S. HRG. 111–733 

CONCURRENT RESOLUTION ON THE 

BUDGET FISCAL YEAR 2011 

HEARINGS 

BEFORE THE

COMMITTEE ON THE BUDGET 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

January 28, 2010–THE BUDGET AND ECONOMIC OUTLOOK: FISCAL 

YEARS 2011-2020 

February 2, 2010–THE PRESIDENT’S FISCAL YEAR 2011 BUDGET 

PROPOSAL 

February 4, 2010–THE PRESIDENT’S FISCAL YEAR 2011 BUDGET AND 

REVENUE PROPOSALS 

February 9, 2010–CRISIS AND AFTERMATH: THE ECONOMIC 

OUTLOOK AND RISKS FOR THE FEDERAL BUDGET AND DEBT 

February 11, 2010–SETTING AND MEETING AN APPROPRIATE TARGET 

FOR FISCAL SUSTAINABILITY 

February 23, 2010–DEFENSE BUDGET AND WAR COSTS: AN 

INDEPENDENT LOOK 

February 24, 2010–THE PRESIDENT’S FISCAL YEAR 2011 BUDGET FOR 

THE DEPARTMENT OF TRANSPORTATION 

March 4, 2010–DEPARTMENT OF DEFENSE FISCAL YEAR 2011 

BUDGET REQUEST 

( 

Printed for use of the Committee on the Budget 

CONCURRENT RESOLUTION ON THE BUDGET FISCAL YEAR 2011 

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58–153pdf 2010

S. HRG. 111–733 

CONCURRENT RESOLUTION ON THE 

BUDGET FISCAL YEAR 2011 

HEARINGS 

BEFORE THE

COMMITTEE ON THE BUDGET 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

January 28, 2010–THE BUDGET AND ECONOMIC OUTLOOK: FISCAL 

YEARS 2011-2020 

February 2, 2010–THE PRESIDENT’S FISCAL YEAR 2011 BUDGET 

PROPOSAL 

February 4, 2010–THE PRESIDENT’S FISCAL YEAR 2011 BUDGET AND 

REVENUE PROPOSALS 

February 9, 2010–CRISIS AND AFTERMATH: THE ECONOMIC 

OUTLOOK AND RISKS FOR THE FEDERAL BUDGET AND DEBT 

February 11, 2010–SETTING AND MEETING AN APPROPRIATE TARGET 

FOR FISCAL SUSTAINABILITY 

February 23, 2010–DEFENSE BUDGET AND WAR COSTS: AN 

INDEPENDENT LOOK 

February 24, 2010–THE PRESIDENT’S FISCAL YEAR 2011 BUDGET FOR 

THE DEPARTMENT OF TRANSPORTATION 

March 4, 2010–DEPARTMENT OF DEFENSE FISCAL YEAR 2011 

BUDGET REQUEST 

( 

COMMITTEE ON THE BUDGET 

KENT CONRAD, NORTH DAKOTA, CHAIRMAN 

PATTY MURRAY, WASHINGTON 

RON WYDEN, OREGON 

RUSSELL D. FEINGOLD, WISCONSIN 

ROBERT C. BYRD, WEST VIRGINIA 

BILL NELSON, FLORIDA 

DEBBIE STABENOW, MICHIGAN 

ROBERT MENENDEZ, NEW JERSEY 

BENJAMIN CARDIN, MARYLAND 

BERNARD SANDERS, VERMONT 

SHELDON WHITEHOUSE, RHODE ISLAND 

MARK WARNER, VIRGINIA 

JEFF MERKLEY, OREGON 

JUDD GREGG, NEW HAMPSHIRE 

CHARLES E. GRASSLEY, IOWA 

MICHAEL ENZI, WYOMING 

JEFF SESSIONS, ALABAMA 

JIM BUNNING, KENTUCKY 

MIKE CRAPO, IDAHO 

JOHN ENSIGN, NEVEDA 

JOHN CORNYN, TEXAS 

LINDSEY O. GRAHAM, SOUTH CAROLINA 

LAMAR ALEXANDER, TENNESSEE 

MARY ANN NAYLOR, Majority Staff Director 

CHERYL JANAS REIDY, Minority Staff Director 

(II) 

iii 

C O N T E N T S 

HEARINGS 

Page 

January 28, 2010—The Budget and Economic Outlook: Fiscal Years 2011– 

2020 ....................................................................................................................... 1 

February 2, 2010—The President’s Fiscal Year 2011 Budget Proposals ............ 77 

February 4, 2010—The President’s Fiscal Year 2011 Budget and Revenue 

Proposal ................................................................................................................ 151 

February 9, 2010—Crisis and Aftermath: The Economic Outlook and Risks 

for the Federal Budget and Debt ........................................................................ 229 

February 11, 2010—Setting and Meeting an Appropriate Target for Fiscal 

Sustainability ....................................................................................................... 301 

February 23, 2010—Defense Budget and War Costs: An Independent Look ..... 371 

February 24, 2010-The President’s Fiscal Year 2011 Budget for the Department of Transportation ........................................................................................ 445 

March 4, 2010—Department of Defense Fiscal Year 2011 Budget Request ....... 487 

STATEMENTS BY COMMITTEE MEMBERS 

Chairman Conrad...................................................... 1, 77, 151, 229, 301, 371, 445, 487 

Ranking Member Gregg ............................................................................ 7, 84, 158, 378 

Senator Bunning ...................................................................................................... 40 

Senator Merkley ...................................................................................................... 399 

Senator Session .................................................................................................... 236, 352 

WITNESSES 

Gordon Adams, PhD, Professor of International Relations, School of International Service, American University........................................................... 394, 397 

Douglas W. Elmendorf, Director, Congressional Budget Office ........................... 10, 13 

Honorable Timothy F. Geithner, Secretary, US Department of the Treasury...................................................................................................................... 160, 164 

Simon Johnson, PhD, Ronald A. Kurtz (1954) Professor of Entrepreneurship, 

Massachusetts Institute of Technology, Sloan School of Management, and 

Senior Fellow, Peterson Institute for International Economics.................... 242, 246 

Honorable Raymond H. LaHood, Secretary, US Department of Transportation 

(Accompanied by Chris Bertram, Chief Financial Officer, US Department 

of Transportation)............................................................................................. 454, 456 

William H. Lynn, III, Deputy Secretary of Defense, US Department of Defense; Accompanied by Robert F. Hale, Under Secretary of Defense (Comptroller) and Chief Financial Officer, US Department of Defense ................. 487, 489 

Maya MacGuineas, President, Committee for a Responsible Federal Budget, 

and Director, Fiscal Policy Program, New America Foundation .................. 320, 325 

Donald Marron, PhD, Visiting Professor, Georgetown Public Policy Institute..................................................................................................................... 253, 255 

Honorable Peter R. Orszag, Director, Office of Management and Budget ............................................................................................................................ 87, 90 

Rudolph Penner, PhD, Institute Fellow, Urban Institute Co-Chair, Committee 

on the Fiscal Future of the United States...................................................... 337, 341 

Carmen M. Reinhart, PhD, Professor of Economics, and Director, Center 

for International Economics University of Maryland.................................... 238, 240 

Honorable Alice M. Rivlin, PhD, Director, Greater Washington Research, 

The Brookings Institute ................................................................................... 311, 313 

Page

iv 

Paul K. Van Riper, Lieutenant General, United States Marine Corps (Retired) .................................................................................................................. 410, 412 

Cindy WIlliams, PhD, Principal Research Scientist, Security Studies Program, 

Massachusetts Institute of Technology........................................................... 378, 381 

QUESTIONS FOR THE RECORD 

Senator Byrd......................................................................................................... 128, 214 

Senator Cardin ......................................................................................................... 481 

Senator Cornyn ........................................................................................................ 521 

Senator Crapo .......................................................................................................... 211 

Senator Enzi ............................................................................................................. 138 

Senator Feingold .................................................................................................. 226, 522 

Ranking Member Gregg ................................................................ 41, 142, 205, 472, 509 

Senator Merkley ...................................................................................................... 149 

Senator Murray.................................................................................................... 145, 218 

Senator Nelson ....................................................................................................... 42, 481 

Senator Sessions .......................................................................................... 123, 294, 512 

Senator Stabenow .................................................................................................... 517 

Senator Warner ........................................................................................................ 131 

Senator Whitehouse .................................................................... 269, 298, 438, 442, 518 

Senator Wyden ..................................................................................................... 477, 514 

(1) 

THE BUDGET AND ECONOMIC OUTLOOK: 

FISCAL YEARS 2011–2020 

THURSDAY, JANUARY 28, 2010 

U.S. SENATE, COMMITTEE ON THE BUDGET, Washington, DC. 

The Committee met, pursuant to notice, at 9:01 a.m., in room 

SD–608, Dirksen Senate Office Building, Hon. Kent Conrad, Chairman of the Committee, presiding. 

Present: Senators Conrad, Feingold, Nelson, Stabenow, Cardin, 

Whitehouse, Merkley, Gregg, Grassley, Enzi, Sessions, Bunning, 

and Alexander. 

Staff present: Mary Ann Naylor, Majority Staff Director; and 

Cheri Reidy, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. 

First, we want to welcome the CBO Director here to the Budget 

Committee to report on the latest CBO estimates. And before we 

begin that, I want to publicly thank Director Elmendorf for the 

really extraordinary effort he and the people at CBO have made 

over the last year with an unprecedented workload, and I mean 

truly unprecedented. I know firsthand that he and his people have 

worked nights, weekends, repeatedly, repeatedly, repeatedly, under 

extraordinary time pressures and with real complexity. And I must 

say, even though there have been times I disagreed with Director 

Elmendorf’s views, sometimes strenuously, I absolutely respect his 

independence and his integrity. And I think he has won the respect 

of people on both sides of the aisle who have seen that he has tried 

to call them straight. And that is the best that we can ask for, and 

it really is, I think, high professionalism from Director Elmendorf 

and from the people at CBO. And, again, I have had my disagreements on some of their findings on things that mattered a lot to 

me, but what is important is that we do have an independent 

scorekeeper that has integrity. And certainly Director Elmendorf 

has proved that, and I appreciate it. 

Let me just turn briefly to my remarks about the subject at 

hand. The jobs situation across the country is very much in the 

front of everyone’s mind, and if we look at the changes in payrolls 

going back to July of 2008, we can see we reached a peak of job 

loss in January of 2009. Virtually every month we have seen some 

improvement, and in November, we actually had no jobs lost, no 

net jobs lost; in December, 64,000. So a dramatic improvement 

from the 700,000 that were being lost a month in January of 2009. 

2 

The same pattern can be seen in terms of the economic growth 

in the economy, the first quarter a negative 6.4 percent, improving 

each quarter; so fourth quarter, according to the Blue Chips, we 

can anticipate growth in the fourth quarter of last year of 4 percent. Some are now saying it may be even stronger than that. 


58153.014
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So things have moved from the edge of the precipice. I believe 

very strongly we were on the brink of a global financial collapse before actions that were taken by the Congress, the President, and 

I would include the previous President, because the actions of his 

administration at the end I think were part of the response from 

the Government, both the administration, the Congress, and, of 

course, the Federal Reserve, taking actions to provide liquidity to 

prevent a collapse. Those actions did forestall, I believe, what 

would have been the worst recession since the Depression. 


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But it leaves us with a long-term budget outlook that is truly 

daunting, and we cannot flinch from that. We cannot deny it. We 

have to face up to it. The 10-year budget outlook worst-case scenario is as this chart depicts. We see improvement for the next 5 

years, but then it starts to turn and move the other way if we do 

not act, and act we must. 

The gross debt now is approaching World War II levels, and let 

me just indicate that I know the economists like to focus on debt 

held by the public. I like to focus on the gross debt because, for 


58153.016
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budget purposes, all the debt has to be repaid, and debt can only 

be repaid out of current revenues. And so the fact is if we are looking at what is going to have to be dealt with from a budget standpoint, we have to consider gross debt. Those borrowings from the 

trust funds are real. They must be repaid. They are backed by the 

full faith and credit of the United States. And when I look at the 

gross Federal debt, I see it exceeding 100 percent by 2020—and, in 

fact, before that. 

The World War II high was 121.7 percent. Now, to put this all 

in perspective, other countries, industrialized countries, do have 


58153.017
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higher debt-to-GDP. Japan I believe at this point is in the 189-percent-of-GDP range. But there are real consequences for that. I believe Japan is about to have their debt downgraded because people 

see the risk of debt of that magnitude. 

More alarming and more concerning to me is the long-term trajectory, and if we look at the long-term budget outlook from CBO, 

we see debt, with all policies extended, all current policies extended, reaching 400 percent of GDP by 2059. There is no one that 

thinks that is a sustainable course. So anybody that tells us, well, 

you do not have to do anything, you do not have to worry about 

these things, we can just continue as we are, they are not telling 

us the truth. And this is not just my judgment. It is the judgment 

of Senator Gregg, the Ranking Member here. This has been the 

testimony before this Committee of this head of the CBO, of the 

previous head of the Congressional Budget Office, of the head of 

the Office of Management Budget, of the former head of the General Accounting Office, of the Chairman of the Federal Reserve, of 

the current Secretary of the Treasury, of the previous Secretary of 

the Treasury. 

So it is critically important that we honestly describe our circumstance. Our circumstance requires action on the debt. 

Colleagues, let me quote from CBO on the budget outlook: ‘‘The 

Federal fiscal outlook beyond this year is daunting. Accumulating 

deficits will push Federal debt held by the public to significantly 

higher levels. With such a large increase in debt plus an expected 

increase in interest rates, as the economic recovery strengthens, interest payments on the debt are poised to skyrocket. Without 

changes to Federal fiscal policy involving some combination of 

lower spending and higher revenues, rising costs in health care and 


58153.018
7 

from the aging population will rapidly drive the size of the Federal 

debt.’’ 

Now, I do not know what could be more clear. I do not know 

what could be more clear. 

Yesterday, or perhaps the day before, I used a chart on the floor 

that showed the historical context of our spending and revenue. 

That chart showed that current revenue is the lowest it has been 

in 60 years. If we look at last year and this year, revenue as a 

share of the gross domestic product, the lowest it has been in 60 

years; spending, the highest it has been in 60 years as a share of 

the gross domestic product. The difference between a revenue level 

of about 15 percent of GDP and an expenditure level of 26 percent 

of GDP, that is an 11-percent gap. We would not qualify for membership in the European Union with deficits of that magnitude. 

They do not permit it. They do not permit entry for countries that 

have deficits of that level. 

Senator GREGG. Over 3 percent. 

Chairman CONRAD. Yes, I think their limit is 3 percent. 

So, look, this is the reality that we confront. The President was 

right to focus on this last night, and it is our responsibility to focus 

on it as we put together a budget for this year and the years beyond. 

With that, I call on the distinguished Ranking Member, Senator 

Gregg. 

OPENING STATEMENT OF SENATOR GREGG 

Senator GREGG. Thank you, Mr. Chairman. Obviously, I second 

everything you have said about the problems we have as a Nation 

and that we are confronting relative especially to the debt. As you 

have said, the debt is the threat. And it is more than a threat now. 


58153.019
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It is a cataclysmic event facing us which is going to basically give 

our children a Nation they cannot afford and a lower standard of 

living than we have had in our generation. 

I want to put one chart up because I think it is the most telling 

chart that I have seen in recent years. 

This chart takes the CBO numbers and projects them out. What 

the Chairman was talking about is the line that is through the 

middle, the axis line, which shows the red line at its height—the 

red line being spending—and shows the blue line at its nadir, 

which is the taxes line. And that is where we are today, this massive gap, which is generated in large part by the recession, but also 

because much of the spending is recessionary driven, and obviously 

the drop in tax revenues is recessionary driven. 

But what is also shows in stark terms is that when we return 

to some level of ‘‘normalcy,’’ to use I guess it was Herbert Hoover’s 

term—no, it was Harding’s term—when revenues return to their 

historic levels, we still have a massive gap because spending is not 

returning to its historic levels, which makes the obvious point that 

the problem is primarily a spending problem. Even if you get your 

revenues back to where they have been on average for the last 40 

years, you do not solve our problem, and we continue to pile on this 

debt, and we get to a position, regrettably, in the very near future 

where our debt is so large that, like a dog, we cannot catch our tail. 

In other words, we will not be able to afford the interest payments 

on that debt. The world community and our own Nation will begin 

to be suspicious of our capacity to pay our debt down, which will 

lead to an inevitable crisis of significant proportions relative to the 

value of the dollar, relative to our ability to sell debt, and relative 

to the productivity of the Nation as we have to probably dramatically raise the cost of Government on the productive side of the 

ledger. 


58153.006
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So this is a problem of inordinate proportions, and it is in large 

degree a spending issue. And, thus, we have to start addressing it 

on the spending side, obviously. There are others who want to address it on the revenue side. But I believe that we have got to address the issue where it lies, and this chart unequivocally points 

out that it lies in the fact that we are taking the size of the Government from its historic level of about 20 percent of GDP up to 

25, 26, 27, potentially up to 30 percent of GDP. 

Well, how do we address that? Last night, the President said, related again that he wanted to freeze non-defense discretionary. 

Well, that is good language, but not a lot of money. I mean, it is 

a lot of money for us individually. It would actually be a lot of 

money for the State of New Hampshire. But in the context of what 

we are facing in deficits, it is not a lot of money. The ‘‘lot of money’’ 

comes on the entitlement side, not on the non-defense discretionary 

side, and that is where we have got to set our course and try to 

do something. 

