mean, number one, I
+don't know the numbers on the receipts that would flow into the
+Treasury if we had greater exploration and extraction. I doubt
+it solves the problem.
+ Mr. Calvert. I am not saying that it solves the problem.
+ Mr. Holtz-Eakin. We have to be realistic. The second thing
+is that, in the end, our current account deficit is the
+difference between how much we save and how much we invest. And
+while, if we don't change how much we save and we don't change
+our investment, we can change the nature of our energy
+portfolio dramatically. We will just change the composition of
+our trade deficit. It will still be there. So we have to change
+the fundamentals. And our biggest problem with our saving is
+our federal budget deficit.
+ Mr. Calvert. Well I would just make the point, if folks
+back home are spending four bucks for gas, they don't have a
+lot of money to save even for a pizza and a beer on the
+weekend. Thank you.
+ Mr. Holtz-Eakin. The last thing to remember on this, and I
+know that time is up, is that if you are going to change the
+energy portfolio, that is costly. And we are coming out of a
+recession; and to change our energy portfolio dramatically is
+not a benefit, it is a cost. It might be worth it, we can have
+that debate. But let's be clear, it is a cost.
+ Mr. Campbell. Thank you, Mr. Holtz, I am going to try and
+be a little ruthless on the time so we make sure we get to
+everybody. Mr. Blumenauer.
+ Mr. Blumenauer. Thank you. Although I would note that if we
+drain America dry of our oil it goes into a global pool. We
+only consume 20 percent of it; it is kind of goofy that we
+consume 20 percent of it. But it is a global price. And to the
+extent to which it drives anything down, most of the benefit
+will flow through the Chinese, to the Japanese, to the
+Europeans. I don't know that we are going to get anywhere on
+that. But I want to come back to gas prices in a moment.
+ But, again, the more I sit on this committee, and listen to
+witnesses like that, the more optimistic I get. Because having
+had a chance to look at various ups and downs in the government
+process over the last 40 years from all different levels, we
+end up affirming Churchill's aphorism that, You can rely on
+Americans to do the right thing after they have exhausted every
+possibility. I think we are reaching that point now on the
+federal level, and it is of a greater magnitude. But it seems
+to me that the whole issue underlying this is how we do
+business.
+ And I actually think there is a lot of agreement that is
+coming forward. I think there is an opportunity; I feel guilty
+for being away from a Ways and Means meeting right now where we
+are talking about tax reform. And I think there is an
+opportunity to change that system. I think there is a dramatic
+opportunity, in this Congress, to change how we subsidize
+agriculture in this country to help more farmers and ranchers,
+and spend less money doing it, with less market distortion. And
+I think there is bipartisan interest in pursuing that.
+ And I agree, Social Security, any 10 people around a Rotary
+Club table could, in 30 minutes and a website, can come up with
+three alternatives that are largely going to represent what we
+will ultimately do. I hope, and I agree with Ms. MacGuineas,
+let's get to some specifics.
+ And I would like to focus on one specific. Because for over
+50 years, there has been an agreement in this country, going
+back to President Eisenhower, about a self-supporting trust
+fund for infrastructure investment. And that always, to this
+point, has been bipartisan. Ronald Reagan, in 1982, when
+economic times were tough, supported a five cent increase in
+the gas tax, a user fee that helped us move forward. Yesterday
+we had lunch with Senator Simpson, Mr. Bowles, and they had
+proposed a significant and periodic increase in the gas tax to
+be able to deal with both problems with that, and the fact that
+we are draining the general fund to prop up something that has
+been sub-supporting to this point.
+ We have record unemployment in the construction industry.
+We have infrastructure in every one of our communities that is
+falling apart, for roads, transit, and water. Isn't this an
+area where we could move forward with a tax increase or user
+fee that actually has broad support? This panel, in a prior
+hearing, had people from the Chamber of Commerce, AAA, and
+construction unions come in and testify in support of an
+increase. Is that part of a solution that might get us moving
+in this direction, put people to work, protect the budget
+deficit, and maybe even reduce some dependence on foreign oil
+at some point?
+ Anybody want to take that on the panel?
+ Mr. Holtz-Eakin. So I will be brief. I mean, there was a
+report that came out of the bipartisan policy center from a
+commission that I served on two years on transportation reform.
+And I would encourage everyone to look at that. What it says
+pretty clearly is, number one; we have to reform the
+transportation programs, because we have never identified, what
+is really the federal role. We know that, in principle,
+infrastructure is important, but we have never decided what is
+the appropriate role for the federal government.
+ We have a hundred programs over there, and we proposed
+creating four. And then you have to finance them effectively.
+And I completely agree with that. One thing to note is that
+many people believe the gas tax itself is obsolete, and that we
+need to go to an alternative.
+ Ms. Reinhart. Let me just point out that I think we have to
+be very discriminating and very clear about how we define
+infrastructure. Japan spent a massive amount on infrastructure
+in an effort to prop up the economy, and I am not an expert in
+that area, but it has to be very focused on productivity
+enhancements.
+ Ms. MacGuineas. Yes, I agree with so much of what you said.
+I think we need to focus far more on investment spending than
+consumption spending, and this is one of the more important
+areas. Second, we need to tax more the things we want less of,
+like pollution, through energy taxes, not the things we want
+more of, like work and saving. Third, I think the commission's
+proposal on how to not spend more than the tax raises, and to
+increase the tax to cover our highway costs and other
+transportation costs is a very good idea.
+ Fourth, I do think we have to make sure that what we do in
+terms of investment we do very well. We don't want to run the
+risk of suddenly calling everything investment, you know, farm
+subsidies, that is investment, and suddenly it loses all
+credibility. We want to do investment that really has
+productive payoffs.
+ Finally, I want to increase investment spending, and I
+also, on the tax side want to do some, I would call,
+sweeteners. I want to lower the corporate tax rate. These are
+the things that I think should be part of a broad,
+comprehensive deal, as sweeteners, to help move them forward. I
+would be worried to do them on their own.
+ Mr. Campbell. All right, thank you. Have to cut off now,
+and go to Dr. Price of Georgia.
+ Mr. Price. Thank you, Mr. Chairman. I want to thank the
+panelists as well. And I think there is a remarkable unanimity,
+as has been discussed, the need to address the spending side in
+both discretionary and entitlement, automatic spending, and how
+we get there is the challenge. It seems that every one of these
+comments in this committee starts with some finger pointing at
+the other side, and I would just remind my friends on the other
+side of the aisle that the Budget Committee's responsibility is
+to come up with a budget to provide direction for the country.
+And in the last Congress, of course, there was no budget. So as
+we grapple with these challenges, I think it is important to
+remember that.
+ I would also point out, and I don't know if we can bring up
+S6, but it is the deficit record by President. And, here it is.
+And you kind of bop along there for, for, with some deficits in
+the 200 to $400 billion range, and under a Democrat president
+and Republican Congress, we balanced the budget appropriately
+and had some surpluses. And then you see what has happened
+under the current administration. I think all of us can look at
+that, certainly the American people look at that and say, What
+the heck is going on?
+ In terms of, I don't know if we could put up S2, which is
+the tidal wave of debt that is coming, and the red chart here,
+the red line here that you can see, it increases
+astronomically, and clearly unsustainable. And then, finally,
+the issue that I want to get the panel to weigh in on is
+something that hasn't yet been talked about to a significant
+degree, and that is the issue of short-term debt and interest
+rates.
+
+
+
+ All of the presumptions, candidly, on both sides, have low
+interest rates. If interest rates increase any significant
+degree at all, then it blows up the models that all of us have.
+So I would ask you each if you would comment on the
+consequences of any increase in interest rates, and what, if
+anything, we are able to do about that.
+ And then, also, if you can touch on short-term debt, the
+chart that I had wanted to refer to has a significant increase
+in the short-term debt, the debt that comes due within a year
+to three years. And we are up in the 60 percent, or pushing the
+60 percent range on that. What are the consequences of that? Is
+there anything that we can do about that? So if I could ask you
+to address interest rates and short-term debt, please.
+ Mr. Holtz-Eakin. I will just be real brief. I mentioned
+this in my remarks, we have moved to very short-term financing,
+it is like financing on a teaser rate. And if we get a sharp
+spike, we are going to have to roll over a big fraction of
+Treasuries at much higher interest rates; that is going to feed
+through the budget, it is going to feed through all the
+interest rates in the economy, whether they are mortgages, or
+car loans, or anything else. So, we are exposed, both in terms
+of a financial management point of view, and also an economic
+point of view.
+ Mr. Price. And anything that we can do, I would ask to
+address that issue, as a Congress.
+ Ms. Reinhart. Let me say that a characteristic, when
+Chairman Ryan asked, of what a crisis looks like, in the run-up
+to debt crisis, in the run-up to severe financial crisis, you
+see the rise of short-term debt, in total debt. That is
+worrisome. What has been done? Some of the stuff that was done
+was quite out of the picture now. In 1951, we actually had a
+debt conversion, called the Treasury-Federal Reserve Accord,
+which took marketable medium to short-term debt and converted
+it to 29-year bonds. Now we don't call that a restructuring or
+a default because an interest rate sweetener was offered. But
+it was, of course, under very different circumstances.
+ But what I am suggesting is that if we are faced with a
+sudden rise in interest rates, we may see a return of what is
+called financial repression. And captive audiences, like
+pension funds and financial institutions would be targets. It
+has happened.
+ Mr. Price. Maya.
+ Ms. MacGuineas. CBO recently, a couple years ago, I guess,
+did a great study on this showing the massive costs that are
+affiliated, I think it was at the request of Congressman Ryan,
+the massive costs that are affiliated with increases in
+interest rates. Obviously we are highly vulnerable to that; if
+you look at where we are right now. It is like a credit card
+teaser rate, right, it is luring us in, we are borrowing more,
+Look, rates are low, we can keep borrowing. When those rates go
+up, we are incredibly vulnerable.
+ There is another issue which I don't know exactly what to
+make of it, but when QE2 ends this summer, nobody knows exactly
+how that is going to play out. We don't know whether it is the
+flow or stock of debt that is going to have an effect. But we
+are more vulnerable than we would have been.
+ Third, you asked what we could do, and you made the first
+point. Stop finger-pointing and come up with specific
+solutions. It is the only thing we can do to be less vulnerable
+to the upward tick in interest rates.
+ Mr. Price. Great. John.
+ Mr. Podesta. Well, I basically agree with Maya's points. I
+think that they, right now we don't see that spike in interest
+rates, but we are vulnerable to it. And I think we need to
+ensure, as I think Mr. Bernanke and the Fed have tried to
+ensure, that this recovery gets roots, that jobs begin to grow,
+that is the most important thing to, I think, solve both the
+debt crisis and the jobs crisis and the economic crisis, over
+the long term.
+ But I think the one thing that Congress could do is, you
+know, we are now repeating ourselves, is to come up with a
+framework in which the debt stops growing. And I think if you
+could do that on a bipartisan basis over the next couple of
+years, that would, I think, settle these markets down.
+ Mr. Price. Within the five year window. Thank you.
+ Mr. Campbell. Thank you, Mr.Podesta; Mr. Pascrell of New
+Jersey.
+ Mr. Pascrell. Thank you, Mr. Chairman. You know, I agree
+with my friend from Georgia that we can't point fingers. I
+would rather put it a different way, we need to put things in
+context. We need to put things in context so we understand. You
+know, sometimes I get the impression in this committee, and
+other committees that deal with the budget, spending, and
+revenue, that we are involved in a gigantic science project.
+And all science projects turn out very positive. They all do.
+But, you know, we can have brilliant results, it will have very
+little positive impact on the people we represent in reality.
+ See, I read a story this morning about a quadriplegic guy
+from New Jersey. His parents are fighting insurance companies
+over denial of 24 hour care. So, you know, we are not simply
+dealing in a numbers project here. We are dealing with human
+beings. And we have to deal with the numbers, there is no
+question about it. But those numbers need to be placed in
+context so we have a Gestalt, an overview of what really is
+happening.
+ We are all to blame, and we are all to gain. There is no
+one party that caused this mess. I think we all should agree on
+that; that is a good starter. But I look at reports, for
+instance, from the SMP indexes in the year ending December 10,
+health care costs covered by commercial insurance rose by 7.75
+percent, as measured by the SMP health care economic commercial
+index.
+ Medicare claim costs associated with hospital and
+professional services for patients covered under Medicaid
+increased at a more modest 3.27 percent rate, over the ending,
+as of December, as measured by the, the SMP.
+ So, health care reform is important in the, quote unquote
+entitlement, or, better known, a sure objective, Obamacare,
+when you take a look at it; it is interesting. One third of
+that entire document talks about the budget, we need to put
+that budget together, dealt with Medicare and Medicaid. If we
+read the bill, all 975 pages, because our 2,200 page document
+was rejected, so that we really accepted the Senate version.
