without fundamental structural reforms the budget nor the economy can sustain projected spending for these programs as they are currently structured i just want to close one quote from general walker who said earlier hearing quote we cannot grow our way out of this problem eliminating earmarks will not solve the problem wiping out fraud waste and abuse will not solve the problem any more cutting way back on defense will not solve the problem and letting the recent tax cuts expire will not solve the problem we're going to have to do much bigger things in congress we're going to have much larger reforms and lead to fundamental restructuring of these entitlement programs if we're going to solve the problem do we want to give our kids and our grandkids a government that is literally twice the size of the government we have today that will literally have to tax about forty percent of our nation's output in order to just pay for the programs we have today in and keep those promises but we didn't come here to talk ourselves we come here to hear what you have to say general walker and one of the two witnesses have the floor jurors will make your statement part of the record if you care to summarize it in the chart on the wall of ryan members of the house budget committee it's a pleasure to be back before you here today to talk about why deficits matter i do have a power point presentation which i'm going to use i find that when you're dealing with numbers this big you need to have charts and graphs ross you really can't convey the message affectively you have a copy of my full statement which i've also provided for the record let me first answer the question do deficits matter the answer is if you care about if you are concerned with stewardship and if you care about the future of our country our children and our grandchildren the answer is a clear yes they do matter secondly today in america we suffer from two maladies near sightedness or short sightedness and tunnel vision the analogy from a fiscal standpoint is the short term deficits aren't our problem it's where we're headed and where we're headed chris rock the ship of state if we don't get serious we do not face an immediate heart attack but we have been diagnosed with cancer and we need to change behavior and we need to engage in dramatic and fundamental ref which i'll touch on in order to save our future next place this represents deficits as a percentage of the economy going back to our comments first obviously our eighty's we then took a number of dramatic steps we turned deficits into surpluses the trend turn negative it's gotten better in the last several years but let me reinforce my statement the problem is not the short is when you're flying a plane driving a car you need to look forward not in the rearview mirror and it doesn't really make any difference what the deficits were in the eighty's what matters is where we are now and rare we had it and one of the consequences to the country and our children grandchildren next plays this represents the future of unified surpluses and deficits as a share of g d p under two alternative fiscal policy simulations one is c b r baseline extended you can see even with that we face large problems in the out years that the second one which is the red dotted line shows discretionary spending growing with the february of two thousand and one and i testified before numerous committees in the house and the senate about where we stood from a financial and fiscal standpoint this represented long range fiscal stimulation in running of two thousand and wrong it was based upon a number of assumptions some have brunch proved to be valid some of which did not anytime you go out forty plus years that's a long way to go and obviously the power of compound is such that national debt although i know a lot of people were really concerned about that personally i was never really concerned about that but some people were next place this represents the next one place that represents the current simulation based upon baseline extended and just to help the black line represents revenues as a percentage of the economy only federal revenues the balance represents spending is discretionary spending will only grow by the rate of the economy for the first ten years and assumes a number of other things including that we don't have a long term fixed a m t you can see we have a large and growing problem in the out years next please the following simulation assumes that discretionary spending the economy rather than the rate of inflation and that all tax cuts are made  which represents interest on the federal debt now on right two thousand and one where we had fiscal sustainability for forty plus years under this model blows up in the two thousand and forty next place we're on a path where even if you exclude interest on the federal debt which obviously you can't the federal government is not going to default either on debt held by the public or frankly debt held by the trust funds we're not going to default on that  that it represents a priority claim on future general revenues but if you exclude interest on the debt which obviously we can't but for us repurpose is social security medicare and medicaid along on a path where they will consume the entire our revenues based on the percentage of our economy these three programs alone that obviously can't be allowed to happen next please now this is important in the last six years i believe unfunded commitments of the united states government have gone up from twenty trillion dollars now you have to write twelve zeros to social security present value let me explain this this takes dedicated payroll tax and premium revenues over the next seventy five years estimated benefit payments based upon the best estimate assumptions of the trustees of such good medicare and i used to be one from ninety to ninety five you calculate the difference and you discount it back to current dollar terms at treasury rates so other words how trillion ninety five percent of the entire every american fifty trillion dollars is ninety five percent of the estimated net worth of every american one hundred percent within the next two years fifty trillion dollars hundred thirty thousand dollars per american household median household income in america thirty seven thousand already running a negative cash for medicare and in fact the medicare part a trust fund is expected to become exhausted in about two thousand and seventeen two thousand and eighteen next place this is a possible way forward number one we have to financial reporting public education and performance metrics you can't solve a problem talk people understand that we have a problem that needs to be solved prudent to solve it summarizing later we need to improve transparency with regard to financial reporting badging and other measures safer processes more truth in advertising about where we really are secondly we need to gives you an idea of the kind of questions that we're going to have to ask and answer and it's going to take us twenty years but we need to get started now last two slides this is not just about numbers this is about values and people the value that i would give you to focus on is stewardship starship leaders have an obligation is not acceptable to may and i would imagine it's not acceptable to you so it's about values and it's about people next and last these are my three grandchildren they did not create this problem are you sitting down i'll introduce you further dr graham like a long and distinguished careers and economists he was a professor at the university of michigan for much of his career he serves the governor on the federal reserve board from ninety seven to two thousand and five talk about deficits and why they matter and much of my testimony involved current deficits and why they matter but i would strongly endorse what david walker has just told you that the real problem is not so much the short run short run has some difficulties we'll talk about but the real problem is the long run and so i'm going to start with the short run and talk about some of the issues there and then i'm not going to say much about the long run because i can't do it any better than david walker already has and then talk about the policy issues now david used the  trying to blow blow the house down or to termites in the basement the pussy cat argument is basically their private sabre's will offset the deficit and make it no problem