Unfortunately, I did not hear anything about controlling the entitlement accounts, and, in fact, on balance, if you take all the new 

programmatic ideas that were put on the table last night—and 

there were a whole series of them that were put out. I have not 

added them up yet, but I am sure that they far exceeded by a factor of, I suspect, 4 or 5 what was represented as would be saved 

under a discretionary freeze, a non-defense discretionary freeze. So 

actually spending under the proposals from last night goes up 

again. 

We need to face up to this. You know, it is like that old TV ad, 

Fram oil filter ad, ‘‘You can pay me now or pay me later.’’ But the 

‘‘later’’ is coming fast. This is no longer an over-the-horizon event. 

It is on the horizon and closing fast. And I will be interested to 

hear from the Director what he thinks the closing date is. When 

does the Nation hit the wall? We know that Japan is hitting it 

right now. Their debt is about to be downgraded, it appears. And 

when are we going to get to that point? And is it not a predictable 

event right now that that will occur in our Nation? And when that 

occurs, that is when you have basically stepped off the insolvency 

cliff, and it is very hard to catch yourself as you fall off an insolvency cliff. So I will be interested in hearing what the Director 

says. 

I also want to join with the Chairman in thanking him for his 

extraordinary work and his team’s extraordinary work over the last 

few months, an incredibly intense period with the scoring of the 

health care bill. And the integrity and fairness of CBO really gave 

the whole exercise a lot more—well, it made me feel comfortable 

that we were at least getting good numbers on a bad bill and we 

were getting honest and fair numbers on a bad bill. And that is 

what CBO should do. It should be the fair umpire around here, and 

you have really done an extraordinary job of being the fair umpire, 

and we thank you for that. 

Chairman CONRAD. Director Elmendorf, just before you begin, I 

want to amplify something Senator Gregg said. I have had people 

suggest to me that any commission that would consider our longterm debt would make adjustments to Social Security and MediVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
10 

care. I think we have got to look people in the eye and say yes. 

There is really no alternative. 

Medicare is cash-negative today. The trustees tell us it will be insolvent in 8 years. Social Security is cash-negative today, and your 

report of the day before yesterday says that it will be cash-negative 

every year except two for the future. 

You say in your report it will go cash-negative on a permanent 

basis in 2016. So anybody that says you do not have to make any 

changes to those programs, programs I strongly support—I lost my 

parents when I was young. I got Social Security; it helped me go 

to college. So I understand its importance in people’s lives. I understand the importance of Medicare in people’s lives. I have seen it 

in my own family. But the suggestion we do not have to do anything is just not being straight with people. 

And so I hope as this debate goes forward we just do not fall 

back into the same old divide of you cannot cut this, you cannot 

add any revenue here. I personally believe given the nature of the 

baby-boom generation that has doubled the number of people who 

are eligible for these programs, you are going to have to do something on the revenue side as well. 

So I again welcome you to the Committee and again thank you 

for your and your team’s extraordinary work during these last 

many months. 

STATEMENT OF DOUGLAS W. ELMENDORF, DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE 

Mr. ELMENDORF. Thank you, Mr. Chairman and Senator Gregg, 

for your very kind words about our work at CBO. 

Exactly 1 year ago today, I testified before this Committee for 

the first time as the newly minted Director of the Congressional 

Budget Office, and on behalf of all of us at CBO I want to express 

our appreciation for the support that both Senator Conrad and 

Senator Gregg have shown for our work over the past year, which 

means a great deal to us. 

To you and to all the members of the Committee, I appreciate the 

invitation to testify today about CBO’s annual outlook for the budget and the economy. 

Under current law, CBO projects that the budget deficit this 

year, fiscal year 2010, will be about $1.35 trillion, or more than 9 

percent of the country’s total output. That deficit would be only 

slightly smaller than last year’s deficit, which was the largest as 

a share of GDP since World War II. 

We expect that revenues will grow modestly this year, primarily 

because we expect a slow pace of economic recovery. 

We expect that outlays will be about even with last year’s level 

as a decline in Federal aid to the financial sector is offset by rising 

outlays from the stimulus packages and for other purposes. 

Debt held by the public will reach $8.8 trillion by the end of this 

fiscal year, or 60 percent of GDP—the largest burden since the 

early 1950’s. 

Looking beyond this fiscal year, the budget outlook is daunting. 

Again, under current law, CBO projects that the deficit will drop 

to about 3 percent of GDP by 2013 but remain in that neighborVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
11 

hood through 2020. By that point, interest payments alone would 

cost more than $700 billion per year. 

Moreover, maintaining the policies embodied in current law that 

underlie those projections will not be easy. It would mean, for example, allowing all the tax cuts enacted in 2001 and 2003 to expire 

next year as scheduled, and not extending the temporary changes 

that have kept the alternative minimum tax, or AMT, from affecting more taxpayers. 

But as you know, many policymakers have expressed their intention not to let current law unfold as scheduled. If instead they extended all of the 2001 and 2003 tax cuts, indexed the AMT for inflation, and made no other changes to revenues or spending, the 

deficit in 2020 would be twice the size of the deficit that we project 

under current law. Debt held by the public would equal 87 percent 

of GDP and be rising rapidly. 

The baseline projections also assume that annual appropriations 

will rise only with inflation. If instead policymakers increased such 

spending in line with GDP, which is about what actually happened 

over the past 20 years, the deficit in 2020 would be two-thirds 

again as large as we project under current law. 

In sum, the outlook for the Federal budget is bleak. 

To be sure, forecasts of budget and economic outcomes are highly 

uncertain. Actual deficits could be significantly smaller than we 

project or significant larger. We believe that our projection balances 

those risks. 

One set of factors contributing to the bleak budget outlook are 

the financial crisis and severe recession along with the policies implemented in response. Analysts define the end of a recession as 

‘‘the point at which output begins to expand again.’’ By that definition, the recession appears to have ended in mid-2009. However, 

payroll employment, which has fallen by more than 7 million since 

the beginning of the recession, has not yet begun to rise again, and 

the unemployment rate, as you know, finished last year at 10 percent—twice its level of 2 years ago. 

Unfortunately, CBO expects that the pace of economic recovery 

in the next few years will be slow. Household spending is likely to 

be dampened by weak income growth, lost wealth, and constraints 

on their ability to borrow. Investment spending will be slowed by 

the large number of vacant homes and offices. 

In addition, although aggressive action by the Federal Reserve 

and the fiscal stimulus package helped moderate the severity of the 

recession and shorten its duration, the support to the economy 

from those sources is expected to wane. 

Employment will almost certainly increase this year, but it will 

take considerable time for everyone looking for work to find jobs, 

and we project that the unemployment rate will not return to its 

long-run sustainable level of 5 percent until 2014. Thus, more of 

the pain of unemployment from this downturn lies in front of us 

than behind us. 

A deep recession and protracted recovery mean under current 

law lower tax revenues and higher outlays for certain benefit programs. CBO estimates that those automatic stabilizers will increase the budget deficit by more than 2 percent of GDP in both 

2010 and 2011. In addition, CBO projects that last year’s fiscal 

12 

stimulus package will increase the deficit by roughly 2 percent of 

GDP this year and by a smaller amount next year. 

As the economy recovers and the effects of the automatic stabilizers and legislated policies fade away, the budget deficit will 

shrink relative to GDP. However, as I have noted, the projected 

deficit remains large throughout the decade even under current 

law. And if current law is changed in some way that more closely 

matches current policy, as many people perceive it, the amount of 

Government borrowing relative to GDP would be unprecedented in 

the post-war period. 

A large and persistent imbalance between Federal spending and 

revenues is apparent in CBO’s projections for the next 10 years and 

will be exacerbated in coming decades by the aging of the population and the rising costs of health care. That imbalance stems 

from policy choices made over many years. 

As a result of those choices, U.S. Fiscal policy is on an 

unsustainable path to an extent that cannot be solved by minor tinkering. The country faces a fundamental disconnect between the 

services that people expect the Government to provide, especially 

in the form of benefit payments to older Americans, and the tax 

revenue they are prepared to send to the Government to finance 

those services. This fundamental disconnect will have to be addressed in some way if the Nation is to avoid serious long-term 

damage to the economy and to the well-being of the population. 

Thank you. I would be happy to take your questions. 

[The prepared statement of Mr. Elmendorf follows:] 

13 


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Chairman CONRAD. Well, first of all, thank you for that. Sobering 

but truthful. 

I wrote you some time ago and asked you to analyze and have 

your people help analyze various measures to help strengthen the 

economy and help create jobs at this time of continuing economic 

weakness. And you and your people came back with an analysis, 

and I would like to talk for a few minutes about your views with 

respect to what measures to help the private sector employ more 


58153.012
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people would be most effective and would be most effective in a 

way that is timely. 

As I read your analysis, your top three most impactful policy 

changes for increasing jobs in 2010 were, No. 1, tax assistance for 

businesses that would hire additional people; additional tax assistance for small business through small business expensing; and as 

I read the report, the extension of unemployment insurance—that 

those three would have the biggest bang for the buck and the most 

immediate impact. Is that correct? 

Mr. ELMENDORF. I would just distinguish among those three, Mr. 

Chairman. In our review, the incentive for greater business investment would be less effective than tax credits for firms that increase 

their payroll or additional benefits for people who are unemployed. 

For many years, economists have believed that temporary tax incentives can have a powerful stimulative effect, particularly because of their temporariness and, thus, the need to take the action 

now. I think, unfortunately, the experience of the last decade, when 

these sorts of incentives have been tried on several occasions, has 

somewhat dampened economists’ enthusiasm for those approaches 

because they appear to have been less successful in stimulating investment. 

I think one piece of intuition for that is that when firms have a 

lot of unused capacity, as they do today, and a lot of uncertainty 

about the course of the future demand and the use of that capacity, 

they may be less responsive even to cut-rate opportunities to do 

more investment. 

So that would be the least effective of the three you mentioned, 

according to our analysis. 

Chairman CONRAD. Which would be the least effective? 

Mr. ELMENDORF. The business incentives. The incentives for 

business investment, which I think was one of the ones that you 

mentioned. The ones that would be more effective, in our judgment, 

would be increasing payments to people who are unemployed, particularly because they are very short of income and likely to spend 

a large share of the money they receive very quickly; and, second, 

incentives for businesses that increase payrolls because that puts 

money into the economy, but also provides this particular incentive 

to do more hiring. And the effectiveness depends a good deal, in 

our judgment, on just how that incentive is structured. 

Chairman CONRAD. I see. I was perhaps not hearing you right. 

I thought in your original response you were putting the jobs credit 

in the same camp as the small business expensing. What you are 

saying, what I hear you saying is the two things with the biggest 

pop would be, in essence, a tax break for businesses that hire people, No. 1, on the business incentive side. And the other thing that 

you see in your analysis that would help is the unemployment insurance extension. 

Why would that be of assistance in terms of jobs? 

Mr. ELMENDORF. The chain of reasoning is basically that if people receive money and then they spend it, that demand for goods 

and services then means that those businesses that are selling 

products have the revenue to hire more people and see a need to 

hire more people because they need to step up their production to 

20 

meet this increased demand, the normal process through which 

extra demand increases jobs. 

Chairman CONRAD. I am running out of time here, so I want to 

go to the third element that we talked about, the small business 

expensing. As I read the report, that was seen as positive in terms 

of helping with the job situation in the country today. 

Mr. ELMENDORF. Well, I think that is right. I did not mean to 

say it would have no effect. It just, in our judgment, would be less 

effective than the other two items that you mentioned. 

Chairman CONRAD. Yes. 

Mr. ELMENDORF. Yes, we do think there is some effect of reducing the price of buying investment goods, particularly for a timelimited period, which then would encourage businesses, if they 

were thinking of doing investment in the future, to do it right now. 

Chairman CONRAD. Are there any other things that would be as 

effective as those three, or more effective, for 2010? 

Mr. ELMENDORF. Those are the ones that we think of as being 

most effective. The one thing, I would just broaden a bit this increased aid to the unemployed. One can just give money to other 

people in the form of tax cuts or increased benefits. The effectiveness depends—in our judgment, the effectiveness in spurring overall economic activity and job creation depends on how much of that 

money is spent; and, thus, giving it to people who are unemployed 

is particularly effective because they are likely to spend a large 

share of it. But one could achieve effects that would be somewhat 

smaller by giving benefits to other people as well. 

Chairman CONRAD. And with respect to infrastructure, as I read 

your report, that would be more effective in 2011 than 2010? Is 

that a correct reading of your report? 

Mr. ELMENDORF. Yes, that is correct. Our judgment, and I think 

it has—it was our judgment a year ago, and it has been confirmed 

by the experience of the past year, is that most infrastructure dollars move into the economy somewhat slowly. There are projects— 

resurfacing of roads, and I drive on some, and I appreciate that 

they are resurfaced. That can happen pretty quickly when money 

is made available. But many other infrastructure projects, the more 

substantial projects, have fairly long lags, and it takes some time 

to get that money out the door. 

That is not a judgment, of course, about whether those projects 

are worth doing or not worth doing from any other perspective. But 

as a question of pure macroeconomic impact, they tend to take 

some time to take effect. 

Chairman CONRAD. I thank you for that. 

Senator Gregg? 

Senator GREGG. You have highlighted the fact that one of the 

primary drivers of the growth in the government and the spending 

which is going to create this structural deficit is health care costs, 

especially as it relates to the aging population, is that correct? 

Mr. ELMENDORF. Yes, that is right. 

Senator GREGG. Now, you sent us a letter, myself and the Chairman a letter, that said that if you wanted to control health care 

costs, there were two primary things that could occur that you suggested. One of them was that the amount of deductibility for health 

insurance should be reduced so that people were actually paying 

21 

more of a share of their health insurance rather than having it tax 

deductible, isn’t that correct? 

Mr. ELMENDORF. Yes, and the ‘‘should’’ is your term. We don’t 

make recommendations. But what we did write to you was that 

there are a few levers the government controls and that was—— 

Senator GREGG. That is a primary lever. 

Mr. ELMENDORF. Yes. 

Senator GREGG. So when we hear the House talking about—the 

House leadership talking about changing health care so that insurance is fully deductible and so that the Cadillac plans are given advantageous tax treatment, that is actually going in the wrong direction? 

Mr. ELMENDORF. I think from the perspective of cost control, it 

is a very widespread view among experts that reducing the tax 

subsidy for more generous insurance is one of the very important 

levers the government has, and that taking—and that not employing that lever then reduces the extent of cost control, all else equal. 

Senator GREGG. Also in the health bill that passed, there was a massive savings expected in Medicare. I believe you estimated $500 

billion over the first 10 years. A trillion dollars was our estimate 

over the first 10 years of full implementation, $3 trillion over the 

first 20 years of full implementation. The Medicare savings were 

used to expand other activities of the government, specifically the 

expansion of Medicaid and the new entitlement that was in the 

bill. 

If those dollars were used, which were saved from Medicare, to 

shore up Medicare in some manner, a Medicare reserve fund or 

something that would basically be paying down debt, could you 

give us a thumbnail estimate as to how much that might help correct the out year structural problems we have? 

Mr. ELMENDORF. I can’t do a quantitative calculation in my head, 

but your logic is certainly correct, Senator, that we estimated almost $500 billion in Medicare savings over the 10-year projection 

period and increasing amounts over time in an amount that we 

have not separately quantified—— 

Senator GREGG. Let me try to confine the question, then. If you 

didn’t use it to expand the government but you used it instead to 

try to shore up the Medicare system by reducing the debt, wouldn’t 

that have a significant positive effect for Medicare but also—because it would make it more solvent, theoretically—but also for the 

debt situation? 

Mr. ELMENDORF. Yes, Senator. If we used those same savings to 

pay down debt, that would be a significant improvement in the 

budget outlook. 

Senator GREGG. There has been a lot of talk about the fact that 

TARP money is available to spend somewhere else. First, the law 

doesn’t allow that. It is supposed to be used to reduce the debt. But 

I just want to clarify the fact that there is no TARP money, that 

all this money has to be borrowed, right? I mean, every cent of 

TARP money is borrowed from China or from somebody, right? 

Mr. ELMENDORF. There is just one pool of government money and 

everything else is a sort of accounting treatments to keep track of 

it for various purposes. But yes, if more is spent through the 

TARP, that is just more that is spent. 

22 

Senator GREGG. And more that is borrowed? 

Mr. ELMENDORF. And more that is borrowed. 

Senator GREGG. And more that goes on the Federal debt? 

Mr. ELMENDORF. And more that goes on the Federal debt. 

Senator GREGG. So there is no piggy bank over here that somebody has as a reserve fund somewhere in some desk drawer down 

at Treasury that they can use to create a new small business program or a new housing program or whatever they want to do. It 

has to be borrowed from somebody, right? 

Mr. ELMENDORF. That is right. 

Senator GREGG. The freeze that the President has suggested, and 

I give him credit for using the term ‘‘freeze’’ and for stepping forward on that turf and I thank them for doing that, but I am trying 

to quantify it, because the deficit this year you projected at $1.34 

trillion, was that your number? 

Mr. ELMENDORF. For this fiscal—yes, 1.35 I said, but yes, that 

is correct. 

Senator GREGG. So $1.35 trillion. If we were to do a non-defense 

discretionary freeze, give me the number that that would be adjusted for inflation and not adjusted for inflation. 