+ According to the CBO, the Affordable Health Care Act
+reduced deficits by $210 billion over 10 years, and by more
+than one trillion over 20 years, the most significant deficit
+reduction since 1997, the Balanced Budget Act, which I proudly,
+and some of us may have voted for.
+ So, Mr. Podesta, I have always enjoyed working with you
+because you are a pretty straight shooter, I think Mr. Ryan is
+a straight shooter, Chris is a straight shooter. But when you
+put things in context, we might come out with different
+answers, I think. We have been attacked, on our side, with
+accusations that neither we nor the President has come forward
+with proposals for entitlement reform, which we say, if we are
+going to look at everything in the budget, that is one of the
+things we will have to look at. We certainly need to look at
+it. I reject the claim.
+ Last Congress, we passed the Patient Protection Affordable
+Care Act. As I said, one third of it is devoted, if you read
+it, if you get a chance, in the document, I can list 17 places,
+Mr. Chairman, and the Ranking Member. Seventeen places. The
+first step of entitlement reform was received with attack ads
+claiming 500 billion in benefit cuts to seniors in death
+panels. I heard somebody mention death panels yesterday.
+ To date the only action this majority has taken at
+entitlement reform is repealing the reforms. So Mr. Podesta,
+are you familiar with the roadmap?
+ Mr. Podesta. Yes, Mr. Pascrell.
+ Mr. Pascrell. Mr. Podesta, are you familiar with how it
+proposes to control costs in Medicare?
+ Mr. Podesta. It basically voucherizes Medicare.
+ Mr. Pascrell. I am sorry?
+ Mr. Podesta. It creates a voucher in Medicare. It
+essentially shifts costs from the federal government onto
+recipients.
+ Mr. Campbell. Mr. Pascrell, your time has expired.
+ Mr. Pascrell. Can I finish my sentence, my question?
+ Mr. Campbell. Okay. But he won't be able to answer. I am
+just trying to get everybody a chance.
+ Mr. Pascrell. Thank you. Has the cost of health care risen,
+as compared to inflation? That is what we are concerned about.
+And what happens in the voucher system is you never, ever, ever
+catch up.
+ Mr. Campbell. Thank you, Mr. Pascrell.
+ Mr. Pascrell. So let's be, put everything on the table in
+context, Mr. Chairman. Thank you.
+ Mr. Campbell. Time has expired. Thank you, Mr. Pascrell.
+Mr. McClintock of California.
+ Mr. McClintock. Well, Professor Reinhart, you mentioned
+that there has been one other time in our history when we had
+proportional debt. I am hoping that history offers us some lab
+notes. How did we get out of that? And we have also had several
+other spikes right after the Assumption Act in 1792; we
+suddenly had 35 percent debt. We were able to finance the War
+of 1812, and the Louisiana Purchase, and pay off all of that
+debt by 1830. What lessons can history offer us?
+ Ms. Reinhart. Okay. Let me be very brief. One thing that
+makes the situation of more concern than the end of World War
+II, which was our last really big debt spike, is private debt.
+At the end of World War II we were lean and mean. Households
+and firms, financial and non-financial, were lean and mean. So
+it was exclusively a public debt issue. But public debt now is
+much more broadly defined. We have a lot of contingent
+liabilities.
+ But how did we get out of World War II, well, making cuts
+after war was a lot easier. But let me also say, I mentioned
+the issue of financial repression. That was actually a tax, but
+it was a tax that was never legislated. We kept interest rates
+very low through a lot of financial regulation. We created a
+lot of markets in the financial industry for holding government
+debt. That was a factor. We also ran balanced budgets for an
+extended period of time.
+ So you had the post-war reductions, which were somewhat
+more obvious than they are today.
+ Mr. McClintock. About $85 billion.
+ Ms. Reinhart. Indeed. There was a series of balanced
+budgets, even some surpluses. And there was a lot of financial
+repression; do not underestimate the power of that. It amounts
+to about three percent in revenues, meaning lower interest
+costs and actual liquidation of debt. That is how we got out of
+debt out of World War II.
+ Mr. McClintock. So we had repressed demand, plus dramatic
+reductions in spending.
+ Ms. Reinhart. Indeed.
+ Mr. McClintock. And then actually produced balanced
+budgets. Which gets me to the next question, and that is, we
+talk about taxes and deficits as if they are opposite things.
+Aren't they really the same thing? Isn't the deficit is simply
+a future tax? Aren't those merely the two ways that we finance
+spending? And isn't spending the principle?
+ Ms. Reinhart. And this is now seat of the pants because I
+have not tested this empirically, as I have other things, but
+one of the reasons why we find high levels of debt cause low
+growth, or associate it with low growth, has to do with
+anticipated future uncertainty, either of lower benefits or
+higher tax liabilities.
+ Mr. McClintock. So, to borrow from the Clinton
+Administration, with obvious apologies, it is the ``spending,
+stupid.''
+ Ms. Reinhart. The point I am trying to make is that the
+last time we were in this, we really did touch all bases. We
+had severe, or sharp spending cuts.
+ Mr. McClintock. If I may, I am going to need to go to Mr.
+Podesta for a moment. Mr. Podesta, you mentioned that the state
+of the economy at the outset of the Clinton Administration, we
+were running huge deficits; we were in some economic
+difficulty. The Clinton Administration ended up reducing
+federal spending by a full four percent of GDP, which is
+miraculous, produced the only four surpluses that we have had
+in the last 40 years. It approved the biggest capital gains tax
+cut in U.S. history, it tackled entitlement spending with
+welfare reform. We were doing pretty well at the end of that
+administration, as you pointed out.
+ Mr. Podesta. Well, I agree with that, Congressman. I think
+that was a combination. We did increase revenues in 1993, and
+painfully, because it led to, at least in part, losing both
+Houses of Congress in 1994, but they did increase revenues. But
+he did restrain spending over the whole period of time, and
+that resulted in an economy that produced 10 times as many
+jobs, much stronger wage growth.
+ Mr. McClintock. Cut spending four percent. Now, George W.
+Bush takes office, and ends up increasing federal spending by a
+full two percent of GDP. He approved the biggest increase in
+entitlement spending since the Great Society, he embarked on
+massive stimulus spending, and as we all know, the condition of
+the economy and the budget wasn't so hot at the end of that
+experiment. So my question is why do we keep employing policies
+that we know don't work, and instead go back to those policies
+that your administration employed, by reducing spending, that
+the Truman Administration employed, that the Reagan
+Administration employed, all of which were marked by
+substantial economic progress and advancement.
+ Mr. Campbell. Just to remind members, the five minutes
+includes the answer time.
+ Mr. Podesta. Well, I will send you a note on that,
+Congressman.
+ Mr. Campbell. All right. Mr. Tonko of New York.
+ Mr. Tonko. Thank you, Mr. Chair. Mr. Chair, I know that we
+have colleagues here from both sides of the aisle that share my
+appreciation for American history, and I would like to use my
+time here today to explore a few elements of our shared past.
+ Mr. Holtz-Eakin, certainly you were the director of the
+Congressional Budget Office from 2003 to 2005. The CBO, as we
+know, is a non-partisan institution. So I would like to
+highlight some of your non-partisan observations from that
+time, as I think they were insightful and fair, and have real
+meaning, I think, for the debate that we have here today.
+ This is a, a Washington Post article from January 27 of
+2004, and CBO's annual budget report had just come out, under
+your direction, showing that the Bush Administration had asked
+for more than $1 trillion, had added more than $1 trillion to
+the deficit in just six months, and that that government debt
+could more than double if President Bush succeeded in making
+his tax cuts permanent. According to this article, you noted at
+that time that the massive deficits that would result from
+extending the Bush tax cuts, which were grossly skewed to favor
+the wealthy would, and I quote, lower national savings, reduce
+economic productivity, and ultimately, ultimately, curtail
+economic growth. Is that accurate?
+ Mr. Holtz-Eakin. That is what I said, yes, absolutely, and
+I continue to worry about deficits; that is the implication to
+have.
+ Mr. Tonko. This is a Washington Post article from one year
+later, on January 27, of 2005. You were still at CBO, and due
+to the rising cost of the wars in Iraq and Afghanistan, the tax
+cuts for the wealthy, and a prescription drug plan that wasn't
+paid for, things were looking worse. You are quoted in this
+article in saying, again, and I quote, We are doing a little
+bit worse over the long term, and it is largely due to policy,
+policy changes. Could you tell me, is that quote accurate? And
+which political party was in charge of the White House, the
+House of Representatives, and the Senate at the time?
+ Mr. Holtz-Eakin. I have no reason to believe it is not
+accurate, and Republicans controlled both Houses of Congress
+and the White House.
+ Mr. Tonko. Finally, this is an op-ed that you posted
+through your organization, the American Action Forum, just two
+weeks ago. And it reads, There has been talk that the House
+would pursue a series of short-term, two-week CRs, instead of a
+full-year CR. There could be no greater management nightmare
+than the inability to plan for more than two weeks at a time.
+And my point is that I agree with you on that point, certainly.
+And though we may not agree on everything, I think you have
+offered this chamber very sound advice in the past.
+ I was not here in 2004 and 2005, but I cannot help but
+think that if our leaders would have listened to you then, we
+might not be in the place we are in right now. Today our fiscal
+challenges are so great that the Republican leadership in our
+House is proposing calling for cuts to programs that range from
+preschool literacy programs, to senior health benefits. And
+yet, we still refuse to look at the policies that really got us
+here. And two wars on the credit card, the deregulation of Wall
+Street, and tax cuts for billionaires, simply didn't appear to
+be the formula for success.
+ No matter how many times we say it, the Koch Brothers are
+not a small business, and I do not believe they need taxpayer
+dollars to fund union-busting campaigns in Wisconsin. I don't
+believe it any more than I believe that if we are going to give
+oil companies bigger subsidies, they will someday become
+charitable institutions that won't gouge my constituents at the
+pump, and bring in record profits in the midst of the Middle
+East crisis.
+ Tax cuts for the wealthiest two percent of Americans were a
+bill of goods sold to us on the promise that they would create
+jobs, but even before the financial meltdown, they failed, at a
+cost of trillions of dollars. If we are going to spend that
+kind of money, America should be better for it. But while CEO
+pay doubles and triples throughout the decades, the purchasing
+power of the minimum wage has declined by nearly 10 percent.
+Where is that American? Where is that fair?
+ According to the CIA, the United States ranks 42nd globally
+in income and equality, putting us in the same range as Uganda,
+Nicaragua, and Iran. We cannot move forward this way and hope
+to compete economically with numbers like that. And we just
+need to address, I think, the inequitable treatment in our
+situation which has really seen a growth, exponentially, in the
+top one percent of wealth in this country and its income
+availability. And how can we go forward without strengthening a
+middle class in this country? It just confuses me economically,
+and irritates me programmatically. Thank you.
+ Chairman Ryan [presiding]. Thank you. Mr. Ribble.
+ Mr. Ribble. Thank you, Mr. Chairman. I have been listening,
+somewhat entertained here this morning, but disappointed in
+several ways with some of the hyperbole with massive tax cuts
+and all this kind of stuff, and how our deficit is because of
+massive tax cuts. And that revenue after the tax cuts in 2003,
+by OMB's numbers, went up in the next five years by 100
+billion, 371 billion, 624 billion, 785 billion, 801 billion,
+and in 2010, after the global meltdown overnight, over 2003
+numbers after the tax cuts, up 400 billion.
+ So, revenue is a difficult thing to really project what is
+going to happen, quite frankly. I have run my own business for
+30 years. When we do budgeting I realize that a cut in spending
+is a direct savings, and something I can control 100 percent. I
+can choose whether to spend the money, or not to spend the
+money. I have the choice. I cannot choose whether a customer
+will buy from me, whether my business will grow. I can plan and
+strategize and try to do those things. And in the broad
+economic sense, addressing this strictly on the revenue side is
+nearly impossible. Not that it shouldn't be done, not that we
+shouldn't include that. But I do know that on the spending side
+we do have lots of control. And a dollar not spent is a dollar
+saved.
+ I actually have a question for Ms. MacGuineas. I
+appreciated your testimony a lot, and I want to give you a few
+minutes here to expound a little bit on something that I have
+talked about for about the last six months, and that is the
+psychology of the American consumer and the American business
+owner. You address it a little bit.
+ We have a psychological problem in this country and it
+relates to and affects economic growth, don't we? And could you
+talk a little bit about that? You didn't have enough time in
+your comments to do that.
+ Ms. MacGuineas. Great. Thank you for the opportunity,
+because I do think that the lack of certainty that surrounds
+businesses and households is certainly a factor in keeping the
+economic recovery from moving forward as much as we want it to.
