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FISCAL CHALLENGES AND THE

ECONOMY IN THE LONG TERM

HEARING

BEFORE THE

COMMITTEE ON THE BUDGET 

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

HEARING HELD IN WASHINGTON, DC, FEBRUARY 28, 2007

Serial No. 110–10

Printed for the use of the Committee on the Budget

(

Available on the Internet: 

http://www.gpoaccess.gov/congress/house/budget/index.html 

(II)

COMMITTEE ON THE BUDGET 

JOHN M. SPRATT, JR., South Carolina, Chairman 

ROSA L. DELAURO, Connecticut, 

CHET EDWARDS, Texas 

JIM COOPER, Tennessee 

THOMAS H. ALLEN, Maine 

ALLYSON Y. SCHWARTZ, Pennsylvania 

MARCY KAPTUR, Ohio 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL BLUMENAUER, Oregon 

MARION BERRY, Arkansas 

ALLEN BOYD, Florida 

JAMES P. MCGOVERN, Massachusetts 

BETTY SUTTON, Ohio 

ROBERT E. ANDREWS, New Jersey 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

BOB ETHERIDGE, North Carolina 

DARLENE HOOLEY, Oregon 

BRIAN BAIRD, Washington 

DENNIS MOORE, Kansas 

TIMOTHY H. BISHOP, New York 

[Vacancy] 

PAUL RYAN, Wisconsin, 

Ranking Minority Member 

J. GRESHAM BARRETT, South Carolina 

JO BONNER, Alabama 

SCOTT GARRETT, New Jersey 

THADDEUS G. MCCOTTER, Michigan 

MARIO DIAZ–BALART, Florida 

JEB HENSARLING, Texas 

DANIEL E. LUNGREN, California 

MICHAEL K. SIMPSON, Idaho 

PATRICK T. MCHENRY, North Carolina 

CONNIE MACK, Florida 

K. MICHAEL CONAWAY, Texas 

JOHN CAMPBELL, California 

PATRICK J. TIBERI, Ohio 

JON C. PORTER, Nevada 

RODNEY ALEXANDER, Louisiana 

ADRIAN SMITH, Nebraska 

PROFESSIONAL STAFF

THOMAS S. KAHN, Staff Director and Chief Counsel 

JAMES T. BATES, Minority Chief of Staff 

(III)

C O N T E N T S

Page 

Hearing held in Washington, DC, February 28, 2007 .......................................... 1

Statement of: 

Hon. John M. Spratt, Jr., Chairman, House Committee on the Budget ..... 1

Hon. Paul Ryan, a Representative in Congress from the State of Wisconsin ............................................................................................................. 2

Hon. Ben S. Bernanke, Chairman, Board of Governors, Federal Reserve 

System ........................................................................................................... 5

Prepared statement of ............................................................................... 10

Response to Ms. Kaptur regarding the fees paid to Wall Street firms 

for underwriting Treasury debt ............................................................ 31

(1)

FISCAL CHALLENGES AND THE

ECONOMY IN THE LONG TERM 

WEDNESDAY, FEBRUARY 28, 2007

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. John M. Spratt, Jr. (Chairman 

of the committee) presiding. 

The Committee met, pursuant to call, at 10:00 p.m., in room 210, 

Cannon House Office Building, Hon. John M. Spratt, Jr. (Chairman 

of the committee) presiding. 

Present: Representatives Spratt, Cooper, Allen, Schwartz, Kaptur, Becerra, Doggett, Blumenaur, Berry, McGovern, Andrews, 

Scott, Etheridge, Hooley, Moore, Bishop, Ryan, Barrett, Bonner, 

Garrett, Hensarling, McHenry, Campbell Tiberi, Alexander, Smith. 

Chairman SPRATT. The hearing will come to order. 

I am pleased today to welcome the Federal Reserve Chairman, 

Dr. Ben Bernanke, to the first appearance he has made before the 

House Budget Committee for a hearing on fiscal challenges and the 

economy over the long term. 

I am pleased for many reasons not least of which is the fact that 

Dr. Bernanke is from Dillon, South Carolina, which is in my congressional district. 

So I claim among other things the value of having his presence 

here today but also the bragging rights for what he has accomplished at the Fed where over a year’s time, he has won high 

marks for his short hand at the helm. 

Despite historically high budget deficits, interest rates and inflation are relatively low and our economy has been growing at a fairly good clip or healthy pace even if that rate has been slowing 

down recently. 

Six years ago, we were in surplus. Our budget was in surplus 

and black for the first time in 30 years, not just in the year 2000, 

but in 1998 and 1999 as well. As a result, the federal government 

paid down nearly $400 billion of debt held by the public. 

And President Bush came to office with an advantage that few Presidents have enjoyed, a budget in balance and surplus by $236 

billion a year before he took office and in balance that year, 2000, 

without including the Social Security Trust Fund. 

As a consequence, a number of members took up a new idea that 

had a corny name, lock box, but has a serious substantive core to 

it. Basically the idea was that we would quit using the Social SecuVerDate 0ct 09 2002 10:28 Apr 13, 2007 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 J:\DOCS\HEARINGS\110TH\110-10\HBU059.000 HBUD1 PsN: DICK
2

rity surplus to buy up new Treasury debt and instead use it to buy 

down outstanding Treasury debt. 

The idea was that if we pursued this policy diligently, religiously, 

by 2020 or thereabouts, when 77 million baby boomers begin claiming their Social Security and Medicare benefits, Treasury would be 

less encumbered by public debt, more solvent, and thus better able 

to meet the claims of the baby boomers. 

And by buying down existing Treasury debt, we would add to national savings, roll the cost of capital, and make the economy more 

productive and free us from dependence on foreign capital. 

After all, one way to make entitlements more affordable, this will 

make our people more productive, and that was part of the idea behind the so-called lock box. 

We said to the President when he began to unveil his proposal, 

which took a different turn and he was relying upon projected surpluses of $5.6 trillion, that while we may be sitting on an island 

of surpluses, we were surrounded by a sea of debt, long-term debt, 

and that should be taken into account now that we have the wherewithal to begin doing something about the problem. 

The President, however, took a different path. He proposed a 

budget that over time included tax cuts close to $2 trillion. The 

numbers that were projected in 2001 did not obtain. They were seriously wide of the mark. 

And so six years and $3 trillion in debt later, we find ourselves 

on a path that is described everywhere as unsustainable, deficit 

down a bit, down to $248 billion last year. That is good news. 

But, Dr. Bernanke, you warn in your testimony that this could 

very well be the lull before the storm. We are glad to have you here 

today to help us understand the perils of the path we are now taking and how we can employ the federal budget, which constitutes 

20 percent of our GDP, to shore up our shortfall in savings and to 

move our economy and our country back towards long-term solvency. 

We look forward to your testimony, and we appreciate your coming today. 

Before turning to you for your statement, though, I would like to 

recognize Mr. Ryan, our Ranking Member, for a statement of his 

own. 

Mr. RYAN. I thank the Chairman for yielding, and I am pleased 

to have Chairman Bernanke here today. It is nice to have you with 

us. 

I just wanted to quickly go on the area where the Chairman 

went to. If you could call up chart one, please.

3

Mr. RYAN. We are here to discuss in the Budget Committee how 

we balance the budget, and that is a very important and worthy 

goal. But if we simply just balance the budget without addressing 

the underlying fundamentals of our budget issues, it will be a temporary thing. If we do not balance the budget without actually addressing the systemic spending problems underneath our budget, 

that is the problem that we are experiencing. 

If you take a look at entitlement spending under the Bush Administration, under the Clinton Administration, under Republican 

Presidents, Democrat Presidents, Republican Congresses, Democratic Congresses, we have had this problem in front of us for quite 

some time. 

As you can see, all other spending is getting crowded out and we 

are piling on interest and entitlement spending. And we are going 

to hear a lot of talk about the tax cuts as perhaps the route to fix 

and balance the budget. 

But if we balance the budget without addressing the underlying, 

unsustainable growth rates of entitlement spending, we will only 

balance the budget temporarily and go quickly back into deficits because of the growth of entitlements. 

If you go to chart two, please.


ryan1.eps
4

Mr. RYAN. This chart, I think, does a good job of illustrating the 

situation we have in front of us. This looks at spending in relation 

to tax revenues, which shows us in two ways. 

First, if we keep the current tax laws in place just as they are, 

current tax rates, current child tax credit, current marriage penalty relief, and so on, that is the lower line, the blue line. 

If we allow all those tax cuts to go away at the end of the decade as they are scheduled to expire, meaning a tax hike of $153 billion 

in 2011, tax hike of $254 billion in 2012, and larger amounts thereon after, that is the red line. These automatic tax increases are 

insumed in CBO’s current law baseline. 

Notice that either way, with or without the tax cuts, making 

them permanent or allowing them to expire, they do not come anywhere close to balancing the budget over the long run. They are 

quickly outpaced by the spending that we are on auto pilot right 

now with our entitlement programs. 

So clearly what we face is an immense problem of spending. This 

is the problem right at hand right now and it is not going away. 

Members of both sides of the aisle are going to debate about how 

just to accomplish and address these challenges. But I think it is 

very important that as we look at the performance of our economy, 

as we look at whether or not high tax rates on capital, high tax 

rates on families and businesses is the right way to go to a balanced budget or not, even if we go down the route of letting all the 

tax cuts expire, it does not come anywhere close to solving our fiscal problems, which is unsustainable entitlements. 

And that is the issue that I think we ought to be addressing, and 

that is the issue I would love to get your opinions on, Chairman 

Bernanke. 

Also, I will just simply say we had an interesting day in the 

stock market yesterday with the precipitous drop. I know all of us 


ryan2.eps
5

are very concerned about that, and I think we would love to get 

your reflections should you care to share them with us on that 

point as well. 

And with that, I would like to yield back the balance of my time. 

Thank you, Chairman. 

Chairman SPRATT. Thank you, Mr. Ryan. 

Dr. Bernanke, thank you again for coming. 

Before proceeding, let me ask unanimous consent that all members be allowed to submit an opening statement for the record at 

this point. 

In addition, Dr. Bernanke, we will be glad to make your statement a part of the record so that you can summarize parts of it 

if you please. 

The floor is yours. Thank you again for coming. 

STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF 

GOVERNORS, FEDERAL RESERVE SYSTEM 

Mr. BERNANKE. Thank you. 

Chairman Spratt, Representative Ryan, and other members of 

the Committee, I am pleased to be here to offer my views on the 

federal budget and related issues. 

At the outset, I should underscore that I speak only for myself 

and not for my colleagues necessarily at the Federal Reserve. 

My testimony will focus on the long-term budget outlook and will 

draw on the most recent set of long-term projections from the Congressional Budget Office issued in December 2005. 

The CBO constructed its projections based on the assumptions 

that real gross domestic product would rise about three and a half 

percent per year in 2005 and 2006 and at the rate of 2.9 percent 

per anum from 2007 to 2015. 

The growth projections through 2015 were in turn based on the 

assumptions that trend labor force growth will average 0.8 percent 

per year and that trend labor productivity growth in the nonforeign 

business sector will average 2.4 percent per year. 

The CBO has since updated those assumptions for the purposes 

of other analyses, but the revisions were not large enough to materially alter the broad contours of the fiscal outlook. 

As to the longer-term outlook, the CBO assumed that the growth 

rate of real GDP will average about two percent per year starting 

around 2020. While such projections are subject to considerable uncertainty, the CBO’s assumptions provide a sensible and useful 

starting point for assessing the budget situation over the long run. 

Before discussing the longer-run outlook, I will comment on recent budget developments. As you know, the deficit in the unified 

federal budget declined for a second year in fiscal year 2006, falling 

to $248 billion from $318 billion in fiscal 2005. 

So far in fiscal 2007, solid growth in receipts, especially in collections of personal and corporate income taxes, has held the deficit 

somewhat below year earlier levels. Of course, a good deal of uncertainty still surrounds the budget outcome for the year as a whole. 

Federal government outlays in fiscal 2006 were 20.3 percent of 

nominal gross domestic product. Receipts were 18.4 percent of GDP 

and the deficit, the difference of the two, was 1.9 percent of GDP. 

These percentages are close to their averages since 1960. 

6

The on budget deficit, which differs from the unified budget deficit, primarily and excluding receipts and payments of the Social 

Security system, was $434 billion or 3.3 percent of GDP in fiscal 

2006. 

As of the end of fiscal 2006, federal government debt held by the 

public, which includes holdings by the Federal Reserve, but excludes those by the Social Security and other trust funds, amounted to 37 percent of one year’s GDP. 

Official projections suggest that the unified budget deficit may 

stabilize or moderate further over the next few years. Unfortunately, we are experiencing what seems likely to be the calm before 

the storm. In particular, spending on entitlement programs will 

begin to climb quickly during the next decade. 

In fiscal 2006, federal spending for Social Security, Medicare, and 

Medicaid together totaled about 40 percent of federal expenditures 

or eight and a half percent of GDP. 

In the medium-term projections released by the CBO in January, 

these outlays increase to ten and three-quarters percent of GDP by 

2017, an increase of about two percentage points of GDP in little 

more than a decade. And they will likely continue to rise sharply 

relative to GDP in the years after that. 

As I will discuss, these rising entitlement obligations will put 

enormous pressure on the federal budget in coming years. 

The large projected increases in future entitlement spending 

have two principal sources. First, like many other industrial countries, the United States has entered what is likely to be a long period of demographic transition. The result, both of the reduction in 

fertility that followed the post World War II baby boom and of ongoing increases in life expectancy. 

Longer life expectancies are certainly to be welcomed, but they 

are likely to lead to longer periods of retirement in the future even 

as the growth rate of the workforce declines. 

As a consequence of these demographic trends, the number of 

people of retirement age will grow relative both to the population 

as a whole and to the number of potential workers. 

Currently people 65 years and older make up about 12 percent 

of the U.S. population, and there are about five people between the 

ages of 20 and 65 for each person 65 and older. 

According to the intermediate projections of the Social Security 

Trustees, in 2030, Americans 65 and older will constitute about 19 

percent of the U.S. population and the ratio of those between the 

ages of 20 and 64 to those 65 and older will have fallen to about 

three. 

Although the retirement of the baby boomers will be an important milestone in the demographic transition, the oldest baby 

boomers will be eligible for Social Security benefits starting next 

year. 

The change in the nation’s demographic structure is not just a 

temporary phenomenon related to the large relative size of the 

baby boom generation. Rather, if the U.S. fertility rate remains 

close to current levels and life expectancies continue to rise as demographers generally expect, the U.S. population will continue to 

grow older even after the baby boom generation has passed from 

the scene. 

7

If current law is maintained, that aging of the U.S. population 

will lead to sustained increases in federal entitlement spending on 

programs that benefit older Americans, such as Social Security and 

Medicare. 

The second cause of rising entitlement spending is the expected 

continued increase in medical costs per beneficiary. Projections of 

future medical costs are fraught with uncertainty. But history suggests that without significant changes in policy, these costs are 

likely to continue to rise more quickly than incomes, at least for 

the foreseeable future. 

Together with the aging of the population, ongoing increases in 

medical costs will lead to a rapid expansion of Medicare and Medicaid expenditures. 

Long-range projections prepared by the CBO vividly portray the 

potential effects on the budget of an aging population and rapidly 

rising healthcare costs. 

The CBO has developed projections for a variety of alternative 

scenarios based on different assumptions about the evolution of 

spending and taxes. The scenarios produce a wide range of possible 

budget outcomes reflecting the substantial uncertainty that attends 

long-range budget projections. 

However, the outcomes that appear most likely in the absence of 

policy changes involve rising budget deficits and increases in the 

amount of federal debt outstanding to unprecedented levels. 

For example, one plausible scenario is based on the assumptions 

that federal retirement and health spending will follow the CBO’s 

intermediate projection, defense spending will drift down over time 

as a percentage of GDP, other noninterest spending will grow 

roughly in line with GDP, and federal revenues will remain close 

to their historical share of GDP, that is about where they are 

today. 