Mr. ELMENDORF. So if we did a full—our report shows what 

would happen with a full discretionary freeze. So if one froze discretionary appropriations for defense and non-defense for a full 10 

years—— 

Senator GREGG. Just non-defense, the proposal that the President—— 

Mr. ELMENDORF. So, unfortunately, we don’t have enough details 

about the President’s proposal to do that calculation. I know only 

what I have seen in the newspapers. When we receive the President’s budget next week, we can do that calculation. But until we 

know exactly which categories are included, excluded—— 

Senator GREGG. Well, how about a range? It would range, 

wouldn’t it, between $15 billion and, say, $25 billion, somewhere in 

that range, right? 

Mr. ELMENDORF. Well, so in the—again, it depends crucially 

what happens after the freeze. So if you freeze for 3 years, if you 

then go back up to the level you would have been at otherwise, 

then the savings are just in those 3 years and they are small. If 

you maintain the—if you freeze and then grow from the end of the 

freeze but don’t jump back up, then you can achieve significant 

savings over the remaining years, and that is obviously a policy 

choice that the Congress will have to make. 

Senator GREGG. What I am trying to get at here, obviously, is 

compared to the deficit this year, which is going to be $1.35 trillion, 

we are talking about this year saving, if you did a non-defense discretionary freeze of maybe 1 percent or 10 percent—what—— 

Mr. ELMENDORF. Yes, it is even less than that. So we think a 

freeze on all discretionary appropriations would only save $10 billion in fiscal year 2011. 

Senator GREGG. So it is a step in the right direction, but it has— 

that is a lot of money, but it still has a marginal impact on what 

we—— 

Mr. ELMENDORF. As a share of the total deficit problem, it is a 

small step. 

23 

Senator GREGG. Thank you. 

Chairman CONRAD. Senator Feingold? 

Senator FEINGOLD. Mr. Chairman, let me begin by thanking you 

and the Ranking Member for your bipartisan efforts to get our 

long-term fiscal house in order, and in particular for your Fiscal 

Commission amendment to the debt limit measure. As you know, 

I had some concerns with the concept of a Special Fiscal Commission. I don’t think we should be outsourcing the job that we should 

be doing. But I share your frustration at the consistent failure of 

Congress to confront our long-term budget problems. 

And as is the case for many issues that we consider, there comes 

a moment when you have to decide, and in the Senate, you can’t 

vote maybe. So even though I am not entirely comfortable with this 

approach, I decided to support the amendment. And while it didn’t 

get the 60 votes it required under the unanimous consent agreement, I was encouraged that it was supported by the majority of 

the Senate. 

Of course, as is obvious from the Director’s testimony, it will only 

get tougher, in particular, when we finally have to consider specific 

spending and revenue policies to correct the problem. There will be 

enormous pressure to resist such a correction, and that is appropriate. It is the way of a democracy. When that day comes, and I 

hope it comes soon, our country will be best served if that date concentrates all of our minds. 

I thank Director Elmendorf for all his work and the work of the 

CBO. Please know that some of us truly appreciate the work of the 

CBO and I acknowledge, as the Chair and the Ranking Member 

did, the pressures you face, perhaps because we are responsible for 

a whole lot of that pressure. I also want to acknowledge the limitations of any economic forecasts and especially those under which 

the CBO operates. Keynes said, never predict. If you do predict, 

predict frequently. Congress won’t allow you to obey either of these 

admonitions, though. However, you are wise enough to recognize 

the spot in which we place you and to include language in your report regarding the uncertainty of your projections. 

In that regard, I have a place on my bookshelves for the Budget 

and Economic Outlook Report CBO issued in January of 2001. It 

was the first report that included a rather stunning summary figure about the uncertainty of CBO projections. It showed a shaded 

fan of possible budget outcomes, with the darker central areas of 

the fan being more likely and lighter outer areas being less likely. 

Even under the worst scenario in that figure, at the faintly shaded 

low end of the fan, the budget was still projected to be in rough 

balance. Of course, the fan was based on what the current policies 

were at that time, and that is important, because as it turned out, 

that report was also the last Budget and Economic Outlook prepared by CBO before Congress enacted what would be a stunning 

set of policies that led to the biggest fiscal turnaround in our history. 

In less than 3 years after that report, Congress enacted two massive tax cut bills, it authorized two wars, and it enacted a massive 

entitlement program under Medicare, and none of those enormously expensive measures were paid for. Each and every one of 

them was added to the bill we are leaving our children and grandVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
24 

children. And sadly, each and every one of them remains with us 

today. 

As I read the report, CBO projects that extending the Bush-era 

tax cuts and just indexing the alternative minimum tax for inflation would add over $4.5 trillion to our deficits over the next 10 

years. And while it is difficult to project the cost over the next 10 

years of the legislation which created the Medicare prescription 

drug benefit, Medicare’s chief actuary estimates the legislation will 

end up costing $534 billion, more than half-a-trillion dollars, over 

its first 10 years. 

One of the policies with the biggest potential impact in future 

budgets, of course, is the cost of the ongoing wars in Iraq and Afghanistan. As I read CBO’s report, the outlays projected in the 

baseline for the wars in Iraq and Afghanistan and related activities 

for the next 10 years are $1.4 trillion. Of course, that is the baseline, and CBO is constrained in the assumption it makes for that 

baseline. Our actual policy is not likely to be the one which is reflected in the baseline. 

CBO anticipates by providing two alternative budget scenarios, 

but even under the alternative which CBO estimates will produce 

the greatest savings relative to the baseline, reducing the number 

of troops deployed in Iraq and Afghanistan to 30,000 by 2013, over 

the next 10 years will cost about $400 billion. And under CBO’s 

middle-ground alternative, reducing the number of troops deployed 

by 60,000 by 2015, over the next 10 years, the cost is nearly threequarters of a trillion dollars. 

Mr. Chairman, every penny of those costs is added right to our 

deficits. That has been our policy for the past 10 years and it continues to be our policy. We aren’t paying for those wars. We are 

just running up the enormous tab we are already leaving our children and grandchildren. 

Director Elmendorf, there is a telling statement in the Budget 

and Economic Outlook Report which notes that if CBO assumed 

that all the expiring tax cuts were extended beyond 2010 and they 

weren’t paid for, the long-term effect would be to lower future GDP 

because of the greater accumulation of debt. Is it not also the case 

that the greater accumulation of debt that results from failing to 

fully pay for the wars in Iraq and Afghanistan will also mean future GDP will be lower than it otherwise would be? 

Mr. ELMENDORF. Yes, Senator. 

Senator FEINGOLD. Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator. 

Senator Bunning? 

Senator BUNNING. Dr. Elmendorf, welcome. 

Mr. ELMENDORF. Thank you, Senator. 

Senator BUNNING. When you appeared before this committee last 

year, I asked some questions about CBO’s practices. Now that you 

have had a year of experience as Director, I would like to ask you 

about these policies again. 

Current CBO practice assumes that any law that increases 

spending will be permanent. On the other hand, current CBO practice assumes that any tax decrease will not be permanent. Do you 

have any plans to address this inconsistency? 

25 

Mr. ELMENDORF. No, Senator, we don’t. As I understand our policies, they are consistent across spending and taxes in the sense 

that when a proposal is put forward, if it is enacted to be a permanent policy, then it is scored at that time as the effects it would 

have over the 10-year budget window. If it is enacted to be temporary, then it is scored as having those effects, and—— 

Senator BUNNING. That was not my question. 

Mr. ELMENDORF [continuing]. Into the baseline. 

Senator BUNNING. That was not my question. My question was 

current policy of CBO—— 

Mr. ELMENDORF. Right—— 

Senator BUNNING [continuing]. On spending, that any increase in 

spending would be permanent. On the other hand, CBO’s practice 

assumes that any tax decrease will not be permanent. Is that the 

current policy of CBO? 

Mr. ELMENDORF. I think not every spending policy is viewed as 

being permanent, but many of them are. Yes, that is right, Senator. 

Senator BUNNING. OK. I think it is common sense that tax relief 

helps business grow. When the business grows, it will pay more 

taxes. As I am sure everybody here knows, factoring this effect into 

budget estimates is known as dynamic scoring. Do you have any 

plans to use dynamic scoring at CBO? 

Mr. ELMENDORF. We do not intend to incorporate the effects of 

policies on macroeconomic conditions in our estimates. Of course, 

the tax estimates themselves are done by the staff of the Joint Tax 

Committee, so that particular branch, the question really needs to 

be directed to them. But for our part, we do not intend to incorporate those effects. We do try, when we can, to provide analysis 

for you and other members of the macroeconomic effects, as we do 

every year for the President’s budget and have for some years now. 

But we don’t incorporate those and don’t intend to incorporate 

those in our estimates of particular legislation. 

Senator BUNNING. Then your answer is no? 

Mr. ELMENDORF. That is right. 

Senator BUNNING. OK. Do you believe that extending the socalled Bush tax cuts will have a positive or a negative effect on the 

economy? 

Mr. ELMENDORF. We think that extending those tax cuts would 

have a positive effect on the economy in the year or two at the beginning because they would encourage spending and thus encourage job creation of the sort that I was discussing earlier. Over a 

longer period of time, if those tax cuts are extended permanently 

and no other changes are made to spending or revenues, then we 

think that the larger debt that would arise would lower the level 

of economic impact. 

Senator BUNNING. In other words, if they were extended on not 

a permanent basis but a temporary basis of two or 3 years, you 

think that would help the economy? 

Mr. ELMENDORF. That would certainly, again, help the economy 

in the period when they were—in those first few years. Again, 

there would be—even for those few years, of course, there would be 

a good deal of additional debt accumulated and that would have 

some drag in later years if it were not offset in some other policy 

change. 

26 

Senator BUNNING. OK. During my time in Congress, which has 

been unbelievably long—— 

[Laughter.] 

Chairman CONRAD. Not so long. 

Senator BUNNING. Twenty-four years. I have worked to advance 

the creation of a strong domestic fuel industry that would provide 

our government agencies with a safe, secure supply of fuel regardless of policies, global policies of oil. To this end, I have authored 

legislation that would provide incentives for this through a mix of 

loan guarantees and tax credits, as well as providing multi-year 

procurement contracting authority for our government agencies. 

Aside from providing marketplace stability through price certainty, 

I believe this allows for more consistency in the budgeting process. 

As the energy demands within our government agencies continue 

to grow, do you believe it is important to provide our government 

with the authority to enter into these multi-year procurement contracts? 

Mr. ELMENDORF. As you know, Senator, we don’t make policy 

recommendations, but I understand and agree with your point that 

uncertainty in future costs, all else equal, complicates the budget 

process. But I can’t judge the specific ways in which you would 

make those costs more certain and costs that might be—— 

Senator BUNNING. I understand what you are saying. Thank you. 

Thank you, Mr. Chairman. Thank you. 

Chairman CONRAD. Thank you, Senator Bunning. 

Senator Stabenow? 

Senator STABENOW. Thank you, Mr. Chairman, and first, I want 

to thank you for your ongoing leadership, you and the Ranking 

Member, in focusing us on long-term deficits while at the same 

time talking about what we need to do in the short run to create 

jobs. I appreciate your balance on both of those, which are so critical. 

I wanted to take a moment and just ask that we re-look at two 

charts, Mr. Chairman, that you had put up. One of those—because 

I think it is important. Let me just start by saying, it is important 

to look, not for the purpose of blame but for the purpose of understanding what works and what doesn’t work, to look at the last 8 

years and to look at before then and sort of what has worked, what 

has not worked. 

When I came into the Budget Committee in 2001, we were debating what to do with the largest surpluses in the history of the 

country—the largest surpluses in the history of the country. That 

period in the 1990’s was focused on innovation, education, also balancing the budget, but very much focused on investing in people 

and in innovation and in growing jobs, 20 million new jobs plus. 

Eight years coming in, different economic policies were put into 

place, ones that focused on tax cuts at the top, hoping they would 

trickle down to middle-class families, two wars not paid for, a prescription drug bill not paid for, we go from huge surpluses, the 

largest in the history of the country, to largest deficits. 

So I don’t think it is insignificant as we now look at different 

policies and that we are looking at how do we go back to, in some 

ways, what worked in the 1990’s that created jobs and created surpluses, to look at what has happened in the last year. 

27 

The first thing is the fact that this is not insignificant, Mr. 

Chairman, that we are, in fact, moving in a direction of less people 

losing their jobs, and hopefully we are going to see people beginning to have a net plus in terms of creating jobs. That is not insignificant. 

I also don’t think it is insignificant, Mr. Chairman, that the economy is improving. I mean, we have, in fact, put in place different 

policies than the last 8 years. And at least part of that, when we 

look at the Recovery Act, I was very pleased that the effort I championed on Cash for Clunkers had such an immediate impact in a 

small amount of time, and some economists certainly have credited 

that with some of the boost in—short-term boost in GDP. But it is 

not insignificant. 

So I think it is important to stress that different policies are beginning to swing this in a different direction, and I think that is 

important. Now, we are focused on, again, as we were in the 

1990’s, middle-class tax cuts. We are focused on investments in innovation, in education, and in jobs, and I think that is very significant. 

I wanted to ask, Mr. Elmendorf, and again, I want to join my colleagues in thanking you for the incredible job that your staff have 

done, particularly around health care, which was an incredibly 

stressful 24-hour-a-day effort and thank each of you for doing that. 

Mr. ELMENDORF. Thank you, Senator. 

Senator STABENOW. But you talked about how infrastructure 

spending has a delay, and so what I assume, that the dollars that 

we passed last February in the Recovery Act would have more impact this year than last year? 

Mr. ELMENDORF. So the infrastructure dollars, yes, that is correct. 

Senator STABENOW. And—— 

Mr. ELMENDORF. It is also true more generally for the program, 

but infrastructure, it is definitely the case. There is much more impact this year than last year. 

Senator STABENOW. So you would expect in 2010 that we would 

see more impact and more jobs created as a result of that? 

Mr. ELMENDORF. Yes, that is correct. 

Senator STABENOW. OK. Could you talk about how growing the 

economy, just a little bit more in terms of creating jobs in the economy, will help us reduce the deficit? It is different than sort of a 

top-down approach, about how putting money in the pockets of 

Americans, middle-class people, and creating jobs grows the economy. 

Mr. ELMENDORF. So as you are saying, Senator, increase in economic growth, declining unemployment would increase the revenues the government collects under current law and it would decrease the benefit payments that go out to unemployment insurance and formerly the Food Stamp program, now Supplemental 

Nutrition Assistance, and so on. 

In rough terms, we and the staff of the Joint Committee on Taxation think about a dollar of extra GDP or total income raising government revenue by about 25 cents. So there is a substantial feedback effect. We show in our outlook that if the economic growth is 

stronger than we project over the next year or two or three or 

28 

more, that would lead to smaller deficits. If it is weaker than we 

project, that would lead to larger deficits, and I keep emphasizing 

the uncertainty, but we think risk on both sides. 

Senator STABENOW. Right. And so it would be fair to say that— 

and I appreciate your critique in terms of what would be most effective for us, but focusing on some kind of jobs-specific credit for 

business as well as unemployment extension as well as some other 

investments that we can make, that that not only creates jobs, but 

that also helps us tackle the deficit, is that correct? 

Mr. ELMENDORF. That is right. It does. Again, you do understand 

that scale of deficit now, this year and next year and so on, is very 

large. We would have to be unbelievably far off, even by the standards of the fan chart that was shown, in terms of economic growth 

to take that problem away, but it is a step in the right direction. 

Senator STABENOW. And I am certainly not minimizing what is 

a huge issue for us. 

And then finally, I just wanted to reemphasize, in all the work 

that we did last year and we continue to do to tackle health care 

costs, which I believe also creates jobs—it certainly does in my 

State of Michigan and I think across the country—if you might just 

reiterate again your feeling in terms of tackling health care costs 

as an important part of addressing the deficit and, in fact, the work 

of your great staff indicated that the bill, as passed in the Senate, 

would reduce the deficit, I believe, by $132 billion in the first 10 

years, and then a much larger amount—I have heard different 

numbers now, but certainly a much larger amount in the second 

10 years. Do you still believe that tackling health care costs is a 

critical part of bringing down the deficit? 

Mr. ELMENDORF. Certainly, reducing Federal spending for health 

care is almost a necessary part of pulling the budget into a sustainable trajectory over time because a significant part of the growth 

of the budget gap, the deficit, comes from rising health costs. 

Whether particular sorts of health reform are effective in reducing 

the government’s spending on health depends, of course, on the 

specific reforms. As you say, our estimate is that the bill that 

passed the Senate and also the bill that passed the House would 

have a small effect of deficit reduction in the first 10 years. 

Again, as Senator Gregg indicated, $130-some-billion is large by 

many, many standards, but not by the standard of the size of the 

deficit we project. So by our estimation, if those bills were allowed 

to unfold as written, they would be a step in the direction of reducing the deficit, but only a small step. 

Senator STABENOW. But the second 10 years and the Senate bill? 

Mr. ELMENDORF. The second 10 years, again, we think in both 

bills that they would slightly reduce budget deficits in the second 

10 years. We have not given dollar values ourselves, as you know, 

but just expressed this as really ranges of GDP, and that is because we want to emphasize the vast uncertainty that surrounds 

that. But our view, again, is that if both bills were allowed to unfold as written, they would represent slight reductions in the budget deficit over the second 10 years, as well. 