+And if you look at, sort of, the ideal model for fiscal
+consolidation, and how to deal with the fact that we are also
+coming out of a very weak economy, most people have said that
+what we want to do is put in place a multi-year plan that
+doesn't have to phase in so quickly, because you can still
+leave some time for the recovery to take hold. So you wouldn't
+have to have tax increases or spending cuts very, very early
+on. We recommended starting them next year. As long as that
+plan was credible, and so that markets believed that that plan
+was going to be implemented.
+ I think that plan, to be credible, would have to be
+bipartisan, it would have to be put in statute, and it would
+have to come with budgetary triggers, so if those changes
+weren't made, that changes would come automatically. That would
+allow households to know what is going to happen. Importantly,
+because of all the capital on their balance sheets right now
+that would allow businesses to know what is going to happen.
+ If you look at part of the model in London, when they are,
+in England, going through their consolidation efforts, they
+have hoped that businesses would, kind of, be the drivers of
+growth, and fuel the recovery. There haven't been as many
+policies to help enable that, so you want to surround that with
+policies that allow businesses to help be an engine of growth
+in this recovery. We can't look to government to spend our way
+out of this, or households, who are over-indebted, to spend our
+way out of this. We do want businesses to be the engine of
+growth. None of that works in place, in terms of reassuring
+markets, letting households know what to expect, in terms of
+tax and spending policies, or having businesses invest in the
+longer term, unless we put in place policies that are credible,
+and likely to stay in place, and will put us on a glide path to
+something stable.
+ Mr. Ribble. How long have you been studying this topic, and
+this whole issue of economics here, as it relates to this
+budget crisis? Been a few years?
+ Ms. MacGuineas. It has been a few years. We haven't made
+that much progress.
+ Mr. Ribble. Do you think that, that the Congress has acted
+credibly in the past? Are there examples that we can point to
+that might help us?
+ Ms. MacGuineas. I mean, sure, the budget deals that we had
+in '90, and '93, and '97, all of those are different models,
+when we fixed Social Security, they were all different models
+for people coming together. There were a number of factors that
+made them work. You need leadership, you need real leadership.
+You need an understanding in the public of the problems and a
+commitment to fixing them. You do need bipartisan cooperation
+for anything that is hard, otherwise there is going to be
+immediate pressure to take back whatever policy changes you
+have put in place. And I do think that public component is
+actually quite important. You need people to understand.
+ Remember there was the Ross Perot moment; it kind of
+changed the whole world, right? But you need people to
+understand why this is something that you do for the country.
+And the narrative really has to be that this is part of a
+successful growth strategy. It is not just all about, you know,
+we are the eat your spinach crowd, it is not all doom and gloom
+though; it is about part of building a long term economic
+growth strategy in the country. And I think that has to be told
+to people, and then they are willing to step up to the plate
+and make those changes.
+ Mr. Ribble. That psychology will change, then, won't it?
+ Ms. MacGuineas. Absolutely.
+ Mr. Ribble. Okay. Thank you very much, and I yield back.
+Mr. Chairman.
+ Chairman Ryan. Ms. Bass.
+ Ms. Bass. Thank you. Ms. MacGuineas, I wanted to ask you a
+couple of questions. If I heard you right, I think you said, a
+few minutes ago in your presentation, that several events could
+tip us over the edge, seriously increase the crisis. And one of
+those events could be something going wrong in the states. And
+I really wondered, given what is happening in the states, what
+you meant by that, considering so many of the states are in
+such a deep crisis. California, a couple of years ago, had a
+budget of $110 billion: budget now is $83 billion, and we are
+facing a $23 billion deficit with no real clear way out of it.
+They are attempting a balanced approach in California,
+hopefully it will be voted on in the next week. But I wanted to
+know what you meant. What else could go wrong in the states
+that you are referring to?
+ Ms. MacGuineas. Well, there is certainly the situation that
+states may not be able to pay what they owe on their debt, and
+that this could be the beginning of a cycle of markets losing
+faith in the ability of the U.S. to make good on all of its
+commitments. There are also the structural problems in the
+states, which are a result of the economy. And then there are
+also the long-term problems, that we are all aware of, but
+their pensions and their health care commitments, which are
+obviously unsustainable. And again, much like what is going on
+at the federal level, this is a problem that we need to get out
+ahead of. This is a problem where they, these reforms need to
+take place in advance so that the states don't bump up against
+their limits.
+ Just one final problem with the states that we have been
+seeing is that the information, the data on the states is very,
+very poor. You can't make an apples to apples comparison of
+fiscal positions of various states. And so, transparency is a
+piece of all of this. We need to understand the fiscal well-
+being of the federal government and the states, and right now
+we don't have the information to do that.
+ Ms. Bass. Thank you. One other question. It seems as
+though, in several of your comments, that you were supportive
+of a balanced approach to us getting out of this crisis. And,
+on the revenue side, which I think we spend an awful lot of
+time talking about the spending side, and I would agree we
+certainly need to pay very careful attention to that, and rein
+in spending, but I don't think a whole lot is said on the
+revenue side. And it seemed as though, you talked about tax
+reform, and I know I have certainly attempted that in my time
+in California, and that is very big, very difficult to get to.
+So I would see that as a long term, and something that we
+definitely need to do. But in the short term, in terms of
+revenue, what suggestions would you have? And would you
+include, maybe closing some tax loopholes as part of it?
+ Ms. MacGuineas. Yes. I actually think that the answer to
+that question, what you would do in the short term, closing
+those tax loopholes, is in many ways the right start for the
+long term fundamental reforms, too. I think the fiscal
+commission put out a really, really smart structure, which
+said, let us show you how much we can bring rates down
+aggressively by clearing out all the trillion dollars in tax
+expenditures from the base.
+ Now, realistically, they are not all going to be cleared
+out. But, once you start funneling them back, and you say,
+well, we want part of this to still be there, or we want all of
+this to still be there, you bring up rates accordingly, and you
+actually have the cost of these. So we haven't had a budget for
+tax expenditures, they have been like mandatory spending, on
+automatic pilot. This creates a sense of the tradeoffs, and it
+certainly starts the, the right direction for fundamental tax
+reform, which is broaden that rate base as much as possible,
+bring rates down. And I believe you need to use a piece of that
+revenue to close the fiscal gap. And because tax expenditures
+are so big, there is actually plenty to do on both sides. So I
+think the framework by the fiscal commission is immensely
+helpful.
+ Ms. Bass. Thank you. We attempted the broadening in
+California, too, and everywhere you talk about broadening.
+ Ms. MacGuineas. Somebody likes that tax break, of course.
+ Ms. Bass. Exactly, it is so difficult. But in my remaining
+time, Mr. Podesta, you mentioned that health care spending was
+one of the drivers. And I wanted to know if, in the last few
+seconds, if you could give us your opinion as to whether or not
+the Affordable Care Act begins to address some of the concerns
+you raised around health care spending.
+ Mr. Podesta. Well, Mr. Pascrell went through a list of the
+items in which there is restraint in the Affordable Care Act
+that begins to move that cost curve down. The CBO, as has been
+noted, estimates that it has some savings in the, in the near-
+term budget window, but over a trillion dollars in the second
+20 years, which is really where the money is.
+ I think that the other place to look is to the CMS
+actuarial report from last summer, which indicated that health
+care spending would, would rise just slightly in the United
+States, by .2 percent, but include coverage for 32 million
+people. So I think that, at that point, the trend line is going
+down, whereas if you repealed health care, the trend line would
+continue to rocket up, as it has been for the last decade. So
+it is really important, I think, to be able to fulfill the
+authorities that are included in the Affordable Care Act,
+including the IPAB, the demonstration projects, changed the way
+we deliver health care, get on with trying to put more emphasis
+on primary care, try to get more errors, as the administration
+is currently doing, out of the system, so that we, across the
+board, in both the public programs, and in private sector
+health care, we begin to reduce the cost, which is extremely
+expensive, and not producing the results that we need.
+ Chairman Ryan. Mr. Mulvaney.
+ Mr. Mulvaney. Thank you, Mr. Chairman. My colleague raises
+the issue of the balanced approach, which is something that we
+have been talking about as a committee, both within our party,
+and in a bipartisan basis. I think you have started to see in
+some of the discussion today that a lot of us agree that, in
+fact, I think Mr. Van Hollen actually said that we agree that
+we need to have some spending cuts. What is the right balance?
+I will put that question to each of you, very briefly. What is
+the right balance between spending cuts and revenue
+enhancements, to use a euphemism? Is it 50-50, is it 80-20, is
+it 110 with tax cuts? What is the right balance? Has anybody
+given that any thought? Let us go right to left because Mr.
+Podesta always gets left off at the end, and I am always good
+with starting on the right hand start of things.
+ Mr. Podesta. Thank you. I think that the right balance is
+probably in the arena of 50-50. I think that the Simpson-Bowles
+was two-thirds, one-third. I am looking more at the near term,
+at the course of the next five years; it is probably in the
+range of 50-50. Over the long term, particularly as we get
+these health care costs under control, it shifts, and begins to
+probably look more like two-thirds, one-third. Two-thirds on
+the spending restraint side, one third on the revenue side.
+ Ms. MacGuineas. Great question. When you think about
+balance, two things complicate it; baselines, what baseline are
+you using, and how you allocate interest. I look at this as,
+actually, you could solve the problem on the spending side
+alone, but nobody wants to. There is not a politician who is
+talking about what you would have to do to current retirees. So
+we might as well get realistic, that revenues have to be part
+of it. And I think one of the keys is that that has to be
+combined with very serious structural reforms to entitlements.
+And there has to be an understanding that those revenues are
+going to close the fiscal gap, not to funnel into new spending.
+And then I think we can start being more realistic about that.
+ I don't think 50-50 is the right balance. I think, if you
+look at the problem, it is a spending problem, if you look at
+where the growth in the budget is, and compare it to historical
+averages. But since no one is willing to close it completely on
+the spending side, I think you start at, maybe, 80-20, and you
+end up at, maybe two to one. And you, you do what you have to
+do to get it done. But the problem is a spending problem, and
+both are going to have to be on the table for the solution.
+ Ms. Reinhart. Two-thirds, one-third. And I say that on the
+basis of, simply, demographics. And this is not a short-run
+issue, but a medium-term issue. And a lot of our problems have
+to do with an aging population; this effects both the health
+and the social security side.
+ Mr. Holtz-Eakin. I don't think you should frame the
+question that way. I really don't. I think we get lost in a, in
+a debate over whether the number is eight or nine, we lose our
+way. We need to rethink the government budget from top to
+bottom, identify those things the government can and should do,
+their traditional roles, fund them effectively, and, and build
+a vision for growth and opportunity, and articulate that. And
+there is nothing right now that is going to produce growth or
+opportunity. Congresses of both parties have a long history of
+spending tons very ineffectively and not funding them
+adequately. That has got to change. Spend the money
+effectively; fund it adequately. And let us, let us get started
+fast.
+ Mr. Mulvaney. And here is why I asked the question, and I
+appreciate that. But, if you look at it historically, no one
+has ever been able to turn this type of situation around on a
+50-50 basis. It simply has never happened. And if you look at
+it historically, Ms. Reinhart, maybe you can speak to this, Mr.
+Holtz-Eakin, really, that the folks who do this successfully
+are the folks who are more down in the 80-20 range. In fact, of
+the successful fiscal consolidations in the last several years,
+there is actually more evidence that 110 percent worth of cuts
+in spending, with tax reductions, because it leads to what you
+have just described, which is the opportunity for growth and
+economic development, that that is the model that we use.
+ Mr. Holtz-Eakin. I want to concur with that. I mean, that
+is the, that is the international evidence. Successful growth
+and consolidation episodes are grounded on keeping taxes down
+and cutting kinds of spending, government payrolls and transfer
+programs. Those are the, those are the heart of those things, I
+completely concur. I just think if you want to go to the
+American people and say, We are going to cut X dollars, that is
+not a very compelling story. What you need to do is explain to
+them, This is important for the opportunities that our children
+will have. These are the roles we have assigned for our
+government. We are going to do that, and this is how it adds
+up.
+ Mr. Mulvaney. Mr. Podesta.
+ Mr. Podesta. Congressman, that might be true, if you are
+starting from a very high revenue base, but as I noted in my
+testimony, we are starting from a historically low revenue
+base. We are at 15 percent of GDP in collections. That hasn't
+happened since 1950. We have a lot bigger government than we
+had in 1950. And so if you begin, particularly with the notion
+that we are going to go further down the revenue stream from
+there, and begin to think you are going to be able to make that
+up on the spending side, it is just not realistic.
+ Under President Reagan, our average spending was 21, 22
+percent of GDP. How are we going to get down to that 15 percent
+rate that is currently the base that we are looking at? Mr.