from a standpoint of national saving and you can see the characters are top line is the national saving rate of the united states and the bottom line is the badgett contribution to that national savings and you see particularly in the last twenty years that the two are highly correlated that is when the budget went into surplus in the late ninety's national saving when not used me but before that it had gone down and after that it was going down in other words private savers have really not offset the behavior of the federal budget and so the deficit is not a pussycat  inflation get out of control well the fed doesn't have to do that they're ways to conduct monetary policy without doing that in the fed has been very firm in its resolve the past two decades to keep prices stable it has done that it can continue to do that so i don't think that is a realistic worry it could be in some countries but not here in the united states the other part of the rest argument is that  would begin charging higher interest rates long term interest rates the stats and that really hasn't happened either and that's one of the things that we used to worry about at the fed exactly why long term interest rates were so low chairman greenspan at one point called it a conundrum this sent many bond traders to their dictionaries to find out what conundrum was and they once they found out yeah they  the termites in the basement argument that you can see from the chart which we have deficits they're going to do lower national saving when national savings goes down one of two things must happen this is mathematics  our saving is going down and so we have to come up with the funds somewhere so we borrow it from broad and this is what ted truman is going to talk about and i'm just going to raise three questions about  time i won't go into that in great detail one question you want to ask is well we been able to borrow the difference between investment and saving for how long how long can we do  this these are international lenders and they may get cold feet at some point and then if if we can't keep on borrowing then our investment will have to go down the second question that you could ask and again dr truman will address this is what happens if this borrowing on wind you could have the history you have financial international finance  been that good very often these periods are ugly that currency rates change abruptly in a short period of time and that causes lots of dislocation and that's an issue too and the third question i would ask is why do we put ourselves in this position all we have to do is run responsible fiscal policy we can keep our national saving at a higher rate we don't have this decline that we see there recently and  isn't that a more stable and sensible and sound way to manage our economy so my fundamental argument about deficits in the short run would be that we're just this is not good risk management we're just putting the economy of the country at risk going away that we don't have to do now things get much worse in the long run and you've already seen david walker's charts and so forth and  know it's driven by entitlement spending the demographics the i would just make one further point about that right now we have roughly three point three workers per retiring in by twenty thirty we're going to have two workers for retirees how are these these workers and twenty thirty in the kids and grandkids going to support us if we're still lucky enough to be alive and twenty thirty well they're going to need more capital that's the way they're going to support us and the only way they get to the more capital is by saving more and so this is a very good time i would put for national saving to drop this as it has the last point is one one simple thing i'm going to try to be nonpolitical about this should we fix the deficit on the tax or expenditure side in the long run it's it's obvious we really have to do something about the growth has been title me spending in the short run i would say it's not so obvious we could fix it on either side and  know it's it's a huge political issue for all of you but i would just make the simple point as an economist that the problem here is the deficits these are what ought to be fixed if you if your belief is that america needs lower tax rates fine great congratulations but you have to cut spending if your belief is that in some areas america needs more spending fin great congratulations but you have to be willing to pay the taxes to cover that spending economics read was called out of town on a family emergency he regrets he cannot participate in your hearing on this important topic i work closely with him on preparation of this his testimony the words are he is right i fully matter should we be concerned that foreigners now own more than fifty percent of u s treasury debt that is in private hands should we be concerned that warner's own about fifteen percent of the value of long term securities we have tables in the testimony documenting all this should we be concerned that at the end of two thousand and five the latest data company is a day to day oh bill our net debt to foreigners was twenty two percent of our g and our gross debt to foreigners was thirteen point six trillion equal to almost one hundred ten percent of our g d p the answer is not entirely straightforward  importance who they are is also relatively unimportant whether they're private holders or official however what is important is that foreigners as a group continue to hold existing claims on the united  form and continue to add to their holdings add a rate of about two trillion dollars a year to cover both our current account deficits and our capital outflows our overall dependence on foreign financing is one of the major reasons why we should adopt a national policy objective of restoring the modest budget surpluses that were in place as recently as one thousand nine hundred eighty two thousand and one preferably by the end of this decade  excluding off budget financing if we do not put our house in order as a phrase goes the performance of the u s economy is vulnerable to an abrupt cessation of corn capital inflows this is the one point i think in terms of your hearings where there is some difference between the sort of longer term view that you've heard from david and ed which is certainly correct but in the short run we may not have as long as we think we that has to do with our  to foreign financing as evidence of that vulnerability noted over the past five years we've only been able to attract to foreign financing to cover our current account deficits at progressive league lower exchange rates in other words by selling us assets each year at lower prices the cost is also rising in other dimensions our gross income payments to foreigners are now more than four and a half percent of g d p compared with small savings from abroad to cover more than three quarters of our net domestic investment investment that is critical to boosting the productivity of our cami as baby boomers baby boomers retire just because of our dependence on foreign financing the u s economy faces the risk of what is called a hard landing not only important in the form of a lower dollar which is essentially inevitable but in the form of higher investment higher interest rates lower investments and a weaker economy moreover if we fail promptly to put our house in order the rest of presidents may also lose confidence in our policies and seek to move their investments broad their holdings of u s financial assets are three times those  prudent policy is to anticipate that the current account deficit will be cut in half to about three and a half percent of g d p by the end of the decade not sure but that would be the prudent assumption in my judgment if this process just to proceed supposedly national savings the only policy tool that we have can expect with confidence to deliver such an increase in national savings is a comparable improvement in the federal budget position thank you look forward to your questions table bring everybody to the table we've got a model for that nine hundred eighty three at work we make social security solvent for the next sixty years in effect and we can do that again medicare is the  difficult problem and you're lying reason for that the major reason is that the cost of medical care is going up at two and a half percent to three percent over and above the c p i the rate of inflation are coming