Senator STABENOW. Thank you. Thank you, Mr. Chairman. 

Chairman CONRAD. Senator Grassley? 

29 

Senator GRASSLEY. Thank you, Dr. Elmendorf. I want to ask 

you—and I got here late, I hope it hasn’t been asked by other people—about the bank tax, widespread agreement with the President 

among taxpayers and Members of Congress that financial institutions should repay every dime that they have received from the 

government for financial stability. The President recently proposed 

what he calls a Financial Crisis Responsibility Fee to help facilitate 

the repayment. 

Obviously, a lot of us agree with the goals that the President articulated. Before Congress is asked to vote on legislation imposing 

such a fee, it will be very important to understand the potential 

impact on consumers, the criteria for applying the fee to some entities and not others, and the implication for securing the stability 

of these institutions. 

So does the CBO know if the fee will get passed on to consumers 

in any manner? If so, how will it be passed on to consumers? And 

second, will the fee reduce the amount of bonuses paid by financial 

institutions subject to the fee? 

Mr. ELMENDORF. So Senator, we and the staff of the Joint Tax 

Committee are hard at work trying to answer the many questions 

that you have sent us regarding this fee and we hope to get back 

to you shortly on at least some of them. Other questions will have 

to wait until we get more details ourselves about the proposal in 

order to answer. 

I don’t think I have a good short answer to your questions. The 

incidence of the fee, who it is who will bear the burden—and somebody will, right. We understand there is no other pool of money in 

the sky for it to come out of. It will be borne by somebody. How 

much will end up being passed into loan costs or into lowering interest rates paid on deposits versus how much would get passed to 

the shareholders or to the managers is a very hard question and 

we just don’t have an answer to that now, and I doubt even at the 

end we will have an answer that we will have great conviction 

about because it is an uncertain business. But we are working on 

that analysis, but I am afraid we just don’t have any useful answer 

to that question at this point. 

Senator GRASSLEY. OK. Well, then I will be glad to wait, and 

thank you for your consideration. More importantly, thank you for 

studying it in depth, and hopefully, you will have some real concrete answers for us. 

I want to go to interest rates and the publicly held debt. Your 

baseline projects that debt held by the public will exceed 60 percent 

of GDP in 2010, begin approaching 70 percent of GDP by 2020, and 

those are your figures. I happen to have read other places where 

some people expect at the 10-year window they might even get up 

into the high 80’s or 90 percent of GDP. Anyway, net interest costs 

on this debt are estimated to rise from over $200 billion this year 

to over $700 billion in 2020, a threefold increase. What are the implications for our economy on such large interest payments? 

Mr. ELMENDORF. So, Senator, just to say quickly, I think the difference that you are seeing between what we projected and some 

other projections really rests on different assumptions about the 

path that fiscal policy takes. As you know, our baseline assumptions assume current law, but we have discussed in our outlook 

30 

and I did say in my comments that you weren’t able to be here for 

that if, in fact, some laws were changed in a way that more closely 

match what most people think of as current policy on the tax or 

spending side, that the deficits would be substantially larger, and 

I actually used a figure of 87 percent of GDP at the end of the 10- 

year window under some alternatives. 

The borrowing by the government has different sorts of costs for 

the economy. One is that that debt crowds out investment in real 

capital, in business, plant, and equipment of the sort that makes 

people more productive and raises incomes over time. And that 

happens incrementally year by year every time more debt is accumulated. Debt also poses a risk of some more cataclysmic event in 

which investors might decide that they were not willing to hold 

Treasury debt at anything like the current interest rates or became 

unwilling to hold U.S. dollar assets in the way they have at this 

point. 

That is a risk, and economists are very bad at trying to analyze 

how big the risk is or what a triggering event might be. All that 

we can really say as analysts is that that risk increases as the debt 

rises relative to GDP, because that means that debt would have to 

become an increasing share of the portfolios of investors and that 

raises the risk of their reassessing their decisions. But whether 

there is a tipping point, and if so, at what level of debt relative to 

GDP it would occur, we just don’t know. 

All we know, again, is that the risk is rising, and as we move 

our debt from the 60 percent of GDP it will be the end of this year 

higher over the next decade, we are moving increasingly into territory that we have not seen in this country in more than 60 years 

and that we don’t see in very many other developed countries, and 

I think there is a warning in that, but it is not a warning that I 

am able to quantify in any way. 

Senator GRASSLEY. Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator Grassley. 

Senator Cardin? 

Senator CARDIN. Thank you, Mr. Chairman. It certainly is a sobering analysis, and we all need to focus on this issue. I want to 

make one observation first about the Ranking Member’s comments 

and your response, that there is just one pool of money, that whenever we change your baseline assumptions, whether on spending or 

on revenues, if it increases spending or reduces revenues, it means 

more borrowing. That is the point that you made, and that is true 

whether we change your assumptions on TARP funds or we extend 

tax cuts that are not in the baseline. It means more borrowing. In 

addition, if we enact new tax cuts or increase troop levels beyond 

what is in the baseline, all that means more borrowing and makes 

forecasts even worse in the future. I thank you for reminding us 

of that constantly. 

I want to follow on the Chairman’s point about how we can stimulate the economy, which would then improve the forecast and help 

us deal with the long-term fiscal dilemma we face. 

I was interested in the response to the Chairman’s question 

about the most effective ways. If we can help businesses hire more 

employees, that obviously is going to help us on the forecast. Last 

night, the President brought up help for small businesses. I was 

31 

pleased to hear him say that because historically most job growth 

has occurred with small businesses. Coming out of this recession, 

the more we can inspire confidence with small business to put on 

more employees, the faster we will see the job growth that is going 

to be necessary for our economy. So targeting the tax credit for new 

hires to small businesses will have a very positive effect. 

I want to make one additional point. You mentioned that the expensing, although positive, is not quite as strong as the job credits 

for new employment. I want discuss the availabiity of credit. I can 

just tell you, in Maryland small businesses that want to expand do 

not have the same access to credit as larger companies. That is a 

fact. Much of that is because they do not have the same type of relationships that larger companies have with alternative financial 

institutions that can get them through this period. 

One of the proposals that is being made is to try to ease the 

manner in which small businesses can access credit, not by changing the ground rules that would allow them to get credit, but just 

making it easier for them to obtain that in hopes that that would 

help expand our economy. 

So I would just like to get your assessment as to the availability 

of credit as one factor. If we can make it easier for small businesses 

to access credit so that they can carry out a business plan that is 

also reinforced by a jobs credit for new hires, how could that have 

a positive impact on our future outlays? 

Mr. ELMENDORF. I have a couple of observations. You are certainly right that small businesses have been—their access to credit 

has been particularly hurt by the financial crisis of the past few 

years, and we can see that in the reports of small business owners 

themselves. 

We did not as part of this project about stimulating employment 

growth focus on ways to improve access to credit. It just was not 

an area that we considered, so I do not have much to say specifically about how one might help that and what particular means 

might be effective at addressing that problem. 

I would say on the more general question of encouraging employment, a lot of jobs are made in small businesses. A lot of jobs, unfortunately, are lost in small businesses as well. They are very 

volatile. Some succeed and some, unfortunately, do not. There is 

not really anything in the economic analysis that suggests that one 

should focus employment incentives on small businesses. 

If you can encourage large businesses to hire more, those count 

as jobs, too, of course. Those can bring down the unemployment 

rate. Those can create incomes that will create demand for other 

goods. Those would create additional tax revenue and so on. 

So there is nothing that says that the—regardless of how many 

jobs are created in which sector under normal times, there is no 

reason to think that focusing job credits on small businesses would 

be more effective dollar for dollar in raising employment than allowing the same credits for big businesses as well as small businesses. 

Senator CARDIN. Well, I would clearly agree that we need to 

focus on our entire economy. I just tell you anecdotally that for a 

small company that extra dollar is so important today in making 

their decisions. In some cases, it determines whether they will deVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
32 

cide to go after a contract or not. The incentive difference between 

a small company and a large company is much greater and historically we have seen more job growth from smaller companies. But 

you are correct. I agree with you. We have got to concentrate on 

the entire economy. I was just pleased to see the President recognize the need that we have not yet reached small businesses 

through our economic programs as effectively as we need to for 

stimulating our economy. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator. 

Senator Enzi? 

Senator ENZI. Thank you, Mr. Chairman. First I want to thank 

Director Elmendorf for all the good work that he did on health care 

and I appreciate all the time that your staff had to put into analysis day after day and night after night and weekend after weekend. And now that we’re in budget season, I am concerned that the 

Federal Government has not been a good partner in the economic 

recovery. Businesses need a stable environment to make plans for 

the future, purchasing plans, production decisions, hiring plans, 

strategies to manage cash-flow. They cannot be made in a vacuum. 

But how can the business community plot a path toward growth 

and recovery when the future is clouded by the uncertain fate of 

major initiatives like health care reform, forced paid sick leave, expiring income taxes, the estate tax, and the business tax extenders? 

My question is: Is it logical to assume that Congress’ failure to act 

on these initiatives has had a negative impact on the job creation 

and the economic growth? And if so, is it possible to quantify the 

magnitude of that impact? Should Government be a better partner 

in this recovery and move quickly to address some of the low-hanging fruit such as the business tax extenders? Would that have an 

effect? 

Mr. ELMENDORF. I think you are correct, Senator, that uncertainty about future Government policy is weighing on business decisions. I cannot quantify it, and I think it is not as important an 

uncertainty, of course, as uncertainty about the future demand for 

products, future sales, which is the predominant uncertainty 

weighing on businesses. For example, on the small business front, 

although they do report problems getting credit, they also report 

that their biggest uncertainty is whether they will be able to sell 

their goods. So I think that is the biggest uncertainty which is 

weighing on business decisions to invest and hire. But I think uncertainty about Government policy is also playing some role. 

Senator ENZI. Continuing the theme of taxes and uncertainty, 

there is some question in the business community about the fate 

of the income tax cuts that Congress passed in 2001 and 2003. As 

you know, small business is the engine of our economy. And many 

of those small businesses file their taxes as partnerships or limited 

liability corporations and subchapter S corporations, and they pay 

income taxes according to the rate schedule for individuals, which 

puts a lot of them in that over $250,000 category. Consequently, 

the fate of the marginal rate cuts in 2001 are very important to 

them, and you do talk about some of the impact of that on page 

45, and I appreciate that. 

33 

CBO’s current policy forecast for real GDP growth in 2011 is 2.4 

percent. The Blue Chip forecast is 3.1 percent. The Federal Reserve 

is 3.4 percent. 

Is it correct to say that the CBO predicts that our failure to extend all of the 2001 and 2003 tax cuts will reduce economic growth 

by seven-tenths to a full percent of GDP next year? And is it wise 

to sacrifice the opportunity for growth in this economic environment? If the Government wanted to be a good partner in recovery 

and reduce uncertainty in the business climate, it seems logical 

that Congress should act quickly to permanently extend all the tax 

cuts, especially those rates that affect small business. What would 

be your take on that? 

Mr. ELMENDORF. Senator, we do think that if you and your colleagues were to extend those tax cuts on a temporary basis, that 

would provide a stimulus to economic growth next year. We think 

if you were to extend the tax cuts on a permanent basis, that would 

actually supply an even larger stimulative effect next year because 

people would tend to spend a larger share of taxes they thought 

would be cut for some period of time. 

The problem is, of course, that if you do that and take no other 

steps, then the deficit outlook is quite a bit bleaker, and over time, 

unless other steps are taken, that extra debt would hold down economic activity. 

So just as our estimate for the stimulus package last year had 

an increase in economic activity in the short run but some dampening effect toward the back half of the 10-year window, an extension of the tax cuts—again, with no other changes in policy—would 

have an important stimulative effect up front but would depress 

economic activity later on in the 10-year projection window. 

We do think that a large share of the gap between our economic 

projection of the next couple of years’ growth and that of outside 

forecasters probably stems from this difference in fiscal policy assumptions. Of course, we stick with current law, and they are making some guess of what you will do, which we do not and should 

not do ourselves. And we do not quite know their assumptions, but 

if we changed ours to include a permanent extension of the tax 

cuts, that would raise economic growth over the next couple of 

years in our forecast by more than a percentage point. But, again, 

I will come back to baseline projections that would show deficits 

twice the size that we are showing now at the end of the 10-year 

window, and that is the other part of the problem that you and 

your colleagues are confronting. 

Senator ENZI. Let me switch quickly to education for a short 

question. Using the 2009 baseline, CBO scored the savings in the 

Student Aid and Fiscal Responsibility—SAFR—bill at $87 billion. 

But a subsequent estimate provided to Senator Gregg estimated 

only $47 billion in savings when the market risk was factored in. 

Given your advised baseline estimates and the fact that a number 

of schools have switched to direct loan programs, how much do you 

approximate that the previous score will change given the new 

baseline and assumptions? 

Mr. ELMENDORF. We do not think that that score would change 

very much because there are some offsetting factors at work. So it 

is true that the switch, because more people in schools have alVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
34 

ready switched to the direct lending, that has an effect in one direction. On the other hand, we have lowered our forecast for interest rates a little bit over the next decade in response to the weak 

economic conditions, and that has an effect in the other direction. 

I do not think we have completed an estimate yet, but the work 

in progress suggests not much net difference from what we reported last year. 

As you say, there is a significant difference between the official 

score, which is based, of course, on the Federal Credit Reform Act 

of 1990, and an alternative that tries to incorporate market risk in 

the way that Senator Gregg asked us to produce for him. 

Senator ENZI. Thank you. I will submit some followup questions 

on that in writing. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator Enzi. 

Senator Nelson? 

Senator NELSON. Thank you, Mr. Chairman—— 

Chairman CONRAD. Senator Nelson, if you would just withhold 

for a minute, I just want to thank you for your strong support of 

the initiative that Senator Gregg and I advanced. Nobody was a 

stronger advocate for that or pushed harder for it, and I just want 

to publicly acknowledge the work that you did on the debt control 

commission. 

Senator NELSON. Mr. Chairman, the fact that we only got 53 

votes for setting up a commission in the statutes that you and Senator Gregg proposed I think is a shame. We had to reach the 60- 

vote threshold under the Senate rules to get it, and we only got 53 

votes. And there were how many against, forty—— 

Chairman CONRAD. Forty-six. 

Senator NELSON. Forty-six against having a statutory commission to get the national debt problem under control. That says a 

lot about the willingness of folks to get our fiscal house in order. 

I wanted to thank you, Dr. Elmendorf. You have done yeoman’s 

work in all of the requests that we have had to you for scoring as 

we considered this health care bill. 

Let me go back to one of the Chairman’s charts. Is it true that 

if we took the Senate health insurance reform bill—call it broader, 

the Senate health reform bill, that debt, the long-term Federal 

debt, would come down? 

Mr. ELMENDORF. It would come down by a little bit, Senator. 

I—— 

Senator NELSON. Well, I want to ask you about that because you 

said in the second 10 years—if I recall, your projection was if the 

Senate health bill passed, the second 10-year period it would come 

down in the range of $650 billion to $1.3 trillion. 

Mr. ELMENDORF. So the way we put that was as a share of GDP, 

Senator, and some people have taken to doing their own calculations of GDP in that second decade and doing the multiplication. 

But we deliberately stuck with percentages of GDP, but that chart 

is still relevant. Actually, you can bring the chart back up. We said 

that the bill would reduce the deficit between a quarter and half 

a percent of GDP. So over a decade, that amounts to 10 times that, 

so that would be 2.5 to 5 percent, 2.5 percent to 5 percent of GDP. 

35 

You can see on that chart—take the end of that second decade 

at 2029. Debt is going from 100 percent of GDP to 200 percent of 

GDP over the space of—I cannot be sure, but a decade or two. So 

we are taking 5 percentage points off the level for that second decade. It is lower, but I think if we were to hold up a chart next to 

that chart, to be honest, you would have trouble detecting the difference. 

Senator NELSON. Well, now, is it not true that one of the things 

that you cannot score when you do a score for the Senate health 

bill is the insurance reforms, things like that insurance companies 

cannot suddenly cancel you for pre-existing conditions, and we are 

going to set up accountable care organizations that are going to follow the patients through Medicare, the emphasis on primary care 

doctors so that they have to get a doctor that will go and say you 

need to go to this specialist, electronic records so that one physician 

to the next knows what the other has done and, therefore, you do 

not have to repeat all of these tests that we find in the Medicare 

system right now where the Medicare recipient goes to this specialist, this specialist, this specialist, all not knowing what the 

other specialists are doing, and they are duplicating tests? That is 

something you cannot score. Isn’t that right? 

Mr. ELMENDORF. Well, we try. Estimating the effects of those 

kinds of changes on the budget is very difficult, and certainly there 

are other analysts who think that we have produced estimates of 

the budgetary effects that are too pessimistic and other analysts 

who think we have produced estimates that are too optimistic. And 

either group could be right. The uncertainty is great. But we do 

think we have balanced the risks in the projections that we have 

provided. 

Senator NELSON. Well, you certainly agree that health care is a 

big part of our Federal spending and it is going to affect that huge 

debt in the future. 

Mr. ELMENDORF. Yes, absolutely. 

Senator NELSON. And so maybe there are things like on the private sector, these insurance market reforms that we have got to get 

into, some of which I just mentioned will affect the Federal budget 

that it are difficult for you to score. 