Under these assumptions, the CBO calculates that by 2030, the 

federal budget deficit will approach nine percent of GDP, more 

than four times greater as a share of GDP than the deficit in the 

fiscal year 2006. 

A particularly worrisome aspect of this projection and similar 

ones is the implied evolution of the national debt and the associated interest payments to government bond holders. 

Minor details aside, the federal debt held by the public increases 

each year by the amount of that year’s unified deficit. Consequently, scenarios that project large deficits also project rapid 

growth in the outstanding government debt. 

The higher levels of debt in turn imply increased expenditures on 

interest payments to bond holders which exacerbate the deficit 

problem still further. 

Thus, a vicious cycle may develop in which large deficits lead to 

rapid growth in debt and interest payments which in turn adds to 

the subsequent deficits. 

According to the CBO projection that I have been discussing, interest payments on the government’s debt will reach four and a 

half percent of GDP in 2013, nearly three times their current size 

relative to national output. 

8

Under this scenario, the ratio of federal debt held by the public 

to GDP would climb from 37 percent to roughly 100 percent in 

2030 and would continue to grow exponentially after that. 

The only time in U.S. history that the debt to GDP ratio has 

been in the neighborhood of 100 percent was during World War II. 

People at that time understood the situation to be temporary and 

expected deficits and the debt to GDP ratio to fall rapidly after the 

war as, in fact, they did. 

In contrast, under the scenario I have been discussing, the debt 

to GDP ratio would rise far into the future at an accelerating rate. 

Ultimately this expansion of debt would spark a fiscal crisis which 

could be addressed only by very sharp spending cuts or tax increases or both. 

The CBO projections by design ignore the adverse effects that 

such high deficits would likely have on economic growth. But if 

government debt and deficits were actually to grow at the pace envisioned by the CBO’s scenario, the effects on the U.S. economy 

would be severe. 

High rates of government borrowing would drain funds away 

from capital formation and thus slow the growth of real incomes 

and living standards over time. 

Some fraction of the additional debt that would likely be financed 

abroad would lessen the negative influence on domestic investment. However, the necessity of paying interest on the foreign held 

debt would leave a smaller portion of our nature’s future output 

available for domestic consumption. 

Moreover, uncertainty about the ultimate resolution of the fiscal 

imbalances would reduce the confidence of consumers, businesses, 

and investors in the U.S. economy with adverse implications for investment and growth. 

To some extent, strong economic growth can help to mitigate 

budgetary pressures and all else being equal, fiscal policies that are 

supportive of growth would be beneficial. 

Unfortunately, economic growth alone is unlikely to solve the nation’s impending fiscal problems. Economic growth leads to higher 

wages and profits and thus increases in tax receipts. But higher 

wages also imply increased Social Security benefits as those benefits are tied to wages. 

Higher incomes also tend to increase the demand for medical 

services so that indirectly higher incomes may also increase federal 

health expenditures. 

Increased rates of immigration could raise growth by raising the 

growth rate of the labor force. However, economists who have 

looked at the issue have found that even a doubling in the rate of 

immigration into the United States from about one million to two 

million immigrants per year would not significantly reduce the federal government’s fiscal imbalance. 

The prospect of growing fiscal imbalances and their economic 

consequences also raises essential questions of intergenerational 

fairness. As I have noted, because of increasing life expectancy and 

the decline in fertility, the number of retirees that each worker will 

have to support in the future, either directly or indirectly, through 

taxes paid to support government programs will rise significantly. 

9

To the extent that federal budgetary policies inhibit capital formation and our increases net liabilities to foreigners, future generations of Americans will bear a growing burden of the debt and 

experience slower growth in per capita incomes than would otherwise have been the case. 

An important element in ensuring that we leave behind a stronger economy than we inherited as in virtually all previous generations in this country will be to move over time towards fiscal policies that are sustainable, efficient, and equitable across generations. 

Policies that promote private as well as public saving would also 

help us to leave a productive economy to our children and grandchildren. In addition, we should explore ways to make the labor 

market as accommodating as possible to older people who wish to 

continue working as many will as longevity increases and health 

improves. 

Addressing the country’s fiscal problems will take persistence 

and a willingness to make difficult choices. In the end, the fundamental decision that the Congress, the Administration, and the 

American people must confront is how large a share of the nation’s 

economic resources to devote to federal government programs, including transfer programs, such as Social Security, Medicare, and 

Medicaid. 

Crucially, whatever size of the government is chosen, tax rates 

must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run. 

Thus, members of the Congress who put special emphasis on 

keeping tax rates low must accept that low tax rates can be sustained only if outlays, including those and entitlements, are kept 

low as well. 

Likewise, members who favor a more expansive role of the government, including relatively more generous benefits payments, 

must recognize the burden imposed by the additional taxes needed 

to pay for the higher spending, a burden that includes not only the 

resources transferred from the private sector but also any adverse 

economic incentives associated with higher tax rates. 

Achieving fiscal sustainability will require sustained efforts and 

attention over many years. As an aid in charting the way forward, 

the Congress may find it useful to set some benchmarks against 

which to gauge progress towards key budgetary objectives. 

Because no single statistic fully describes the fiscal situation, the 

most effective approach would likely involve monitoring a number 

of fiscal indicators, each of which captures a different aspect of the 

budget and its economic impact. 

The unified budget deficit projected forward a certain number of 

years is an important measure that is already included in the congressional budgeting process. However, the unified budget deficit 

does not fully capture the fiscal situation and its effect on the economy for at least two reasons. 

First, the budget deficit by itself does not measure the quantity 

of resources that the government is taking from the private sector. 

An economy in which the government budget is balanced but in 

which government spending equals 20 percent of GDP is very different from one in which the government’s budget is balanced but 

10

its spending is 40 percent of GDP as the latter economy has both 

higher tax rates and a greater role for the government. 

Monitoring current and prospective levels of total government 

outlays relative to GDP or a similar indicator would help the Congress to ensure that the overall size of the government relative to 

the economy is consistent with members’ views and preferences. 

Second, the annual budget deficit reflects only near-term financing needs and does not capture long-term fiscal imbalances. As the 

most difficult long-term budgetary issues are associated with the 

growth of entitlement spending, a comprehensive approach to budgeting would include close attention to measures of the long-term 

solvency of entitlement programs, such as long horizon present values of unfunded liabilities for Social Security and Medicare. 

To summarize, because of demographic changes and rising medical costs, federal expenditures for entitlement programs are projected to rise sharply over the next few decades. Dealing with the 

resulting fiscal strains will pose difficult choices for the Congress, 

the Administration, and the American people. 

However, if early and meaningful action is not taken, the U.S. 

economy could be seriously weakened with future generations bearing much of the cost. 

The decisions the Congress will face will not be easy or simple, 

but the benefits of placing the budget on a path that is both sustainable and meets the nation’s long-run needs would be substantial. 

Thank you again for allowing me to comment on these important 

issues, and I would be glad to take your questions. Thank you 

again. 

[The prepared statement of Ben S. Bernanke follows:]

PREPARED STATEMENT OF HON. BEN S. BERNANKE, CHAIRMAN, BOARD OF

GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Chairman Spratt, Representative Ryan, and other members of the Committee, I 

am pleased to be here to offer my views on the federal budget and related issues. 

At the outset, I should underscore that I speak only for myself and not necessarily 

for my colleagues at the Federal Reserve. 

My testimony will focus on the long-term budget outlook and will draw on the 

most recent set of long-term budget projections from the Congressional Budget Office (CBO), issued in December 2005. The CBO constructed its projections based on 

the assumptions that real gross domestic product (GDP) would rise about 31⁄2 percent per year in 2005 and 2006 and at a rate of 2.9 per cent per annum from 2007 

through 2015. The growth projections through 2015 were in turn based on the assumptions that trend labor force growth will average 0.8 percent per year and that 

trend labor productivity growth in the nonfarm business sector will average 2.4 percent per year. The CBO has since updated those assumptions for the purposes of 

other analyses, but the revisions were not large enough to materially alter the broad 

contours of the fiscal outlook.1 As for the longer-term outlook, the CBO assumed 

that the growth rate of real GDP will average about 2 percent per year starting 

around 2020. While such projections are subject to considerable uncertainty, the 

CBO’s assumptions provide a sensible and useful starting point for assessing the 

budget situation over the longer run. 

Before discussing that longer-run outlook, I will comment on recent budget developments. As you know, the deficit in the unified federal budget declined for a second 

year in fiscal year 2006, falling to $248 billion from $318 billion in fiscal 2005. So 

far in fiscal 2007, solid growth in receipts, especially in collections of personal and 

corporate income taxes, has held the deficit somewhat below year-earlier levels. Of 

course, a good deal of uncertainty still surrounds the budget outcome for the year 

as a whole. Federal government outlays in fiscal 2006 were 20.3 percent of nominal 

gross domestic product (GDP), receipts were 18.4 percent of GDP, and the deficit 

(equal to the difference of the two) was 1.9 percent of GDP. These percentages are 

11

close to their averages since 1960. The on-budget deficit, which differs from the unified budget deficit primarily in excluding receipts and payments of the Social Security system, was $434 billion, or 3.3 percent of GDP, in fiscal 2006.2 As of the end 

of fiscal 2006, federal government debt held by the public, which includes holdings 

by the Federal Reserve but excludes those by the Social Security and other trust 

funds, amounted to 37 percent of one year’s GDP. 

Official projections suggest that the unified budget deficit may stabilize or moderate further over the next few years. Unfortunately, we are experiencing what 

seems likely to be the calm before the storm. In particular, spending on entitlement 

programs will begin to climb quickly during the next decade. In fiscal 2006, federal 

spending for Social Security, Medicare, and Medicaid together totaled about 40 percent of federal expenditures, or 81⁄2 percent of GDP.3 In the medium-term projections released by the CBO in January, these outlays increase to 103⁄4 percent of 

GDP by 2017, an increase of about 2 percentage points of GDP in little more than 

a decade, and they will likely continue to rise sharply relative to GDP in the years 

after that. As I will discuss, these rising entitlement obligations will put enormous 

pressure on the federal budget in coming years. 

The large projected increases in future entitlement spending have two principal 

sources. First, like many other industrial countries, the United States has entered 

what is likely to be a long period of demographic transition, the result both of the 

reduction in fertility that followed the post-World War II baby boom and of ongoing 

increases in life expectancy. Longer life expectancies are certainly to be welcomed. 

But they are likely to lead to longer periods of retirement in the future, even as 

the growth rate of the workforce declines. As a consequence of the demographic 

trends, the number of people of retirement age will grow relative both to the population as a whole and to the number of potential workers. Currently, people 65 years 

and older make up about 12 percent of the U.S. population, and there are about 

five people between the ages of 20 and 64 for each person 65 and older. According 

to the intermediate projections of the Social Security Trustees, in 2030 Americans 

65 and older will constitute about 19 percent of the U.S. population, and the ratio 

of those between the ages of 20 and 64 to those 65 and older will have fallen to 

about 3. 

Although the retirement of the baby boomers will be an important milestone in 

the demographic transition—the oldest baby boomers will be eligible for Social Security benefits starting next year—the change in the nation’s demographic structure 

is not just a temporary phenomenon related to the large relative size of the babyboom generation. Rather, if the U.S. fertility rate remains close to current levels and 

life expectancies continue to rise, as demographers generally expect, the U.S. population will continue to grow older, even after the baby-boom generation has passed 

from the scene. If current law is maintained, that aging of the U.S. population will 

lead to sustained increases in federal entitlement spending on programs that benefit 

older Americans, such as Social Security and Medicare. 

The second cause of rising entitlement spending is the expected continued increase in medical costs per beneficiary. Projections of future medical costs are 

fraught with uncertainty, but history suggests that—without significant changes in 

policy—these costs are likely to continue to rise more quickly than incomes, at least 

for the foreseeable future. Together with the aging of the population, ongoing increases in medical costs will lead to a rapid expansion of Medicare and Medicaid 

expenditures. 

Long-range projections prepared by the CBO vividly portray the potential effects 

on the budget of an aging population and rapidly rising health care costs. The CBO 

has developed projections for a variety of alternative scenarios, based on different 

assumptions about the evolution of spending and taxes. The scenarios produce a 

wide range of possible budget outcomes, reflecting the substantial uncertainty that 

attends long-range budget projections.4 However, the outcomes that appear most 

likely, in the absence of policy changes, involve rising budget deficits and increases 

in the amount of federal debt outstanding to unprecedented levels. For example, one 

plausible scenario is based on the assumptions that (1) federal retirement and 

health spending will follow the CBO’s intermediate projection; (2) defense spending 

will drift down over time as a percentage of GDP; (3) other non-interest spending 

will grow roughly in line with GDP; and (4) federal revenues will remain close to 

their historical share of GDP—that is, about where they are today.5 Under these 

assumptions, the CBO calculates that, by 2030, the federal budget deficit will approach 9 percent of GDP—more than four times greater as a share of GDP than 

the deficit in fiscal year 2006. 

A particularly worrisome aspect of this projection and similar ones is the implied 

evolution of the national debt and the associated interest payments to government 

bondholders. Minor details aside, the federal debt held by the public increases each 

12

year by the amount of that year’s unified deficit. Consequently, scenarios that 

project large deficits also project rapid growth in the outstanding government debt. 

The higher levels of debt in turn imply increased expenditures on interest payments 

to bondholders, which exacerbate the deficit problem still further. Thus, a vicious 

cycle may develop in which large deficits lead to rapid growth in debt and interest 

payments, which in turn adds to subsequent deficits. According to the CBO projection that I have been discussing, interest payments on the government’s debt will 

reach 41⁄2 percent of GDP in 2030, nearly three times their current size relative to 

national output. Under this scenario, the ratio of federal debt held by the public to 

GDP would climb from 37 percent currently to roughly 100 percent in 2030 and 

would continue to grow exponentially after that. The only time in U.S. history that 

the debt-to-GDP ratio has been in the neighborhood of 100 percent was during 

World War II. People at that time understood the situation to be temporary and expected deficits and the debt-to-GDP ratio to fall rapidly after the war, as in fact they 

did. In contrast, under the scenario I have been discussing, the debt-to-GDP ratio 

would rise far into the future at an accelerating rate. Ultimately, this expansion of 

debt would spark a fiscal crisis, which could be addressed only by very sharp spending cuts or tax increases, or both.6

The CBO projections, by design, ignore the adverse effects that such high deficits 

would likely have on economic growth. But if government debt and deficits were actually to grow at the pace envisioned by the CBO’s scenario, the effects on the U.S. 

economy would be severe. High rates of government borrowing would drain funds 

away from private capital formation and thus slow the growth of real incomes and 

living standards over time. Some fraction of the additional debt would likely be financed abroad, which would lessen the negative influence on domestic investment; 

however, the necessity of paying interest on the foreign-held debt would leave a 

smaller portion of our nation’s future output available for domestic consumption. 

Moreover, uncertainty about the ultimate resolution of the fiscal imbalances would 

reduce the confidence of consumers, businesses, and investors in the U.S. economy, 

with adverse implications for investment and growth. 

To some extent, strong economic growth can help to mitigate budgetary pressures, 

and all else being equal, fiscal policies that are supportive of growth would be beneficial. Unfortunately, economic growth alone is unlikely to solve the nation’s impending fiscal problems. Economic growth leads to higher wages and profits and thus increases tax receipts, but higher wages also imply increased Social Security benefits, 

as those benefits are tied to wages. Higher incomes also tend to increase the demand for medical services so that, indirectly, higher incomes may also increase federal health expenditures. Increased rates of immigration could raise growth by raising the growth rate of the labor force. However, economists who have looked at the 

issue have found that even a doubling in the rate of immigration to the United 

States, from about 1 million to 2 million immigrants per year, would not significantly reduce the federal government’s fiscal imbalance.7

The prospect of growing fiscal imbalances and their economic consequences also 

raises essential questions of intergenerational fairness.8 As I have noted, because 

of increasing life expectancy and the decline in fertility, the number of retirees that 

each worker will have to support in the future—either directly or indirectly through 

taxes paid to support government programs—will rise significantly. To the extent 

that federal budgetary policies inhibit capital formation and increase our net liabilities to foreigners, future generations of Americans will bear a growing burden of 

the debt and experience slower growth in per-capita incomes than would otherwise 

have been the case. 