every year and compound that you see the problems in the outyears looking just impossibly enormous as you've just shown on your table would you agree that the resolution of the medicare problem is a subset of the resolution of the whole problem of the costs of health care delivery in the country yes i would like health care represents the single largest fiscal challenge of the federal government health care represents the single largest arguably domestic policy challenge challenge your united states and the two big drivers to the fed our long range fiscal imbalance our demographics and health care costs energy you can see from the numbers that i put up that medicare is five times plus worse shape than social security just medicare alone that doesn't include count medicaid or civilian and military you know health care health care entitlements traquair medicaid medicare all of them are afflicted with this problem correct and ultimately i believe that we're going to have to engage in comprehensive reform of our talent our health care system in installments over a number of years security yes i firmly believe we can and there are many ways to do it and they're they're not that painful but the health programs you throw up your hands because number one the dollars  are much more and the ethical issues are much worse was social security you're only talking money somebody gets a little bit more a little bit less we we can deal with those kinds of questions but with medicare you start talking about denying treatments for this and that sort of thing and you just take the whole discussion to a new level and that becomes much harder for anybody to think about and also much harder to think about politically d could well have a messy period over the next three or four years and that's the sense in which in some sense and that is driven by confidence in our policies  what is done here and the sense in which we've gotten our hands around some of these longer term problems because the financial markets have a way of bringing the whole bringing back to the the problems that we see on these charts out there twenty years from now interest rates in our last thirty years and i think we can't rule out another one we have three financial deficits that are of concern and somewhat interrelated we have a budget deficit which we've talked about we have a balance of payments deficit and we have a savings deficit there's absolutely no question that we're on an imprudent and unsustainable  path there's absolutely no question that our risk will increase over time nobody knows for sure when and if we'll hit the wall and how bad it will be but it is fundamentally imprudent to continue on our current you know our big problem is we don't seem to be able to come together for fundamental entitlement reform and i blame politics is a big reason for that both sides you know we did seem unwilling to come together right but even though we know it might cost us politically and actually fundamentally fix these things and change these things i'm not going to ask you to give us political solutions that's not your job but what can we do in the form of metrics to but he's right in saying that he's pretty easy to fix i mean problem with itself the health care stuff it's all there manifestations of the health care situation we have so much much much bigger obstacle to tackle and the question i want to ask you is in the context of this we can fix these entitlement programs easily if we wanted to we could just raise fica taxes and we could just raise the payroll tax to twenty five percent and pretty much probably fix the problem problem is we have to economic threats we have the entitlement threat which is a fiscal meltdown but we also have globalization we have competitiveness we have the threat that confronts our standard of living with a new kind of sense of competition we've never seen before that in the twenty first century and so least many of us believe we need to think about our international competitiveness and the comeback of our workers as we figure out how to fix these entitlement problems so that's why many of us don't want to just tax our way out of this problem because we know we do so we will lose our prosperity and just destroyed our standard of living so how do we better measure this stuff what metrics can we use to get policymakers in the public a better appreciation for the real mix that we're in and indeed do so in within the context of realizing we have to keep an eye on our international competitiveness so that we can enjoy  good jobs at good wages so we can enjoy a higher standard of living i think additional transparency and metrics are very very important not only to help the cause understand what needs to be done and to help manage the way forward but to help the american people understand where we are where we're headed the need for tough choices the prudence of doing it sooner rather than later so that frankly they will reward members who have the courage and five in something called a fiscal wake up tour where myself from the government as well as the concord coalition the heritage foundation the brookings institution and a variety of other groups including the i c p a g a the committee for economic development have been going to various cities around the country we've been to fifteen already where average about once a month to state the facts and speak the truth about where we are where we're headed the need for action the consequence of inaction i a number of the graphics so i showed you this morning there american people are pretty smart they get it they get it pretty quickly and so that's one thing we're doing we're doing it to try to prepare the way to to ground so that people can every member of congress probably on groundhog day february second which is my dad's birthday by my daughter's birthday my dad's birthday on groundhog day i plan to send every member of congress a concise plain fundamental reform entitlement programs and we're going to have to get the most money out of that number to reengineer structure and constrain spending we're going to have to get money tax in order to maximize economic growth maximize disposable income and maximize our competitive advantage as compared to other countries at the same time in the final analysis you've got to have enough revenues to pay your reform really represent a significant down payment a significant credibility enhanced on behalf the public and a significant confidence builder on behalf of congress since we are so demographically driven since our systems are pay as you go systems which are subject to the whims of demographics would not be prudent to move from a pay as you go system to a full funded system with our respect hundred eighty five billion dollars security surplus and we spent every dime of that some security surplus and we've been doing it for years so if you go to a foreign funded system it's got to have individual property rights to protect that the government from taking it away from people put in a real trust fund i'm sure responsibilities and liability that has been discussed before for example i have been involved in conversations over the years where there was a possibility of social risks here and especially you can see it in the in the medical programs that that that some people difficulties of health programs are going to need a lot of money and so i'm not sure information in the form of prego us so example having been through social security i think one of the most interesting ideas about how do we resolve to have the retirement age grow slowly with life expectancy i mean it's you know when when people are living longer and longer and longer and their social security system it just becomes an affirmative bullet some point and  don't well that's not the question i would put the question is do you want to re raise the retirement age or do something else like pay ten percent more taxes or do this or that i mean the these questions can't be given to people in the form of takeaways they have to be given to people in the form of praying gods do you want to do this or that neither one is going to be president and you've got to make the judgment and i think i've always  that is the problem more than the metrics i think people in a vague sense do know read david is talking about they do know that the population is aging they do know that they're going to be fewer people to support to retire repopulation and they do know that the cost of