+Holtz-Eakin said that the Obama budget gets to 19.6 percent. It
+does, but on the basis of a bunch of policies which I don't
+think he supports. So I think that we have got to have some
+balance here, on mandatories, on discretionary, including
+defense, as well as with respect to revenue. And I think, if
+you look at the '93 balanced budget, I think it was about 60-40
+cuts versus revenue. So I think we are in similar places, but
+you have to start from the premise that revenue is at a very
+low base right now.
+ Chairman Ryan. Mr. Shuler.
+ Mr. Shuler. Thank you Mr. Chairman. I would like to thank
+the Chairman and the Ranking Member, put a great panel
+together. Here is the ironic thing about it, four non-elected
+officials could probably sit down and come up with a plan that,
+that would, the American people would agree with.
+Unfortunately, and I will say this on both sides, the maturity
+level is not there from the United States Congress yet. We are
+still playing politics with the future of the next generation.
+And at some point in time we are going to have to stop that,
+because time is of the essence. I look around the room; there
+are not many moderates on this committee. There is very few of
+us. I would, I would ask each of you: is there a policy out
+that is available now for us to review, that you think would be
+acceptable to the American people? I am not asking, would it be
+acceptable to the Congress, because we are not there yet.
+ Mr. Holtz-Eakin. I think you could do a lot worse than to
+start with what Bowles and Simpson came up with. That
+commission did a remarkably good job of examining the problem
+and proposing solutions. And I am deeply disappointed that it
+has been left on a shelf, and in the dustbin. We really need to
+take this problem on.
+ Mr. Shuler. Dr. Reinhart.
+ Ms. Reinhart. I really would like to echo that. It is in
+the spirit of starting afresh, we are here where we are, and
+maximizing the options. Bowles-Simpson is a good starting
+point.
+ Mr. Shuler. Ms. MacGuineas.
+ Ms. MacGuineas. Bowles-Simpson is a great starting point. I
+mean, they gave us exactly what we need. They gave us good
+policies, they found where good political compromises are. It
+is a commission report, so it gives you all the political cover
+to get behind it, and say what they are all saying, we don't
+like every part of it, but it is a good way to start the
+discussion. You can see what is going on in the Senate, and it
+is a very productive discussion that is moving forward.
+ This is what the country needs. It saves $4 trillion over
+10 years. I think anything less than that is probably
+insufficient. And so I wouldn't see why anybody would walk away
+from this opportunity to start the discussion there.
+ Mr. Shuler. Mr. Podesta.
+ Mr. Podesta. I just want to add one note of caution. I
+think, actually, there is a lot of agreement, to some extent,
+on the panel, on the long-run. One note of caution is, to the
+extent that, it is what Ms. Bass said, to the extent that
+moving forward requires a complete revision of the tax code, I
+am for that. We should get rid of a lot of the junk in the tax
+code and get rates down. I am for that. But the process of
+producing that is going to be very, very difficult. And we
+can't wait for that to be done before we begin to tackle these
+midterm deficit problems, so that we get the debt stabilized.
+ So if it has to be in two bites, I can live with that. And
+I think the first bite, I think we also mostly agree on, you
+have got to go after mandatory, you have got to go after
+discretionary, and restrain it. I am for putting defense on the
+table, because I think there is a lot of waste in the defense
+budget, you could save some money there. And I think,
+particularly going after these tax expenditures, and getting
+rid of these loopholes that really don't produce much,
+economically for the country, you could get a balanced package,
+and get bipartisan support for it.
+ Mr. Shuler. Well I certainly hope, and I am very optimistic
+that we can come to a conclusion. At some point in time, we are
+going to have to be grown-ups about this. And the next
+generation will look at us, and wonder if we made the right
+decision. And if we lose our elections, if all of us lose our
+elections in 2012 because we made the right decision for the
+next generation, then that is good for us, and that is good for
+the American people. Because, 10 years from now, they will say
+that we will be the best Congress to have ever served.
+ So I am pleading, I have heard all the back and forth, and
+unfortunately, most of the, the higher-ranking, up on the top
+tier, on both sides, continue their political debate and
+posturing, because it is easy for them to get reelected. And I
+want to see us start working together across the aisle to make
+this work for the American people, and for our next generation.
+I yield back.
+ Chairman Ryan. Thank you. Mr. Huelskamp.
+ Mr. Huelskamp. Thank you, Mr. Chairman. I appreciate the
+opportunity to ask a few questions, and as a member of the
+freshman class, I know there is a lot of finger pointing in
+this room, but there are some members here that shouldn't be
+pointed at. I am not saying anybody is, but just to point out,
+that is the lead-in to one of my questions. And that would be,
+throughout the last 20 years of Congress, there have been all
+kinds of balanced budget mechanisms; we are going to solve
+that.
+ We can sit here and talk about tough decisions and making
+those, and I guess the question would be for Mr. Holtz-Eakin,
+what mechanisms would you say are necessary in order to make a
+deal secure in future years? Because I would say folks in my
+district have no confidence, in either the Congress or the
+President, to actually implement, and to maintain. And I would
+agree, I think multiple congresses, multiple presidents that
+haven't balanced that, didn't care to balance it. And so what
+kind of mechanisms would you suggest are necessary for
+implementation?
+ Mr. Holtz-Eakin. I have a couple of observations. The
+first, and the one that I think is most important, is there are
+no budgetary mechanisms, PAYGO rules, discretionary spending
+caps, or anything of that sort, that are a substitute for the
+Congress having the political will to do this, and agreeing it
+has to be done. Because any Congress can circumvent rules, and
+does on a regular basis.
+ So, rules are not the solution; deciding to solve the
+problem is the top priority. Having done that, you can then
+agree on some sort of fiscal goal. I actually don't care deeply
+which one. Whether it is debt to GDP, spending targets,
+anything that gives you a way to identify that you are off
+track; we agreed to do this, but we are off track, you get a
+warning signal, and gives you a way to say no, Yes, we would
+like to do that, but the larger priority is our kids and the
+growth of this economy, we are not going to do that, we have
+this limit that we can't bust. That is what you need.
+ And there is no magic to the particular flavors. You have
+to have an agreement to do it, you have to have identifiers you
+are not doing it, and you have to have a way to say no.
+ Mr. Huelskamp. Would the rest of the panel agree with that
+assessment? In short response?
+ Ms. MacGuineas. I would just jump in, because we ran a
+commission called Peterson-Pew Commission for two years that
+focused on budget process. And we recommended a set of
+budgetary targets, so everybody knows what you are trying to
+get to, triggers, so that if you don't get there they would
+enforce them and move you back on track, and help keep you on
+track, and transparency. So the three T's: targets, triggers,
+and transparency.
+ But the bottom line is, it won't force anybody to do
+anything they don't want to do, but it will give you political
+cover if you do want to do the right thing, and it gives you
+the way to say no. So I think that framework is really
+important to help move us in that direction and keep us on
+track.
+ Mr. Podesta. What did produce a balanced budget and a
+surplus were hard budget caps on the discretionary side, and a
+real PAYGO that covered both mandatory and revenue. And so, I
+think, if you go back and look at history, it is worth at least
+attempting to say, that worked before, why don't we try it
+again?
+ Mr. Huelskamp. Yeah, and I appreciate that, historically.
+But we are at such historically high levels, and I don't know
+how you could implement that. I mean, you lock in trillion
+dollar deficits, as the President's indicated, sustainable
+deficits forever. So, Carmen?
+ Ms. Reinhart. Simply put, in this environment, debt
+targets. Taking into account that Europe has blown Maastricht,
+but having credible debt targets would be a useful starting
+point.
+ Mr. Huelskamp. I didn't hear anyone mention though, and I
+come from state-level, where we have a mandatory balanced
+budget requirement unlike some other states; no one mentioned a
+balanced budget amendment, those kind of things, which would
+be, there would be no legislative way around that, is there
+opposition to that from any of these members here that believe
+they don't work, or would not work at the federal level?
+ Mr. Holtz-Eakin. That is a fiscal rule, and would have the
+same benefits that, that I mentioned for others. Getting there
+is going to be awfully hard. We are so far from balanced. And
+so, I am all for a balanced budget, but I encourage you first
+to tell me how we are going to get there.
+ Mr. Huelskamp. Well, that, that was the requirement for the
+panel members today.
+ Mr. Holtz-Eakin. I have my plan.
+ Mr. Huelskamp. The follow-up question I would have, in
+reference to that is, and quickly, for each of you, I just have
+a few seconds left. How many years do we have, and it might
+have been asked already, counts to five years, I have heard
+less years, I am going to be listening very closely. How many
+years do we have, quickly?
+ Mr. Holtz-Eakin. We don't know; pretend you have none.
+ Ms. Reinhart. Great answer.
+ Ms. MacGuineas. It is a great answer. I am worried, because
+I have heard the number five around today. And I think that
+that is too optimistic, chances are that is too optimistic.
+There are a lot of people who believe that the risk is it could
+be in the next year or two.
+ Mr. Podesta. I think you have this year to lock in a
+bipartisan agreement to stop the debt from going up.
+ Mr. Huelskamp. All right. I look forward to help from the
+Senate, and from the administration. Thank you.
+ Mr. Lankford [presiding]. Great. Thank you, Mr. Ryan.
+ Mr. Ryan of Ohio. Thank you, Mr. Chairman. We had a meeting
+yesterday with Mr. Bowles and Senator Simpson, and I have got
+to say it was very sobering, to just sit with them for an
+extended period of time, and kind of embody the real gravity of
+the problem here. I know Mr. Van Hollen has said this, as well
+as others in the Democratic Caucus, I think, and to Mr.
+Podesta's point that he just made, I believe that this needs to
+happen in the next year because if it doesn't, we are going to
+get into a political year, which we are already actually into
+the presidential election, already, as the media is portraying
+it. And, so that whole year will be wasted.
+ And now we are two years down the line, and all of you are
+saying, act like it is happening now, which I think we need to
+do. So just from this perch here, I think we need to drop the
+rhetoric on both sides and come to an agreement. I think it is
+important, it has been noted here, President Reagan raised
+taxes eleven different times, gas, tax, and others. So we are
+not going to get there from here. We have got to get ourselves
+in a position where we all agree that the wealthiest, as the
+Bowles-Simpson proposal has, the wealthiest are going to have
+to pay more. Because the larger issue for them with investments
+and business creation, are going to be the credit markets.
+ And so I think most of them would be willing to pay an
+extra 30, 40, 50, $100,000 a year, if you are making millions
+of dollars, if they know that business activity is going to
+increase. And I think we have got to talk about all of this in
+that context as well. And also, to make the point that there
+are tradeoffs here, when we ask the wealthiest to pay a little
+bit more, what are those programs, what is that money going
+into? It is going into Pell grants, it is going into job
+retraining, it is going into research, it is going into things
+that are going to yield us all a lot of economic activity, as
+we see China investing hundreds of billions of dollars into
+clean energy. And I am from a steel district, in Youngstown,
+Ohio, and Ms. Kaptur is from Toledo, where they are generating
+solar panel industry.
+ We are starting to lose the solar panel industry to China.
+So we are going to reduce our dependence on foreign oil, and
+then we are going to become dependent on China for our
+batteries, our solar panels, and everything else. So these
+investments have to be made, and we have got to ask everybody
+to participate. And remember that George Herbert Walker Bush
+lost his election, as Mr. Shuler was just talking about,
+because he raised taxes because he had to. And that led to Mr.
+Podesta and crew coming in, and President Clinton, and that
+leading to enormous economic activity, 20 million new jobs.
+ One point, and then one question I will let everybody kind
+of take a bite at, that I wanted to make. The point has been
+made, and we talked about animal, animal spirits, and my friend
+Mr. Ribble was talking about psychology, we have a
+psychological problem. We have a psychological problem in the
+market because wages have been stagnant for 30 years. This is
+not psychological; it is a real problem that we have. In the
+last 10 years we have lost wages. And in Ohio we are going to
+see tuition increases because of the economic collapse, we are
+going to see a lot of cuts, we are going to see more burden
+placed on families. And so, if we don't address the issue of
+wages, and Paul Krugman's column just talked about this in the
+last day or so, about the high-growth jobs in the recovery
+aren't coming. It is the low-growth jobs that are expanding
+now.
+ So we have got a real issue, if we are going to continue to
+have this economic instability and political instability if we
+don't address the issue of wages in the United States, and
+health care and other things fit into that.
+ So, my time is out, Mr. Podesta, if you could just comment
+on this, and if there is time, we could just work our way down,
+about the top tax rates. There has been a lot of talk about,
+those are the people who create jobs. I know you guys, when you
+came in in '93 made that decision, raised the top tax rate.
+ Mr. Podesta. Yes raised the top tax rate, the top two
+percent.
+ Mr. Ryan of Ohio. How did that play out, and how would all
+of you guys see that playing out as a big diminishment in
+economic growth?