An important element in ensuring that we leave behind a stronger economy than 

we inherited, as did virtually all previous generations in this country, will be to 

move over time toward fiscal policies that are sustainable, efficient, and equitable 

across generations. Policies that promote private as well as public saving would also 

help us leave a more productive economy to our children and grandchildren. In addition, we should explore ways to make the labor market as accommodating as possible to older people who wish to continue working, as many will as longevity increases and health improves. 

Addressing the country’s fiscal problems will take persistence and a willingness 

to make difficult choices. In the end, the fundamental decision that the Congress, 

the Administration, and the American people must confront is how large a share 

of the nation’s economic resources to devote to federal government programs, including transfer programs such as Social Security, Medicare, and Medicaid. Crucially, 

whatever size of government is chosen, tax rates must ultimately be set at a level 

sufficient to achieve an appropriate balance of spending and revenues in the long 

run. Thus, members of the Congress who put special emphasis on keeping tax rates 

low must accept that low tax rates can be sustained only if outlays, including those 

13

on entitlements, are kept low as well. Likewise, members who favor a more expansive role of the government, including relatively more-generous benefits payments, 

must recognize the burden imposed by the additional taxes needed to pay for the 

higher spending, a burden that includes not only the resources transferred from the 

private sector but also any adverse economic incentives associated with higher tax 

rates. 

Achieving fiscal sustainability will require sustained efforts and attention over 

many years. As an aid in charting the way forward, the Congress may find it useful 

to set some benchmarks against which to gauge progress toward key budgetary objectives. Because no single statistic fully describes the fiscal situation, the most effective approach would likely involve monitoring a number of fiscal indicators, each 

of which captures a different aspect of the budget and its economic impact. The unified budget deficit, projected forward a certain number of years, is an important 

measure that is already included in the congressional budgeting process. However, 

the unified budget deficit does not fully capture the fiscal situation and its effect 

on the economy, for at least two reasons. 

First, the budget deficit by itself does not measure the quantity of resources that 

the government is taking from the private sector. An economy in which the government budget is balanced but in which government spending equals 20 percent of 

GDP is very different from one in which the government’s budget is balanced but 

its spending is 40 percent of GDP, as the latter economy has both higher tax rates 

and a greater role for the government. Monitoring current and prospective levels of 

total government outlays relative to GDP or a similar indicator would help the Congress ensure that the overall size of the government relative to the economy is consistent with members’ views and preferences. 

Second, the annual budget deficit reflects only near-term financing needs and does 

not capture long-term fiscal imbalances. As the most difficult long-term budgetary 

issues are associated with the growth of entitlement spending, a comprehensive approach to budgeting would include close attention to measures of the long-term solvency of entitlement programs, such as long-horizon present values of unfunded liabilities for Social Security and Medicare. 

To summarize, because of demographic changes and rising medical costs, federal 

expenditures for entitlement programs are projected to rise sharply over the next 

few decades. Dealing with the resulting fiscal strains will pose difficult choices for 

the Congress, the Administration, and the American people. However, if early and 

meaningful action is not taken, the U.S. economy could be seriously weakened, with 

future generations bearing much of the cost. The decisions the Congress will face 

will not be easy or simple, but the benefits of placing the budget on a path that 

is both sustainable and meets the nation’s long-run needs would be substantial. 

Thank you again for allowing me to comment on these important issues. I would 

be glad to take your questions. 

ENDNOTES

1 According to the latest estimates of the Bureau of Economic Analysis (BEA), real GDP 

growth was 3.2 percent in 2005 and 3.4 percent in 2006, both figures stated on an annual-average basis. The figure for 2006 is the BEA’s ‘‘advance’’ estimate; a revised estimate is scheduled 

for release today. 2 Excluding the operations of both Social Security and Medicare Part A, the budget deficit in 

fiscal year 2006 was $459 billion, or 3.5 percent of GDP. Like Social Security, Medicare Part 

A pays benefits out of, and receives a dedicated stream of revenues into, a trust fund. 3 Net of Medicare premiums paid by beneficiaries and amounts paid by states from savings 

on Medicaid prescription drug costs, these outlays were equal to 8 percent of GDP. 4For example, in 2030, five of the six scenarios imply deficits ranging from 11⁄2 percent of 

GDP to nearly 14 percent of GDP; a sixth scenario is capable of producing a surplus, but it relies 

on the confluence of a very favorable set of assumptions. 5For more information about this scenario, see the description of Scenario 2 in Congressional 

Budget Office (2005), The Long-Term Budget Outlook, December, pp. 5-13 and 48-49, 

www.cbo.gov/ftpdocs/69xx/doc6982/12-15-LongTermOutlook.pdf. Consistent with the assumptions used by the Medicare trustees, the CBO’s intermediate projections for Medicare and Medicaid are based on the assumption that, over the long run, per beneficiary health expenditures 

will increase at a rate that is 1 percentage point per year greater than the growth rate of per 

capita GDP. Over the past twenty-five years, however, per beneficiary Medicare spending has 

actually exceeded per capita GDP growth by about 21⁄2 percentage points per year. Thus, a significant slowing in the growth of medical costs per beneficiary will be needed to keep expenditures close to those projected in this scenario. 6To give a sense of the magnitudes involved, suppose—for the sake of illustration only—that 

the deficit projected for 2030 in the CBO scenario were to be eliminated entirely in that year, 

half through reductions in discretionary spending and half through increases in non-payroll 

taxes. (Of course, in reality the fiscal adjustment would likely not occur in one year, but this 

hypothetical example is useful for showing the magnitude of the problem.) This fiscal adjustment would involve a cut in discretionary spending (including defense) of nearly 80 percent (relVerDate 0ct 09 2002 10:28 Apr 13, 2007 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6621 J:\DOCS\HEARINGS\110TH\110-10\HBU059.000 HBUD1 PsN: DICK
14

ative to its baseline level) and a rise in non-payroll taxes of more than 35 percent. The need 

for such painful measures could be diminished by beginning the process of fiscal adjustment 

much earlier, thereby avoiding some of the buildup in outstanding debt and the associated interest burden. 7 CBO (2005), The Long-Term Budget Outlook, p. 3. 

8 I discussed this issue in Ben S. Bernanke (2006), ‘‘The Coming Demographic Transition: Will 

We Treat Future Generations Fairly?’’, speech delivered before the Washington Economic Club, 

Washington, October 4, www.federalreserve.gov/boarddocs/speeches/2006/20061004/default.htm.

Chairman SPRATT. Dr. Bernanke, you will receive questions on 

this subject anyway, so I will give you the opportunity to take the 

first pitch. 

Yesterday, we had severe disruption in the stock markets. Would 

you care to make any statement or reflection upon what happened 

yesterday and whether or not it has any connection to our fiscal 

situation? 

Mr. BERNANKE. There did not seem to be any single trigger of the 

market correction we saw yesterday. I do not think it would be useful for me to try to parse the movement into the components associated with different pieces of news or pieces of information. 

I will say that the Federal Reserve in collaboration with the 

President’s Working Group has been closely monitoring the markets. They seem to be working well and normally. 

We have also, of course, been closely monitoring the economy, 

looking at new data and trying to evaluate their implications for 

the forecast. 

And my view is that taking all the new data into account that 

there is really no material change in our expectations for the U.S. 

economy since I last reported to Congress a couple weeks ago in 

the Humphrey Hawkins hearings. 

Chairman SPRATT. Do you expect the growth rate in the economy 

to decline slightly? 

Mr. BERNANKE. We are looking for moderate growth in the U.S. 

economy going forward. And I would add parenthetically that the 

downward revision of the fourth quarter GDP numbers we got this 

morning is actually more consistent with our overall view of the 

economy than were the original numbers. 

So we expect moderate growth going forward. We believe that if 

the housing sector begins to stabilize and if some of the inventory 

corrections are still going on and manufacturing begins to be completed that there is a reasonable possibility that we will see some 

strengthening of the economy sometime during the middle of the 

year. 

Chairman SPRATT. Turning now to a different topic. We have difficulty explaining to the American public why the deficit is such a 

serious matter. You just touched upon and every eloquently 

touched upon the intergenerational equity aspects of the problem. 

But we do not see or feel the effects of it now, and that is even 

more true for the long-term debt, which is substantial. When it is 

discounted back to present value, you can understand it in those 

terms. But, nevertheless, we do not see the consequences of it. 

Traditionally it was believed that the federal government would, 

by running large deficits, crowd out private borrowers in the credit 

markets and run up interest rates. We have not seen any unusual 

increase in relative interest rates, and that appears to be a result 

of the fact that we are financing a lot of our debt with foreigners. 

15

Is that a correct perception and, if so, what are the consequences 

of being reliant for financing the federal government on foreign 

capital markets? 

Mr. BERNANKE. Mr. Chairman, in the short run, budget deficits 

tend to reduce national saving. And that leads to two possible outcomes. One is that domestic investment will fall accordingly along 

with saving. The other possibility is that investment will be maintained, but in order to finance that investment, we have to borrow 

essentially abroad, which results in a large current account deficit. 

In recent years, it seems more of the latter has been happening. 

We have been borrowing abroad to finance domestic investment, 

and so we have seen not a very significant increase in real interest 

rates. In fact, real interest rates are generally low around the 

world. 

But what we have seen on the other side of the equation, we 

have seen large increases in our foreign debt and in our current account deficit. 

Looking forward to the longer run, I guess the analogy I would 

make here is that this is sort of like a snowball rolling down the 

hill. It is already a pretty big snowball, but it is going to get a lot 

bigger a lot faster, and we have an opportunity now to try and prevent that cumulative process that will go on if we do not take some 

action. 

In particular, because deficits feed into debt which feed into deficits, this could really get out of control over a long period of time, 

and it would have very significant consequences for capital formation and for foreign debt and for the financial security of Americans, particularly the next generation who will be saddled with this 

growing debt. 

So it is a very significant problem. The real consequences will be 

felt to a greater degree over time and more so a few years from 

now than today, but it is that very fact that we have the opportunity to move today that we can perhaps put ourselves on a better 

path and avoid what would have to be much more severe and draconian responses ten, fifteen, or twenty years down the road. 

Chairman SPRATT. One reason we resort to foreign borrowing is 

that we have at the present time a dismally, abysmally low savings 

rate ourselves in the United States. 

What do you think we should do to improve to shore up the savings rate in the United States? 

Mr. BERNANKE. Well, that is a challenging question. Certainly 

improving budget balance both at the federal and, to some extent 

also, of course, at the state and local levels. 

Chairman SPRATT. Because that by itself is dis-saving. If you correct that, that in itself——

Mr. BERNANKE. That is correct. 

Chairman SPRATT [continuing]. Corrects part of the problem. 

Mr. BERNANKE. So the borrowing to finance deficits, if you think 

of it is as being taken out of the pool of saving done by the private 

sector, leaving less left over for capital investment. So one way to 

add to national saving is to try to reduce deficits as much as possible. 

16

The other is, of course, to try and increase saving in the private 

sector. And we have in our country relatively low, in fact currently 

negative, household saving rates. 

There is quite a debate among economists about how best to increase those saving rates. I would just point to one direction that 

was included in the recent pension bill that the Congress passed 

and the President signed which is to allow opt out 401k programs 

among employers. 

We have a lot of evidence that people, if they are required to opt 

out of a savings program, that the inertia will win out and they 

will save more. And that is really one of the ways in which we 

probably could increase saving at the private level. 

Beyond that, there are a number of possibilities, including tax 

policies, including financial literacy and others, which I can discuss 

in more detail. I am sure there will be questions. But we do not 

really have a silver bullet for household saving, and we should, I 

think, though, try to encourage it as much as possible. 

Chairman SPRATT. One final question from me. You made a 

speech recently in which you addressed a concern. To some extent, 

you touched upon it today when you discussed the 

intergenerational equity of deficits. You were concerned about the 

disparities in income in our economy. 

To what extent is this a problem for the economy itself, for the 

country, and what would you recommend that we do about that? 

Are you recommending more progressive tax policies or——

Mr. BERNANKE. Mr. Chairman——

Chairman SPRATT [continuing]. What do we need to do to address 

that problem, and how severe is the problem in your estimation? 

Mr. BERNANKE. Mr. Chairman, this is not a new issue. We have 

seen increasing income inequality in the United States for at least 

three decades and, according to some measures, maybe four or five 

decades. 

In my speech, I discussed a number of possible sources of that 

increase in inequality. I think one of the most important is technology which is increasing the returns to higher education. So people who have more education or greater skills are seeing much 

higher incomes relative to those with less education and lower 

skills. And that is generating greater inequality in the economy. 

I think this is an important problem both because we do not 

want to see excessive inequality and we do not want to see people 

at the lower end of the ladder not enjoying, you know, some of the 

benefits of our economic growth. 

I think it is also a problem because in order to continue to grow, 

we need to have public buy-in to a continued open and flexible 

economy. And I am afraid that if people begin to feel that the economy is not benefiting them, then they will, you know, resist the 

flexibility and dynamism that is so important to our economic 

growth. 

I think the most likely approach for arresting this trend, the 

most beneficial approach would be to strengthen our educational 

and training systems as much as possible and to encourage people 

to get the skills they need to earn higher incomes. 

Chairman SPRATT. Thank you very much. 

Mr. Ryan. 

17

Mr. RYAN. Thank you, Mr. Chairman and Mr. Chairman. 

Some people believe that yesterday’s market corrections are due 

to a liquidity crunch and they compare it to the corrections in 1987 

and 1998. 

Do you believe or agree that there is a liquidity problem in the 

world today? 

Mr. BERNANKE. No, I do not think so. 

Mr. RYAN. Some also have been pointing to a concern about 

subprime lending. And just yesterday, Freddie Mac said that it 

would tighten its lending standards. 

It seems to some of us that this is a small part of the market 

and unlikely to cause major problems, but I would be curious about 

your take on that. 

Mr. BERNANKE. There certainly have been some concerns raised 

about the health of the subprime sector. We have seen increasing 

rate of default. We have seen financial distress on the part of lenders. And so that is a concern. 

We are monitoring that situation very carefully, and it was one 

of the factors, I think, which has contributed to some unease about 

the economy, about the market. 

Our assessment, though, while this is a very important problem 

and an issue obviously for many people who are facing foreclosure, 

our assessment is that there is not much indication at this point 

that subprime mortgage issues have spread into the broader mortgage market, which still seems to be healthy, and the lending side 

of that still seems to be healthy. 

So it is a concern. But at this point, we do not see it as being 

a broad financial concern or a major factor in assessing the course 

of the economy. 

Mr. RYAN. I want to ask a question about sort of fed governance. 

For the 1960s and the 1970s, the fed and central banks around the 

world really sort of used a Phillip’s curve to dictate monetary policy. And it seems that the evidence, which obviously is lagging and 

takes a while to build up, has come in and has more or less clearly 

debunked the Phillip’s curve as a primary driver of monetary policy. And there seems to be a growing body of evidence that unemployment and inflation are not nearly as linked as the Phillip’s 

curve would suggest. 

Do you agree with that, and do you believe that commodity 

prices are a better indicator of inflation and of inflationary expectations? 

Mr. BERNANKE. It is true that the empirical evidence suggests 

that the link is looser, that there is less responsiveness of inflation 

to employment conditions than there perhaps may have been in 

past decades. 

My own view is that we should take a very eclectic approach in 

thinking about inflation. I look at the state of the economy and try 

to assess whether demand is exceeding supply in some sense, 

whether the financial conditions are promoting growth and demand 

which is greater than the productive capacity of the economy. But 

I also look at a wide variety of indicators including commodity 

prices, including financial indicators like bond rates and inflation 

compensation. 