Mr. ELMENDORF. Yes, it is certainly difficult for us to score. The 

uncertainty—everything we do is uncertain. The uncertainty here 

is particularly large. And, of course, as you are suggesting also, the 

effect on the budget deficit is not a summary measure of everything 

that might matter in legislation. It is just one aspect. But it is the 

aspect on the table at the moment. 

Senator NELSON. Today—and I will conclude with this—we are 

going to be voting on a so-called pay-as-you-go amendment, and 

that sounds awfully good. But there are going to be certain exceptions for it. There is going to be an exception for the AMT. We are 

not going to pay for that for 2 years. All of bringing doctors up to 

what they should have been getting under Medicare that has this 

acronym called SGR, that is not going to be paid for for 5 years. 

I wonder if it is a pay-as-you-go amendment. And the whole thing, 

we are going to forgive about $1.6 trillion that we are not going to 

pay, and the consequence of that when you add the debt service to 

it is going to be about $1.9 trillion. 

36 

Mr. ELMENDORF. We have not done those estimates precisely, but 

that does sound like the ballpark that we expect the numbers to 

be in, yes. And those provisions, those exceptions—adjustments, as 

they are called in the legislation—do suggest the deficit will be 

larger than if you and your colleagues passed a similar bill that did 

not have those adjustments. 

Senator NELSON. Thank you, Mr. Chairman. 

Senator GREGG [presiding]. I understand Senator Whitehouse is 

headed in this direction. Do we know how far away? 

Does anybody else wish to ask any followup questions of the Director? 

[No response.] 

Senator GREGG. We have got a vote starting at 10:30. Does the 

Director mind waiting for a couple of minutes for Senator 

Whitehouse? 

Mr. ELMENDORF. No. As long as you would like me to wait, Senator. 

Senator GREGG. Well, I can ask you something while we are 

waiting. Following up on this PAYGO issue, do you have an estimate of how many times the Congress has waived PAYGO in the 

last 2 years? 

Mr. ELMENDORF. No. I certainly wish I did now, but I am afraid 

that I do not. 

Senator GREGG. Would the number, the total gross amount in 

waivers that has occurred under—of items that should have been 

subject to PAYGO be, in our estimate, approximately $400 billion? 

Mr. ELMENDORF. I am sorry, Senator. We cannot do that in our 

heads. 

Senator GREGG. Well, I will hypothesize that it is a fairly big 

number and that PAYGO has become a fairly meaningless exercise 

around here because it either gets gamed, waived, or avoided with 

regularity. Is that not true? 

Mr. ELMENDORF. I think our judgment and the judgment of other 

analysts is that in the 1990’s, when there was a bipartisan—— 

Senator GREGG. 1990’s. 

Mr. ELMENDORF. Yes, when there was a bipartisan concern about 

rising Federal debt, that the PAYGO rules and the discretionary 

spending caps helped to restrain actions that might otherwise have 

increased the budget deficits. But by the end of the 1990’s, as you 

know, when the deficits were turning into surpluses, then those 

rules were widely ignored. So they are not by themselves binding, 

but they can be helpful, again, in our judgment, when people are 

already—— 

Senator GREGG. If the will is there, they are useful. If the will 

is not there, they are not useful. 

Mr. ELMENDORF. I think that is right, Senator. 

Senator GREGG. Senator Whitehouse? 

Senator WHITEHOUSE. Thank you, Chairman Gregg. 

Senator GREGG. Thank you. 

[Laughter.] 

Senator WHITEHOUSE. Dr. Elmendorf, thank you for coming back 

to us again. Just a couple of quick questions. 

First, the President’s Council on Economic Advisers has calculated that the excess cost and waste in the health care system 

37 

is in excess of $700 billion a year. The New England Health Care 

Institute has calculated that it is around $850 billion a year. The 

Lewin Group—and I think it is probably their number that former 

Treasury Secretary Paul O’Neill used, because they are coincident—puts the number for excess cost and waste in the health care 

system annually at $1 trillion a year. 

Do you believe that those studies are in the general right order 

of magnitude? 

Mr. ELMENDORF. I think that seems the right ballpark. I mean, 

as we noted in our letter to Senator Gregg and Senator Conrad in 

June, there is a widespread view among analysts that a lot of 

money is not being used effectively, judging principally by comparing different parts of the country which spend a lot and those 

that do not. 

It is impossible to quantify precisely. I would not use the word 

‘‘calculate.’’ 

Senator WHITEHOUSE. I did not say that—— 

Mr. ELMENDORF. I would make an educated guess. 

Senator WHITEHOUSE. But your educated guess is that that is the 

right ballpark. 

Mr. ELMENDORF. Certainly hundreds of billions of dollars, I think 

that is right. 

Senator WHITEHOUSE. In your written testimony, you state that 

the recovery will be dampened by a number of factors, including, 

and I quote, declining support from fiscal policy as the effects of 

ARRA, the American Recovery and Reinvestment Act, wane. That 

states a proposition in the negative. Would you be prepared to 

state the proposition in the positive? 

Mr. ELMENDORF. As we wrote in our report on policies to stimulate employment growth, we think that appropriate fiscal measures 

can spur economic activity and job creation in the next few years. 

Or an alternative positive version—I am not sure what you want— 

is that we believe—and we have written this many times, and I 

said this in my remarks—that the seamless package has spurred 

economic activity and has increased the level of employment relative to what would have occurred without the legislation. 

Senator WHITEHOUSE. So it has been good in terms of getting us 

out of the economic ditch we were in? 

Mr. ELMENDORF. We think that it has shortened the duration 

and reduced the depth of the recession relative to what would otherwise have occurred. 

Senator WHITEHOUSE. And that, I would suggest, works under 

the general category of good. 

Mr. ELMENDORF. Yes, I think that is right, Senator. 

Senator WHITEHOUSE. Not to be too fussy about it, but I think 

that is right. 

One other question. What are your observations about the extent 

to which the foreclosure crisis continues to operate as a drag on the 

economy? And to what extent, if at all, do you believe that a sort 

of clear market solution like resort to bankruptcy court for families 

who are in trouble on their home, first mortgages on their primary 

residence, might help provide clarity in the market so that banks 

and everybody else can respond? And would that move the foreclosure crisis behind us more rapidly if we had that kind of a clear 

38 

market signal coming out of bankruptcy courts as people have the 

chance to get their cases called and heard rather than sit on the 

phone for many hours with banks finding ever new corners of their 

telephone answering system to be thrust into? 

Mr. ELMENDORF. So we do think that the foreclosure crisis continues to be a very serious problem, obviously for the families that 

are involved, but also in macroeconomic terms. And there are analysts who worry a good deal that house prices will take another 

turn down as more foreclosed properties appear on the market. So 

that is a drag. And I think that greater clarity reaching the end 

of that process would indeed help to stimulate economic growth. 

We have not analyzed, however, particular ways of achieving 

that clarity, and I think in general the experience of the last few 

years suggests that the greatest clarity can be achieved with a 

large injection of funds and that achieving clarity with a smaller 

injection of funds is pretty challenging. So I think those are the 

issues one would have to weigh, but we have not done a study of 

that at this point. 

We are in the process of working more on that topic, and we may 

be able to report to you about that shortly. 

Senator WHITEHOUSE. OK. As an observer of markets and economic behavior, if you give banks the opportunity unilaterally to 

decide how much they are going to lose on a mortgage that is underwater rather than allow a market-neutral process to make that 

determination, what effect does that have on getting quickly and 

accurately to the real number and enabling the economy to move 

on? 

Mr. ELMENDORF. I think whether the other process is faster than 

the current process depends on just what structure you set up and 

how it is run and what the incentives are of the people who are 

running it. I do not think I can answer that question in general 

terms. 

I also think that there is an issue—we have a process under 

which contracts were negotiated and signed, and I think there are 

legitimate concerns about changing those contracts and the process 

through which problems are resolved. It does not mean we should 

not. I am just saying that there are other complexities about the 

effects over time as well, and that is why it really requires an analysis. We just have not done it yet. 

Senator WHITEHOUSE. Although the efficiency of the American 

bankruptcy system has been one of the great assets of our economy. There was a very good piece on this in the Economist magazine just a few weeks ago. It is one of the sort of prides of the 

American economy. The bankruptcy system is nothing new. It has 

existed for I think as long as the Republic has. And it applies to 

every single type of debt, including debts that the banks hold, except for one kind, and that is the poor residential mortgage holder 

who years ago for political reasons was carved out of that and denied access to the same quick established resource that every other 

debtor has access to. 

And so I just want to push back a little bit against what I 

thought was your implied theory that this would be something 

novel or peculiar if we allowed this to happen. It actually lifts a 

39 

novelty and a peculiarity out of the system and restores it to its 

traditional general basis. 

Mr. ELMENDORF. I think that is right, but it would be a novelty 

in the mortgage market, and there are studies that suggest that 

that particular novelty or peculiarity of mortgages has helped to 

keep mortgage interest rates down. So there may be a tradeoff between what one is doing for people who end up in trouble versus 

what one is doing to people who do not end up in trouble. And I 

am just suggesting why I do not feel like I can off the cuff analyze 

your particular proposal. But I understand your concerns. 

Senator WHITEHOUSE. Well, very good. Thank you for your testimony. I am sorry I went a little bit over, and I appreciate very 

much Senator Gregg’s patience in allowing me to have this time. 

Senator GREGG. Does anybody else have any questions? 

[No response.] 

Senator GREGG. Well, again, I want to thank on behalf of the 

Chairman and myself you and your staff for the extraordinary job 

you do. We were just sitting here saying to each other the amount 

of work that you folks have done in the last few months has just 

been exceptional, and the quality of it has also been exceptional, 

and the integrity of it has been exceptional, and we thank you for 

it. 

Mr. ELMENDORF. Can I just say, Senator, that I feel very, very 

fortunate to work with such a talented and dedicated group of people at CBO, and I am very grateful to you and to Senator Conrad 

and to Chairman Spratt and Congressman Ryan for giving me the 

opportunity to do that. Thank you. 

Senator GREGG. Thanks. 

[Whereupon, at 10:36 a.m., the Committee was adjourned.] 

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MEMBER GREGG’S SUBMITTED QUESTION ON STUDENT 

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(77) 

THE PRESIDENT’S FISCAL YEAR 2011 BUDGET 

PROPOSAL 

TUESDAY, FEBRUARY 2, 2010 

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:02 a.m., in room 

SD–608, Dirksen Senate Office Building, Hon. Kent Conrad, Chairman of the Committee, presiding. 

Present: Senators Conrad, Murray, Wyden, Nelson, Sanders, 

Whitehouse, Warner, Merkley, Gregg, Sessions, Ensign, and Alexander. 

Staff present: Mary Ann Naylor, Majority Staff Director; and 

Cheri Reidy, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. 

I want to thank Director Orszag for being here this morning. I 

want to thank all members of the Committee who are here and 

who are on their way. We know there are many other hearings underway on the budget in other venues today, and we appreciate 

and respect that. It is important for us on the Budget Committee 

to hear directly from the Budget Director. 

Let me just go through a couple of slides to begin and then go 

to Senator Gregg for his opening remarks and then give the Director a chance to make his presentation, and then we will go to questions. I think we will stick to 5-minute rounds this morning and 

go to a second round if members are desirous of doing that. 

I think it is important to put in context what we confront. This 

President inherited the most dire situation any President has faced 

since Franklin Roosevelt: record deficits; a doubling of the debt had 

occurred before he came to office; the worst recession since the 

Great Depression; crises in the financial markets and the housing 

markets and the energy markets; ongoing wars in Iraq and Afghanistan; and an unsustainable long-term budget outlook with dramatically rising health care costs, and we know the story. 

78 

The previous administration, to their credit, and this administration took a series of steps when the economic downturn became apparent, and the result has been an improvement in the jobs picture. If we recall in January of last year, the economy was losing 

over 700,000 jobs a month. Now, that has been reduced in December of last year to 64,000 jobs. And while that is of cold comfort 

to those who have lost their jobs or who are worried about losing 

their jobs, it is a dramatic improvement from where we started. 


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The same is true on economic performance. In the first quarter 

of last year, economic growth was a negative 6.4 percent. In the 

most recent quarter, that improved to 5.7 percent. 


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If we look at some of the specifics in the President’s budget, we 

see on the revenue side major proposals to further reduce revenue. 

Extending the 2001 and 2003 tax cuts for those with incomes below 

$250,000, the estate tax at the 2009 level, the alternative minimum 

tax relief—that combination is over $3 trillion of tax relief. In addition, there is other tax relief for families and businesses of almost 

$300 billion as well as temporary recovery measures of about $80 

billion. 

On the other side of the ledger, there are health care reform revenues that represent an average of what the Senate and House has 


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done, $743 billion; limiting the itemized deductions to a 28-percent 

rate raises $291 billion; the international tax reforms previously 

proposed and again included in this budget, $122 billion; a financial crisis responsibility fee on the largest banks of $90 billion; 

other loophole closures and reforms of $309 billion. If you net it all 

out, it is an additional package of tax reduction of $1.9 trillion. 

If we look at the deficit path for the first 5 years—and I look at 

the first 5 years because Congress, when we do budgets, virtually 

all of the time do 5-year budgets—the deficit is coming down as a 

percentage of GDP from 10.6 percent in 2010 to 3.9 percent in 

2015. That is the good news. 


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On the other side of the ledger is the long-term outlook. In the 

long-term outlook, the Federal debt continues to rise in an unacceptable and unsustainable way, according to CBO’s long-term outlook, to a projected debt in 2059 of 400 percent of GDP. Let me indicate that is a worst-case scenario because it includes extending 

all of the spending, and it includes extending all of the tax cuts 

that are already in place. Nonetheless, we are on an unsustainable 

course by any measure. 


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And let me just say that when I look at this budget, I strongly 

agree with the President’s budget in the short term. It is absolutely 

imperative that we not allow the economy to slip back into recession. I have strong disagreement with the long term, and I must 

say that. I do not know any other way to say this than to be brutally honest with everyone. Short term, I believe it is absolutely essential that we provide additional liquidity to prevent a double dip. 

Our friends in Japan have warned us repeatedly: Do not try to cut 

your deficit prematurely at a time of economic weakness; you will 

only push the economy back into recession. I believe that. And so 

I believe the President is taking us in the right direction over the 

next several years. 

But I must say I am very concerned about the long term because 

I believe we are on an unsustainable course. I have said it many 

times. I believe it deeply. And it has to be addressed, and the 

President’s 10-year outlook I do not think is the path that we can 

take as a Nation. 

Senator Gregg and I proposed a commission, and I know in fairness to the administration that they are relying on that approach 

to deal with the long-term circumstance we face. I hope very much 

that that works. The President said, on establishing a bipartisan 

fiscal commission, that, ‘‘A decade of irresponsible choices has created a fiscal hole that will not be solved by a typical Washington 

budget process that puts partisanship and parochial interests 

above our shared national interest. That is why, working with Congress, we will establish a bipartisan fiscal commission charged with 

identifying additional policies to put our country on a fiscally sustainable path.’’ I believe in that approach. 


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I have spoken to the Vice President’s office on Friday and asked 

them to reach out to Republican leaders because, while we had negotiated with the White House a way of proceeding, it is important 

now that Republican leadership be consulted to see their ideas for 

the make-up of the commission, the rules under which it would operate, to see if agreement can be found with them. I very much 

hope that that will be the case. 

I believe that it is absolutely essential that we have a look this 

year from a group who has the responsibility to come up with a 

long-term plan, one that would get us to 3 percent of GDP as a deficit by 2015, but much more challenging and what I believe is absolutely imperative is a longer-term plan that brings us to balance 

and that deals with the long-term debt threat. 

With that, I will turn to my colleague Senator Gregg for his 

opening comments. Senator Gregg. 

OPENING STATEMENT OF SENATOR GREGG 

Senator GREGG. Thank you, Mr. Chairman, and thank you again 

for reminding us of the seriousness of the problem and the issue 

and the failure of this budget, honestly, to address that issue in the 

out-years—and in the short term, for that matter, as far as I am 

concerned. 

You know, it is really not what this administration inherited that 

is quite as important as what our children are going to inherit. And 

in both this budget and the budget that came last year, they are 

going to inherit a country whose debts are rising at such a rate and 

have risen to such a level as a result of deficit spending that the 

Nation will be unaffordable for them. 

I actually think it is malfeasance to present a budget which, by 

its own terms and numbers, leads us down a path which ends in 


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insolvency for this Nation. And that is not my assessment of this 

budget. That is the assessment of the administration’s view of this 

budget in the long run. We go into insolvency. It is unsustainable. 

Unsustainable under any form what is proposed in this budget if 

we intend to continue to have a vibrant Nation to pass on to our 

children. 

The blame falls in a lot of different places, and you can blame 

it on the past administrations. You can blame it on the generation 

that is huge and is about to retire. You can blame it on this administration that is exploding the size of Government in a variety of 

different areas. But blaming is not going to do us any good. Let us 

talk about solutions. Let us talk about resolving this. 

Unfortunately, this budget, as it is presented, is filled with small 

ideas and smaller actions in the areas of how you get this longterm issue under control, and what we do not need are a lot of 

bunts and singles and hit-and-runs. We need somebody to step up 

to the plate with some ideas that are going to lead to doubles and 

triples and home runs. We can no longer afford to play small ball 

on this issue. 

I want to put in some context how I see this problem. Could you 

put that one chart up there? 