+ Mr. Podesta. Again, you can't make a direct comparison, but
+GDP growth was twice as strong during Clinton as it was under
+Bush. Business investment was much stronger under Clinton than
+it was under Bush, with a 39.6, you know, top tax rate. And so
+this idea that just by merely cutting the top tax rate we are
+going to eliminate investment and the economy is going to tank,
+I think it is just not borne out by history. I think you need a
+balanced program, one that does exactly what you are
+suggesting: invests in human capital in science and technology,
+in the things that power the economy forward. And that is what
+is going to get wages growing again.
+ And the only thing I would disagree with you about, Mr.
+Ryan, is that wages did grow in the 1990s, and they grew
+substantially in the middle and at the bottom during the 1995
+to 2000 period.
+ Mr. Lankford. I wish we had time to get all the other
+responses. Mr. Young.
+ Mr. Young. Thanks so much to all of our panelists, I really
+appreciate you being here today. I am going to focus my
+question on, if time permits, the role of the U.S. dollar in
+the world, its current position as the world's reserve
+currency, how that might be threatened, and the implications
+thereof.
+ Before I get into that, though, I would like your thoughts
+on, what I typically discuss in southern Indiana, as I mix with
+my constituents, and try and inform them on this issue, get
+their thoughts and concerns. And one of the things that I try
+and do is bring it down to the human level. Individual persons
+and businesses and families, and I thought you might be able to
+add some additional texture to that overall portrait.
+ What will things look like if the doomsday scenario, if the
+debt crisis does in fact play out, if the United States suffers
+from a Greece, or Japan-like, situation, where either they have
+to go through a lost decade themselves, or instead, there is a
+sudden response by the markets as a result of a lack of a
+credible plan to bring down our debt to GDP ratio.
+ Some of the things I emphasize are the increase in our
+interest rates for our treasury instruments, which redounds to
+an increase in interest rates for all manner of different loans
+and credit instruments that will impact individuals that I
+serve. An increase in taxes, perhaps an immediate increase,
+required to calm the credit markets. An immediate decrease in
+spending, in a non-deliberative and, frankly inhumane way; it
+is inhumane, not because our efforts wouldn't be well-
+intentioned to calm the credit markets, it would be inhumane
+because we failed to act now, when we could put in place a
+smooth trajectory, a gradual mechanism to get our debt under
+control, one that would maintain our social insurance programs
+for the least fortunate. It would also result, this doomsday
+scenario, I anticipate, in a decrease in investment, in
+physical capital, in human capital, all these things that help
+us enjoy those higher-paying jobs that Mr. Ryan was just
+lamenting are not as abundant as they once were. Can someone
+speak to that overall private human impact that we might
+experience?
+ Mr. Holtz-Eakin. I am not the place people usually go for
+humanizing events. But I think you have captured the mechanics
+of the collapse pretty well. But it will be far more
+devastating than that, because in that collapse, you will have
+panic. You think back to 2008, there was palpable panic among
+individuals, among policymakers, and when people are panicky,
+and seeing their social services, you know, rendered, you lose
+a sense of social cohesion. So I believe that there is a lot
+more at stake here than the economics of it. I believe our
+social cohesion is, and will be tested, if we fail to address
+this. And we will, in those moments, also pull back on
+commitments we have made around the globe. You know, we will
+bring back the troops from those bases, we will cut off our
+ground forces in different ways, and we will be more exposed
+and less of a leader in liberty than we want to be. And I think
+those are all very damaging things.
+ Ms. Reinhart. I would say, at the very human level, one
+thing we have to, at some point, start to face, is that the
+past 10 years were not a good indicator of the next 10.
+Households have negative equity. That some, many households
+have negative equity, that is something that has to be dealt
+with. Households have a debt overhang. Those are issues that
+were not issues 10 years ago, that we have to think about. I
+would like to think that, sort of a gradualist approach to debt
+reduction is more likely. It is, historically, it hasn't worked
+out that way.
+ Let me conclude with a commentary on the dollar. One of the
+things that is actually, actually helping us be more gradualist
+than we otherwise could be, is that people, notably central
+banks from all over the world, willing to hold U.S. Treasury
+securities. But that is also a dangerous proposition. Without
+gloom and doom, it involves a level of vulnerability that we
+didn't have 20 years ago.
+ Mr. Podesta. Congressman, you know, I think you can go too
+far with this. I think that, we are not Greece. The United
+States is not Greece. We have a pretty darn strong set of
+fundamentals and basics in this country, including the best
+workforce in the world, the most liquid capital markets, the
+most innovation, the highest levels of science and technology.
+But I think what will happen is we will get further away, for
+many, many people, from the American dream, the ability to
+really make their children's lives better than theirs, to
+succeed in their own right. And that is what we have got to be
+worried about, that is why we have got to take the steps now, I
+think, to get on a better path.
+ Mr. Young. Thank you all.
+ Mr. Lankford. Thank you, thank you as well. Ms. Castor.
+ Ms. Castor. Thank you very much, and thanks to the panel
+for all of your expert advice and involvement in this critical
+issue. Back home, when folks focus on the debt and deficit, I
+think they do appreciate that President Obama named a national
+commission of fiscal responsibility and reform. But if he has
+seen some of the polling across the country, they, they rank
+the debt and deficit very high as a problem, and then you say,
+but they don't want any cuts on anything. So we really need to
+find something to pull us on that glide path with a
+comprehensive plan. And the one that seems to get a little
+traction at home is tax reform, and lowering the rates.
+ And then you have got to begin this dialogue about,
+especially, the tax expenditures, I think. Because when you are
+talking about the tax code, it has got to be holistic. And I
+want you all to be specific. You can go back to the commission
+on fiscal responsibility and reform and highlight your
+favorites, but give us the targets for these tax earmarks, and
+tax expenditures, especially the ones that have been built up
+over the years by high-paid lobbyists; people know it, they
+know it at home.
+ Give us those, your best targets, so that we can reduce the
+overall tax rates for the average hardworking American. I would
+like to hear from each of you on this.
+ Ms. MacGuineas. Well, I will say, I think people are going
+to want to understand two important things. And one is, do you
+have a plan? And two, is it fair? And that is going to help
+people be willing to sacrifice. I think they need to feel that
+if they make these sacrifices themselves, it will not lead to
+not fixing the problem, but it will lead to an actual fix.
+ In terms of tax expenditures, you are putting out a tough
+question there, but I am sure we will all give you pretty
+similar answers. There are two big ones that need to be
+reformed: the health care exclusion, the home mortgage interest
+deduction. That is the bottom line, every policy analyst on
+both sides of the aisle knows that these are not good policies,
+and that is, the core of really thinking about tax reform. And
+people can choose to go after them and try to demagogue them,
+or people can talk about the benefits of a better tax system
+that is not regressive, that has more oversight, that leads to
+lower rates, and is part of a fiscal fix. And these tax breaks
+and others have to be reformed.
+ Mr. Podesta. Well, Ms. Castor, I think they fall into two
+big categories. Maya mentioned one, which is on the personal
+income tax side: the exclusion and home interest deductions.
+And, particularly on second homes, you could go after that
+fairly easily, I think. But I think there is a lot in the code
+on the business side that would strike people back home as,
+what I would describe as, you know, tax exclusions that they
+think of, tax expenditures that are really narrow, they are
+focused on a very small number of businesses.
+ I guess my favorite still remains the tax breaks to the oil
+and gas industry. The top five oil companies have made $931
+billion in profits in the last 10 years. Do they really need
+additional incentives to continue to produce what they are
+producing in their business? I don't think so. And it is a
+waste of money, and I think people are getting gouged at the
+pump right now, and they would understand why that level of
+support to an industry that doesn't need it could be withdrawn,
+in a time when we have high deficits.
+ Ms. Reinhart. I would like to point out that,
+realistically, I think there is broad agreement that we need
+higher savings and that interest deduction on housing is
+something that should go. But let us look at the housing
+market. The housing market is in an all-time, historic slump.
+The timing for that is probably problematic. So it really goes
+back to my two-thirds and one-third. I do really think that one
+has to go back to, I would like to be told by the doctor that I
+can lose weight and eat just as much. But I really do think
+that the expenditures side, particularly in light of
+demographics, is unavoidable.
+ Mr. Holtz-Eakin. Briefly, I think we have to educate the
+American people on the reality of the tax code. For the
+majority of Americans, the biggest tax they pay is the payroll
+tax. So if you talk about tax reform to them, there is nothing
+to do. A minority of Americans are now paying the income tax,
+and it needs to be radically reformed to reflect the reality.
+ Go to the President's panel from a couple years ago, the
+growth investment tax plan, adopt it tomorrow. Way better than
+anything we have got.
+ Ms. Castor. I am not even familiar with what that is.
+ Mr. Holtz-Eakin. I would encourage you to become familiar.
+Mortgage interest, the health exclusion; those have been on the
+table for years. Congress has never touched them. You should go
+do exactly what Bowles-Simpson did with the corporate tax. You
+should go to a territorial system with a low rate, because, in
+the end it is the American worker who is paying that tax.
+Companies don't pay taxes, people do. And the workers are
+getting hurt by the uncompetitiveness.
+ Ms. Castor. Thank you.
+ Mr. Lankford. Thank you. Mr. Flores.
+ Mr. Flores. Thank you, Mr. Chairman. And I want to thank
+the panel for joining us today. And except for the rock-
+throwing back and forth, it has been a fairly-informed panel,
+and I apologize, I am sorry that you had to put up with the
+rock-throwing. I am not going to throw any rocks. I am going to
+ask a couple of questions for you. We have got a couple of
+alternatives out there. We have got this, that is supposed to
+be winning the future. You have got the Bowles-Simpson
+Commission that I think did some really good work. Looking at
+the Bowles-Simpson plan, and I would like each of you to limit
+your answers to about 15 or 20 seconds, what would you do to
+make the Bowles-Simpson plan better? We all said that is a good
+place to start. What would you do to make it better? So let us
+start on the right with Mr. Podesta.
+ Mr. Podesta. Well, I think that, I noted earlier, that we
+think that Social Security reform could be tackled, but I think
+the way they tackled it is wrong. And I think there is a way to
+protect people at the bottom in Social Security and still get
+that 75 years of actuarial integrity and that is where I would
+probably start.
+ Mr. Flores. Okay.
+ Ms. MacGuineas. I think it is a terrific plan, I think the
+main thing that needs to be filled out is how you would live
+within the health care budget that they proposed. So in the
+decade when you would start controlling health care cost to GDP
+plus one, we need to figure out structures that are going to
+fill that in. And I actually think, on Social Security, we use
+too much of the revenue to funnel into Social Security, and I
+would use that more on investments, and bring benefits down for
+the well-off in Social Security a little bit more aggressively.
+ Mr. Flores. Okay. So greater means-testing. Ms. Reinhart?
+ Ms. Reinhart. I think we need to be a little more
+aggressive on Social Security benefits.
+ Mr. Flores. Okay. Mr. Holtz-Eakin?
+ Mr. Holtz-Eakin. I am going to echo those, I think the
+biggest hole though is, we really took a pass, a serious pass
+on health programs. And those are the problem going forward, so
+you have to take those on.
+ Mr. Flores. You talked about health programs, but it seems
+to me like Medicare is the biggest issue, that is the biggest
+gaping wound that we have in our future financial security.
+ Mr. Holtz-Eakin. I believe that if you look at Medicare,
+Medicaid, and the Affordable Care Act collectively they are the
+threat.
+ Mr. Flores. Okay, thank you. Looks like I have some more
+time, so I am going to ask you another question. This hasn't
+been brought up. One of the things that I have seen, I was a
+CEO of a small company, and one of the things that I felt, and
+that people are feeling today, is the impact of regulation on
+the economy. We haven't touched that, and that is not going to
+be in the budget, but I think it is an important component of
+what is restraining the economy. And so I would like each of
+you just, again, 10, 15 seconds, do you think that our
+regulatory zeal today is hurting our economic potential? Let us
+start on the left.
+ Mr. Holtz-Eakin. Absolutely. A chief indicator of
+regulatory activity is federal register pages, and last year we
+set a record, exceeding even when the Bush Administration set
+up the Department of Homeland Security, I never thought we
+would beat that. And that is before we see the implementation
+of the Affordable Care Act, before we see the Dodd-Frank common
+line and before the EPA rolls out its boilers and other
+foremeasure rules. So we are in the midst of a massive
+regulatory push.
+ Mr. Flores. That is a terrifying metric. Ms. Reinhart.
+ Ms. Reinhart. I alluded to this in my earlier remarks; I
+think we are going to see even more heavy-handed regulation. It
+won't be called financial repression, it will come under the
+guise of prudential regulation, but I think we will, and
+pension funds will be importantly affected.
+ Mr. Flores. But is it or is it not hurting us, in terms of
+economic potential?
+ Ms. Reinhart. The historic experience has been that
+financial repression is not conducive to growth.