18

I do not think we can rely on any single indicator, particularly 

one like the natural rate of unemployment concept. It is very difficult to know if—even if there is such a relationship, it is very difficult to assess in real time where that number might be. 

And so we really have no alternative but to look at, you know, 

many indicators, including the one you mentioned, to try to assess 

where inflation is going. 

Mr. RYAN. In the past in your academic career, you seem to be 

a fan of inflation targeting. We have seen other countries, obviously 

much smaller economies, test inflation targeting with some great 

degrees of success, it seems. 

What is your current impression of inflation targeting? 

Mr. BERNANKE. Well, I should say that I view inflation objectives 

and the like as being part of the communication tool kit that a central bank may have to try to explain to the markets and to the 

public what its approach is, what its plans are, and how it sees the 

economy. 

We are currently in the Federal Open Market Committee conducting a zero-based review of our communications policies, looking 

at, among them, numerical objectives for inflation, but many other 

approaches as well, to try to provide more information to the public 

about our plans and our approach. 

So in terms of the specifics, I think I would leave that open because our Committee has not yet decided, you know, what approaches we want to take. 

The one thing I would say is that there is certainly a strong conviction that maintaining low and stable inflation is not—this goes 

back to the first part of your question—is not something that reduces employment and growth. To the contrary, an economy that 

has low and stable inflation is going to grow faster and have more 

stability than one in which inflation is high and unstable. We 

learned that in the 1970s and it has become increasingly evident 

in the last couple of decades. 

So whether or not we have an explicit target or not, it is very 

important for the Federal Reserve to maintain low and stable inflation. 

Mr. RYAN. I totally agree with that. I would just simply encourage, and I have one quick last question. 

As you continue these deliberations on your communications toolbox, that the more explicit expectations that the market can see, 

the better and more stable the market horizon and investment horizons are for investors and for the economy. So to the extent that 

you can be more explicit about that, that is all to the good, I think. 

One last final question. There is going to be a lot of talk this year 

about whether or not to raise taxes. And you are seeing a lot of 

speculation as to whether or not Congress is going to affirmatively 

allow some tax cuts to expire, such as the growth tax cuts, dividends, cap gains, top marginal income tax rates, things like that. 

Is there a chance that this discussion itself could have a negative 

impact on the market? And we have also had surging revenues. 

Would you care to comment on that as well? 

And then I yield. 

Mr. BERNANKE. Congressman, as you know, the Federal Reserve 

is nonpartisan. And I talk about many, many issues. I realize some 

19

of them are very broad. But I do think it is important for me, and 

this is something that is going to be relevant to today’s discussion, 

I think it is important for me not to implicitly or explicitly endorse 

any spending or tax program for or against. 

So I hope you will understand if I do not make an assessment 

of that. 

Mr. RYAN. All right. Thank you. 

Chairman SPRATT. Mr. Cooper. 

Mr. COOPER. Thank you, Mr. Chairman. 

And thank you, Chairman Bernanke, for your excellent testimony. 

On page nine, you say, ‘‘A comprehensive approach to budgeting 

would include close attention to measures of the long-term solvency 

of entitlement programs, such as the long horizon present values 

of unfunded liabilities for Social Security and Medicare.’’

Last year, this Committee passed unanimously—in fact, it was 

the only unanimous thing the Committee did—my amendment that 

would encourage us to look not only at the unified budget deficit 

but also at, for example, accrual measures of our fiscal position so 

that we would have better perspective on where we are. So this 

Committee has been trying to focus on a broader set of measures. 

It worries me, though, that we are in the situation of the average 

American who does not know they have high blood sugar levels, 

which means possible diabetes, because in this country, there is 

sadly, tragically for many people, a seven-year delay between onset 

of high blood sugar and then actual diagnosis of the disease, because, as Chairman Spratt noted, there are no symptoms. You cannot tell that you have high blood sugar. 

The average American just looking at the unified budget deficit 

cannot tell we have got a major problem. That is why we need 

broader measures, so that we might be encouraged to take action. 

Several of us have been working on those measures, for example, 

highlighting the Treasury Department’s financial report of the 

United States, which uses accrual accounting and which shows 

that the deficit last year was not 1.9 percent of GDP. It was closer 

to three or four percent of GDP. 

But even that measure does not take into account some of the 

most important programs that we have in this country like Social 

Security and Medicare. 

So in your testimony, you mentioned the unfunded liabilities of 

Social Security and Medicare. Does that mean that you count these 

as liabilities? 

Mr. BERNANKE. Let me first start by agreeing with your basic 

thrust that the unified budget deficit has its value because it says 

some things about the current economy, but it is not a full measure 

of the fiscal obligations that are being taken on. 

As I am sure you know, the Advisory Board to the Treasury has 

promoted this accrual accounting approach to the deficit, and that 

gives you the bigger number you mentioned. And what they have 

done there is they have included not only the current spending, but 

they have, you know, taken on board the accrual of obligations to 

future pensions for federal government workers and veterans and 

the like, and those are legal obligations that any private company 

would include as part of its liability assessment in a given year. 

20

The FASB is currently looking at whether to include a measure 

of the accrued liabilities to Social Security and Medicare as part of 

a broader measure yet of the accrual-based deficit and there they 

are confronting exactly, I think, the issue that you are talking 

about. 

First of all, projecting those liabilities, of course, is difficult, but 

that does not stop accountants usually from trying to incorporate 

them. 

The other question is whether or not there are legal liabilities in 

the sense that, of course, Congress can and has in the past changed 

benefit schedules from what had originally been planned. And so 

in that sense, perhaps these are not liabilities in the strict legal 

sense of the word. And that is part of the reason why they have 

not been incorporated in these accrual measures. 

But I would say that there certainly is a sense that if there is 

no change in policy that automatically we will be incurring these 

large entitlement costs and our short-term unified budget deficit 

does not in any way reflect the fact that as we move along, we are 

getting older, and those obligations, at least implicit obligations, 

are getting larger and larger. 

Mr. COOPER. Thank you. 

In my short time remaining, it seems to me to be the biggest single disconnect in all of American politics, the fact that all of us on 

both sides of the aisle praise these programs and promise benefits. 

And, yet, when you actually look at the budget of the United States 

and the common deficit measure, these entire programs are largely 

excluded, ignored. 

So not only are these unfunded obligations or liabilities, they are 

also largely uncounted obligations. And in order for us to have a 

chance of delivering the benefits that we promised, we are going to 

have to start counting them. That is why I am so strong an advocate for these broader measures, so that we have a chance to fulfill 

the promises that all of us have made to our constituents. 

But I thank you for your great service and your steady hand at 

the fed. 

Mr. BERNANKE. Thank you. 

Chairman SPRATT. Mr. Barrett. 

Mr. BARRETT. Thank you, Mr. Chairman. 

Chairman, thank you for being with us today. I am going to 

throw three questions at you and then give you all the time to answer them. 

Number one, savings. I know other countries do this, but we lose 

a lot of savings time between zero and 18 or zero, date of birth, and 

when they enter the job market. 

Would it not be a smart thing to do to set up some type of personal retirement account through incentives or whatever that 

would allow members, citizens to start some type of savings, give 

breaks if they add to it along? Something to think about there. 

Number two, in your testimony, right at the end, you say if 

early—talking about entitlement spending, by the way—if early 

and meaningful action is not taken, the U.S. economy could be seriously weakened, and you go on. Of course, I know you are talking 

about Medicare and Medicaid. 

21

Can we continue, question two, can we continue down the road 

of doing a little bit here and a little bit there? Are you talking 

about major course adjustments and do you not think or do you 

think that we need some type of overall national road map to say, 

hey, these are problems, we cannot do hit-and-miss operations anymore, we need a national goal that all of us can buy into and work 

on? 

Last one, there is a direct correlation, I know you know, between 

the tax burdens and economic growth. Some people seem to think 

the average level is about 35 percent all government levels. 

How close are we to that level right now when we look at state, 

local, federal, the whole nine yards? It is all yours. 

Mr. BERNANKE. Thank you. 

On savings for young people, obviously it would be great to get 

young people saving. There have been some proposals. Again, I am 

not going to try to address very specific proposals. But there have 

been proposals about giving money to children, you know, creating 

an account at the time that they are born. 

I think it is a problem that kids do not know enough about saving. They do not know enough about money in general. The Federal 

Reserve is very interested in financial literacy, teaching that in the 

schools, trying to get kids involved in saving and understanding 

that. I do not have a magic bullet again, but I think that starting 

young and trying to broaden the base. 

You know, there is a certain part of our population where these 

financial matters are just second nature, you know, but many people who do not really get exposed to them and find them difficult 

and mysterious and to their detriment. And to the extent that we 

could help people learn about how to save, how to budget, we are 

doing a great service. 

On the size of the entitlements, these are very large deficits. It 

is hard to find good ways to measure it. The trustees have the 

present value of the infinite horizon deficit for Medicare at about 

$72 trillion, to give you an idea of the enormous amount of money 

that is. 

That does not include the fact that we already have a baseline 

level of finance in the budget for Medicare. If you take that out, 

it is still about $54 trillion. So these are enormous amounts of 

money. 

It is important, I think, to note that the Medicare part is probably four or five times as big as the Social Security part. So as difficult as it has been to address Social Security, Medicare is a bigger 

problem. 

And I do think we are going to have to, you know, think hard 

about the structure of those programs. And in the case of Medicare, 

think also about the healthcare sector more generally and the cost 

that it is creating. 

It was implicit in my comment about looking at multiple indicators that to the extent that Congress can look beyond the next couple of years and perhaps have some kind of plan or some kind of, 

you know, benchmarks moving forward that that might be quite 

useful. 

In particular, this is just going to get harder politically because 

you are going to get to the point where you will be affecting the 

22

benefits of people who are, you know, close to retirement. If you 

make changes now that take place decades in the future, you know, 

you will not be affecting anybody’s benefits who are either retired 

or close to retirement. And you can phase them in gradually. You 

can give people time to plan. So I think working well in advance 

is a much better way to deal with this. 

On taxes, the federal share of GDP and revenues is about 18 and 

a half percent. For state and local governments, it is nine to ten 

percent. So we are somewhere in the 27, 28 percent range right 

now. 

I do not know if there is a magic number where economic growth 

is affected, but it is true that on the revenue side, that higher taxes 

do have disincentive effects and do have some adverse effects on 

the economy. And the question, of course, you always have to ask 

is whether the spending programs have enough benefits to outweigh those costs to the economy. 

Mr. BARRETT. Thank you. 

Thank you, Mr. Chairman. 

Chairman SPRATT. Mr. Allen. 

Mr. ALLEN. Mr. Chairman, thank you for being here. I have a 

quick comment and then I want to pursue this same line. 

You conclude your testimony by saying decisions the Congress 

will face will not be easy or simple, but the benefits of placing the 

budget on a path that is both sustainable and meets the nation’s 

long-run needs would be substantial. 

It seems to me we were once on a path, though not perfect and 

not likely to grapple with all the problems of Medicare and Medicaid, it was a lot closer to that goal than we are today. And that 

was the last four years of the 1990s when we were running surpluses and in much better fiscal condition than we are today. And 

I think the policies that drove us in the 1990s are worth looking 

at again. 

But my question really goes back to these healthcare issues. This 

is the Budget Committee. We deal with the federal budget. But you 

just said that with respect to Medicare, we need to look at 

healthcare more generally. 

And most of the health policy experts I know would say that the 

cost drivers in Medicare and Medicaid are pretty much the cost 

drivers in the private commercial system as well, and that if you 

look at other countries, we have essentially, you know, one of the 

least cost-effective systems in the developed world. 

So the question is probably, how much does it matter whether we 

pay for healthcare through the public sector or the private sector? 

Imagine this. Imagine that we could take care of our small businesses who are having trouble providing coverage, to help Ford and 

GM and other large businesses that are finding it hard to compete 

in the global economy, suppose we develop a simpler healthcare 

system which covered more people but held down the cost. 

If more of that were paid through the public sector, would it 

make—and I am not asking you to evaluate a particular plan—but 

would it make any real difference, because if you had a cheaper 

system with essentially more money available in the private sector 

for investment but more of the healthcare sector being taken care 

23

of through the public programs, you would wind up with a more 

cost-efficient system overall but a little larger public component. 

Do you have any reason to think that would have a material effect, positive or negative, on our global competitiveness? 

Mr. BERNANKE. Congressman, I have many views about the 

healthcare sector, and I hope you do not expect me to give them 

all——

Mr. ALLEN. I do not. I do not. 

Mr. BERNANKE [continuing]. In a minute or two. We have a very 

good healthcare system. Let me just say that. And we have the 

most technologically-advanced system in the world. And on average, we get our money’s worth in the sense that studies have 

shown that the benefits in terms of reduced mortality from heart 

attacks and so on, you know, that the cost, you know, is justified. 

Having said that, I think we could be much more efficient. I 

think we could get more or less the same health benefits at lower 

cost. And there are a number of issues there. There is health IT. 

There is transparency. There is a whole variety of things that we 

could probably do. 

One of the issues that is important, I think, is that our system 

promotes perhaps overuse of insurance by some people. I mean, we 

have some people with no insurance and we have some people who 

have first dollar insurance. And first dollar insurance has the problem that no one cares about the cost. It is going to generate higher 

cost and people are going to use high technology solutions which 

may not be essentially necessary. 

So I think there are ways that we could go about making the system more efficient, reducing costs, and rationalizing the healthcare 

system overall. And I think independent of the fiscal situation, that 

is just very important to do and we should be trying to do that. 

In terms of the government’s role, you can point to a few things 

like potentially reduced administrative costs. I would raise the concern about a system where the middle class person pays taxes for 

services received by middle class people because by doing that, you 

are raising the tax burden, the overall tax burden, and, therefore, 

the marginal tax rate. And that is going to have incentive effects 

and efficiency effects on the economy. 

So I think in terms of the efficiency impact, I think you are better off focusing on those with lower incomes and those who are sick 

who need more help and not necessarily using taxes to pay for the 

average person’s healthcare. 

Chairman SPRATT. Mr. Garrett. 

Mr. GARRETT. Thank you. Thank you, Mr. Chairman and Mr. 

Chairman. 

Your testimony is much like testimony of other experts that we 

have had before this Committee in the last month and a half, and 

that is it is all ominous and discouraging. I am sure well-intended 

though. Ominous in the sense of the problem that lays before us 

and that is not just a short-term, but it is a long-term one. 

And in dealing with the problem, it seems very basic then that 

you either have to address—some of your suggestions are on the 

spending side of the equation or very simply on the revenue side 

of the equation. 

24

And so I am just going to take one little narrow approach just 

for a minute here. If we look in part to the revenue side of the 

equation, there are some from both sides of the aisle, mainly I will 

say the other side of the aisle, that suggest that we solve that problem by raising our taxes. And I am not going to give you a specific 

tax right here. 

But basic economic thought would be, correct me if I am wrong, 

that if we raise taxes on one sector, for example, the business sector, at the end of the day, businesses do not, in essence, pay taxes. 

It is the consumer who ends up buying that product that ends up 

actually paying that tax, whether that is a rich consumer or poor 

consumer. 

Is that a correct basic economic thought of how taxes get flowed 

down to the bottom line? 

Mr. BERNANKE. Businesses are not people. Corporations are fictional people but not real people. And somebody, either the shareholders, the customers, the workers, or somebody, is going to bear 

the ultimate burden, the ultimate incidence of taxes. 

Mr. GARRETT. One of the questions here was with regard to the 

housing market and the huge effect that it plays. And on the 

subprime market, there was a question already. And somewhere I 

have here an article that talks about that. Well, the headline in 

this paper was ‘‘U.S. Mortgage Crisis Goes Into A Meltdown.’’

And they had the head of the Pacific Capital said the sector was 

in an unstoppable meltdown that is, ‘‘It is a self-perpetuating spiral. As subprime companies tighten lending, they create even more 

defaults.’’

And one of the Governors of the Board, Governor Susan Schmidt 

Bies, stated that although she did not see much total large impact, 

she did say that there are ‘‘hidden problems caused by sellers pulling property off the market. The percentage of homes where nobody 

is living in them is at a record level so the potential for inventory 

correction is still very high,’’ she said. 