The revenue side is a big issue for us right now because in a recession revenues drop, and they have dropped more precipitously 

in this recession than probably in any recent recession. But CBO 

projects—and I would note that CBO’s baseline projections are for 

lower deficits than the deficits under the Administration’s policies—CBO projects that revenues will jump back to their normal 

historic level of 18.2 percent fairly quickly because of additional 

revenue that comes in when the tax cuts expire at the end of this 

year, and that they will exceed that level, getting up to 20 percent 

of GDP essentially, which would be well above their historic levels. 

The problem, of course, is that spending has not only spiked as 

a result of the desire to float the economy through using the liquidity of the Government, but it is also spiking because there is being 

put in place programmatic activity which radically expands the size 

of the Government. And so spending goes up astronomically as a 

percent of GDP to levels not seen really in any time except for 

when we have been at war. And it does not come down. That is the 

real horror of this budget. And the proposal is that when you get 

out 10 years—and you cannot blame George Bush 10 years from 

now—when you get out 10 years, the deficits are going up, and the 

debt has crossed into a place where recovery is virtually impossible 

from it because you are like a dog chasing your tail. You cannot 

catch it.Debt service will amoutn to $800 billion by CBO’s estimate, 

potentially $1 trillion. And as a result, there is no light at the end 

of the tunnel. It is pretty black. And there may be a stone wall out 

there that we are headed toward. 

So what should we do? Well, I would have liked us to use a statutory commission, as the Chairman and I proposed, because I think 

that that is the only way you can pull together a group of people 

and have it be bipartisan. You need that initial vote where a bipartisan vote actually occurs that creates the commission because that 

gives it the imprimatur of bipartisanship that is so critical. An Executive order by definition is an Executive order, and, therefore, it 

86 

is partisan and it is not part of the Congress, and so it has got fundamental flaws there. 

And then, second, you need a statutory structure because you 

have to have an up-or-down vote, you have to have fast-track, and 

you cannot have an amendable vehicle or else too many games are 

played around here. 

And would a task force have solved all the problems? No. But 

would it have addressed a big chunk of the solution? Yes. And 

should everything be on the table? Absolutely. Some people on my 

side did not vote for it because they did not think that there should 

be any tax policy on the table. That is foolish. You have to have 

everything on the table. The people on your side did not vote for 

it because they did not want Social Security or something else on 

the table. That is foolish. You have to have everything on the table. 

So that was, in my opinion, the best approach, but it failed. I 

hope we will bring it back. We were seven votes short. We ought 

to be able to bring it back and pass it. 

I saw this Congress, members of the other party, cast 60 votes 

for a couple of items around here, so they ought to be able to get 

43 if we can get 17. Maybe we can get a few more on our side. 

Independent of that, we have got to think of bigger approaches 

to this. That is the bottom line. You cannot do this a freeze on discretionary non-defense items post-2010. What is that? Ten billion 

dollars on a $1.6 trillion deficit? I mean, sure, it is the right sentiment, but it does not get you anywhere. That is small ball. That 

is not even a bunt. 

An Executive order commission probably gets you a nice report, 

but it does not get you action. There are a number of programs 

which the administration has suggested eliminating. I will vote to 

eliminate them. Unfortunately, most of them have been proposed 

before, and they have not been accomplished. I think we have got 

to think in a little bigger context here. Let me suggest four things 

that we could do. 

First, we could freeze all discretionary spending today, really 

make a statement that we are going to freeze annual appropriations. In fact, if you want to make it a real freeze, make it a freeze 

less earmarks. That is a number that will get you a little bit of 

money. 

Second, it is inexcusable that the TARP (Troubled Assets Relief 

Program) is being used as a piggy bank. Inexcusable. The language 

of the TARP was very specific. Monies paid back were supposed to 

go to debt reduction. Once we got past the crisis, which we have 

by all accounts, including the Secretary of the Treasury and the 

Chairman of the Fed, we should not be drawing down more TARP 

money. Those dollars should be lapsed, and the moneys that are repaid should go to debt reduction. You are talking hundreds of billions of dollars there. 

Third, there is no excuse for spending stimulus money after 

2010. And that is a lot of money. There is money being spent under 

that stimulus package that occurs in 2014, 2015, 2016, 2017, and 

2018. How can you justify that? Clearly, those dollars should be 

lapsed. 

And, last, let me take an idea that was put forward by the other 

side of the aisle, a very courageous idea, in my opinion. The other 

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side of the aisle in their health care bill suggested adjusting Medicare spending by $500 billion. Actually, it was $1 trillion when 

fully implemented over a 10-year period. Regrettably, rather than 

using that money to stabilize Medicare, they took that money and 

then created major new entitlements with it. They took Medicare 

funds that should be used for Medicare and funded a brand new 

series of entitlements. 

Well, if you were willing to vote to make those types of tough decisions on Medicare, do it again, but use the money to stabilize 

Medicare. Put it in a Medicare stabilization fund, and you will get 

some very significant out-year savings, and they will be really positive. 

Those are some ideas. I am sure there are some ideas from the 

other side of the aisle on tax policy that could also be considered. 

But as a very practical matter, let us stop talking about these little 

ideas, and let us stop putting forward budgets like this which represent a death certificate to the American dream for our kids, because that is what this is if we continue on this path. Our kids are 

not going to be able to participate in the American dream because 

their lives will be mortgaged, and their capacity to be prosperous 

will have been fundamentally undermined by the debt we will have 

put on their backs. 

Thank you, Mr. Chairman. 

Chairman CONRAD. I thank the Ranking Member and thank him 

for his strong statement. I would say, you know, this is a time I 

think unlike any other as I look at our national history since the 

Great Depression, and it really does require us—it requires the 

very best from all of us. We have got to go beyond—I like your description ‘‘small ball.’’ I really do think it is a time that requires 

us to come up with a comprehensive, long-term plan that demonstrates to the American people, that demonstrates to our colleagues, that demonstrates to our creditors that we are equal to, 

as a great Nation, facing up to this long-term challenge. And we 

simply have to do it. 

With that, we turn to Director Orszag. Thank you for your service. I know you are somebody who in your history has certainly had 

an eye on fiscal responsibility and a commitment to it, and we are 

fortunate to have you in this position. The country is fortunate to 

have somebody of your ability and your vision in that job. Welcome 

and please proceed. 

STATEMENT OF THE HONORABLE PETER R. ORSZAG, 

DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET 

Mr. ORSZAG. Thank you very much, Mr. Chairman, Senator 

Gregg, members of the Committee. This year’s budget focuses on 

three main things: first, job creation in the near term; second, middle-class security; and, third, beginning the task of putting the Nation back on a path to fiscal sustainability. Let me just pause and 

give a little bit of background before turning to what we should be 

doing on those topics. 

We just came through a year in which a second Great Depression 

was averted. At the end of 2008, the economy was declining by 

more than 5 percent on an annualized basis. At the end of 2009, 

it was increasing by more than 5 percent on an annualized basis. 

88 

Although the economy is now expanding, the employment market 

remains too weak. The unemployment rate is 10 percent, and there 

are 7 million fewer jobs today than in December 2007, which is 

why the administration has put forward items like a jobs and 

wages tax credit and why this budget invests in education, innovation, and clean energy. 

Second, let us look at the pre-existing condition with regard to 

our fiscal situation when the administration took office, and, actually, if I could have Senator Gregg’s chart put back up, that would 

be terrific. 

In January 2009, the Congressional Budget Office issued its Economic and Budget Outlook, which at that time showed an increase 

in Federal spending from 20.9 percent of the economy in fiscal year 

2008 to 24.9 percent in 2009. This was, again, before the Obama 

administration took office, so presumably was not a reflection of 

our policies. And, similarly, if you look at where that green line is, 

that increase in spending and that decline in revenue was already 

apparent in January 2009. So it cannot be attributed to the policies 

that have been put in place since then. 

Similarly, with regard to the projected deficits, if you look out 

over the decade from January 2009 forward, the projected deficit 

was $8 trillion at that point. That reflects two main factors. One 

was the fact that the 2001 and 2003 tax cuts and the Medicare prescription drug benefit were not paid for; they were deficit financed. 

That added more than $5 trillion to the projected deficit. And, second, the economic downturn, precisely what you see here, a decline 

in revenue as the economy weakens and an expansion in spending 

on things like unemployment insurance and food stamps and other 

automatic stabilizers built into the Federal budget that help to 

mitigate the economic downturn, but that do temporarily expand 

the deficit, added more than $2 trillion to the projected deficit. 

So that is the situation that we face. We do face a very substantial medium-term deficit, and we also face a jobs deficit. So what 

are we doing? 

First, the budget includes a $100 billion jobs package, including 

the new wage and jobs tax credit that I already mentioned to try 

to spur hiring among small businesses in particular, and it is 

worth pausing to examine the logic there. As I already mentioned, 

real GDP has started to increase, but employment growth typically 

lags behind economic growth. And one of the things that we are 

hoping to accomplish through a jobs package is to shorten that lag 

between when you have a statistical recovery and when you have 

a jobs recovery, and shorten the time between when income picks 

up or aggregate demand picks up and when employment picks up. 

Second, with regard to our fiscal deficits, what are we doing? The 

first step in the face of this kind of problem is to make sure you 

do not make the problem worse, and the administration is particularly pleased that the Senate has now joined the House in embracing a concept that the administration has also embraced, statutory 

pay-as-you-go legislation, which embeds in law that basic principle. 

Do not dig the hole any deeper when you already have a hole. If 

this policy and this principle had been in place in the past, our outyear deficits would be only 2 percent of GDP, and debt as a share 

of the economy would be declining. 

89 

Second, economic recovery will help to reduce the deficit over 

time, moving the deficit from roughly 10 percent of the economy 

today to about 5 percent of the economy by 2015. That 5 percent 

of the economy is too high. It is above our fiscal target of roughly 

3 percent of GDP, which is also consistent with balancing the budget, excluding interest payments on the debt. So how do we get from 

5 to 3? 

The first thing that we do is we put forward a set of specific proposals that would reduce the projected deficit over the next decade 

by $1.2 trillion—I would note the largest deficit reduction both in 

dollar terms and as a share of GDP in over a decade embodied in 

any administration’s budget proposal. This includes steps like the 

financial services fee, which raises $90 billion and also helps to 

repay taxpayers in full for the costs of TARP. It includes allowing 

the 2001 and 2003 tax cuts for those making more than $250,000 

a year to expire as scheduled in 2011, which reduces the deficit by 

roughly $700 billion. And I would note, Senator Gregg, I appreciate 

the suggestions you made. I did a rough calculation. I think they 

come in total roughly to the same amount as simply extending 

those high-income tax cuts which I know many in your party would 

support, so perhaps we could go through that in more detail. It includes eliminating fossil fuel subsidies which amount to $40 

billion over the next decade. And it also includes the 3-year freeze 

on non-security discretionary funding which would reduce the deficit by $250 billion over the next decade. And I would note this is 

not an across-the-board freeze on non-security discretionary spending. We are increasing investments in education, where we are putting an additional $3 billion into elementary and secondary education. We are increasing investments in research and development, which is up 6 percent in this budget. And in clean energy, 

in addition to eliminating fossil fuel subsidies, there is more than 

$6 billion in clean energy R&D and related activities embodied in 

the budget. All of that put together, again, $1.2 trillion, but it does not get 

us to where we need to be. I think it has been long recognized, including through the leadership of Senator Gregg and Senator 

Conrad, that a bipartisan process is necessary to get us the rest of 

the way there. We supported a statutory commission. In the absence of a statutory commission, we support an Executive order 

commission. This has to be done on a bipartisan basis, and we are 

calling for a commission and with the goal of not only addressing 

our long-term fiscal imbalance, but also balancing the budget, excluding interest payments on the debt, by 2015 which would get us 

the rest of the way there to our fiscal target. 

Finally, let me just note that over the very long term—this was 

all with regard to the next decade. Over the very long term, the 

key driver of our deficits is the rate at which health care costs 

grow. The legislation that both the House and Senate passed would 

not only reduce the deficit over the next decade, but also put in 

place the key infrastructure that would help to reduce costs and 

improve quality over time thereafter, which is one reason why the 

administration is so focused on getting that legislation done. 

Thank you very much, Mr. Chairman. 

[The prepared statement of Mr. Orszag follows:] 

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Chairman CONRAD. Thank you, and thank you for your testimony. 

Let me, first of all, go to this notion of excluding interest payments from the calculation of deficits and debt, or at least of deficits. I guess I understand the concept, but it strikes me, when I 

look at where we are headed, interest payments in this budget, net 

interest is expected to rise from $188 billion this year to $840 billion by 2020—$840 billion in interest. 

Now, the interest has to be paid, so I do not understand how it 

makes any sense to be excluding interest from the calculations. 

What is the thinking there? 

Mr. ORSZAG. Senator, it is not that we would exclude it from the 

calculations, but as you know, economists have often focused on the 

so-called primary budget, which is the budget excluding such interest payments on the debt. The reason to do so is you are then isolating the sort of programmatic side of the budget as opposed to, 

as you correctly point out, net interest must be paid, and isolating 

the programmatic part of both expenditures and revenue. And so 

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pening to the primary balance, that is, the budget excluding interest payments. 

It turns out that balancing the budget excluding interest payments in 2015 is consistent with an overall budget deficit of 3 percent of GDP in that year. So the fiscal target of 3 percent and balancing the primary budget or the budget excluding interest payments turn out to be the same goal. 

Chairman CONRAD. All right. Put me down as a skeptic. 

Mr. ORSZAG. OK. 

Chairman CONRAD. I understand, to me, you know, when we 

start excluding things, for whatever purpose, I think we tend to 

just mislead ourselves about really the gravity of the situation. And 

as I look at the trend that we are on as a country, I see a very 

grave situation, a dire situation. And, again, I give the administration high marks for what you have done thus far to avert what I 

believe would have been a global financial collapse. 

I was in the room with the previous Secretary of the Treasury, 

with the head of the Federal Reserve, and that long weekend in 

which hour after hour we were advised of the impending collapse 

of major financial institutions, not only here but around the world. 

Anybody who was there had to be sobered by how close we came 

to a financial collapse. 

So I give the administration and, frankly, I give the previous administration at the end of that administration high marks for responding to what could have been a depression as severe as the 

previous depression. 

But now we are looking ahead, going forward, and again, in the 

short term, I believe we have to be very careful not to move too 

quickly to deficit reduction, and I am a deficit hawk. I have felt 

this way my entire life. I think we have to be very careful not to 

prematurely reduce the deficit because, in many ways, we are facing what the Japanese did. The Japanese call it a balance sheet recession because their businesses, their financial institutions are unable to generate the type of economic activity necessary to sustain 

growth because their balance sheets have been impaired. And in 

that circumstance, the only one big enough to come to the table to 

fill the demand gap is the Federal Government, and if it doesn’t, 

economies crater. That is reality. That is a fact. 

With that said, we then look to our long-term circumstance. So 

I believe, and believe strongly, it is critically important that we run 

deficits and add the debt in the short term. But I also believe just 

as passionately that as the recovery takes hold, we then must pivot 

and deal with the long-term debt. And the place where I would 

fault this budget is I don’t see the pivot. I don’t see the pivot. I 

don’t see the focus on bringing down that long-term debt. 

I don’t see us getting below, as I look at the numbers, 5 percent 

of GDP in the next 10 years. And I know there are other estimates, 

but looking at the way CBO will judge this, my own sense is we 

are probably not going to get below 4.5 percent of GDP. That is too 

high, especially given what is happening with the retirement of the 

Baby Boom generation and the debt we have already by that time 

accumulated. 

102 

So help me understand, what is the administration’s thinking 

with this long term? I am certain you don’t see this as a sustainable circumstance. So how is it going to be addressed? 

Mr. ORSZAG. No, we don’t view the long term as on a sustainable 

course. I would note three things. First, that is precisely why we 

are calling for a commission along the lines that you have already 

tried to embody in a statutory version. 

Second, it is another reason why we do believe comprehensive 

health legislation is crucially important. 

And finally, I would just note, there are alternatives that have 

been put forward. For example, Senator Gregg’s colleague on the 

House side, Mr. Ryan, has put forward a plan that would eliminate 

the long-term deficit, and that is a significant accomplishment. But 

it is worth examining how that is done. 

The way it is done is taking the Medicare program and turning 

it into a voucher program for those 55 and below, which would shift 

risk onto individuals and beneficiaries, and then have that voucher 

not keep pace with health care costs over time, which would shift 

expected costs onto individuals. And then there are a variety of 

other changes, but that is the big driver. It is possible to address 

our long-term fiscal problem that way, and that would be worthy 

of debate. 

So again, I am going to come back and say we strongly favor a 

Fiscal Commission, in part because we agree. The fiscal course that 

we are on out in 2020 and 2030 and 2040 is unsustainable and it 

needs to be addressed. 

Second, if we don’t address rising health care costs, there is nothing else that we are going to be able to do that will alter that basic 

fact, and there are lots of parts of the legislation that both the Senate and the House have passed which would help with that problem. 

And finally, it is worthy of further discussion, some of the other 

proposals that are out there, and that is partly what we would 

hope the commission would do. 

Chairman CONRAD. Senator Gregg? 

Senator GREGG. I must just take a bit of difference with your 

comments. It is not 2020 and 2030 that we need to worry about. 