+ Mr. Flores. Okay. Ms. MacGuineas.
+ Ms. MacGuineas. Yes, I certainly agree with that point, and
+I think we need to do everything we can to enhance
+competitiveness, both by lowering the corporate tax rate in a
+revenue-neutral way, and dealing with regulations. And I think
+that principle, that businesses don't pay taxes, people pay
+taxes is very important. I also, however, have a real belief
+that the income and equality problems that we have are real.
+And so, while I would try to bring down burdens on businesses,
+I am perfectly comfortable with a more progressive tax code
+that reflects people who are doing well also contributing at
+the personal level, and letting businesses thrive and be an
+engine of growth.
+ Mr. Flores. Okay. So, by having a more moderate regulatory
+scheme, I am assuming, partially.
+ Ms. MacGuineas. That is one of the necessary components for
+increasing competitiveness.
+ Mr. Flores. Right, good. Mr. Podesta.
+ Mr. Podesta. I think one, I think one of the history
+lessons of the past couple of years is that, if you take the
+argument too far, regulatory laxity produces really disastrous
+results. And the failure to regulate the financial sector led
+to a meltdown that is being felt today in every community
+across America. So you have got to find the right balance. I
+think that the new executive order that the President signed at
+the beginning of the year to try to find that right balance,
+get rid of regulations that are not producing the results that
+they are seeking to achieve, while you push forward with smart
+regulation is where the country needs to be.
+ Mr. Flores. One last question, as I am about to run out of
+time. Ms. Reinhart, I really appreciate your work that you have
+done to talk about the impact on GDP versus debt levels. My
+question is this; inside the President's budget this year, it
+has some GDP growth assumptions based on what I consider to be
+a fairly high debt level. It doesn't even talk about actuarial
+unfunded liabilities. What do you think about the economic
+assumptions of, basically, four percent GDP growth in this?
+ Ms. Reinhart. In one word, improbable.
+ Mr. Flores. Okay.
+ Mr. Lankford. One word is perfect for the timing.
+ Mr. Flores. Thank you.
+ Mr. Lankford. Mrs. Moore.
+ Ms. Moore. Thank you so much, Mr. Chairman. And thank you
+very much for appearing today. I am really proud to see women
+as experts in economics, and so I really appreciate your being
+here. Everything has been asked, except that everybody hasn't
+asked it. So forgive me if I am asking some of the same kinds
+of questions. I want to get right into the discussion of some
+of the Bowles-Simpson's recommendations, and to really flesh
+out this whole thing about entitlements. You know, it has
+become such a buzz word; we have got to reform entitlements.
+ In my understanding, I am glad there was already a
+discussion about some of the tax expenditures. But farm
+subsidies, and as you pointed out, Mr. Holtz-Eakin, the
+prescription drug program where we did not ask pharmaceutical
+companies, at all, to lower their prices, or to negotiate with
+them, as being one of the problems. And you also pointed out,
+Mr. Holtz-Eakin, that the problem was the cost curve in health
+care, period, at least I thought, not being curved. Not so much
+a problem with, as I think Mr. Podesta pointed out, that when
+Medicare and Medicaid came into effect, just like three-tenths
+of one percent of federal spending on health care. But this
+unsustainable growth.
+ So I want you all to comment on the problem with
+entitlements and mandatory spending as being something other
+than Social Security. I don't think that that is the driver of
+the debt, I think it is these mortgage interest deduction tax
+expenditures, which are mandatory spending, farm subsidies, is
+that correct? People are using this entitlement thing, and
+people are interpreting it as Social Security, and that is not
+correct, am I correct about that?
+ Mr. Holtz-Eakin. It is not just Social Security, but Social
+Security is certainly part of the problem. Running a cash flow
+deficit right now and those cash flow deficits will rise with
+time, and the program is on track to deliver to the next
+generation, 22 percent across the board cuts, that is
+unconscionable.
+ Ms. Moore. Okay, so let others answer, please.
+ Ms. MacGuineas. Well, entitlements are all programs of
+mandatory spending that don't go through a normal
+appropriations authorization process.
+ Ms. Moore. Like the mortgage interest deduction, for
+something, it goes to Oprah.
+ Ms. MacGuineas. That is right, I would completely agree,
+that tax expenditures are very much like entitlements in their
+automatic nature, and that we should be budgeting for all.
+ Ms. Moore. So when we talk about it, I am just saying, we
+need to not just hone in and say Social Security.
+ Ms. MacGuineas. No, I think we hone in on the ones that are
+the biggest drivers of growth, though, which are the ones that
+are related to aging and health care. So Social Security,
+Medicare, and Medicaid are the most problematic, but the way we
+budget, we need to look at all of these things on a regular
+basis.
+ Ms. Moore. Let me get Mr. Podesta to answer this question,
+and then let me move on.
+ Mr. Podesta. Well, I think you are exactly right,
+Congresswoman, that the mandatory spending is broader, I think,
+with respect to health care. That is a challenge of delivering
+better health care at a lower cost across the board, not just
+in the federal programs. That is where we really need to, I
+think, spend our time and attention, which will have impact on
+the federal programs, I think as one of the previous members
+pointed out, the inflation in the federal programs is actually
+lower than it is on the private sector. So we need to produce
+that result.
+ Ms. Moore. I didn't understand, for example, why Mr. Holtz-
+Eakin, said we ought to get rid of the American Care Act, but
+then he agreed we need to slow the growth in the private health
+care. I just didn't understand how that could be done. And Mr.
+Podesta, I want you to comment on his testimony.
+ Mr. Podesta. Well Doug and I have debated this for a long
+time, I think that the drivers in the bill will restrain the
+growth of health care spending, and I think, if you repeal it,
+as the CBO indicated, you are going to have both a negative
+effect on the overall federal budget deficit, and a negative
+effect on health care spending.
+ Ms. Moore. Thank you, Mr. Podesta. I do have 50 seconds
+left. I turned on the news today, and thank God they weren't
+talking about Charlie Sheen or Lindsay Lohan but they mentioned
+that there were, you know, 199 new billionaires during this
+whole worldwide recession. And so I guess I wanted to ask you,
+I didn't vote for the extension of the Bush-era tax cuts, even
+the ones that benefit the lower-income people, because I see
+that they benefit wealthy people six times as much as they do
+higher-income people. How does inequality fit in with some of
+our deficit problems? There won't be people to consume, for
+example. Mr. Podesta.
+ Mr. Podesta. Inequality; I think that if judged by history,
+when we have a thriving middle class, when we have people at
+the bottom who are getting into the middle class, that produces
+a stronger economy overall, stronger receipts, it actually has
+an effect on the budget, so I think we very much should be
+concerned about it.
+ Ms. Moore. Thank you so much. This is a great panel. Thank
+you Mr. Chair.
+ Mr. Podesta. Thank you.
+ Mr. Lankford. Thank you. Mr. Stutzman.
+ Mr. Stutzman. Thank you, Mr. Chairman, and thank you to the
+panel for being here today; I really enjoyed the conversation
+today. The title of the hearing today is Lifting the Crushing
+Burden of Debt and I guess what I have heard a lot of today is,
+we need to control spending, we need to possibly raise revenue
+through tax increases, and I want to start with Mr. Podesta. In
+your testimony, we are all talking just recently, here in the
+House, about where do we start cutting debt? And on page six of
+your testimony, you mention the shock of asset-constrained
+government spending in the immediate would have an undeniable
+effect on our wider economy. Our Moody's chief economist says
+that it could lead to a loss of about 700,000 jobs, and then
+Chairman Bernanke agrees that it could result in a couple of
+hundred thousand jobs, and then you mention that there is wide
+consensus on the general impact.
+ Mr. Podesta. Except for Mr. Holtz-Eakin.
+ Mr. Stutzman. Well this is what I want to ask, is what kind
+of job loss are we looking at?
+ Mr. Podesta. Well I think that virtually everybody who has
+taken a look at this, Doug is an exception, has said that there
+will be some loss of jobs, and there is a range of forecasts
+there. And I think that the general direction is clear, and
+that is why I am not saying that we shouldn't restrain non-
+defense discretionary spending. We call for specific cuts to do
+so. But the deep cuts that are included in HR 1, I think, would
+have a negative effect in the very near term, and my other beef
+is that you don't go after any of the other components. You are
+narrowly focused on 12 percent of the budget. So those things
+will have an impact in the short term.
+ Mr. Stutzman. Are these primarily public or private jobs?
+ Mr. Podesta. I think they are on both sides of the ledger,
+mostly in the private sector.
+ Mr. Stutzman. This is what concerns me, and I give the
+Clinton administration a lot of credit for the way that they
+handled the situation throughout the 90s. There were tax
+increases right at the beginning, there were tax cuts at the
+end, and I believe that Republicans, when they were in charge
+were in the early part of this last decade, failed, and that
+there should have been better control in spending. And I think
+that we need to go into this very disciplined, and my concern
+is when we start--we are only talking about $6 to $60 billion
+in cuts right now, and when we go out and we hear the rhetoric
+saying, Well we are going to lose up to 700,000 jobs, that puts
+fear in the American people. That puts fear in Congress. We
+don't want to do that. And if we can't even cut $6 to $60
+billion right now in the near term, I don't see the political
+will long-term, ever. And I guess that is my concern, at some
+point this type of rhetoric needs to stop, because I think the
+American economy is more resilient than this.
+ Mr. Podesta. Well so far, it has been partly because of the
+deep financial shock from the recession, it has been less
+resilient than I think a lot of people would have predicted.
+But it is coming back, the private sector is producing jobs,
+almost a million jobs produced last year, we need to make sure
+that keeps going, I think. That is key, I think, to create the
+circumstances under which you actually can get the deficit down
+because it takes money out of the unemployment insurance
+system, et cetera. And it will increase revenues.
+ Mr. Stutzman. Okay, really quick, I just want to ask this
+question of the entire panel, and answer is as long as we have
+time. My question is what is a predictable and sustained rate
+of debt to GDP?
+ Ms. MacGuineas. Well we have recommended that it be brought
+back down to 60 percent of GDP within a decade, but that it
+needs to go back to historical levels of below 40 percent to
+maintain fiscal flexibility.
+ Ms. Reinhart. The median debt-to-GDP in the advanced
+economies has actually been 36 percent post-World War II. We
+are a long range from there. I think 60 is a good starting
+point.
+ Mr. Holtz-Eakin. I concur.
+ Mr. Stutzman. Okay. I think that again, we need to start
+looking at our, we need to control spending first before we
+even discuss, and I like what Erskine Bowles and Simpson did
+propose, I think that is a great starting point in the
+dialogue, but until we start controlling our own spending, and
+I think this sort of fear put into not only Congress.
+ Ms. MacGuineas. One quick question which is, while I think
+there is some problems with HR 1, that it is probably too
+large, too small a part of the budget, and a little bit too
+early, we are starting to control spending, and that is going
+to have large positive fiscal effects, the fact that we are
+talking about cuts. And even though it will have some negative
+effect in the short run, what these studies don't show is that
+it will have positive gains over a longer period, to make these
+fiscal improvements. And that is what we need to emphasize.
+ Mr. Stutzman. Thank you.
+ Mr. Lankford. Thank you. The gentlelady from Ohio is
+recognized.
+ Ms. Kaptur. Thank you, Mr. Chairman. Welcome to the
+panelists, I am sorry I had two, actually three concurrent
+hearings, so I came late and I have read your testimonies. The
+housing sector's continued demise, with 26.5 percent of the
+American people being underwater on their mortgages and in my
+district, 37.5, continues to be a serious damper on recovery.
+Ohio, Wisconsin, where we see people mobilizing in the state
+capitals, are in deep trouble because their property taxes have
+not been paid in at the normal rate, and with the large numbers
+of foreclosures, school systems and state governments just
+simply can't keep up. And therefore the solution I see them
+proposing out there, at least those governors is, Well, get rid
+of teachers, get rid of police, rather than solve the
+fundamental problem, which is recovery in the housing sector.
+ Now a few Wall Street banks took us down this very
+dangerous road, and they threw our economy into a very deep
+ditch, and what I see happening is that the six big ones that
+remain, that now control two-thirds of the banking system of
+this country; Citigroup, J.P. Morgan Chase, Wells Fargo,
+Goldman Sachs, Morgan Stanley, and Bank of America are making
+extraordinary profits, $55 billion just last year for those
+six. This year, Bank of America is going to get a $666 million
+refund, and those six institutions have paid a net effective
+tax rate of 11 percent when businesses in my district are
+paying a 35 percent rate. I am thinking, what is fair about
+this? Wait a minute; we are not addressing the housing problem.
+Not one prosecution, not one. And the housing sector continues
+to deteriorate, and they are running away with the money, and
+they control two-thirds of the banking system in this country.