With that all being said, is there an additional problem that we 

could see if we took action now looking at either that market or the 

overall market and said to address these mandatory problems, Social Security, et cetera, besides just the ones you talked about, to 

address that problem from a revenue side, we are going to raise 

taxes at least on that sector? Could that exacerbate the problem on 

the housing sector? 

Mr. BERNANKE. I would have to know more about what taxes you 

have in mind. If you raise taxes on housing, you would reduce the 

price of housing generally speaking. 

I guess I would just want to respond to your initial comments 

and say that we are concerned about the subprime mortgage sector. 

We are watching it very carefully. We think there has been some 

bad underwriting in that sector. 

We have attempted to provide some guidance to lenders about 

proper procedures for underwriting and disclosing subprime loans. 

And we are going to provide additional guidance, I believe soon. So 

that is a significant problem. And there are obviously some financial losses associated with it. 

But as Governor Bies said and as I said earlier, so far, there 

seems to be no indication that those problems are spreading either 

25

into the broader financial markets or that they are having significant effects on housing or housing demand in the broader economy. 

But we will be watching that obviously very carefully. 

Mr. GARRETT. Okay. And my last question is on that sector. If 

we were to impose a tax just on the—not the middle class, but the 

first time entering market in the housing market, specifically those 

markets that is where the securities are picked up through the 

GSEs, and that is where the market goes into, the mortgages going 

into, if we were to place a tax on that sector of the market where 

we are already having problems, such as a tax on the mortgages, 

could that exacerbate the problem then? 

Mr. BERNANKE. If there is a tax on the new home buyer or on 

mortgage interest, naturally it would affect behavior. 

Mr. GARRETT. And, again, whether it is directly on me the borrower going to the bank and have a tax just on me or the overall 

GSE, wherever you place the tax, that eventually——

Mr. BERNANKE. I see. If you are talking about the GSE situation, 

I understand. I think it would depend. I think there is an interesting and serious question about, as I mentioned before, the incidence of a tax on a business goes to lots of different people. It goes 

to shareholders. It goes to workers. It goes to customers and so on. 

And so I think one of the important questions in addressing the 

issue you are talking about would be what is the incidence of that 

tax. Is it mostly on the shareholders? Would it affect the cost of 

mortgages? Would it affect something else? So I think that is the 

question one would have to address. 

Mr. GARRETT. Okay. So I have 53 seconds left. I will try to pin 

that down a little bit more. 

At the end of the day, even if initially the burden is placed on 

the shareholders, that leads to the natural inclination of people not 

to want to invest so heavily in that company or entity no matter 

which one it is. And eventually that raises the cost of doing business for that particular entity. They may have to borrow at other 

rates, at higher levels. 

So eventually, although the shareholders may actually pay the 

cost today, that corporation ends up having to bear the burden 

itself. But as you said, they do not bear burdens. They pass it on 

to somebody else. So today the shareholder pays it. 

But eventually if higher interest rates that they have to charge 

again goes down to the ultimate user, and that is the consumer; 

is that not correct? 

Mr. BERNANKE. Well, in the case of the GSEs, as you know, although there is no official government guarantee behind the GSEs, 

there is a perception in the market that there is such a guarantee. 

And as a result, the interest rate at which GSEs borrow is just a 

little bit above the Treasury rate. 

I would think that until such time as there is a change in the 

views of the financial market about this implicit government guarantee that that interest that GSEs pay will continue to be pretty 

close to the Treasury rate. 

Mr. GARRETT. Interesting. Thank you. 

Chairman SPRATT. Ms. Schwartz. 

Ms. SCHWARTZ. Thank you, Mr. Chairman, and appreciate the 

opportunity to follow-up. 

26

Some of my colleagues on both sides of the aisle have talked 

about the concern about household debt and the relationship to the 

housing market. And I think that for many Americans, they sort 

of do not necessarily see the cumulative effect of each household increasingly borrowing to meet basic obligations. I mean, sort of 

meeting the pattern that the federal government is doing the same 

thing. You know, we are borrowing to meet basic obligations. 

What is happening, and I wanted you to comment? You talked 

a bit about both risky behavior and maybe some of the subprime 

market. But even more middle class folks are now using the one 

big asset they have, maybe the only real long-term asset they have, 

their home, to borrow against in order to continue spending. 

Now, some of them may be outside of their control a little bit in 

terms of meeting basic obligations, healthcare costs, obviously 

other kinds of costs that they have. 

But could you speak really a little bit more specifically about how 

you see either the risky behavior on the part of lenders or maybe 

the risky behavior on the part of borrowers, and this is really 

every-day Americans who are trying to meet their obligations, who 

have stopped saving and are not only using all their dollars that 

they have to meet obligations, but are now refinancing their homes, 

they are consolidating credit card debt and other kinds of debt, 

maybe even educational debt, to borrow against, as I say, that one 

asset, which is seeing an increase? 

Now, of course, the bubble is over in housing. We may not actually see the house even be worth it in the future. So they are borrowing against their only asset. 

And to what point does that put that family at greater risk long 

term in not planning for a downturn personally, but also the effect 

it has more broadly on the economy not being able to access that 

capital that used to be put into savings potentially, either for themselves or so it would be available in the marketplace? 

Mr. BERNANKE. Congresswoman, that is a very interesting question. With respect to an individual family, it would depend a lot on 

their individual financial circumstances. There are people who 

have owned their homes for a long time and they have quite a bit 

of equity in the home. And in that case, it probably makes sense 

to consolidate debt and to pay for college and so on from home equity. It is an important part of wealth. 

There are others who have very little equity share and they are 

putting themselves in a situation where they are not able to refinance and they could end up losing their home. So it depends very 

much on the individual circumstance. 

I think, you know, it is good that markets have become more sophisticated and more flexible so that people do have the flexibility 

to use money from their home under, you know, appropriate circumstances. But it does probably contribute to a lower saving rate, 

at least over short periods of time. 

The increases in people’s wealth associated with higher house 

prices or higher stock prices are not counted as part of the national 

saving rate or individual household saving. So when you do have 

a run-up in house prices, for example, and people let their houses 

do their saving for them, then that is one reason why the current 

saving out of current income is low, and that has the consequence 

27

that we talked about before, that we have to then borrow for new 

investment. We have to borrow from abroad or pay higher interest 

rates. 

So my expectation, I mean, one effect potentially of the flattening 

out of prices in the housing market may be if people are therefore 

less able to use extracted equity, they may actually begin to save 

more out of current income. And that is one reason to think that 

saving out of current income may rise a bit over the next couple 

of years. 

Ms. SCHWARTZ. Is there more that we could do, either we, you 

or we could do in helping to have most Americans understand that 

in a way? 

Now, some of what you are suggesting might just be market-driven people understand they cannot borrow against their house, but 

we are doing the same thing. We are sort of by example, federal 

government is borrowing to meet obligations. 

We are suggesting and there is a lot of market out there that is 

suggesting consolidate your debt. Again, that may be a good thing. 

But over time, individual families are not protecting themselves 

and there will be a consequence to them. 

And could you be more specific in the few seconds left about 

what else we could be doing either by example or to educate the 

American family about how that may not be the best even if the 

market is telling them they can do it? 

Mr. BERNANKE. Well, there is one important difference between 

the hypothetical family than the U.S. government. The hypothetical family is borrowing against an actual asset that they have. 

I mean, household wealth is still rising on net, net of debt. So it 

is not that the households are drawing down their debt in that 

sense. 

Ms. SCHWARTZ. But it is a point well taken. The government is 

actually borrowing against——

Mr. BERNANKE. We are borrowing against future taxes essentially. 

Ms. SCHWARTZ. And we are borrowing mostly from foreign governments at this point. 

Mr. BERNANKE. Well, not directly, but indirectly, yes. On the individual family, I am again a strong advocate particularly for 

lower-income families, helping them through counseling, training, 

financial literacy, and so on, to understand better, you know, the 

complexities of finance, personal finance, so that they can live better lives in terms of saving and acquiring assets. 

Ms. SCHWARTZ. And then we should learn by example from them. 

Mr. BERNANKE. Yes, ma’am. 

Ms. SCHWARTZ. Thank you. 

Chairman SPRATT. Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. And thank you for 

holding this hearing which I believe is probably one of the most important hearings we may have this year. 

Chairman Bernanke, welcome. It is good to see you again. 

If I could have chart number two pulled up please. 

Mr. HENSARLING. Chairman, on page two of your testimony, you 

used the phrase that we are experiencing what seems likely to be 

the calm before the storm. You allude to the growth in the three 

28

major entitlement programs and relate that to a percentage of 

GDP. 

As I understand it, you were referring to CBO analysis and in 

that analysis, I believe you show that in 2006, Social Security, 

Medicare, and Medicaid totaled about 40 percent of federal expenditures or eight and a half percent of GDP, soon to increase to ten 

and three-quarters of GDP by 2017. 

And eye-balling spending under CBO analysis over the long 

term, it appears that the budget will grow from roughly 20 percent 

of GDP if we do not reform current spending trends to roughly 30 

percent by 2037 and approaching 40 percent, almost double, in 

about 40 years. I do not know if that is one or two generations. 

My first question is, and I believe your numbers are based on 

CBO analysis, to the extent that you have looked at other analyses 

from OMB, from GAO, from Treasury, everybody who is in charge 

in the federal government of looking at long-term spending trends, 

is this an accurate analysis? Is there any significant disagreement 

of thought on these long-term spending trends? 

Mr. BERNANKE. There is always some uncertainty because of just 

the difficulties of projecting far into the future. We are quite confident about the demographics. We know how that is going. 

One issue which creates some uncertainty is how quickly medical 

costs are going to rise. The standard assumption, which is in the 

CBO analysis that I presented and is also in the Medicare Trustee’s analysis, is that costs per beneficiary are going to grow at one 

percent faster than incomes, which creates, you know, higher and 

higher cost and is a big part of this. 

Now, you could think of that as being pessimistic or optimistic. 

It is actually optimistic in the sense that historically, the last 25 

years, the so-called excess cost growth has been about two and a 

half percent, much higher. So we are going to have to get some efficiencies in terms of our medical sector just to get down to that one 

percent cost growth. 

Mr. HENSARLING. Using the CBO analysis on page five of your 

testimony, you have a footnote here. Assuming that we were agreed 

that we wish to balance the budget and it had to be done in one 

fell swoop, you allude to an analysis that if we took half the burden 

from tax increases and half from spending reductions that we 

would be looking at an 80 percent decrease, I believe, in discretionary spending relative to the baseline and an increase in nonpayroll taxes of 35 percent. 

So would that seem to suggest that if we follow that model in one 

generation——

Mr. BERNANKE. He actually did it. 

Mr. HENSARLING [continuing]. For all intents and purposes, we 

would have to increase taxes, nonpayroll taxes 35 percent just to 

have a federal government that consists of little besides Medicare, 

Medicaid, and Social Security? There may be no border patrol. 

There may be no U.S. Marines. There may be no Department of 

Education. 

Mr. BERNANKE. Congressman, if I may, the simple arithmetic, in 

2030, according to projections, the entitlement programs by themselves will be about 15 percent of GDP and interest on the national 

debt will be about four percent of GDP. So you add those things 

29

together, you are already above the 18 and a half percent of GDP 

which we are currently receiving in revenues. 

So if you wanted to balance the budget in that case without either changing entitlements or raising taxes, as you point out, you 

would have to eliminate the Defense Department and everything 

else that the government does. 

Mr. HENSARLING. My time is about to run out. I would like to 

try to slip in one more question. Alluding to this chart up here, the 

debate in Congress today tends to be between that blue line and 

red line debating the wisdom of previous tax relief over the last few 

years. 

Again, this is a CBO analysis. But to some extent, does that tend 

to suggest that we are debating how to mop up six inches of water 

in the stateroom of the Captain of the Titanic when we should be 

focused upon the gaping hole in the hull of the ship? 

Mr. BERNANKE. I do not want to downplay the importance of 

near-term decisions that you are going to make both in terms of 

spending decisions and how to structure the tax code, how high 

taxes should be. Those are important decisions that are going to affect how our economy performs. And they are going to affect the 

near-term deficits as well. 

But I think what that picture tells you is that, you know, you 

should probably think hard about going to the heart of the problem, and the heart of the problem is are the entitlement programs 

and those—you are not going to solve this problem by small budget 

cuts or small tax changes. You do have to think about these large 

obligations and, you know, how you want to deal with them. 

Mr. HENSARLING. Thank you. 

Chairman SPRATT. Ms. Kaptur. 

Ms. KAPTUR. Thank you, Mr. Chairman, very much. 

Welcome, Chairman Dr. Bernanke. Glad to have you here. 

Mr. BERNANKE. Thank you. 

Ms. KAPTUR. The first two items I want to mention would just 

be a reporting back from your staff to the Committee. I would like 

your staff to provide a complete list to us of which Wall Street 

firms are earning fees off the sale of the array of U.S. debt securities, to provide a list of which firms from 2000 to the present, and 

the amount that each has been paid annually by U.S. taxpayers for 

conducting those transactions. That is the first request. 

Number two, based on your testimony, in order to help to create 

a savings consciousness in our country, particularly among the 

young, I would invite your cooperation and suggestions on how to 

create and promote a public debt postal savings stamp program to 

sell the debt to our own citizens, including our youth in small denominations, as the Japanese have done through their postal savings stamp system and Franklin Roosevelt created in this country 

during the 1930s. I would value your suggestions there. 

I wanted to make a comment and then ask two questions. The 

basic theme that runs through my comment is that our capital 

markets have to be held accountable in solving some of the problems that we face in this nation and that our economy is in unchartered waters. 

As you say, we have very high debt levels. Our public debt, according to your testimony, amounts to 37 percent of one year’s 

30

GDP. And if you add to that the fact that the trade deficit knocks 

off an additional point off that GDP, that is well over half of the 

growth that does not benefit economic investment in this country. 

Our middle class is shrinking. I used to say that these conditions 

were resulting in the middle class running hard to stay in place. 

I now say the middle class is running harder but falling behind as 

reflected in their rising debt levels and net negative savings. 

Factory workers in my district are working six days a week, ten 

hours a day, week after week, month after month, and we still see 

the hemorrhage of jobs. They are being told the reason for their 

predicament is that they are in a knowledge economy and they are 

falling behind because they are not smart enough or that the problem in your testimony is, well, the fact is we got too many people 

getting older. I beg to disagree. 

I think what is happening is that capital investors have figured 

out how to make egregious profits by outsourcing jobs to very undemocratic places and then reimporting those goods here because 

our trade policy is snuffing out jobs and we have a tax policy that 

rewards it. 

And we do not have a redistributed income policy that helps our 

people to keep up in view of what is going on. ExxonMobile, I 

guess, is my key example of where we are out of whack, out of 

sync. 

So my two questions are, what do you think might happen to the 

market for U.S. debt securities if a foreign buyer like China or 

Japan were to sell off a significant portion of their holdings of U.S. 

debt securities? 

And, number two, nearly 95 percent of recent issues of U.S. debt 

instruments have been purchased by foreign buyers. Why are they 

the purchasers rather than American investors? 

Mr. BERNANKE. Well, on the first question, I should first point 

out that it is not in the interest of China or Japan to dump treasuries on the market. They themselves would suffer capital losses 

from doing that. 

I do think if there were—and I should be very clear, I have no 

information or expectation this is going to happen—but if there 

were significant sales by foreign central banks, for example, that 

there would be some short-run effect on the market in terms of the 

currency and interest rates probably. 

I think the longer-term effect would be somewhat less because 

the market would adjust. It is a liquid market. And the holdings 

of, say, China of U.S. debt securities, including both public and 

nonpublic, is only about five percent of the total credit market outstanding. 

So obviously we are watching that very carefully. I do not see 

that as a major threat to our financial system or our economy. 

I am sorry. The second question was? 