It is 2017, 2015, when our bonds are no longer salable or become 

very expensive and we are not able to defend our currency because 

we have got so much debt. And the signs are pretty clear that that 

is where we are headed. I mean, the Japanese already face the 

problem. Their debt is being downgraded. The Chinese have made 

it clear they are not going to purchase debt at the rate that they 

were. So we have got this problem. It is no longer on the horizon. 

It is closing fast. 

I want to talk about one specific here. The President today is 

going to announce he is going to take—and I am quoting from a 

statement, which I assume is his quote from his speech, and it is 

going to be in New Hampshire, ironically—‘‘that is why today I am 

announcing a proposal to take $30 billion of money that was repaid 

by the Wall Street banks and use it to create a new small business 

lending fund.’’ 

Then I want to read to you from the law, the TARP law. That 

is money from TARP. The TARP law says ‘‘revenues of and proVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00108 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
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ceeds from’’—that are recovered from the banks—‘‘shall be paid 

into the general fund of the Treasury for reduction of the public 

debt.’’ That is ‘‘shall.’’ 

This proposal violates the law. Are you intending to amend the 

TARP law? 

Mr. ORSZAG. Senator, my understanding is that the proposal 

would require new legislation to implement, so it would only be 

done with Congressional approval and a change in the law, sir. 

Senator GREGG. So you are proposing to add $30 billion to the 

debt? 

Mr. ORSZAG. We are proposing to put $30 billion into a new program that would help promote small business activity because 

small businesses are suffering from a lack of access to credit currently. 

Senator GREGG. It comes from deficit financing. 

Mr. ORSZAG. Relative to simply repaying the debt, yes. 

Senator GREGG. Well, you know, I mean, how are we going to get 

this under control if on the day that you are up here telling us that 

you are going to be fiscally responsible, you are proposing language 

which is going to spend $30 billion of repaid TARP money which 

specifically was supposed to be used to pay down the debt? The 

whole concept of the TARP was—and I was in the room, also, with 

Senator Conrad, and this was debated at some length—the whole 

concept of the TARP was that as we recoup the money, we would 

use it to pay down the debt because we were borrowing it from 

Americans and from the Chinese. Now with this proposal, that is 

not going to happen. It has become a piggy bank—— 

Mr. ORSZAG. Well, Senator—— 

Senator GREGG [continuing]. A piggy bank which adds to our deficit, adds to our debt, and gets put on our kids’ backs. 

Mr. ORSZAG. The degree to which shifting funds would add to our 

debt or deficits depends on what the net subsidy rate would be on 

that new activity. Remember, the purpose of TARP was to address 

problems in our financial markets, and it has been remarkably successful in bringing credit spreads back down to normal levels. 

One of the lingering problems in our financial markets, however, 

is access to credit for small businesses. That is why in this budget 

we are—— 

Senator GREGG. No, no, no. You can’t make that type of statement with any legitimacy. 

Mr. ORSZAG. OK. 

Senator GREGG. You cannot make that statement. This is the 

law. 

Mr. ORSZAG. Small businesses are suffering from—— 

Senator GREGG. Let me tell you what the law says. 

Mr. ORSZAG [continuing]. Lack of credit—— 

Senator GREGG. Let me read it to you again, because you don’t 

appear to understand the law. The law is very clear. The moneys 

recouped from the TARP ‘‘shall be paid into the general fund of the 

Treasury for reduction of the public debt.’’ It is not for a piggy bank 

because you are concerned about lending to small businesses—— 

Mr. ORSZAG. And this would require new legislation—— 

Senator GREGG [continuing]. And you want to get a political 

event when you go out and make a speech in Nashua, New HampVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00109 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
104 

shire. That is not what this money is for. This money is to reduce 

the debt of our children, that we are passing on to our children. 

And you ought to at least have the integrity to be forthright about 

it and say that is what you are doing. You are adding to the debt 

that our kids are going to have to pay back, when you are claiming 

at the same time—— 

Mr. ORSZAG. Senator, with respect—— 

Senator GREGG [continuing]. That you are being fiscally responsible. 

Mr. ORSZAG. Senator—— 

Senator GREGG. Let me ask you another question, because clearly, we are not going to agree on this and you are not going to follow 

the law. Second—— 

Mr. ORSZAG. Sorry, I do—excuse me. We will be following the 

law. This would involve legislation—— 

Senator GREGG. Well, then you are not going to be able to do it 

unless Congress—— 

Mr. ORSZAG. Yes, exactly—— 

Senator GREGG [continuing]. Gives you the authority to do it. 

Senator SANDERS. Yes. That is how laws are made usually. Congress passes them. 

Senator GREGG. Did the Senator from Vermont make a statement? Well, the Senator is wrong. This is the law as it stands 

today. There is no law on the books which allows-—— 

Senator SANDERS. And Congress can amend the law—— 

Senator GREGG. There is no law on the books, Senator, that allows you to take that money and spend it. 

Senator SANDERS. And he is indicating he is going to go to Congress to amend the law. 

Senator GREGG [continuing]. To do it. 

Chairman CONRAD. Please. No. We don’t operate that way in this 

committee. People seek recognition through the Chair. We don’t 

have ad hominem debates here. That is not the way this committee 

is going to function, period. 

Senator GREGG. On another—— 

Chairman CONRAD. The witness gets a chance to respond. The 

Senator asked the question and I will extend his time so the witness has a chance to respond—— 

Mr. ORSZAG. Very briefly—— 

Chairman CONRAD [continuing]. Then the Senator will have an 

additional chance. 

Mr. ORSZAG. Very briefly, the proposal would involve—would require new legislation, so it would be fully consistent with existing 

legislation, and the net impact on the deficit would depend on the 

net subsidy rate for the new activity. It would not be a net cost in 

terms of the budget deficit of $30 billion. 

Senator GREGG. That is an extraordinary answer. What you are 

essentially saying is that when this TARP money comes back in, 

you are going to change the rules so that you can spend it, not put 

it toward debt reduction. 

Mr. ORSZAG. If Congress agrees, sir. 

Senator GREGG. Right, but, I mean, the purpose was to reduce 

the debt, and you are not going to use it to reduce the debt at the 

same time that you are alleging that you are trying to pursue a 

105 

course of small steps, small ideas, of fiscal responsibility. So you 

have got a law on the books which says specifically, reduce the 

debt. You are going to change it so you can spend the money, add 

to the deficit. 

Mr. ORSZAG. I would just say again, one of the lingering problems in the economy today, one of the reasons why we are not getting the job creation that we need is that small businesses lack access to credit. There are a variety of steps the administration favors taking, including expanded activity at the Small Business Administration, including this new proposal which would require Congressional approval to try to address that problem. 

Senator GREGG. Thank you. 

Chairman CONRAD. Senator Murray? 

Senator MURRAY. Thank you, Mr. Chairman, and I look forward 

to that discussion. We have a lot of small businesses in my State 

that are really struggling with capital today, so I look forward to 

that debate as we get into it in Congress, as well. 

Dr. Orszag, I do want to talk a minute about a subject that I 

know you understand is of importance to me and that is the DOE’s 

EM, environmental management, budget. We are in a different 

place from last year when the EM budget had a proposed cut, and 

I do want to thank you for the proposed increase, which is an acknowledgement that the Federal Government does have an obligation to clean up those sites across the nation. I think it is important that the people in the country see that the administration is 

going to put their money where their mouth is when it comes to 

meeting those very important moral and legal obligations of cleanup. 

Having said that, I am sure you expected that I would have some 

specific questions about Hanford, which is in my home State of 

Washington, and I am worried that it appears that DOE is once 

again offsetting base program work with ARRA dollars. That was 

never the intention of those funds and it sets up a huge hurdle to 

overcome when the money is gone. From what I have seen throughout the budget, ARRA is not being used as an offset in very many 

other places. I am also very concerned that there is some significant reduction to groundwater work. 

Now, my time is limited and I have some specific questions. I 

would just like to ask you if we can sit down with some of the folks 

on your team to understand how you made those decisions and 

work our way through it. 

Mr. ORSZAG. Absolutely. I would be delighted to do that. 

Senator MURRAY. OK, great. I also wanted to talk to you about 

the Corps of Engineers budget, because as you may be aware, in 

my home State of Washington, we have a dam—it is called the 

Howard Hanson Dam—that has significant seepage problems that 

is prohibiting the Corps from operating it at a fully authorized 

level of flood protection to a lot of our downstream communities. 

There is currently a study underway to determine the permanent 

fix for that dam in the Corps’ Dam Safety Seepage Stability Correction Program, and I understand the Corps is also conducting studies on about 70 other projects, as well. All of those studies are proposed to be funded for $49 million in the fiscal year 2011 budget, 

and I am concerned that that level of funding won’t be sufficient 

106 

to undertake that many studies. Do you believe that the $49 million will give the Corps their full capability to follow through on 

all those studies that are being required? 

Mr. ORSZAG. We do believe that it would give the Corps adequate 

capability, but we can again, in the discussion that we are going 

to have with you, sit down and walk you through that. 

Senator MURRAY. OK, because it is really important that we get 

those studies done so that we can begin the construction in 2012 

because it will be significant damage if that doesn’t get fixed. 

Also, I wanted to just say that I am really pleased to see the policy changes in the VA budget providing greater access for non-disabled veterans with modest incomes. That is something we have 

been pushing for a long time. It recognizes those veterans and I 

want to thank you for that. 

I do want to ask you about the Veterans’ construction budget for 

both major and minor construction dollars. We know that the number of beneficiaries is going to increase by about 550,000 non-disabled veterans by 2013. That is especially concerning to me because of the increasing demands of both disabled veterans that we 

are seeing coming home and from previous wars, and also the 

unique needs of female veterans, which we are seeing a huge increase of and we need to meet, as well. And, by the way, increasing 

the construction budget for the VA would provide construction jobs, 

and that is, I know, an important goal for the budget, as well. 

So I just wanted to ask you this morning what your rationale for 

reducing the overall construction budget by 15 percent in VA is. 

Mr. ORSZAG. Well, again, although there is a reduction from 

2010, we are still at historically high levels for the construction account and we believe it will allow VA to focus on its highest priorities in terms of its construction. And this is in a context, also, in 

which the VA budget has gone up between 2009 and 2011 by 20 

percent. 

Senator MURRAY. And that is mostly for beneficiaries that—— 

Mr. ORSZAG. It is mostly for beneficiaries. 

Senator MURRAY [continuing]. We have a huge increasing need 

for, so we can’t ignore that. 

Mr. ORSZAG. Yes. 

Senator MURRAY. But I am also specifically worried about the 

construction dollars. These are projects out across the country that 

we have been working on trying to get built to meet the demands 

of the VA. So reducing the construction budget in particular by 15 

percent is a real concern to many of us, and—— 

Mr. ORSZAG. I understand that, and again, I would just again 

emphasize, even with that, it is still at an historically high level, 

and I know that Secretary Shinseki and others would be delighted 

to walk you through in more detail. 

Senator MURRAY. And we will definitely be asking them that. 

Mr. ORSZAG. OK. 

Senator MURRAY. OK. Thank you. 

Chairman CONRAD. Senator Alexander? 

Senator ALEXANDER. Thanks, Mr. Chairman. 

Dr. Orszag, thank you for being here. I have three suggestions 

and a question. 

Mr. ORSZAG. OK. 

107 

Senator ALEXANDER. So my first suggestion is to suggest that 

whoever came up with the idea of leaving the interest payments 

out of the budget, you might gently tell them you ran it up the flag 

pole and it didn’t do very well. 

Mr. ORSZAG. Can I intervene very quickly? No one is talking 

about leaving interest payments out of the budget, and I know the 

Chairman had asked about this before. They are absolutely in the 

budget. The only question is are there intermediate steps to balancing the overall budget where you have other targets that 

are—— 

Senator ALEXANDER. Well, if—— 

Mr. ORSZAG. No one is talking about excluding interest payments 

from the budget. 

Senator ALEXANDER. Well, whatever. In my own view, it ought 

to be first. If I went in to borrow money to buy a house and I told 

the—— 

Mr. ORSZAG. Absolutely. 

Senator ALEXANDER [continuing]. I told the banker, look, in 10 

years, my interest payment is going to be 15 percent of my income, 

but I am going to put that on another account, I don’t think he 

would make the loan. That is one suggestion. 

Suggestion two, Senator Gregg’s suggestion of four pretty big 

steps, I hope you will take those seriously. I do. We have had a difficult time here in the Senate with comprehensive bills. You know, 

comprehensive health care has been very hard. Comprehensive 

economy-wide cap-and-trade has been very hard. Comprehensive 

immigration, even though we had Senators from both parties who 

were working on it, was very hard. We may do better step by step 

to go in the right direction. 

Those were four pretty good steps. Start the freeze right away. 

Stop using TARP as a piggy bank. Don’t spend the stimulus money 

after 2010. Find some money in Medicare to use to strengthen 

Medicare. I can think of others. You probably can, too. So I think 

you would find bipartisan support for steps in that direction and 

I hope that will be taken seriously. 

Third—— 

Mr. ORSZAG. Senator, can I clarify on that—— 

Senator ALEXANDER. Yes. 

Mr. ORSZAG [continuing]. Because, again, on the Medicare reductions, there was some opposition from members of your party. So 

if—— 

Senator ALEXANDER. Because you spent it for a new program. 

Mr. ORSZAG. OK. I just wanted to clarify. 

Senator ALEXANDER. That was the problem. 

Mr. ORSZAG. OK. 

Senator ALEXANDER. That is the problem, and I think that is 

what Senator Gregg said. There was a lot of opposition for that. 

On the Fiscal Commission, you might want to consider following 

a suggestion about bringing that up again, amending it, and finding out what the problems are. I mean, it has 17 Republican votes. 

If the President with 59 or 60 votes can’t pass something that is 

important to him, it is going to be a long 4 years. So that is a good 

start, and maybe there are some adjustments that could be made 

in the statutory commission. 

108 

My own view is that working on that is much more likely to get 

a result than an Executive Order, no matter how well intended 

that might be. President Bush had a very good Executive Order 

creating a panel on tax reform. It never saw the light of day. 

So those are three suggestions. 

Mr. ORSZAG. Thank you. 

Senator ALEXANDER. Now, here is my question. There is a lot of 

talk about inheritance, and members of the administration say, 

rightly, that they inherited a debt, inherited a recession. That is 

exactly right. But the question is what you do with your inheritance. That is what we are talking about here. 

And it seems like that what we are saying here is that, aha, I 

see the problem. The boat is sinking and it has a hole in it, and 

your solution is to put some more holes in it with big increases in 

spending. There is the stimulus bill, the auto bailout, the appropriations bills, the spending for health care, and the spending for 

the jobs bill. And I have a specific one to ask you about, which is 

what you propose to do with Pell Grants. 

We all like Pell Grants. I am a former university president and 

was Education Secretary. I am a big backer of Pell Grants. But in 

your budget, as I read it, we would increase spending for these college scholarships by $14 billion, nearly $15 billion. We are up 

around $34 or $35 billion a year. We would then spend $118 billion 

over 10 years to fund the existing maximum grant award, and then 

we would spend $69 billion over 10 years to increase it according 

to the cost of living plus 1 percent, and then we would take all of 

that money, which is about a half-trillion dollars over 10 years, and 

make it mandatory spending. 

Now, I was invited to a summit with the President at the White 

House last year, which I appreciated very much, where all of the 

concern was about entitlement spending. How can you justify adding a half-trillion new dollars over 10 years in Pell Grant spending 

from the discretionary side to the mandatory automatic pilot side? 

Mr. ORSZAG. Well, Senator, I think the objective there is that, as 

you know, education is one of the underpinnings of not only the 

middle class—living the middle class dream, but also of economic 

growth. And so in addition to our elementary and secondary education reforms, we also want to be promoting college attendance, 

because one of the things that has happened over the past decade 

or so is that increase in average educational attainment among the 

U.S. population, which was a tail—I am sorry, a wind at our backs 

in terms of economic growth, has now tailed off and it is no longer 

rising. So we need to go additional steps and again promote not 

only college attendance, but college completion. That is what this 

proposal is aimed at getting at. 

Senator ALEXANDER. Thank you, Mr. Chairman. My time is up. 

Chairman CONRAD. I thank Senator Alexander. 

Senator Nelson? 

Senator NELSON. Dr. Orszag, thank you for your public service 

and for trying to get your hands around this budget deficit and the 

problems facing the country. 

I want to ask you a friendly question and I want to ask you an 

unfriendly question. 

Mr. ORSZAG. OK. Which one first? 

109 

Senator NELSON. The friendly question, but you are going to 

think it is unfriendly. 

Mr. ORSZAG. OK. 

[Laughter.] 

Mr. ORSZAG. Great. 

[Laughter.] 

Senator NELSON. I am going to zero into a specific part of the 

budget. The President, with regard to the future of manned space 

flight, appointed a Blue Ribbon Panel. Basically, in your budget 

that you have announced, you have accepted the recommendations 

of the Blue Ribbon Panel, which is called the Norman Augustine 

Panel, with the exception of what they said for meaningful human 

space flight for the future of what you had to spend. 

Here is what the Augustine Commission said. Human exploration beyond low-earth orbit is not viable under the fiscal year 

2010 budget guideline. We agree with that. And they went on to 

say, meaningful human exploration is possible by increasing annual expenditures by approximately $3 billion in real purchasing 

power above the 2010 guidance. And, of course, you haven’t done 

that. 

Do you want to explain? And that is my friendly question. 