+I call that a great crime. Now I notice a number of you
+actually have ties to Wall Street, and I am going to place this
+in the record. Mr. Holtz-Eakin, the Board of Directors for
+American Action Forum, does it still include Robert Steele?
+ He is gone. Okay. He had been a former executive of Goldman
+Sachs when he served on your board. You personally were a
+senior staff economist for President Bush at the Council of
+Economic Advisers, am I correct on that?
+ Mr. Holtz-Eakin. That is correct.
+ Ms. Kaptur. Correct and Mr. Bush never submitted one single
+balanced budget to this Congress, because I served during those
+years. I am not saying you don't have a lot to contribute to
+the conversation, but let us look at the record. Now Ms.
+Reinhart, you are a fellow at the Peterson Institute, and you
+had been the chief economist, am I correct? For the investment
+bank of Bear Stearns back in the 1980s. And the Peterson
+Institute receives major contributions from Mr. Peterson, and
+he had been the former chairman and CEO of Lehman Brothers. Am
+I correct in that? Is my information correct?
+ And he co-founded the private equity firm of Blackstone
+Group. I am just saying, the influences on Congress, where we
+get our opinion from, we have many new members. It is important
+to know who is giving us information and who isn't. Ms.
+MacGuineas, you are with the Committee for a Responsible
+Federal Budget.
+ Mr. Peterson also contributes money to the Committee for
+the Responsible Federal Budget, am I right on that, Ms.
+MacGuineas? Yes, I think that is really important to place on
+the record. And Mr. Podesta, you were the chief of staff to the
+only president that ever gave us a balanced budget in my whole
+career here, so it seems to me you have got something to
+contribute to the conversation here. But my fundamental
+question is, in the housing sector, we lack a solution as a
+country, and that is pulling us down coast to coast. You really
+haven't addressed it in your testimonies to any great extent.
+The fact that it is missing is of great concern for me. Should
+it be?
+ Ms. Reinhart. It certainly should. One of the things I have
+been saying for many years now, since the crisis began, is that
+we should move forward to write down bad loans. The problem of
+having mortgages with negative equity is a serious one, and it
+is time to start having financial institutions price those
+loans closer to market. Until we do get rid of that debt
+overhang and those zombie loans, they were called zombie loans
+when they were in Japan, we will have a very weak housing
+market.
+ Ms. Kaptur. You know, by the way, that the majority of
+those asset-backed securities, the mortgage-backed securities,
+were traded through Cancun? I don't know if people on the
+committee know that. Any comments about why that might have
+been done? You know it is a tax haven? Goldman Sachs and the
+companies that did that made a whole lot of money. Nobody has
+done a single thing about it. Thank you, Mr. Chairman.
+ Mr. Lankford. The gentleman from Georgia, Mr. Woodall, is
+recognized.
+ Mr. Woodall. Thank you, Mr. Chairman. I want to inherently
+I associate myself with my friends on the left because I think
+they bring a lot of value. I want to disassociate myself with
+Ms. Kaptur's comments and tell you how much I appreciate you
+being here, in particular Mr. Podesta and Ms. MacGuineas. You
+all invested time in us at the bipartisan freshman retreat, and
+I remember those sessions well. We had a particular amount of
+fun on the chief of staff session; you all gave us a lot of
+good stories, and I don't know where we go as freshman if folks
+aren't willing to come and invest in us like this. I tell folks
+regularly that the best part of my job is really smart people
+who want to come by and make me smarter. And I certainly
+appreciate the willingness to engage and do that as the last
+fellow who generally gets to ask questions here in the Ws,
+folks are often anxious to depart, but I just had a couple of
+things on my mind.
+ Everybody talks a lot about tax expenditures. I wish there
+were more of my colleagues left, I actually have the only bill
+in Congress that eliminates all corporate tax expenditures. I
+am a big believer that those are spending measures. It is the
+Fair Tax Bill, it actually abolishes the corporate tax rate
+altogether, because I believe, as you all have said, that only
+consumers pay taxes, whether it is the shareholders or whether
+it is the employees or whether it is the purchaser, it is only
+us at the end of the day that pay those taxes, and I would have
+welcomed more support for going after those tax expenditures,
+but let us talk about the regulation side again, and we started
+down that with Mr. Flores a little bit earlier.
+ Do you think that is coming? Because I saw an editorial in
+the Wall Street Journal, I think it was in January, that had a
+giant spike in the cost of compliance with reg.s back in '92,
+as the Clean Air Act was coming online, and then it dropped
+down and was fairly level throughout the '90s and the early
+part of this decade, but the last four years, we had spiked
+back up to those 2000, or that 1992 level and even gone 25
+percent higher in 2010. If we can agree that tax expenditures
+are just the same as spending and ought to have the same amount
+of oversight on them, can we also say that about regulation,
+that we ought to consider each and every reg. with the same
+critical process that we consider each spending bill and each
+tax bill?
+ Mr. Holtz-Eakin. I believe so, yes. I mean, these are the
+same as taxes. Just as you remit tax payments, you have
+compliance costs, you have to spend money, and in the same way
+that taxes can cause a business not to hire one more person,
+not to make the last investment, regulation can have the
+exactly the same influence in economic activity. And so I am
+concerned about the pace at which new regulations are being
+rolled out for two reasons. One, the overall economic burden
+might not be matched by benefits. I mean, these things aren't
+done gratuitously. There is a reason regulations show up. But I
+am worried that we have gone too far. And the second is that
+rapid rule-making is generally bad rule-making. The Affordable
+Care Act and the Dodd-Frank Bill both share a characteristic of
+what I think are unrealistic rule-making deadlines that will
+produce bad regulation in the end.
+ Mr. Woodall. We talked a little bit about income
+inequality, that is something that concerns me as well, though
+it concerns me more that if it comes from a place of
+productivity, inequality. And I actually think of what we are
+doing on the tax code and the reg. side of things as creating
+productivity inequality among American citizens. It doesn't
+trouble me if we have income inequality if it is in line with
+what one produces and contributes. Can anybody point me to any
+studies, information where I can educate myself about whether
+we have seen a change in productivity inequality as we have
+seen a change of income inequality?
+ Mr. Podesta. Mr. Woodall, I would be happy to try to get
+you something for the record. I think the one thing that is
+characteristic really, of the recent period of economic history
+is that productivity gains in the economy have not been shared
+by the entire workforce of the enterprises that are making
+those productivity gains, the way they had been in previous
+decades and particularly in the post-World War II period. So we
+have a lot of productivity in the economy, most of the revenue
+from that, most of the gains from that, have gone to the top,
+and that has been a change and that has led to the deep income
+inequality that was commented on earlier.
+ Mr. Woodall. And let me use my last 10 seconds to say, as
+much as I value the Gingrich-Clinton years, and I do, I view
+those as very productive years, I look back at what we did with
+Medicare reform, where we are still kicking the doc fix and the
+SGR down the road, what are we now? Twelve years later, 15
+years later, and so as scary as it is to do things today, to do
+things now, to do things immediately, I have seen what happens
+when we put something on the list for three years from now, and
+I appreciate folks being willing to do things today. Thank you
+all for being here.
+ Mr. Lankford. Thank you. The Hoosier from Indiana, Mr.
+Rokita.
+ Mr. Rokita. Thank you, Mr. Chair. Only place where Hoosiers
+are from, really. Unless I am missing some of my constituents I
+need to get to. Thank you for your leadership, Mr. Chair. I
+want to put some things on the record, and for nothing else, I
+appreciate today's discussion. I appreciate you all coming, I
+appreciate what Mr. Ryan from Ohio said, I appreciate even what
+Mr. Pascrell said earlier, and I also enjoy Congresswoman
+Kaptur. We have been able to have some excellent conversations
+in the short time that we have known each other, maybe with
+today's issue aside. But even with today, I know that what you
+say comes from a genuine concern.
+ What I saw that was disingenuous, Mr. Chairman, on this
+committee today are comments from Ms. Schwartz. And they are
+almost so silly that I risk using time to refute them, but I
+think the record deserves it. To say that what we are dealing
+with here in terms of a $14 trillion debt, in terms of $100
+trillion in promises made to future generations, is somehow the
+fault of the last administration, that is her words, is
+ridiculous. And then to further compound that problem by saying
+the only thing that this current Congress has done is propose
+$61 billion in cuts, really puts salt in the wounds. Her party
+can't even get to $61 billion in cuts, and I agree with her
+that it is only 12 percent, that discretionary spending is only
+12 percent of the budget. Can't even get there. And that is why
+Mr. Ryan's comments, Ms. Kaptur's, and Mr. Pascrell's, even,
+are so important. We need to get there. To make sure we have a
+full picture for the record, Mr. Podesta, I just want to ask
+you a few direct questions before I get onto some other ones,
+and hope they have direct answers. And I hope you would agree
+with them.
+ The years that President Clinton, and I appreciate his
+leadership, because he led on the budget--in the years that we
+had a balanced budget, which party controlled Congress in each
+one of those years?
+ Mr. Podesta. In 1998, 1999, 2000, and I would probably put
+2001 in that as well, the Republican Party led the Congress.
+ Mr. Rokita. That is what I wanted to know. I will get to
+some other questions here now, reclaiming my time. And under
+the Constitution, is it not the Congress' job to control the
+purse strings? To create and pass a budget is one of our core
+constitutional duties.
+ Mr. Podesta. I would hope so.
+ Mr. Rokita. Okay, right. And wasn't Ms. Schwartz's party in
+the last Congress that failed to do that?
+ Mr. Podesta. Well, Ms. Schwartz's party passed a continuing
+resolution that funded the government.
+ Mr. Rokita. That is what I thought, okay. Just want to make
+sure we have that full picture there. As much as I appreciate
+Mr. Clinton's leadership, it takes two to tango, especially
+when it comes to a budget, in this case, a Congress that is
+also willing to lead. And that is what we need now, and that is
+what we are trying to do now.
+ Mr. Podesta. You know what? I agree with you.
+ Mr. Rokita. Thank you. Can you put the cartoon slide up, if
+you can, please? The one with the ship and the submarine? Let
+me get to that question. As they are putting that up, let us
+talk about the way in which the growing U.S. debt could impact
+America's status as a world power, as well as its freedom to
+act. According to the CBO's long-term budget projections, U.S.
+interest payments on the debt will begin to exceed our yearly
+defense spending in 2022, and then double in 2037. Can a
+country that borrows this much maintain its economic and
+military power and diplomatic leverage over the long run?
+ Mr. Holtz-Eakin. I clearly expressed my concern about that.
+I don't believe so.
+ Mr. Rokita. Okay, thank you. Ms. Reinhart.
+ Ms. Reinhart. All we have to do is look at the loss of the
+British Empire.
+ Mr. Rokita. Okay, thank you. Maya.
+ Ms. MacGuineas. Our influence in the world is clearly
+already on the decline, and I will just quote a friend of mine,
+former member of Congress Tanner, who always says, We have an
+agreement that we would protect Taiwan. If China were to
+attack, the problem is we would have to go and borrow the money
+from China. That is just not the position we want to be in.
+ Mr. Rokita. I laugh so I don't cry. John?
+ Mr. Podesta. I agree.
+ Mr. Rokita. Final thing, just to put all your comments in
+context, I just want to ask you a basic one real quick. Art
+Laffer's curve, does it have validity or not when it comes to
+the tax issues you brought up?
+ Mr. Holtz-Eakin. It is correct in principle, but we have
+never been over the top of it.
+ Ms. Reinhart. I concur.
+ Ms. MacGuineas. It is not relevant to where we are in the
+tax rates right now.
+ Mr. Rokita. John?
+ Mr. Podesta. Well, I again reference back to the last
+couple decades of history, and I think it would probably be a
+bad place to begin this conversation.
+ Mr. Rokita. Thank you all very much. I yield back.
+ Mr. Lankford. Thank you, and I yield to myself the five
+minutes that remain here as the final person doing the
+questioning. Yesterday we had the privilege of having a joint
+session of Congress and the prime minister of Australia; she
+came and spoke to Congress and to all of us as American people.
+And one of the interesting things she kept coming back to was
+this clear statement, that she believed as a child watching us
+land on the moon, Those are Americans and they can do anything.
+And there is this sense that is rising up that I sense from
+Americans, saying we have got to take on the big, difficult
+thing of our time, and that is our debt. And it has been very
+interesting to be able to hear your comments on it, and to
+especially hear you say, this is not something that can be done
+five years from now. This is something that has to be done
+right now. So I appreciate your comments and all of your work,
+and for you coming here and spending so much time with us and
+letting us get a chance to ask you some random questions with
+it.
+ Knowing that, we are fully aware you can't just shut the
+government down for a couple years and say we are not going to
+spend money on anything. This conversation that is happening
+between investing while we are also trying to cut the debt. We
+understand we have to do infrastructure projects; there are
+things that still need to be able to continue on. What would
+you recommend as a balance, or as a thought that you have
+clearly between this balance between investing, and also we
+have got to get aggressive in cutting the debt.