health care is rising we all see that in our in our daily life that they don't know is what the tradeoff is and i think the information that  should should go to people is is that do you want to work longer or do you want to pay more taxes you know that kind of thing mr cooper thank you mr chairman thank each one of the witnesses for your wisdom we need it you know congress is undergoing mandatory ethics training right now but we have to narrow definition of ethics i think according your testimony particularly mr walker values question how we handle these budget deficits may be the ultimate ethics question elsewhere robbing our children and grandchildren today the way we're conducting business in this country  it's never fun to undergo radiation or chemotherapy but if you've got cancer that can be your salvation so i want to work on the diagnosis of you all agree that deficits do matter i think it's a problem sometimes though getting us to realize the implications of that for example mr walker mentioned how every penny of the poultry surplus has been spent in my opinion one reason that happens is because we only report the net deficit number which allows us to hide the growth of borrowing figure and the fact that we do make off with associate producer plus every year the president has held a couple press conferences bragging about how small the net deficit is but he's always omitted the gross borrowing numbers and so much of that money one hundred eighty five billion was borrowed from social security and spent on other things not related to sell security another way of measuring the deficit fifty billion or seven hundred sixty billion not in the two hundred billion range and that's the number that rotarians across america online squad members and civic club members can relate to because that's the way they're worked hard to measure their business they cannot prote back home and main street america that mention health care law abilities are liabilities only the federal government's able to do that as you know business was required to account for pension health care law belief back in one thousand nine hundred two state local government have had to do it in recent years the federal government is the last holdout so i'm worried that this committee operates in an air of unreality you mention the medicare drug bill seven point nine trillion dollar present value liability added to our books and one of the reasons we were able to vote on it is because the budget committee under prior leadership pretended under our little budget window that if the bill came in under four hundred billion it was ok for us to vote on that was bruce bartlett a reagan economist said possibly the worst bill ever passed in american history because it's one of the least funded bills ever passed so i'm worried that th unintentionally under old rules contributes to the aragon reality and the two primary areas of unreality are not only hiding this fact that we're stealing the still security surplus but also the fact that according to the ch matter it's completely discretionary with the federal government so those are the issues i'm concerned about let's focus on diagnosis then the treatment options will seem a lot more palatable and a comment yes let's talk a little bit about metrics for fiscal two thousand and six there are three annual deficit numbers the first is a unified budget deficit two hundred forty eight billion dollars the second is  the the on budget deficit for hundred thirty four billion dollars the third is the net operating cost accrual basis for one hundred fifty billion dollars but i know that for one hundred fifty there was a significant actua gain so but for that actual gain didn't with the v a the number would have been much higher with regard to pensions and health care the federal government is already ahead of the private sector on accounting for employer sponsored pension and health care cost we broke the entire fund it arrived early for our pension accrued pension and health costs for civilian and military employees and that's on the books however the federal government is not needs to be with regard to accounting for some actual insurance programs i do not believe for a variety of reasons which i won't go into here that you want to book arrived only for the thirty trillion dollars that i put out i don't think it's appropriate i think it's misleading and we shouldn't do it however i do believe that we ought to have more transparency with regard  states government you will not find it on the financial statements of the u s government that is wrong in my view return money we spent the people's money we replaced it with a bond that's guaranteed that needs to be changed so we do need to change our financial reporting and quite frankly the other you need to do on the budget i would respectfully suggest that you need to disclose the discounted present value dollar cost of any major spending and tax proposals before your vote because there's a lot of gamesmanship the girls aren't aware of the cost explode on the five or ten year horizon and that's just when i wave comes in that's when the wave crest was beyond that ten year arisan shooting ourselves by doing that together for fresh air and sunshine with a lot of different organizations throughout america to let people know exactly what's going on when it comes to the problem of entitlements if there's one hundred thirty five members of congress  four hundred thirty five different ways to handle how we need to go forward whether they're spending caps whether it's reckoned silly let the reconciliation legislation or whatever is there anything that you are doing right now and if not i would encourage you to try to get these groups together general whether they be conservative moderate liberal doesn't matter in work a road map are you doing anything like that right now to give us a  roadmap in doing that are you thinking about major wholesale changes and i think that might be wrong because i think i heard you mention several times doing it in in kind of a step fashion second question to all three of you gentlemen we talk about national savings we talk about social security one of the pieces that they've talked about is a personal retirement account that has an individual's name on it that money just for the um this is not a novel idea but my question to you is doesn't it make sense to try to proceed with that something like that most goes but start it in the first year of someone's life whether it's incentivize or give them or whatever i don't know missing eighteen years of productivity and sometimes more more agree that our financial conditions worsen advertized they agree that we face a large and growing structural deficits to the demographic trends are rising health care costs and the top choices are required to know the better they generally agree that you're going to have to  come up with a comprehensive reform to social security i can write it in three minutes and exceed the expectations every generation of americans number two round of tax reform and you know we need to start looking comprehensive simply not subject to resolution by one party or the other and i think that mr ryan was saying we can't just tax our way out of these problems i agree with that we also can't just  on programs and get out of the problem that way i do think that probably no place in the congress reflects the debate over these issues better than then the debates we've had in this committee over the last few years and there are tax cuts generate only a fraction a relatively small fraction though of course it's debatable the loss in revenue so the tax cuts carbs the deficit to go up in a significant way in fact citing the treasury study the post post says that those who did that study concluded that economic let me go back to another point since the federal government collects about eighteen percent of gross domestic product in taxes enlarging g d p by two point seven percent which is what they say would be the impact of making the bush tax cuts permanent would result in an extra tax revenue to zero point one three percent p that would offset less than a tenth of the revenue that would be lost because of the tax cuts it seems to me that we've got to get a balance here in terms of how we think about additional taxes to deal with this unprecedented pressure on our entitlement programs and how we deal with reform itself so my question to you is since tax cuts increase the