Ms. KAPTUR. The second question is nearly 95 percent of recent 

issues of U.S. debt instruments have been purchased by foreign 

buyers. Why are they the purchasers rather than American investors? 

Mr. BERNANKE. Well, a couple of reasons. One, as we talked 

about before, is that Americans are not saving that much, and you 

31

have to save in order to buy assets. And so that is part of the problem. 

The other is interestingly that Americans seem to have a stronger preference for equities and riskier investments than particularly 

foreign central banks. So at the time foreigners have been acquiring fixed income instruments like Treasury debt or GSE debt, a lot 

of American investors have been purchasing either domestic or foreign equity which pays a higher return, but is also riskier. 

So there is a bit of diversification going on in both directions for 

investors. But, again, the low rate of saving is also a contributor 

to that. 

Ms. KAPTUR. Doctor, could I just ask you on the first two requests I had for data on providing a list of those brokerage firms, 

can you provide that to the record? 

Mr. BERNANKE. I am not certain that we can, but we will do our 

best. 

[The information requested follows:]

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, 

Washington, DC, March 30, 2007. 

Hon. MARCY KAPTUR, 

House of Representatives, Washington, DC. 

DEAR CONGRESSWOMAN: I am responding to a question that you posed during my 

testimony before the House Budget Committee on February 28. You asked for information regarding the fees paid to Wall Street firms for underwriting Treasury debt. 

On further consideration following the hearing, it seemed to me that your question could be based on a misunderstanding of the Treasury’s approach to issuing 

debt. Treasury debt is not issued through a process in which the underwriting firms 

earn specified fees for assisting with Treasury’s debt placement. Rather, the Treasury issues marketable debt through a public auction process in which the highest 

bidders are awarded the securities being issued. (Some small investors also bid to 

receive securities at the interest rate set by the auction.) Such auctions are open 

not only to the twenty-one primary dealers firm but to all potential buyers, including other dealers, banks and other depository institutions, insurance companies, 

pension funds, mutual and hedge funds, and foreign investors. These auctions, like 

virtually all aspects of the Treasury securities markets, are highly competitive and 

transparent. The auction process helps ensure that the Treasury issues debt at the 

lowest possible cost to the taxpayer over time. 

I hope this information is helpful. Please let me know if I can be of further assistance. 

Sincerely, 

BEN S. BERNANKE, 

Chairman.

Ms. KAPTUR. And the fees that are being paid. Who would have 

that if the Federal Reserve——

Mr. BERNANKE. We deal directly with so-called primary dealers 

who are brokers who deal in the Treasury securities and will have 

some information. We collect some information about their operations and their income and so on. And we will check to see what 

we have and we will be in touch with your staff. 

Ms. KAPTUR. Thank you. 

I mean, you would expect to see Cantor Fitzgerald on that list; 

would you not? You would expect to see Goldman Sachs on that 

list; would you not? 

Mr. BERNANKE. Yes. 

Ms. KAPTUR. All right. We would be very interested in the fees. 

And then secondly, on the question on the postal saving stamp 

program, could you perhaps provide a framework in which to suggest how that might be reinstituted in this country? 

32

Mr. BERNANKE. Well, I am eager, as I said before, to try and promote saving behavior among young people, and there are many 

ways to do that. Making saving more accessible, making acquisition of assets more accessible would be one step in that direction. 

And, you know, I think it is worth looking at. 

Ms. KAPTUR. Thank you. 

Thank you, Mr. Chairman. 

Chairman SPRATT. Mr. Campbell. 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

Thank you, Dr. Bernanke. 

I have a couple of economic questions, then one relative to the 

savings. First on the economic question, as you stated, spending 

currently is 20.3 percent of GDP which is roughly equivalent to the 

average since 1960. 

If as part of curing this long-term problem that government 

spending as a percent of GDP went up, what impact would that 

have on economic growth? 

Mr. BERNANKE. If government spending as a share of GDP went 

up primarily in order to finance transfer payments, that is entitlement programs, and taxes would have to go up a comparable 

amount in order to have long-term budget balance, then depending 

on the nature of the taxes, presumably it would tend to create a 

dead-weight burden. It would tend to slow economic growth. 

Mr. CAMPBELL. You have eloquently pointed out the problem of 

our snowball of accumulating spending and debt. If, big if, political 

if, we were to arrest that and basically balance the budget going 

forward, does carrying the existing national debt that we have, if 

we were to carry that over time, how big a drag is that on the economy and how big a problem is that, if we were not adding to it? 

Mr. BERNANKE. If we were not adding to it, I think it would be 

a good stable situation. The 37 percent ratio of debt outstanding to 

GDP is actually lower than most other countries. Japan has a ratio 

of over 100 percent, for example. 

So if we were staying at this point, it would be fine. The problem 

is that prospectively with the entitlements coming down the road, 

we are looking to go well over 100 percent in the next 25 years. 

Mr. CAMPBELL. Right. But carrying that forward is not the great 

economic disaster if it is does not continue? 

Mr. BERNANKE. No. No. I would say that the current level of 

debt, if there were no entitlement problem, which is an enormous 

if, would be not necessarily a problem. But it is the prospective increases that are a concern. 

Mr. CAMPBELL. So putting those two questions together, if we 

were able to balance the budget, arrest the increase in debt, and 

keep the government spending and revenues at roughly the same 

kind of level that they are at today and have been historically, that 

would be a pretty good economic situation in terms of the government’s contribution? 

Mr. BERNANKE. Given what we are seeing in terms of the potential liabilities for entitlements, it would be an enormous improvement over the current situation. 

Mr. CAMPBELL. The last question I have is relative to the savings 

and net worth. Now, I am from California. And as you mentioned, 

net worths are rising. Savings have not been. 

33

It seems to me that people are consciously making the decision 

to put their net worth increase in places other than traditional savings as measured by the Fed or whomever, whether that be in the 

value of their house, equity in their house, or some other nonfinancial asset or whether that be in some retirement thing or 

stocks or some other financial asset. 

And I would suggest that people are making those decisions because they believe that financially it is smarter to put their net 

worth in those sorts of assets rather than in traditional savings. 

So my question to you is, why is the savings rate a problem if 

you agree, and maybe you do not, that that increase in net worth 

is not going into savings because people are making a rational economic decision which improves their financial stability or certainly 

they believe improves their net worth over time? 

Mr. BERNANKE. To a large extent, it is a rational decision. If your 

stocks and your home value are going up a lot, then there is less 

need from your personal family perspective to save out of your current income. 

I would just add parenthetically that what some people do is 

take money out of their home, for example, in order to invest it in 

other assets so as to diversify to some extent their overall portfolio. 

From the national perspective, though, the problem is that increases in the value of homes, for example, do not constitute funds 

that are available to make new investments, for example, in capital 

equipment and so on. 

And so in order to maintain our investment rate which includes 

construction of new homes as well as business capital investment, 

we have been forced to go abroad to the tune of about six, seven 

percent of GDP to finance that out of current flows of savings. 

So from the individual family perspective, it is not irrational. I 

would——

Mr. CAMPBELL. Well, if I can then insert my last question before 

my time runs out, then are we not seeing here a disconnect between an individual family perspective making something that is 

perhaps best for them but may not be best from a national perspective and, if so, what could we do to align those two? 

Mr. BERNANKE. Well, I would note first of all that the family 

with lots of equity that is making rational financial decisions, that 

is one group of people. That is not everybody. There are obviously 

some people who would be well served to increase their saving, increase their assets, be better off financially. 

And the second comment I would make is that, apropos to the 

subject of this hearing, that a big negative influence on the national saving rate is budget deficits at the federal, state, and local 

level. And one very direct way to begin to increase national saving 

and in particular to create more resources available for current investment, current home construction is for the budget deficits to be 

reduced or for surpluses to increase. 

Mr. CAMPBELL. Thank you, Dr. Bernanke. 

And thank you, Mr. Chairman. 

Mr. Becerra. 

Mr. Doggett. 

Mr. DOGGETT. Thank you. Thank you for being with us. 

34

In your recent address in Omaha, you endorsed boosting national 

investment in education and training and cited specifically the 

work of the Federal Reserve Bank of Minneapolis and its findings 

of the higher returns from pre-kindergarten programs and other 

early childhood efforts and how that can help us achieve lower 

rates of social problems like teenage pregnancy and welfare dependency. 

Why do you recommend investing in pre-k and does it appear to 

be one of the public policies with the best return? 

Mr. BERNANKE. Well, I was referring to some very active research that has been done at the Federal Reserve Bank of Minneapolis and some policy work that is being done in Minnesota as 

well. And I was citing the research by Jim Heckman, who is a 

Nobel Prize winner, and others that this is a high return activity 

from a social perspective and from an individual perspective as 

well. 

So I do think it is definitely a direction that might well we pay 

attention from the Congress. 

Mr. DOGGETT. Thank you. 

I am trying to balance this hearing and one that is happening 

at the same time in Ways and Means concerning climate change. 

And as you are well aware, an increasing number of responsible 

businesses are urging that we address the troubling increase in 

global temperatures, and fewer and fewer fit within that shrinking 

breed of climate change deniers. 

Do you believe that the dynamic economy that you have described can absorb the cost of reasonable measures to address global warming and perhaps even expand clean energy and energy efficiency as a growth industry for our country? 

Mr. BERNANKE. Well, let me say first obviously that I am not a 

scientist and I do not have an independent opinion about the magnitude of the problem, and I think very importantly I do not have 

an independent opinion about how severe or how large the effort 

would have to be if we were try to reduce emissions to levels of 20 

years ago. I would imagine it would be a fairly significant cost associated with doing that. 

So I hope that the scientists and the economists will get together 

and try and think together about, first of all, you know, how much 

effort is needed, how fast in terms of what makes sense for both 

the climate and for the economy. 

And secondly, I think very importantly that, to the extent we 

agree, that we need to do something that we try to do it in ways 

that will minimize the impact on the economy. One way to do that, 

which is consistent with what you were saying, is government support for basic technology. I think that there are incentives for firms 

to develop applied technology. But at the basic research level, the 

government can provide some help, some resources. 

And secondly, if, and, again, I am making no judgments about 

whether this should be done or not, if Congress were to decide to 

go forward with some kind of program, trying to use some mechanism like a cap and trade or market-based system that equalizes 

the cost of any given amount of carbon reduction across firms, 

across industries could allow a given amount of carbon reduction 

at lower cost. And obviously we should always be looking for ways 

35

to reduce the cost of achieving any particular environmental objective. 

Mr. DOGGETT. So a reasonable cap and trade system that tries 

to rely on the marketplace to address these issues is one approach 

that you think we should consider? 

Mr. BERNANKE. I think relative, for example, to an approach that 

prescribes how much each particular company, each industry has 

to do that this would provide, again if Congress decides to go in 

this direction, it would allow a given amount of emission reduction 

to take place at lower overall cost to the economy. 

Mr. DOGGETT. One last one. Some of the questions I have heard 

here this morning seem to suggest that we do not need to worry 

about revenues or tax shelters or tax savings or whether corporations are paying their fair share, that all we need to be concerned 

about is that grandma’s Social Security check is too big. 

And without minimizing our need to focus on entitlements and 

2030, you are certainly not saying that as we look over the next 

few years of the budget we are developing that we do not need to 

consider both the revenue side as well as the expenditure side? 

Mr. BERNANKE. No. It is the Congress’ responsibility to look at 

all the options, and I am not going to take one side or the other, 

but I think that you should definitely consider all options and try 

to balance the costs and benefits of both sets of approaches. 

Mr. DOGGETT. Thank you for your testimony and your important 

service. 

Chairman SPRATT. Mr. Smith from Nebraska. 

Mr. Tiberi. 

Mr. TIBERI. Thank you, Mr. Chairman. 

Chairman, can you tell us a little bit about your thoughts on, 

when we have seen the economic growth over the past several 

years higher than most economists have projected, when you look 

at that, what are your thoughts in terms of behavior? And you 

have talked about behavior with respect to our tax policy. What are 

your thoughts on how the cut in the capital gains tax and dividends have impacted that growth? 

Mr. BERNANKE. It is frankly hard to assess the effects of one specific tax over a short period of time. From a longer-term perspective 

and looking strictly at the efficiency side of it, public finance economists generally, I would say, support keeping taxes on capital low 

because of the implications for saving and investments and other 

effects that might have. 

But as always, you know, the Congress has to balance that 

against the revenue and progressivity aspects of the tax code as 

well. 

Mr. TIBERI. But a general belief would be that keeping taxes on 

capital gains and dividends would encourage more savings and investment. 

Mr. BERNANKE. That would be, I think, the view of most public 

finance economists, yes. 

Mr. TIBERI. Thank you. 

Again, thinking about economic growth, we have seen probably 

or I have seen, let me say, over the last year a bit of a backlash 

with respect to America’s trade policy, with statements made by 

36

some that America’s trade policy, international trade policy has 

been negative to economic growth in America. 

Can you share your thoughts on how international trade impacts 

our economic growth? 

Mr. BERNANKE. I think that trade is very positive for growth. If 

you look around the world, countries that are open and actively 

trading show higher growth rates than those that are less open. So 

I think that for the economy as a whole, trade provides very substantial benefits. 

Like new technologies, it also creates a certain amount of disruption and that is the kind of concern that would be useful to address 

in order to preserve the political support for open trade and capital 

flows, which I do believe are very beneficial to our economy both 

in the short run and the long run. 

Mr. TIBERI. So in the long run, and I do not want to put words 

in your mouth, you believe that a trade policy which encourages 

fair trade between the United States and other countries abroad 

can be helpful to a broadening middle class? 

Mr. BERNANKE. I do believe that it will provide broad benefits for 

the economy. Again, one of the problems here is that, like many 

things, that the benefits of trade are sometimes widely spread and, 

therefore, not quite so evident as the obvious costs of a shutdown 

of a mill or a factory. 

And so we have to weigh those costs and benefits and in particular to again provide political support for continued integration 

with the world economy, continued openness. I do think we have 

to, you know, not ignore the dislocations that take place in particular communities, particular industries. 

Mr. TIBERI. One final question, Mr. Chairman. Following up on 

Mr. Campbell’s point about the savings rate, it appears to me that 

a family that rather than puts money in a savings account but 

quickly pays off their 30-year mortgage and has equity in a home, 

the current formula is not showing that positive benefit from that 

family’s perspective of paying off a home. Yet, if they had not paid 

off the home and put that money in a savings account, it would 

have shown a different picture. 

What can we do to paint a more accurate picture of America’s 

savings? 

Mr. BERNANKE. Well, actually, the increase in the value of the 

home due to a rising real estate market, for example, would show 

up in the Federal Reserve’s measures of household wealth. So we 

do capture it in wealth measures as opposed to savings measures. 

The example you gave of paying down the mortgage, if I put 

something aside from my paycheck in order to pay down the mortgage, that, in fact, gets captured as saving because that is part of 

current income which is not being consumed. It is being used to 

pay down debt. That would be part of saving. 

Mr. TIBERI. Thank you. 

Thank you, Mr. Chairman. 

Chairman SPRATT. Ms. Hooley. 

Ms. HOOLEY. Thank you, Mr. Chair, for being here today. 

I just want to follow-up on a couple of questions. One was we 

were talking about capital gains tax cuts, whether that is increased 

savings or not. 

37

Do we have any proof that that is increased savings? Do we 

know that that has had an impact on savings? 

Mr. BERNANKE. Well, as I said, it is difficult to assess the effects 

of one small part of the tax package over a short period of time. 

Economists have looked at this and their concern is that when you 

tax capital income at a too high a rate that that will have effects 

over a long period of time because they really distort the decision 

about how much to consume today and how much to save, say, for 

retirement. 

So there is sort of a theoretical case for this. But, frankly, you 

know, for a specific tax cut over a short period of time, it is hard 

to make an absolutely convincing empirical case. 

Ms. HOOLEY. You said in a recent speech that the income of the 

top 90th percentile has grown over the last 27 years by 34 percent 

whereas if you are at the 10th percentile, it has grown four percent. 