+ Mr. Holtz-Eakin. I think the key is to recognize that the
+budget at the moment is structured so that the legacy programs
+of our past, the Medicare's, the Medicaid's, the Social
+Securities, are going to crush our ability to invest in the
+future. They are literally just pushing out any ability to do
+discretionary spending. And if you are going to let your past
+crush your future, you are going nowhere as a nation. So you
+have got to fix that.
+ Mr. Lankford. Any comments from anyone on that?
+ Mr. Podesta. Yes, Congressman. You know, this is where the
+rubber hits the road. Because this is where the tough choices
+need to get made. And I think that we know what produces
+productivity in the economy, we have seen it in the past,
+investments in education, and building human capital in giving
+people the skills they need to succeed in science and
+technology, those produce strong results. So we have to find a
+way to pay for those. And the issue around health care and
+particularly Social Security, I come back to what I said in my
+prepared statement, which is in the early 1960s, nearly 30
+percent of elderly Americans lived in poverty. Today less than
+10 percent do. So we can't abandon that commitment; we have got
+to find a way to produce health care in a way that is going to
+produce good results at a lower cost.
+ Mr. Lankford. Right. And I don't hear a lot of people
+trying to abandon that commitment. The question becomes how do
+we do that? Because currently we are trying to make life in
+this generation easier by making it harder on the next
+generation, and it is progressively getting closer and closer
+to this generation making it much tougher, based on putting the
+hard decisions off, putting it off, putting it off.
+ Mr. Podesta. I agree with that.
+ Mr. Lankford. Let me bring up just some process things to
+you as well, just for perspective. Since 1921, the President
+has submitted a budget to Congress, which I understand since
+1922 has been dead on arrival each year when it comes, but just
+this perpetual process of the President setting out the wish
+list, both parties, and then Congress trying to work through
+the process on that. Is there a benefit to setting some harder
+caps on it a year before, that Congress is able to send to the
+President, You can submit a budget no larger than, please work
+with your agencies and submit a budget that fits under this
+criteria, and that allows the Executive Branch and the
+Legislative Branch then that next year to work on a budget,
+knowing that we are all dealing with the same numbers.
+ Ms. MacGuineas. I would say that right now, given where we
+are in our budget challenges, what we should really be thinking
+about is multi-year budgeting. And we need to have a fiscal
+path that would bring us to stabilizing the debt at a
+sustainable level and then below over more time, and I think
+the way to do that is multi-year budgeting, and I think you
+have to put hard caps and triggers in the budget. Again, budget
+process will never fix this problem alone, but it needs to be
+there to strengthen whatever policy deals people came up with
+so we can stay on track over the multi years it will take to
+get us back to a place of fiscal health.
+ Mr. Lankford. Thank you. Other comments on that?
+ Mr. Podesta. I agree with that, I just had one note, which
+is that in the 1980s, after Gramm-Rudman-Hollings passed, the
+caps were set at an unrealistically low level, and therefore
+they were continuously blown through and Congress set them
+aside. I think they have to be realistic, but I think having
+hard caps that can be enforced is really the trajectory on the
+discretionary side, and as I said earlier, I think you have to
+have the same kind of discipline through a strong PAYGO
+mechanism on mandatory and the revenue side.
+ Mr. Lankford. Terrific. Thank you all for coming and for
+being a part of this, I really appreciate it. You worked right
+through lunch, I am sure you had a long day of preparing
+yesterday and then a trip to be able to get over here and come
+through security and everything that you did today, so I
+appreciate very much your time and for being here and investing
+in the future of our country. With that this budget hearing is
+adjourned.
+ [Additional submission from Ms. Kaptur follows:]
+
+ Submission of Hon. Marcy Kaptur, a Representative in Congress
+ From the State of Ohio
+
+ BIOGRAPHIES AND REPORTED SOURCES OF PRIVATE FUNDING OF WITNESSES
+
+Douglas J. ``Doug'' Holtz-Eakin--President of the American Action Forum
+ In early 2010, Mr. Holtz-Eakin became president of the conservative
+American Action Forum.
+ According to the New York Times, the Board of Directors for the
+American Action Forum includes Robert K. Steel, a former executive of
+Wachovia and Goldman Sachs. A major contributor is believed to be
+Kenneth G. Langone, a founder of Home Depot and a former director of
+the New York Stock Exchange.
+ 1. Appointed to the Financial Crisis Inquiry Commission in 2009
+ 2. Chief Economic Policy Adviser to U.S. Senator John McCain's 2008
+presidential campaign
+ 3. Senior Staff Economist for President George H. Bush's Council on
+Economic Advisors.
+ 4. Director of the Congressional Budget Office, from 2003--2005
+ 5. Visiting Fellow at the Peterson Institute, from 2007--2008
+ 6. Former academic appointments at Princeton and Columbia
+Universities. He later received tenure at Syracuse University.
+Carmen M. Reinhart, Ph.D.--Fellow at the Peterson Institute for
+ International Economics
+ Reinhart is also a researcher at the National Bureau of Economic
+Research and the Centre for Economic Policy Research and a member of
+the Congressional Budget Office Panel of Economic Advisers and Council
+on Foreign Relations.
+ The Peterson's Institute receives major contributions from Peter G.
+Peterson and his wife. Mr. Peterson is a former Chairman and CEO of
+Lehman Brothers, and he co-founded the private equity firm the
+Blackstone Group. In 2009, he reportedly gave the Peterson Institute
+$8.5 million.
+ 1. Formerly a professor of economics at the University of Maryland
+ 2. Chief Economist and Vice President at the investment bank Bear
+Stearns in the 1980s.
+ 3. Also spent several years at the International Monetary Fund.
+Maya MacGuineas--President of the Committee for Responsible Federal
+ Budget
+ She has served as the group's President since 2003.
+ Ms. MacGuineas' organization reportedly receives major funding from
+billionaire Pete Peterson. (Peterson, who also provided contributions
+to the Peterson Institute for International Economics, was Chairman and
+CEO of Bell & Howell, from 1963 to 1971. From 1973 to 1984, he was
+Chairman and CEO of Lehman Brothers. In 1985 he co-founded the private
+equity firm, the Blackstone Group. He also served as Secretary of
+Commerce under Nixon.)
+ 1. Served on The Washington Post editorial board, in the Spring of
+2009, covering economic and fiscal policy, and writing extensively on
+the health care reform debate
+ 2. Social Security Adviser to the McCain Presidential Campaign.
+(She claims to be nonpartisan)
+ 3. Worked at the Brookings Institution and the Concord Coalition
+ 4. Worked on Wall Street (Firms Unknown)
+John Podesta--President and CEO of the Center for American Progress
+ Major individual donors include to the Center for American Progress
+include Peter Lewis (Ohio based Chairman of Progressive Insurance),
+Steve Bing (New York Real Estate Developer and liberal philanthropist),
+George Soros, and Herbert M. Sandler.
+ 1. Co-chairman of the Obama-Biden Transition Project, and visiting
+Professor of Law at Georgetown University
+ 2. Assistant to the President, Deputy Chief of Staff, and White
+House Chief of Staff during the Clinton Administration
+ 3. In 1988, Podesta founded with his brother, Tony, Podesta
+Associates, Inc., a Washington, D.C., ``government relations and public
+affairs'' lobbying firm. Now known as the Podesta Group, the firm ``has
+been retained by some of the biggest corporations in the country,
+including Wal-Mart, BP and Lockheed Martin.''
+ 4. Podesta held positions on Capitol Hill, including Counselor to
+Democratic Leader Senator Thomas Daschle (1995--1996); Chief Counsel
+for the Senate Agriculture Committee (1987--1988); Chief Minority
+Counsel for the Senate Judiciary Subcommittees on Patents, Copyrights,
+and Trademarks; Security and Terrorism; and Regulatory Reform; and
+Counsel on the Majority Staff of the Senate Judiciary Committee (1979--
+1981).
+ 5. Podesta worked as a trial attorney for the Department of
+Justice's Honors Program in the Land and Natural Resources Division
+(1976--1977), and as a Special Assistant to the Director of ACTION, the
+Federal volunteer agency (1978--1979).
+
+ [Questions for the record and their responses follow:]
+
+ Questions for the Record Submitted by Hon. Michael M. Honda, a
+ Representative in Congress From the State of California
+
+ Ms. Reinhart: Economists contend that mandatory spending will drive
+the impending fiscal crisis. Because of this, would you agree that it
+is impossible to bring our debt and deficit crisis in line through a
+plan that solely cuts non-defense discretionary spending?*
+---------------------------------------------------------------------------
+ *Editor's Note: As of publication deadline, the committee has
+received no response from the witness.
+
+ Ms. MacGuiness: You testified today about the psychological aspects
+of the debt crisis. As I understand it, you are suggesting that as long
+as we pass a credible plan that brings our debt-to-GDP level to
+sustainable levels in a reasonable amount of time, it will create
+enough certainty in the bond markets to stave off disaster and allow us
+the time to implement that plan. Is that correct?
+ Since we agree that the Republican spending bill, HR 1, is not a
+credible plan and therefore is not an effective way to calm bond
+markets and delay the onset of a major fiscal meltdown, there seems to
+be no reason to pass this legislation--legislation that hundreds of
+notable economists including Goldman Sachs, Mark Zandi and Ben Bernanke
+believe will cost hundreds of thousands of jobs and endanger our
+economic recovery.
+ We know there is a better way.
+
+ Mr. Podesta: You outline an alternative, credible plan. The plan
+has a number of features including reducing spending and increasing
+revenue. It also, however, includes strategic investments in education,
+transportation, infrastructure, and R&D, all areas slashed in HR 1.
+Please explain to the Committee why these kinds of investments are a
+key component of any credible long-term plan to put our fiscal house in
+order.
+
+ Ms. MacGuineas' Response to Mr. Honda's Question for the Record
+
+ You testified today about the psychological aspects of the debt
+crisis. As I understand it, you are suggesting that as long as we pass
+a credible plan that brings our debt-to-GDP level to sustainable levels
+in a reasonable amount of time, it will create enough certainty in the
+bond markets to stave off disaster and allow us the time to implement
+that plan. Is that correct?
+ Yes, that is correct. I believe that we cannot completely backload
+a plan or it will appear that politicians are merely pushing all the
+hard choices into the future. But if we adopt a credible multi-year
+plan we can buy ourselves some time and don't need to implement major
+policy changes this year when they are more likely to disrupt the
+economic recovery. It is worth noting that whenever we start fiscal
+consolidation, it is likely to have short-term negative affects on
+growth, but it will be extremely beneficial in the long-term compared
+to doing nothing.
+ But any plan will have to be credible. I think that means being
+bipartisan, so one party does not try to undo it, statutory, and
+coupled with triggers so that if changes do not occur, automatic
+changes will.
+ I believe the best approach is a comprehensive, multi-year plan
+that includes cuts to domestic discretionary spending, as the House
+Republicans are pushing--though I would prefer to wait another year or
+two for ones this large--but also changes to defense, entitlements and
+revenues. But it is important that those who oppose the cuts in
+domestic discretionary spending go on record on the comprehensive
+budgetary changes they do support-not just argue against those they
+oppose.
+
+ Mr. Podesta's Response to Mr. Honda's Question for the Record
+
+ Of course, deficit reduction is going to have be a mix of spending
+restraint and new revenue. But we cannot ignore a third crucial
+ingredient: strong economic growth.
+ There is a broad consensus that overall investment levels are key
+driver of future economic growth and prosperity. Public investment
+drives technological innovation and productivity growth, builds a
+strong workforce through education and job training, and helps new
+industries like clean energy to grow. Often, it induces the private
+sector to invest as well: a 2003 study of 17 economically developed
+countries found that for every dollar of public investment in research
+and development, private firms spent about 70 cents more thanks to new
+opportunities created by government investment. And it supports and
+expands the American middle class, who can take advantage of better
+education and employment opportunities to start a business or pursue an
+invention, move up in the workforce, and give their children a better
+life.
+ Moreover, while other countries are investing in the technology,
+infrastructure, and education systems of the future, net U.S.
+investment is currently at its lowest level since World War II. We need
+to invest to stay competitive in the global economy, and we are already
+falling behind.
+ While our budget problems are too big and too complicated to simply
+``grow our way out of,'' without robust economic growth, we can never
+hope to solve them. Public investment is critical to getting our
+economy back on track and spurring strong, sustained and broadly shared
+prosperity. Deficit reduction and renewed public investment need not be
+mutually exclusive. On the contrary, strong public investment must be
+made alongside targeted deficit reduction to create jobs, encourage
+private investment, and help grow our economy back to health.
+
+ [Whereupon, at 12:56 p.m., the committee adjourned subject
+to the call of the Chair]
+
+
+
+