deficit you said mr walker let's start with you that there needs to be some tax reform which goes to added revenue what do you suggest i mean how do you best economic growth continuing and still generate added revenues to cuts the economy very few tax cuts pay for themselves the only studies that i've seen where tax cuts potentially pay for themselves are dramatic reductions in marginal tax to simplify the tax code that would broaden the base and try to keep rates as low as possible but bad in the base in order to facilitate compliance and freshman among other things we need to pay tax preparations process financial statements news on the radar screen need to be reviewed just like spending and ultimately i think we're going to need to think about moving more towards a consumption based type of tax other thing if you think about it in the short run tax cuts do stimulate output in spending some but spending increases too as well and i don't think there is the evidence had a period where we actually had government per process if you remember my chart there the government surpluses were high national saving was high and that was one of the better decades ever in american history so it is not necessary to run deficits to have a good economy in the very recent history we have shown that you can have a very fine economic outcome with government if you could start over consumption tax system would be better than income taxes that you would in effect tax people on how much they take out of the system not on how much they put into it and i think most people in prefer that but economists have worried about this issue for years and years and it's incredibly hard to get from one tax system to another raising hundreds of in transitioning from one system to another in the particular case i think you have to be very careful of these hybrid situations because we are right now the tax system is giving saving incentives but it also gives you full write off find your borrowing so i can borrow on my house claim the interest deduction and save tax free and so the government loses and i mean at same anymore so you've got to be very careful of these hybrid systems if we go all the way to a consumption tax that would be great but it's very difficult to do i think maybe even harder than solving medicare so i just give you those words of caution you just take two points here well i think the crucial point in this is what you said bodies is whether a consumption tax would be more efficient in terms of raising a given amount of academic end is undergraduate classroom favors consumption taxes is because you say your consumption tax and consumption but you're not taxing savings savings adds to it that's spent and that helps but the problem is if it's easier will only have a target to save x right you will still say that's right and so by not taxing the savings there's no assurance that you will increase savings that is the less of all the gimmicks that we have used through the tax system and other things to increase savings that are not to go back there gretchen not that we don't see too little not that i don't think it is a good idea good idea to have teach our support when you get down to three to two workers per retiree person that that was talking about you need a bigger capital stock in order to support those like alan born first grade lesson then in budgeting that we went through to something today that is as complex as how do we solve the long term budgeting problems of our country my question will be very brief mr walker i think that you answered a question a few moments ago to tom allen about which tax cuts pay for themselves and use you i want you to clarify i thought i understood you to say  two that potentially could pay for themselves would be dramatic reductions in marginal tax rates like what happened when j f k was president i mean talk about huge reductions in marginal tax rates not several percentage points and dramatic reductions in tariffs you know which promotes additional trade and economic growth but the perception was that you'd have to have a very large marginal tax rate to start start with all the shit together dramatic but right now that doesn't mean that there's not some positive economic stimulus but there's a difference between you know paying for themselves and being stimulative that's my key point i mean as as dr graham like said you know additional spending can stimulate economic growth at a price ok tax cuts can stimulate economic growth at a price as well what's going on right now is we have a national credit card with no credit limit and we're charging and our kids are going to have to pay off the compound  long term issues related to deficit the mandatory spending programs that the crisis places with ten or twelve years down the road how at what point in time the national international point in my view there's no question that ultimately will pay a price the question is what will that price be one could argue that we'll have a gradual erosion over time rather than a seven you know catastrophic event you know a gradual continual roshon in the value of the dollar a gradual increase in interest rates over time a gradual drag on economic growth on standard government we begged the foreigners to come help us right and they said we are going to help you until you have a budget summit right which will put on the table a credible commitment to cut the budget deficit i think was all of thi my home state which is a great state of new jersey where we may need the wake up our state is going through equally difficult budgetary times that whereas other states all revenue increases and be able to cut their taxes new jersey  in dire straits right now financially we are running looking just supposed to have a budget forum recently to try to solve those problems and instead they dealt with others social issues as well so we're on the same cusp in our state we have taken a different tact and said new jersey in that that whereas congress has in the past several years cut taxes to try to stimulate the economy and that sort of thing new jersey has gone the other direction and has actually raised taxes the result is what you see right now and the dilemma that we face and as ronald reagan used to say people vote with their feet and last year sixty thousand people voted with their feet and saw a decline in our population so i welcome you to come and educate our state i commend the general comment at the opening comment i made two statements one is we should be looking forward here in this committee and not looking in the rearview mirror we can depart debate all day long as to what the problems were but we need to look forward and i appreciate your last comment your last lie with your grandkids on there as to who it's all about this congress passed last session the increase and they've been at first for medicare and it is true and correct me for wrong the people who are receiving that benefit today are not the people who are paying for it nor this generation really paying for it it is your grandkids and other grandkids will be paying for the beneficiaries today so i go to my first question is the structural reform that you mention how do we get to the structural reform and for the comments in this sense as far as entitlement reform based on through comments on the role made one is that to which comment was better tax system would be one that is not putting a tax on what you put into the system but it is a tax you take out of the system and since i may not have enough time on this i'll ask my last question now and you can answer these and that is going to the social security and then the whole issue of trade off mr graham like you say we need more transparency and more of a show as to which we have show the trade off to people can we do anything with regard to the information they could have gotten had they been in other markets thank you gentlemen i'll touch on a couple forced bad news flows downhill we're talking about the federal fiscal challenge today state local governments have their own fiscal challenges  and for those that are interested in having a fiscal wake up tour come to your state bob takes the who's executive director of the concord coalition is the point person he's the one that schedules the different visits and we have not been to new jersey yet secondly my point on taxes is you want to try to minimize tax burdens in order to maximize economic growth maximize disposable income and maximize