How do we close that gap? 

Mr. BERNANKE. I think there are a few things that could be done, 

but I think by far the most important is to create a broader base 

of skills and knowledge and education. 

There was earlier discussion about manufacturing. So it is true 

that as manufacturing industries have become much more productive that the number of assembly line workers has dropped. So that 

type of reasonably well-paying job for relatively low educated people is no longer available. 

At the same time, though, the demand for high skilled workers 

in manufacturing who have not necessarily college degrees but who 

know how to operate complex equipment and so on has been soaring. In fact, manufacturers cannot find enough people with the 

kinds of skills they need. 

So, again, I am not an education expert and I am afraid I cannot 

give you a long list of detailed recommendations, but I think broadly speaking what the issue is is helping those who have been left 

behind to acquire the skills they need to earn good wages in what 

is becoming a more and more technologically sophisticated economy. 

Ms. HOOLEY. Well, as I see our economy changing, I see the need 

for more training and retraining of our workers as time goes on. 

And, yet, I look at the budget that was given to us and it has billion dollar cuts in employment and training programs. And I think 

that is where we make a mistake when we do not put money into 

that retraining program. I think our economy is better off when we 

do that. 

Would you agree with that? 

Mr. BERNANKE. One of the tough challenges with both education 

and training programs is being effective and doing a good job. And 

so if the budget involves a reallocation from some types of training 

activities to others, for example, I think it would be very important 

not just to look at the total dollar number but to see are we using 

programs that are known to work and that are effective because 

the total dollar input is not as important as what is the output on 

the other side in terms of skills acquired. 

Ms. HOOLEY. I am going to ask you a question that has not been 

asked, and that was if you were in a class of fifth graders, how 

38

would you explain to them the consequences of our national debt 

and deficit and how that is going to impact their lives, and what 

happens when they do not have a savings? So what would you say 

to that fifth grade class? 

Mr. BERNANKE. I would say that our economy needs machines 

and new factories and new buildings and so on in order for us to 

have a strong and growing economy. If the government does not 

cover all those expenses, it has to take out the money that would 

otherwise be used to build those machines, those factories, those office buildings, all those things that make the economy strong, and 

give them the opportunities when they grow up to have well-paying, productive jobs. That probably would not work for a fifth grader, but that is about as close as I can get. 

Ms. HOOLEY. That is okay. Thank you for your time. 

Chairman SPRATT. Mr. Alexander. 

Mr. ALEXANDER. Thank you, sir. 

Mr. Chairman, good morning still. 

One of the ladies earlier said something about a stamp program 

under the Roosevelt’s Administration to help stimulate growth. But 

is it not true that President Roosevelt used some of the Social Security funds to finance the new deal? 

Mr. BERNANKE. Well, Social Security was tiny. It was just beginning essentially in the 1930s. 

Mr. ALEXANDER. Well, it was tiny, but the pay-outs were tiny, 

but——

Mr. BERNANKE. Well, it is true that the Social Security has always been primarily a pay-as-you-go system which means that the 

payroll taxes that are collected have not been invested in real capital. They have either gone into holding government debt or otherwise been used on benefits. 

Mr. ALEXANDER. Okay. When we are talking about the entitlement programs, a lot more money coming out of those programs 

today than it has been in the past and, of course, a lot more money 

going into those programs. 

But on a percentage basis, how much difference is it today percentage going in and percentage coming out than it was 20 years 

ago? 

Mr. BERNANKE. I might not have your question exactly right. In 

terms of the flow of in and out, currently, as you know, the Social 

Security system is running a surplus, even forgetting about interest on the trust fund. The total benefits being paid are about four 

and a quarter percent of GDP and the total payroll taxes being collected are about five percent of GDP. 

So that is three-quarters of a percent GDP contribution to the 

unified budget deficit not counting the interest being earned on the 

trust fund. So the Social Security fund is still in surplus now and 

is reducing the unified budget deficit. 

Mr. ALEXANDER. Okay. Going back a long way, I think 1965 is 

when President Johnson signed Medicare into law. 

Mr. BERNANKE. Right. 

Mr. ALEXANDER. At that time, I could have bought absolutely the 

best car on the lot for $4,000. And today we have a system that 

is spending that much or more for medical devices, motorized 

39

wheelchairs or whatever, and I am not arguing that there is not 

a need for it, but I am just leading up to a question. 

The amount of money that is being spent withdrawing from 

those entitlement programs now, how much of it is a decision by 

bureaucrats versus Congress? I mean, I do not know if it was a 

congressional act that said, okay, we will now start buying fancier 

wheelchairs for people that need it. 

Mr. BERNANKE. Well, going back to history, there has been a big 

increase in the size of the entitlements even up to now. The total 

entitlement spending in the mid 1960s was about three percent of 

GDP and now it is greater than eight, eight to nine percent of 

GDP. So there has been a big increase. 

The Congress is ultimately responsible, of course, for the spending plans. In some cases, they are put on somewhat automatic 

pilot, which is why they are called mandatory programs. 

For example, the formula for calculating initial and subsequent 

Social Security benefits is in the law and then whatever wages and 

prices do, that determines how much the benefits actually are. 

And similarly some of the medical expenditure is not directly 

controlled. It is set by the rules that Congress has created for defining those benefits. So there is an annual appropriation for the 

total spending on entitlements. 

Mr. ALEXANDER. In other words, you are saying oftentimes the 

spending is not necessarily something advocated by Congress, it is 

just something that Congress did not stop when they had an opportunity to? 

Mr. BERNANKE. Well, Congress created the structure and the 

rules and that is the consequence of those rules. 

Mr. ALEXANDER. Thank you. 

Chairman SPRATT. Thank you, sir. 

Mr. Berry is not here. 

Mr. Moore. 

Mr. MOORE. Thank you, Mr. Chairman. 

Chairman Bernanke, thank you for being here today and for your 

service to our country. 

I printed off just before I came over here from the U.S. Treasury 

web site a document that shows major foreign holders of Treasury 

securities of our country, and it shows Japan as of December 2006 

held $644 billion; China, mainland China, $349 billion; United 

Kingdom, $239 billion; and even Mexico had $34 billion in holdings 

for a total—I did not read off all the countries—but for a total, according to this document, of $2,223,000,000,000. Does that sound 

correct, sir? 

Mr. BERNANKE. I think that is the total of international reserves. 

There might be more in private hands. 

Mr. MOORE. Okay. But I am talking about——

Mr. BERNANKE. That sounds about right. 

Mr. MOORE. Okay. And I heard your answer to Ms. Kaptur’s 

question about what if these countries that hold our debt decided 

they did not want to hold it anymore for whatever reason, because 

of our deficits, because of our trade deficits or budget deficits or 

trade deficits, and decided they wanted to not hold these anymore. 

40

And I heard you say I do not think that will happen, and I hope 

you are right. But sometimes we are not right. Sometimes we are 

wrong. 

And if these foreign countries decided for whatever reason they 

did not want to hold our debt in the future, what would be the impact? What would you expect to be the impact in this country? 

Mr. BERNANKE. Well, it would be disruptive in the debt markets 

in the short run. It would cause, for example, an increase in interest rates. 

As I said before, I think in the longer term, the effects would be 

somewhat less because besides the Treasury debt, there is many 

other forms of corporate and GSE and other debt that is available 

as part of this broad fixed interest market. 

I think it should be noted that the Federal Reserve could be of 

assistance in that situation. If interest rates went up and slowed 

U.S. economic growth, for example, the Federal Reserve could respond by using monetary policy and that would have some benefits. 

I want to make a distinction that the foreign central banks acquire U.S. assets because we do have very deep and liquid, safe financial markets and they find it in their own benefit to do so, not 

because they are doing us any kind of favor. 

Mr. MOORE. I understand. 

Mr. BERNANKE. And as I said, I think that they will be willing 

to hold that for some time. In the scenarios I have described, 

though, where 20, 25 years from now the debt and the deficits are 

so big as to create a tremendous burden, then the willingness of 

foreigners or even our domestic citizens at that point to hold government debt at reasonable interest rates would certainly be much 

affected. 

Mr. MOORE. I understand. I just wanted to point out, though, 

that sometimes we are incorrect in our assessments and the Administration, in fact, projected that between 2001 and 2004, there 

would be a $1.28 trillion surplus which, in fact, turned out to be 

an $850 billion deficit. 

So sometimes with the best intentions in the world and trying to 

be completely straight, we just are in error in our assessment; is 

that not correct? 

Mr. BERNANKE. Yes, sir. 

Mr. MOORE. Another question then, and I have got just a minute 

and a half left. What would you think, Chairman Bernanke, 

about—well, you said that the Social Security fund is still in surplus now, correct? 

Mr. BERNANKE. The current flow of payroll taxes collected is still 

higher than the benefits being paid out. 

Mr. MOORE. Right. What would you think about establishing a 

true Social Security Trust Fund, one that could not be used for any 

purpose except what it was intended for and that is to pay Social 

Security benefits? 

Mr. BERNANKE. So currently we are shooting for a budget balance that includes the Social Security system. 

Mr. MOORE. Yes, sir. 

Mr. BERNANKE. If we were able to shoot for a budget balance 

that did not include the Social Security system and, therefore, was 

essentially buying down Treasury debt with that surplus, then 

41

clearly that would be putting our long-term fiscal situation on a 

stronger footing. 

Mr. MOORE. We talk about a Social Security Trust Fund. In fact, 

in the real sense, the legal sense of the word, there is not one because we spend Social Security money for a lot of other things, 

some good things and some things people might have questions 

about, is that not correct, even though we still do have as a government the liability and the obligation to make good on the Social Security money that was supposed to be in that fund; is that not correct? 

Mr. BERNANKE. Well, the $2 trillion Social Security Trust Fund 

is an asset of the Social Security system and affects the benefits 

profile, for example, going forward. But the $2 trillion Social Security Trust Fund is not an asset of the government as a whole because every dollar that is owed Social Security is a dollar that the 

government has to raise. So it is correct that from the government’s 

perspective or from society’s perspective, it does not reflect any real 

assets like capital or equipment. 

Mr. MOORE. Thank you, sir. 

Chairman SPRATT. Mr. McHenry. 

Mr. MCHENRY. Thank you, Mr. Chairman. 

Great to be with two of my neighbors to the south, Chairman 

Spratt from South Carolina and Chairman Bernanke from South 

Carolina. It is a pleasure to be with you all. 

I wanted to follow-up on Mr. Tiberi’s question about unlocking 

the potential of capital and the free movement of capital by reducing capital gains tax rates. 

At the time we reduced the capital gains tax rate for individuals, 

we did not reduce the corporate capital gains tax rate, which now 

stands at 35 percent. 

In terms of unlocking the potential of capital to move freely and 

to see its highest and best use, would it be appropriate to look at 

that, reducing the corporate capital gains tax rate? 

Mr. BERNANKE. Well, specifically one of the advantages of, again 

from specifically an efficiency perspective, of keeping the dividend 

tax rate low is that it allows firms to pay out dividends without tax 

penalty and that money then gets recirculated in the capital markets and may find better uses than if it is in some sense trapped 

in the corporation. So that is one of the benefits from an efficiency 

perspective of low dividend tax rates. 

Mr. MCHENRY. But in terms of corporate capital gains. 

Mr. BERNANKE. Corporate capital gains are a part of the return 

to savings, return to investment. And for some of the reasons I 

gave earlier, economists tend to argue that moving towards taxing 

consumption and leaving saving to accumulate, not distorting saving decisions through taxes on saving behavior, leads to higher income in the longer run. 

Mr. MCHENRY. All right. Chairman, you also spoke about whatever the size the government is chosen to be, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance 

of spending and revenues in the long run. 

I know you have spoken about this before. But in terms of entitlement reform, at what point does our inaction as a Congress have 

a negative effect on the economy, meaning our inaction to achieve 

42

entitlement reform? At what point does that actually become a 

drag? Is that 2008? 

Mr. BERNANKE. I do not think there is a magic point. But the 

further this goes without any action, the bigger the current deficits 

are going to get which is going to draw capital out of more productive uses like capital investment or, alternatively, increase our obligations to foreigners. And, moreover, the further along we get, the 

harder and more painful it is going to be to try and adjust the 

budget in order to stop the accumulation of debt. 

So it is really a two-sided aspect which is that it is true that we 

are not feeling a lot of pain at the moment from deficits, which 

makes it harder, I understand, politically to take action, because 

the benefits and costs of this are further down the road. 

On the other hand, as I said, by acting now, we can at lower cost 

and with greater notice, we can make changes to programs that 

will take effect ten, fifteen, twenty, twenty-five years from now. 

And in that respect, we can do what we need to do or you can do 

what you need to do without immediate impact or without affecting 

those people who are already retired, who are near retirement, and 

who would perhaps justifiably feel that they were not getting what 

they had been promised if you were to affect their benefits. 

Mr. MCHENRY. I know there are a number of discussions going 

on in the Congress right now about entitlement reform and, in essence, creating a commission to look at all the entitlement programs, all the mandatory spending programs, to look at ways to reform them. 

And I wanted to ask you if you would be willing to comment on 

those ideas for maybe a BRAC like, BRAC style commission to review policy prescriptions and have that sent back to the Congress 

for a simple up or down vote. 

Mr. BERNANKE. I am reluctant to endorse or comment on specific 

budgetary measures or similar measures as you describe. However, 

I do think that trying to focus Congress on the longer term and emphasizing the urgency of beginning to take action is highly desirable and whatever methods achieve that objective would be very 

good to undertake. 

Mr. MCHENRY. Thank you, Chairman. 

Chairman SPRATT. Mr. Berry. 

Mr. BERRY. Thank you, Mr. Chairman. 

Thank you, Mr. Chairman, for being here. 

The United States Congress almost all the time is in this debate 

about taxes and tax cuts are good and tax increases are bad and 

so on and so forth. And I think we all agree that the lower the 

taxes can be, the better it is. 

Now, you have already said here today, I believe, that they need 

to be the same. Whatever your revenues are, they need to be the 

same as your expenditures. 

Does the impact of a tax cut change if you make that policy 

change and it results in tax reductions, but to offset the loss of revenue, you borrow the money? 

Mr. BERNANKE. Because taxes and spending have to be commensurate in the long run, if you cut taxes and lose revenue through 

that tax cut and you do not make any adjustments on the spending 

43

side, then that tax cut will essentially have to be temporary. It will 

eventually have to come back up in order to finance the spending. 

So in order to get the incentive benefits of a tax cut, you also 

have to look on the spending side and be willing to make equal cuts 

in spending. 

Mr. BERRY. We have heard from any number of people that 

sometimes these tax cuts do result in an improved economy and 

sometimes they do not. Would you agree with that? 

Mr. BERNANKE. Not all tax cuts are created equal. Some are 

more effective than others. And, again, tax cuts that are accompanied by spending restraint would be more effective than those 

which are not. 

Mr. BERRY. And we have also heard over and over again, and I 

think it is obviously true, that Medicare and Social Security as 

they are structured today are unsustainable, that we have got a 

train wreck waiting to happen out there. It is not going to happen 

tomorrow, but it is a very serious matter to this country. 

Would this nation be better off without those programs? 

Mr. BERNANKE. I do not think anyone is seriously advocating 

eliminating those programs. I think the question is trying to look 

at how they work and make some judgments about are there ways 

that the cost can be reduced and, if not, and let me just say, if not, 

then making the tough decisions to raise taxes on the other side. 

I mean, the main decision which Congress has to make is how 

big is the government going to be. And all I am saying is the laws 

of arithmetic have to apply. If you just decide to have a larger government, which is not illegitimate, you could well believe that the 

social services and the other benefits of government spending are 

worth it, then that is fine, but you just have to be willing to accept 

the higher taxes and the implications that might have for economic 

growth. 

Mr. BERRY. But right now we are really not facing up to that and 

we are just kind of whistling past the graveyard. 

Mr. BERNANKE. Yes, sir. 

Mr. BERRY. And hoping that the tooth fairy comes and bails us 

out of this deal. Is that a correct assessment? I know that is mine, 

not yours, and I would not expect you to assign yourself to what 

I just said. 