our competitive advantage as compared to your but in the end if you don't want to mortgage the future of our kids and our grandkids and if you want to mitigate the risk of the imprudent unsustainable path that we're on you've got to have a situation we're ultimately we're going to generate enough revenue to pay our current bills and deliver on our peb statement personal running in benefit even more complicated by putting the straight guy and i don't think people would understand i'd rather have the peb statements go out just as they are now but have the fiscal wake up to or go around and explain the issue because you do so determining options i mean you can't you can't put the end something about the retirement age or something about this or something about that and have people have any clue what what they're getting i think it would just confuse people and i'd rather have it done with a little instruction and then focus groups and that kind of thing and i think you get started  chairman several people mention this commission idea that my view is a problem with the commission is that suggest as a one time six and then the problem is solved like social security you had a commission to solve it for five ten fifteen maybe twenty years but if you have the one time takes the fall when you know you can just mess it up all over again we had this thing pretty much on the right track in two thousand and all of a sudden it got messed up unless you have some people willing to make continually make the tough choices you're not going to get very far with with a one time commission the social security question let me mr walker ask you a question that you have under when you're a long term fiscal  seventy five years yes but the next year we would have had a deficit and the reason being is because of non demographic trends what's happening right now in the short term we have surpluses so every year that passes we drop a surplus here and we add on to the end of seventy five years an increasing deficit year and that's why it's important that we recognize that reality you know the next time there's a commission we try to do something to try to ensure groups come together the wrong question is to make the system sustainable for seventy five years because as david said one year passes and also and it's out of balance the right way to do it is to make it sustainable for seventy five years have no change in what is known as a trust fund ratio in the last ten years because that that rate that's the ratio of assets to spending basically and if that ratio is stable then you can presume that as we go forward it won't change in the eleventh year the twelve year old i mean if you fix that ever in the next next year you'll have a different seventy five yes but if you can fix  for seventy five yes it gives you seventy five years starting off now to fix that for the next seventy five years maybe another program something we could have fixed seventy five years but three point eight trillion dollars correct in the two commission and again it gets worse is right before we have a surplus of five point five how much what's the present value of making tax cuts permanent i'll be happy to provide it for the record i don't have it off the top of my head was twelve trillion couple years ago that's not about right i'll have to provide for the record i can tell you that as i showed even if you don't make the tax cuts permanent you're still going to have to do  more but that's obviously a big number well couple of years ago make the tax cuts permanent was equivalent to the present value of the social security trust fund that's a seventy five year deficit in the medicare trust fund seventy five your deficit not to medicare there's no way we could have done that we will ruin the higher fifteen to twenty million to fifteen to twenty trillion are medicare part a and b before medicare prescription drug was passed and so then the combination of both sunscreen did exceed social security there's no question about that what the top one percent were going to get out of making the top tax cuts permanent was in the same order magnitude as a social security seventy five your trust fund their security by itself right and the other ninety nine percent well let me just get in one more question the trade deficit in the capital deficit if you look we have a capital deficit now what does a trade deficit do to that the combination of the ted we have actually as was put in the council of economic report we have a surplus on capital because prices coming in for pay for trade deficit right in the problem is that if you want to the problem is that the trade gap represents the fact that we're adding through those values and all remotely conceivably will have to pay off some of those i o u s so we have to pay the interest on top all all along we have to reduce the rate at which we're piling up use and we may have to pay them off and that means you have to bring down the current account surplus in order to in order to attract that bring up the trade balance in the process that is clear you mr chairman and i'm certainly happy to hear from all of our panelist on this subject on why deficits matter although i'm not sure it's much of a subject of debate within this committee i'm hopeful that you can all return in the future we can have a hearing maybe entitled why spiraling unfunded obligations and entitlement spending matter which i believe is in the testimony i hear clearly a place where this committee needs to put some focus  general walker i don't have the slide number here but i'm looking at it on your handouts composition spending as a share of g d p under sligh extended aug two thousand and six if i'm interpreting this correctly under and all the tax relief that many believe is the root of all evil expire we do not have an a m t patch and yet by twenty forty we still have apparently spending as a percentage of g d p go from roughly eighteen nineteen percent of the economy to roughly thirty percent i'm just eyeballing it it goes from about twenty percent last little over twenty percent economy to about thirty percent of the congress fleet twenty to thirty which would suggest i'm kind of back of a cocktail napkin math i believe the average family of four in the us pays roughly twenty thousand dollars combined in federal taxes that would seem to suggest an increase of fifty percent their tax burden to balance the budget by twenty forty so in inflation adjusted terms might their tax burden go up to thirty thousand a year if to tax increases which i don't know anybody who's proposing that and then you went in and if you waited until two thousand and thirty to do right then you would have to increase tax burdens by about fifteen percent but then again you have to keep in mind that's only at that point in time if you look out further from there we've still got a long range problem so that wouldn't solve it similar to the one nine hundred eighty three saw security we saw that for seventy five but we didn't solve it long term for the reasons that that gramlich talk but for those who do not wish to engage in a bipartisan dialogue on reform of entitlement spending if you take away again the bush track tax relief ultimately even you looking at what i believe many would view as an unconscionable tax increase upon american families in our economy there won't be speaking of time actually i think i heard you say that from your perspective  order for tax cuts to quote unquote pay for themselves i think you said only see significant decreases in marginal rates and significant decreases and terrorists would meet that criteria but recently we had a rather dramatic decrease in the cap gains tax rate and if i did my homework correctly we have doubled our capital gains realizations from two hundred sixty nine billion two to five hundred thirty nine billion tax relief package that might pay for itself well first i would say that i don't think you can look at the capital gains right now isolation i think i think you have to look at what's happened in the capital markets during that period of time what's happened to the real estate prices what's happened  was just pulling money out of some other year you know that's that's the problem with these capital gains realizations you have large accrued gains and then the question is when you realize i'm in if you realize and this year you may not realiz next year so you have to consider all years in that kind of calculation i don't know how would come out but i do know that these are tricky calculations for capital gains and the less than twenty seconds i have left just make sure i understand when i heard earlier general walker i think i heard you say something along the lines of we cannot grow our way out of this problem and perhaps we can't tax our way out of our problem is it fair to say that in your opinion the most important fiscal reform we could undertake is trying to find some bipartisan reform so the growth occurs in entitlement spending there's no question that's number one you're going to have to do more than that no question it's number one and by the way with regard to your question and mr scott's question and feinstein commission is eight entitlements so it's narrow scope permanent or long term part of it i believe what you said earlier we have a budget deficit balance payments deficit and i savings deficit i think we probably agree on that let me ask one other question and maybe all three want to comment on gone down substantially whatever the dollar is today versus what it was in two thousand two thousand which is on the american consumer a tax you know when you cut it and target if you will to the questions of the use you as relates to investment because when we own the debt those dollars that the federal government was paying for the debt was turned over in our economy today is turnover in currencies like that that's down a lot less against as we know against the chinese you want to start with the dollar is down fifteen percent second question is that a tax on american consumers the answer that question yes but it's probably in the category of an edible tax on american consumers right in the sort of death and taxes type of thing because you need to have a lower dollar  we're importing so that actually is x like any acts like a tax but it is a necessary part of how the process works of correcting the current account deficit works out and what this hearing is about is to make sure that as that process of screening that comes along we actually can generate through the principal reason we have the savings to replace the savings that we've been importing from i would just say that arguably the way that we felt the pain so far as decline of the dollar rather than an increase in long term borrowing cost we do have competition on the u s is still a global currency we're not the only one in town anymore and medicare it doesn't include everything doesn't count medicaid doesn't include a variety of other things so it's not like did fiscal exposures and the numbers down below with regard to metrics we've got the wrong metrics and you know we're focusing on debt held by the public which is we're which is a small subset of this i mean space clearly a down payment  of this number and so we need to change how we fix core another example is welcome if you're heading for a cliff and you slow the car down to half speed by the time you hit the cliff i think to get the job done so goes in a bank and can be used to finance corporate investment if the government comes along and runs a deficit then a lot of the individuals money gets used up in paying for the deficit and so the national cleaning would then go down so that that's why you have to worry about what the government is doing and what we want to do is have both individual save a lot and have the government not the detracting thank you very much thank you for the testimony you all have provided in this water if i understand your testimony while we cannot rely exclusively on increased revenues to address these problems there is no way we can solve these problems without a substantial increase in tax revenue over the long haul over the long haul i don't believe you going to be able to solve a problem at eighteen point two percent of g d p i do think you want to keep it much greater shortfall in the future if we continue on the present course correct and that you've seen very few tax cuts that pay for themselves that's the authoritative literature would you take a look back at page five of your charts were you talk about the the baseline that you presented to this committee in january two thousand and one i'm familiar with it yes at that time did it appear that the spending and even in title months or sustainable at the current revenue we were based upon the assumptions that existed at that point time some of which proved not to be assessed money to the ways and means committee where he was concerned we were going to pay off too much debt right and so really some of the assumptions may have changed the situation we find ourselves in today is largely the result of policy decisions that have been made in the last six years largely but not solely and i can write for example back in january of two thousand and one i testified about fiscal risk been a reduction in revenues over that time too has been for a combination of several things changes in assumptions number one also been increasing entitlements there's been a significant increase in spending as compared to struggle levels not all of which is defense and homeland security but a significant part is and thirdly tax cuts you mentioned health care is perhaps the greatest public policy challenge that we face in the country today health care is responsible for a significant number of personal bankruptcies being taken across the country as we look at how to address this looming crisis that you've described don't we also have to consider the crises that individual families are are faced with with health care and address those deficits in health care and education as well health care is the number one fiscal challenge for the federal state governments number two it's the number one competitiveness challenge for american business and number three it's a growing challenge for american families but let me just tell you if there's one thing that could bankrupt america is health care i mean we need dramatic and fundamental reforms in phases over time and i'm happy to talk about that some of the time if you want it could bankrupt our country our it could continue to bankrupt more and more families in the country if we don't find a way to address it would have an adverse effect on many players i thank you for your testimony general walker i was at the white house with the blue dog leadership on the new daimler ship about a month ago and had a chance to meet with the president and when it was my turn to speak for two minutes i said mr president i have seven have grandchildren and we have mortgaged the future of our children and grandchildren so i bring much appreciate the slide with your three grandchildren because i think that's what all of us on this committee in congress should be looking at because they are our future and we have done horrible things to their future we need to change the way we're doing business and i said the president tax cuts kind of pay for themselves and we've heard some differences morning and i understand we need to look at the whole big picture here for really going to make a difference here and it's about it's about time in the certainly that's the big one that you're going to find others wi fight it's about spending and we've got to look at that we've also got to look at tax cuts because i believe all tax cuts are created equally and they don't all pay for themselves some do but  change in metrics within the i mean do you have any suggestions about what we you know i heard you mention too that health care is the big the big thing in the in the picture out here can you give us just a i know you don't have time to go into a lot of detail here i've got three minutes left can you give us just a summary of some of the ideas you half for reforming health care to make it better for us in the future well first i think you need to reconsider the party benefit yes or number two we need to move to national practice standards which would help us to control cost improve consistency and reduce litigation number three we need to expand case management approaches within the federal health care programs we also i mean those are just a few examples but the since this is the budget committee let me suggest that some things that need to be considered we need to go back to pay going on both sides of the ledger we need to scratch an array spending caps we need mandatory mandatory spending programs get a certain size of budget we need to have more transparency and mandatory reconsideration triggers on tax preferences