Mr. BERNANKE. I do not know about the metaphors there, Mr. 

Congressman, but I do think that Congress does, and I realize, as 

I said several times, this is not an easy task by any means, but 

Congress does need to begin to address these long-run fiscal imbalances. 

Mr. BERRY. Thank you, sir. 

Thank you, Mr. Chairman. 

Chairman SPRATT. Mr. Andrews. 

Mr. ANDREWS. Thank you, Mr. Chairman. 

And thank you, Mr. Chairman, for your very edifying testimony. 

I wish every member would read it. I think it is very, very edifying. 

You describe our budgetary situation as the calm before the 

storm and I think you very correctly identified the storm as being 

severe consequences for the economy if capital pools are drained, 

if the price of capital rises, if we continue a policy of borrowing our 

way to an illusionary prosperity. 

44

One of the matrix that you discuss as a way of measuring our 

progress toward avoiding that storm or preparing for that storm is 

the idea of the measurement of the long-term solvency of entitlement programs, such as the long horizon present values of unfunded liabilities for Social Security and Medicare. 

Do you think that there are benchmarks that the markets are 

going to express and manifest as to which benchmarks we have to 

hit on that issue? I will ask you the question another way. 

My understanding is we are adding each year to the present 

value of those unfunded liabilities by failing to take action on entitlement reform, and we are also adding to it by failing to put away 

Social Security surpluses which could be saved for those forthcoming problems. 

Do you think that the market will manifest a benchmark where 

if the unfunded liability grows too large and the time before the 

storm starts grows too short that the markets will begin to punish 

us with higher long-term interest rates and, if so, what would you 

think those benchmarks are both in terms of size of the unfunded 

liability and distance from the storm? 

Mr. BERNANKE. I think it would be hard to give you exact numbers. Thus far, the Treasury market has very willingly financed the 

government. Real interest rates are low. They have not come up 

much. 

I would think that concerns would begin to mount if the government got to the point where it was coming closer to one of these 

snowball situations where the accumulation of interest on the debt 

was adding to the deficit which was adding to the debt. 

If that looked to be something that was inevitable and that it 

was becoming increasingly unlikely that the Congress was going to 

be able to address that, and, again, the closer you get to that, the 

harder it is, then I think capital markets would become concerned 

about it. 

Mr. ANDREWS. We, as you know, deal in five-year budget windows in the resolutions that the Committee addresses. 

Could you give us a perspective as to what the markets would 

regard as a successful five-year project that would either reduce 

the unfunded liabilities or at least let their rate of growth slow? Is 

there a target we should be shooting at in the five-year window? 

Mr. BERNANKE. Well, as I indicated, you need multiple indicators, and I am not sure that the five-year window sufficiently captures the long-run imbalances. So it would be interesting to look 

at projections as we saw on the screen a while ago of the imbalance 

at ten, fifteen, twenty years down the road and steps that move in 

the direction of ensuring that those imbalances are being closed. 

And I think just moving in the right direction is important. 

Mr. ANDREWS. Assuming that we were able to enact a budget 

resolution that during the five-year window stop the process of 

using the Social Security surplus and began to bank it or save it 

toward reducing this future unfunded liability by making it funded, 

would you regard that as a positive development? 

Mr. BERNANKE. I think it would be extraordinarily difficult to 

move that far on budget surplus in a few years, within five years 

and——

Mr. ANDREWS. But if it were, would it be a positive development? 

45

Mr. BERNANKE. Well, the Federal Reserve would have to offset 

the short-term spending effects of that with lower interest rates. 

But that would be——

Mr. ANDREWS. So you promised us lower interest rates if we do 

that? Is that what I just heard? 

Mr. BERNANKE. If you do that, we will do our best. But what we 

would do is we would respond in such a way as to try and keep 

the economy at full employment. 

Mr. ANDREWS. I understand. 

Mr. BERNANKE. But I think if you can demonstrate a plan that 

seems plausible and make a down payment on it, if I may say so, 

that would be certainly the right direction. It would be reassuring. 

Mr. ANDREWS. I think one of the imperative projects of this Committee is to define plausibility, and we need your input on that and 

those of other leaders. 

And I thank you very much for your testimony and for answering 

my questions. 

Mr. BERNANKE. Thank you. 

Mr. ANDREWS. Thank you, Mr. Chairman. 

Chairman SPRATT. Mr. Etheridge. 

Mr. ETHERIDGE. Thank you, Mr. Chairman. 

Chairman, thank you for being here this morning and thank you 

for your time. This is an important issue and you have got a tough 

job. We appreciate the job you do. 

Let me ask you a question. You touched on this in different ways 

and all of us sort of struggle with our own family incomes and 

what our debt ratio is to our assets, et cetera. But my question is, 

do deficits matter at the federal level? 

Mr. BERNANKE. Yes, they matter because they are part of the 

process by which debt builds up, and that debt burden is going to 

affect our children and grandchildren in two different ways. 

First of all, it is going to be actually a debt that they have to do 

something about paying off, number one. But, number two, it is 

going to drain capital from the construction of new machines, new 

factories, and the like, or increase our debt to foreigners so that 

when that time comes to pay off that interest, they are going to 

have a less vibrant economy, you know, to earn income from in 

order to do it. 

So debt does matter because it is the process of accumulation of 

debt which creates the burden for the next generation. 

Mr. ETHERIDGE. Thank you. I happen to agree. I just asked that 

question because Vice President Cheney has stated that deficits do 

not matter. And it is obvious they do not with some of the spending, but let me move to another question. 

You were quoted earlier saying, and you touched on this a little 

earlier today, and you had said earlier this month really that policies that focus on education, job training, and skills and that facilitate job search and job mobility seem to me to be promising means 

by moving toward that goal, talking about expanding the economy, 

et cetera, making it bigger, making the pie much larger. 

I assume you still stand by that statement. 

Mr. BERNANKE. Yes, sir. 

Mr. ETHERIDGE. Thank you. 

46

I ask that question because, just so you will know, in my previous life, I was in business. Prior to that, I was State Superintendent of Schools for a few years. And I happen to believe that 

if you are going to make the pie larger as we look out with all the 

challenges or projections, we can change those projections by 

changing output, educational levels and productivity of workers 

and the value added of each worker to that, because you have been 

saying that. 

Mr. BERNANKE. It will add to growth and it will also create more 

opportunities for people across the income spectrum. 

Mr. ETHERIDGE. Change those dynamics. And I look at the budget that we are dealing with that the Administration sent over, and 

there are a whole lot of gaps as relates to job training and education and those investments that I think are long-term investments as we look at the out years. 

And I would be interested again in your comments and any 

thoughts you could help us with as we are dealing with that because it seems to me that if you really want to change the dynamics, it is an investment versus and expenditure, and you invest in 

the future and you spend for today. 

And I think your comments have indicated previously that if you 

invest in education today and monitor it and measure it, that will 

give you a reward down the road if you do it right. 

Mr. BERNANKE. If you do it right. I mean, the only caveat I 

would add is that the total budget line is not the only indicator of 

the commitment or the effort. It also has to be in programs that 

have shown to produce a good result. 

Mr. ETHERIDGE. Well, let me just give you a couple examples before we get to your comments because I think it is important. 

If we go back to World War II, the GI Bill was an investment. 

And men and women who were coming home and we know the results of that. 

In the 1960s with the Sputnik, we got frightened. We put the 

‘‘National Defense Act’’ in place, and the results of that was an infusion of capital that excited young men and women about a goal 

of going to the moon and it turned into a tremendous economic 

boom for this country. And we led the world in a host of ways. 

We really need, I think, that kind of vision once again for our 

young people to challenge them academically to generate the kind 

of growth in opportunities we need. 

And I think budgets are more than just numbers and figures. I 

think they are moral documents that speak to our visions, our hope 

for the future. 

Mr. BERNANKE. I agree that a strong commitment to helping 

young people realize their potential is extremely important. There 

are many ways to address that. People disagree about the right 

way to do it. And I urge Congress to have a healthy debate about 

how best to foster learning, education, and skills among our whole 

population. 

Mr. ETHERIDGE. Thank you. And thank you for your time. 

Thank you, Mr. Chairman. 

Chairman SPRATT. Mr. Chairman, if you will indulge, Mr. Cooper 

has a question he would like to ask also, if you have the time. 

Thank you very much. 

47

Mr. Cooper. 

Mr. COOPER. Thank you again for your testimony. 

You say toward the close of your testimony that if early and 

meaningful action is not taken implied by Congress, U.S. economy 

could be seriously weakened and future generations bearing must 

of the cost. 

Our problem here is lighting a fire under some of our colleagues 

to get the tough decisions made. So one of the pieces of data that 

I have been using came from last summer’s ‘‘Wall Street Journal.’’ 

It was on page C6. It was from Standard & Poors, a leading credit 

rating agency. 

And they projected, they did not predict, but they projected that 

the U.S. Treasury bond itself would lose its triple A credit rating 

if current trends continued by the year 2012. 

Then they went on to project that by the year 2025, the U.S. 

Treasury bond would achieve junk bond status below investment 

grade. And that has been one of the more tangible warning signs 

because most folks kind of heard of S&P and think, well, gosh, that 

is not Democratic, that is not Republican, that is credit markets. 

And everyone has a sense that U.S. Treasury bond is the most important, most liquid instrument in the world. 

So the prospect that we are literally destroying America’s credit 

today by our inaction has helped light a few small fires, but still 

not enough to get folks going. So I appreciated your response to 

Rob Andrews’ questions. 

We, if we were to follow the President’s budget, would be using $1.3 trillion worth of alleged Social Security surpluses to mask the 

true size of the deficit, because when the President brags that he 

is going to achieve a surplus in year five that he does not tell you 

that he would be doing that by borrowing that year about 230 or 

40 billion dollars from Social Security. 

So that really, if you look at all of our programs, including Social 

Security, we are still going to have a deficit in year five. 

So how do we get a greater sense of urgency here? You are doing 

all that you can, but what can we be doing to get this problem 

solved early as you suggest? 

Mr. BERNANKE. I think you need to consult with your colleagues 

and try to think about a plan. I think one of the—and, again, I am 

reluctant to get into congressional process of which I am certainly 

not an expert—but a good bit of the budgetary planning is about 

the relatively short run, and the question is whether Congress can 

define some matrix or benchmarks for progress on the long-term 

imbalance issue. If that were possible and if there were some will 

in Congress to try to meet those benchmarks, that would be a step 

in the right direction. 

You are right. That is somewhat difficult because so far, the effects of the deficits are not evident to the average American. I 

mean, the average American does not know about the current account deficit and those sorts of things. 

But, again, I think it is also an opportunity because we have 

enough lead time that we can make changes in programs that will 

not take effect until people who are now in their thirties and forties 

are approaching retirement and give them plenty of time to plan 

and adjust to those changes. 

48

Mr. COOPER. I thank you, Mr. Chairman. 

Chairman SPRATT. Mr. Becerra. 

Mr. BECERRA. Thank you, Mr. Chairman. 

Mr. Chairman, thank you for being patient and wading through 

the different questions that we have all asked you. 

I want to go back to something that I know you have talked 

about quite a bit today and in other days and that is how deficits 

do matter. 

And I think to underscore that, it is important to point out that 

this year, we are paying something close to the size of the identified deficit of $240 billion simply in interest payments on the national debt, which means we are getting nothing out of those $240 

billion or so in payments on money we owe. 

But I wanted to highlight and talk to you a little bit about what 

I think is not being explored well by all of us in government, certainly to the detriment of the American people, and that is the fact 

that while the President identifies our budget deficit for 2007 as 

being $244 billion, if it were not for the fact that we are using all 

the monies that we are collecting in the Social Security Trust 

Fund, all the extra dollars that are not being spent today for benefits to the Social Security recipients, the actual size of the deficit 

would be closer to $435 billion because there is about $190 billion 

in excess money that you today, I today, and every American who 

got up today to go to work is paying in the FICA tax for our Social 

Security and Medicare contributions. 

I think it is unfortunate, and I think the Chairman tried to focus 

on this as well, that the American people do not quite understand 

what is going on and do not quite grasp why deficits do matter and 

what the consequences could be, not so much to us today, but to 

our children in the future. 

And I am wondering if you can just comment a bit. This year in 

2007, there are about $190 billion in surplus dollars in Social Security that you and I and everyone in America who works is contributing to the system with the expectation that it will be around 

when we retire. Next year, that amount rises to over $200 billion 

in surplus money. In 2009, it is about $218 billion estimated. In 

2010, $230 billion. In 2011, $246 billion. In 2012, $255 billion in 

surplus monies in Social Security. 

Each one of those amounts of surplus in each of those years, the 

President has in his budget that he has presented to us consumed 

every single cent of those monies, over a trillion dollars, in something other than Social Security. And you have mentioned how we 

need to have some fiscal discipline, how we have to get these deficits down. Is it wise for us—here is the question—is it wise for us 

knowing that we will have this liability, whether it is legal or otherwise, to the American people who today are contributing in FICA 

taxes for the Social Security benefits in the future, is it wise for 

us to not do more to explain to the American people that the size 

of the deficits are not 244 billion as the President identifies in his 

budget, but really $434 billion because we are masking the size of 

the deficit by using Social Security monies that ultimately, I think 

you and I would agree, we must commit to spend on Social Security 

in the future? 

49

Mr. BERNANKE. Well, first, the unified budget deficit concept, 

which is what you are talking about, has been in use for a while. 

It is not a brand new thing. But you are right. It does have the 

property that essentially the surplus from each year is payroll 

taxes being used for other purposes. 

I do not know how effective it would be, but I think probably 

some Americans do think that Social Security is like a 401k plan 

and that their contributions are being invested in real assets, 

which is, of course, not the case except in the very narrow sense 

that the trust fund has these IOUs in it. So I do think that would 

be something worth pointing out. 

And I guess I could go even further and just note, as we had discussed earlier, that beyond the on budget deficit, which is what you 

are talking about, there is also the accrual deficit which adds to 

that the accrued obligations to, say, federal employee pensions and 

the like. And beyond that, it is the money that we are essentially 

owing each year as we get closer and closer to the demographic 

crunch. 

So there are multiple measures of this. And I agree that the unified budget deficit is in some sense the least revealing in terms of 

long-term obligations. 

Mr. BECERRA. And, Mr. Chairman, I would guarantee you that 

most Americans would say to you so you are using those monies 

that we are contributing extra to Social Security to help us take 

care of our troops, to make sure they are well armed, or to make 

sure that Katrina victims are being addressed or taken care of in 

New Orleans. I think they would say fine, that is a good investment. 

But I wonder if most Americans would say that helping pay for 

the President’s tax cuts which have benefitted very few of the majority of Americans who got up to work today because most of those 

tax cuts are directed towards folks who are probably in your income bracket and my income bracket and the upper echelons of our 

wealth, if the American public would say, well, that is really where 

I want to see my $190 billion in surplus Social Security funds 

going, recognizing that today we have got a budget deficit that is 

bigger than the whole $190 billion that Social Security is contributing to this budget. 

And I think if we did a better job, all of us, in our respective 

roles of educating the public on the money that is out there, I think 

they would guide us in some good decisions and these long-term decisions that we have to make to try to corral these deficits that are 

growing very large and the entitlement spending that we have to 

at some point address as well. 

So I thank you for being patient and being here and look forward 

to seeing you again at some point in the future. 

Thank you, Mr. Chairman. I yield back. 

Chairman SPRATT. Thank you, Mr. Becerra. 

Mr. Chairman, you have been forthcoming as well as forebearing 

and we appreciate the efforts you have made to help eliminate the 

problems that line our path. They are daunting challenges, but 

they definitely need to be addressed. And you have helped issue a 

sobering call to action. 

50

Thank you very much for your testimony today. We very much 

appreciate it. 

Mr. BERNANKE. Thank you, Mr. Chairman. 

[Whereupon, at 12:25 p.m., the Committee was adjourned.]

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