and tax expenditures as well and whether you have a commission or not you've  in the minority now on the other side here that are here that i really appreciate what you had private conversations with the ranking member about some of these items and i again i just hope we can come together and put aside all the rhetoric and really work together to address some of these if that's what needs to happen for not for us but for the american people in our country in the future one more question is kind of a tag along i guess is china right now i understand holds over half a trillion dollars or five hundred billion dollars states government people in government can't get their hands around the problems that mr general walker described then you could have a shot in the barrel and and that term bond rates as deficit rose but this hasn't really happened long term rates are well behaved right now and most reasonable forecasts expect them to remain so in the near future we could worry that high deficits will cause high interest rates but that would be crying wolf i'm not crying wolf but i fear the world i do and one of the reasons that i do is inherent in general walker's testimony i look at his graph on page four if i read it correctly he says that under the most likely policy scenario that we're presently on by two thousand and ten we'd be running a deficit of four percent of g d p give or take by two thousand and fifteen it would be about five percent of g d p give or take trending up to seven percent in two thousand and twenty and ten percent in two thousand and twenty five here's my question for all three  general walker's assumptions are correct and that's the path that we're on do you think that we reach a point where the wealth would does the door and we'd be punished in terms of higher interest rates number one and number two if that's a scenario that we should be concerned about what level of remedy do we need to achieve now to forestall or postpone that in other words how much deficit reduction in the short run is enough to mitigate the probability we face that wolf at the door dr graham which do you want to yes congressman i brought brought up the worst so i probably ought to deal with it  i think what you're seeing you know this is this is the conundrum you know give given all these things i mean the international financial traders have seen david's chart they know these numbers but yet they're still not charging very high interest rates and it's puzzling i think the reason has to be honest that there is still a reservoir of faith in the american economy and american politicians that by tantamount to deficits of one or two percent continuing i mean without the explosion that that you see in the charts or if if if that were the case i think you know the  you know the bond traders would be ok with it what what i think they don't like is the unsustainability generally i think you need to address the biggest deficit that america has which is not budget which is not balance a painless which is not savings it's leadership that's the biggest deficit we have my view i'll come back to what i said before if you improve transparency if you enact moving for budget controls engineer re productize government going take twenty you know you think there's a quantitative manifestation of those goals and there is a percentage of debt to g d p or size of the deficit i don't know what the specific metric are and i can just tell you right now that i think people are counting on congress adamantly doing something and the president ultimately doing something and i think it's going to by the way we just need to do it sooner rather than later certainly agree with that dr drew on your first part of your question if we had that scenario would th for barker at some point down the line i think the answer is yes i can't tell you when and whether it could be as easy as two years or not within the next two years or it could be done so i think i think it is unsustainable a do too much thank you very much you know like your question to you quickly for roads along or she had to leave and go to a leadership meeting and we'll take a quick answer so i can get out of here in particular about twelve thirty we face serious challenges in the energy sector college tuition health care costs including some of the highest prescription drug prices in the world and i  laura won't ask a simple question how is the deficit the cost of servicing the debt impacting our ability to address these issues the largest item of waste in the federal budget arguably is interest on the federal debt it is the fastest growing line item in the federal budget and therefore it shows to squeeze out the ability of the government to do other things at a given level of taxation we have a number of sustainability challenges in america today we've only talked about the fiscal one i can give you your ten other ones just just on that issue it is always possible to go through the budget and find this good thing and this good thing in this good thing each of these good things should be evaluated on their face but there is a norm for all tests and as i said in my testimony if if you really want all these good things well we just have to racked up by congress and the president over this recent period at the same time the administration says in making tax cuts of i want to know three permanent almost spending side there's not much inclination to cut discretionary spending you want to make them permanent you pay for them and i also would say that there's waste in defense and homeland security billions and billions and billions a year don't assume there's not because there is help you because you actually it helps you help things from getting worse but it doesn't help you dig out of the hole that you've already created and andrew one could argue about where the tax take is going to have to be over the next twenty five years on average i think i your other way is you now have to pay for some of the things you've been doing over the last five years in the most it's not terms of actual expenditures and in terms of commitments to trip future expenditures that i think is a really tough issue that the that the congress has to address just to quickly reinforce paygo is not enough we need discretionary spending caps mandatory spending ration triggers we need to disclose the disclaimer present value dollar cost of major tax and spending david a question first just to kind of correct the record we don't think that all tax cuts pay for themselves no one says that on our side of the aisle just the point is that not all tax cuts are the same some produce more growth than others some produce more jobs in realizations and economic growth and others may partially offset each other so let's just point for the record my question for you well one more point it may be easier to just reform the whole tax code then get rid of the a m t and make the tax cuts permanent and we've got a whole tax tidal wave hitting us at the end of this decade we're going to have twenty five million people hit painting t v we're going to have you know something close to a two trillion dollar tax increase when these things expire which would be wreaking havoc on our economy so maybe the way out of this thing is to fundamentally reform our tax code and do it based on consumption and one that's internationally competitive and i just throw that out there member  and means and we spend a lot of our time thinking about that david a quick question i have is this you mentioned doing benefit changes on social security to get solvency but then you through sort of i guess i'll just paraphrase an add on accounts on top are you proposing that we do mandatory and own accounts with some kind of a solvency gaining feature to them or just total free and possible way forward i'm not saying the possible way for would be as follows increase the normal retirement age gradually and index it to life expectancy longevity and actually change the replacement rates to reduce the replacement rates for middle and upper income have to consider an increase the taxable wage base you don't have to do it you can make the numbers work without doing that and then on top of a restructured sustainable and secure defined and it's automatic and people don't touch the money you actually can get real savings in progressive indexing plus longevity indexing gets you solvency basically right there i'm just correct me if i'm wrong and then you're saying