Mr. ORSZAG. OK. I can’t wait for the unfriendly one. 

[Laughter.] 

Mr. ORSZAG. Senator, as you know, we increase NASA funding by $6 billion over the next 5 years, including an increase between 

2010 and 2011, despite an overall non-security discretionary freeze. 

So NASA is one of the agencies experiencing an increase. 

I would also note, and I will leave the science to my colleagues, 

Dr. Holdren and others, but that Mr. Augustine has issued a statement strongly in support of the direction that is reflected in this 

budget for the future of NASA. 

Senator NELSON. I choose to disagree with that characterization. 

It was a namby-pamby watered-down statement that was oblique, 

at best. 

Alright. So, in essence, you are saying that in the totality of 

spending and so forth that you all couldn’t afford the Augustine’s 

recommendations of $3 billion a year for human space flight. 

Mr. ORSZAG. No, I don’t know that that is the way I would describe it. I think that, again, under the leadership of our scientific 

and NASA leaders, there is a new course being charted for the future of human space flight that involves more advanced technologies, longer-range R&D, investments in technologies that will 

help us leapfrog existing technologies and allow us to have human 

space flight to different parts of the solar system. 

Senator NELSON. All of which are necessary, all of which were in 

the Augustine Commission report and of which you have embraced, 

but you can’t do it on the cheap and that is the big difference. OK. 

Now for my final question. You accepted the Augustine Commission’s report saying that we are going to develop a commercial 

rocket that will be a space taxi that will basically get us to and 

from the International Space Station. You extended the Space Station to 2020. I mean, we have spent $100 billion and are still constructing it. We now need to make it pay off like a national laboratory. All of that is good. 

110 

The problem is that you have put all the eggs in the basket of 

assuming that those commercial rockets are going to work and that 

NASA is not going to have to spend a lot more in making those 

commercial rockets manned, safe for humans. And you have cutoff 

the testing and development of an alternative rocket. There is no 

fail-safe position. If those commercial rockets don’t work, then for 

the foreseeable future of the next decade or so, we are going to be 

relying on the Russians just to get to and from our Space Station. 

Now, that is what I wanted to talk to you privately out there 

about and we were interrupted. I want you to take that for consideration, and that has got to be changed, Dr. Orszag. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator Nelson, and since I am 

the one who interrupted you, I apologize. I know that you were in 

the middle of a discussion with Director Orszag and I needed to 

have a discussion about some other issues, but—— 

Senator NELSON. No, you didn’t interrupt. It was Senator Gregg. 

[Laughter.] 

Chairman CONRAD. We were together. 

Senator GREGG. Well, I apologize. 

Chairman CONRAD. Senator Ensign? 

Senator ENSIGN. Thank you, Mr. Chairman. 

Dr. Orszag, I appreciate all of the work. I know anybody who 

works for the administration puts in incredible hours and I know 

you want to do the right thing for the country, just like the rest 

of us. We may have disagreements on how we go about doing that, 

but certainly I think we all have the same goals in mind. 

One of the things that was said earlier was about the Japanese 

budget during the 1990’s, the lost decade, and I have heard some 

talk about this and it seems to me to be mischaracterized, because 

it was a lost decade. Everybody agrees on that. The question is, did 

they put the brakes on government spending or was it too much 

government spending? 

Well, in 1991, 32 percent of their GDP was government spending. 

By 2000, it was up to 38 percent of GDP. They had six different 

stimulus bills during the 1990’s on government spending, infrastructure-type projects. It did not take them out of that lost decade. 

It wasn’t government spending that did it. 

The reason I think that is an important point to make is simply 

because it is just like the whole debate about the Great Depression. 

Was it government spending that was taking us out of the Great 

Depression? Well, we lasted a long time during the Depression with 

all of the various things that FDR tried to do, and with good intentions. But it wasn’t until World War II that we came out of the 

Great Depression. 

I guess the point is that the debt, the long-term debt, is a threat 

to the actual viability of the United States economy, just like it is 

for a country, or a company, just like it is for a State, just like it 

is for a city or a family. Too much debt makes it impossible to meet 

your obligations. That is what bankruptcy is about. Well, we are 

heading in that direction. I think Senator Gregg and Senator 

Conrad have talked a lot about this. This is not something theoretical. This is becoming real. 

111 

The question that I have for you is, do you have a best guess at 

what point that our debt would be downgraded? How much debt? 

As a percentage of GDP or a total number, do your economists have 

a guess at what point we will be downgraded, or where the Chinese 

will say, yes, we are maybe not going to buy any more of that debt 

or we are at least, if we are going to, we want higher rates on that 

debt? Have you guys kind of projected that out? 

Mr. ORSZAG. Senator, I do not think we are close right now. I 

think it is worth pointing out we are in an exceptional period 

where private borrowing has collapsed. Total borrowing, as a share 

of the economy, which was roughly 30 percent of GDP in 2006, 

plummeted to single digits, if not roughly zero. And, in that context, it is not surprising, if you look at interest rates, the 10-year 

treasury bond is yielding less than 4 percent. 

The issue really is as private borrowing picks up, and you go out 

over time, interest rates will rise, and at that point we have to get 

ahead of the problem, which is why again we are putting forward 

a trillion dollars in deficit reduction, we think a bipartisan process 

is necessary, and so on and so forth. 

So it is not an immediate issue, but it is an issue that needs to 

be addressed before it becomes a crisis. And I agree with the Chairman and, frankly, with Senator Gregg and others that we need to 

get ahead of the problem. 

Senator ENSIGN. In getting ahead of the problem, though, and 

the reason I brought up about the Japanese, is that these Congresses and the Presidents always seem to wait. They seem to say, 

you know we are not going to make the tough decisions today. It 

is easier to put it in a budget that we are going to do deficit reduction in the future, instead of now. 

OK, you had a stimulus bill last year. Argue the merits of the 

stimulus bill back last year. But then during the appropriations 

bills, those were plussed tremendously on top of the stimulus bills, 

and this year as well. Why do we not start last year, go at least 

year’s level and start this spending freeze? 

I am glad that at least you put this spending freeze forward. 

That is at least something. 

By the way, I think you are going to have a lot of trouble with 

your side of the aisle with that spending freeze. I think you are 

going to have a lot of political trouble. I will support you in it, but 

I think that you will have a lot of trouble with folks on your side 

to get that done. 

But, having said that, it would seem to me that we cannot keep 

kicking this ball down the road. We need to address it and address 

it now. 

Mr. ORSZAG. Well, the challenge really is, Senator, from my perspective, that we face those large fiscal deficits, but we also do 

have this massive jobs deficit. 

And I guess I do have a different reading of both history and my 

view of how economies operate, that in a downturn temporary 

measures, including measures like the Recovery Act, help to reduce 

unemployment, help to spur economic activity. In that context, it 

is counterproductive to start reducing the deficit too quickly. I 

think that is the history of 1937, where that was attempted, and 

we threw the economy back into recession. 

112 

Senator ENSIGN. Well, just to finish up here, Mr. Chairman, 

1937, think about how long the recession had gone on. Think about 

how much money had been spent. Right? 

And remember, it was Republicans that also increased, dramatically increased government spending at that point. There were also 

trade laws. 

I hope that the Administration actually will push free trade, so 

we do not go into a protectionist type of a mode and repeat some 

of the mistakes. But also, I think the government spending, every 

time you take a dollar to the government, that is a dollar out of 

the private sector, and we should be putting those dollars and creating private sector jobs instead of government jobs. It is just a difference in philosophy. 

Thank you. 

Chairman CONRAD. Senator Sanders. 

Senator SANDERS. Thank you, Mr. Chairman. 

Let me begin by saying something to my friend, Senator Gregg, 

through the Chairman—through the Chairman—and that is I really do not like being lectured on deficits when you and many members of your party helped cause the situation we are in right now. 

People voted—Senator Gregg, I believe you were one of them— 

for a war in Iraq which some people will think will cost two or 

three trillion dollars, but you forgot to pay for that war. 

You and other people voted for tax breaks for the wealthiest 1 

percent, cost $600 billion. Forgot to pay for that. 

You voted for a prescription drug Medicare bill, which will cost 

$400 billion, that does not negotiate prices with the pharmaceutical 

industry. Forgot to ask how that was going to be paid for. 

You voted for a bailout, and I believe you want to repeal the inheritance tax, which will cost a trillion dollars over a 10-year period, benefiting the top three-tenths of 1 percent. 

I voted against all of those things. So, please, please spare the 

lectures on deficit reduction. 

Now—— 

Senator GREGG. May I say through the Chair that this Senator’s 

factual position is inaccurate? 

Senator SANDERS. You did not vote for every one of those things? 

Senator GREGG. I did not vote for the drug benefit, and I have 

not proposed eliminating the inheritance tax. 

Senator SANDERS. All right, we have you on Google. All right. 

But you did vote for the wars. 

Senator GREGG. Yes, I believe we should protect ourselves as a 

Nation first—— 

Senator SANDERS. But without worrying about how you were 

going to pay for those. 

Senator GREGG [continuing]. To defend the Country. 

Senator SANDERS. All right. 

Dr. Orszag, now I am going to be rough on you. I did not want 

to be nonpartisan about this. 

[Laughter.] 

Senator SANDERS. I applaud the President for keeping in his 

budget a proposal to let all of the Bush tax breaks for the wealthiest 2 percent expire at the end of this year. My question is why 

have you not moved to do that this year? 

113 

We have a situation where the top 1 percent earns more income 

than the bottom 50 percent. According to the Citizens for Tax Justice, if we repealed all of the 2001 and 2003 tax breaks that went 

to the wealthiest 1 percent alone, we would save over $100 billion 

this year. Why not? 

Mr. ORSZAG. Senator, it was our view that they were scheduled 

to expire at the end of the year and that that was just the best way 

forward. 

Senator SANDERS. Really? We know that they were set to expire. 

But I am asking you, when we have the most unequal distribution 

of income in the entire industrialized world, why did you not ask 

the top 1 percent to start paying their fair share this year? 

Mr. ORSZAG. There are a variety of ways of answering that question. I think one of them is that we were shifting to deficit reduction gradually over time, including in 2011 and 2012, and that 

2010 was not seen as the year to be reducing the deficit, given the 

depth of the economic downturn. 

Senator SANDERS. Well, I surely do not agree with that. 

And, by the way, let me say I think you did a lot of good things 

in this budget, which I applaud, and I think absolutely that in the 

midst of the worst economic recession since the Great Depression 

we have got to do everything that we can to put people to work and 

to make taxpayers out of them and to fight our way out of this horrendous economic situation. 

But let me ask you this in terms of the budget. You chose to exempt the Pentagon from the budget. I could quote—— 

Mr. ORSZAG. Well, from the freeze, yes. 

Senator SANDERS. From the freeze, right. Right. I am sorry. 

There is a lot of belief that a huge Pentagon budget which has 

significantly increased in recent years, that a lot of that money is 

not necessarily directed toward fighting the fights we are in right 

now against international terrorism. But, among other things, 

there are weapons systems designed to fight the cold war, that 

there is an enormous amount of waste. 

I mean people like Don Rumsfeld talked about trillions of dollars 

not being able to be accounted for. 

Why was the Pentagon exempted from the freeze? 

Mr. ORSZAG. Well, first let me say that there were constraints 

placed on the Pentagon budget. It was exempted from the freeze 

because we are at war and we think during a time of war our first 

priority is to protect our soldiers. 

But let me just talk for a second about the steps that Secretary 

Gates is taking. At this time last year, we proposed canceling the 

F–22 fighter jet. Most people thought we would not succeed. We 

did. Cancelled the Presidential helicopter. 

He has come back this year and made it very clear, no more C– 

17s—— 

Senator SANDERS. I apologize. I just have a little bit more time, 

and so I want to ask you a third question. And I do understand 

that, but I think that is a whole area where there is potential savings that we can and should be looking. 

Mr. ORSZAG. We agree. 

Senator SANDERS. The last thing is the President, I think appropriately, understands that many senior citizens in this Country are 

114 

hurting. There is not going to be a Social Security COLA this year. 

He supported the concept of doing what we did in the stimulus 

package, providing $250 per senior and disabled veteran, which I 

think make a lot of sense. It is in your budget. 

Mr. ORSZAG. It is. 

Senator SANDERS. But is that something you are going to fight 

for? 

Mr. ORSZAG. It is in our budget, and we are going to fight for everything in our budget. 

Senator SANDERS. OK. Thank you. 

Chairman CONRAD. Thank you. 

Senator WARNER. 

Senator WARNER. Thank you, Mr. Chairman. 

Let me first associate myself with both the comments that you 

and the Ranking Member made about the need to break the logjam 

on the deficit reduction. I was a strong supporter of the statutory 

approach on deficit reduction. I wish the Administration had actually come onboard earlier for that approach. I was appreciative of 

their support at the end. 

I am a new Senator, but it seemed to me that when folks sign 

up to be co-sponsors of a piece of legislation, the expectations are 

they are going to go ahead and vote in favor of that legislation, particularly when they have been on record time and again supporting 

that we have to break out of the normal process and do this in a 

bipartisan way. 

I had a family emergency on the day of that vote and flew back. 

It sure did seem like the process was a little bit cooked when a lot 

of my colleagues on the other side who had been longtime supporters of this, had the chance to get that critically important piece 

of legislation passed through the Senate, that when the time to put 

their names down as yeas, that they were not there. 

I would echo what the Ranking Member said, we ought to bring 

it back up, and we ought to. I will continue to work with my colleagues on this side of the aisle. 

A lot of new members were very supportive of that effort. I would 

love to hear again from my friends on the other side of the aisle, 

those who had been on record as supportive of that proposal, over 

time, why, when we were this close to getting it done, they chose 

that suddenly now is not the right time when clearly all of the data 

support that the current approach is unsustainable. The current 

process has not proven the ability to move beyond small ball. 

And I again would urge the sponsors of the legislation to continue to bring it back up, and we ought to try to get more folks on 

this side. But, gosh, it sure would be great to have folks who had 

been long-term supporters, who put their name on as co-sponsors, 

to step up and actually adhere to that and be part of the solution. 

I also want to make one other comment. I do not fully agree with 

my colleague, the Senator from Vermont, on the defense budget. I 

do think from the freeze, because the Nation is at war, we need to 

have more flexibility there. 

But I would agree that without putting some pressure on the 

Pentagon budget you end up not having any notion of constraint. 

For example, an issue that I know Senator Nelson would greatly 

disagree with me on this, but there is a debate about home-porting 

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of aircraft carriers. Norfolk does an incredibly good job of that at 

this point. Your budget puts forward spending. You estimate $600 

million. I think more realistic estimates are north of a billion dollars on adding this additional facility in Florida when the Navy has 

a $36 billion backlog in terms of already identified needs. 

I am hoping that as we see more of this budget laid out, that the 

Navy or the Administration will outline what is being bumped from 

that list of existing priorities to add a billion dollars of additional 

spending that I do not think, in terms of need or defense policy, 

clearly had not been identified as a need until the waning days of 

the last administration—how suddenly this is going to trump the 

$36 billion of unmet needs the Navy has already identified. 

Let me get to my question. I appreciate very much the task force 

that the Chairman and the Ranking Member have given me, and 

Senator Whitehouse and others on the other side, to look at performance goals. Jess Zients, your chief performance officer, has 

said performance goals need to be part of this budget. I am not 

sure they have been fully laid out and there was supposed to be 

input from the Congress and the public. I would like to hear 

whether there was that input from the Congress and the public. 

But one of the things that is terribly important, and actually 

quoting President Reagan, one of the things hardest to kill is a government program. You have indicated, and the President has indicated in the past that he was going to go through line by line and 

find those programs that could be eliminated. You suggested 121 

programs last year that would have saved $17 billion. We actually 

ended up only approving $6.8 billion of those. 

With this year and the out-year deficit being as bad as it is, I 

was a little disappointed that in this year’s budget you have only, 

in aggregate, indicated program eliminate that would account for 

$23 billion in savings in 2011, which is about a half a percent of 

our overall budget. Why not identify more programs and would you 

be willing to work with us in seeing if we could identify more 

where we could actually eliminate some of these programs going 

forward? 

Mr. ORSZAG. Absolutely. We are open for ideas. 

And I note with regard to the high priority performance goals, 

they actually are embodied in the documents that we sent out. So, 

in the Analytical Perspectives chapter volume, starting on Page 75, 

we go through it. 

Senator WARNER. Did the individual agencies go out and solicit 

from the Congress and the public the way they were supposed to? 

Mr. ORSZAG. They varied, and the one of the reasons that we 

were so interested in publishing them is to solicit that kind of feedback and commentary now, to the extent that additional commentary is always welcome. 

Senator WARNER. Thank you, Mr. Chairman. 

Chairman CONRAD. Senator Whitehouse. 

Senator WHITEHOUSE. Thank you, Chairman. 

And welcome back, Director Orszag. It is good to be with you. I 

think that in this Committee you are likely to run into disagreement on a whole variety of subjects from various sides, but I do not 

think it is appropriate to question your integrity, and I just want 

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you to know that I at least have full confidence in that, even in 

areas where we may disagree. 

An observation, a recommendation and a question. The observation is that, as Senator Alexander was kind and accurate enough 

to admit, the problems of the deficit that you inherited were considerable. He said that is exactly right, and it sure is exactly right. 

I just wanted to add as an observation that at the time the Bush 

Administration came into power the trajectory that CBO had anticipated for the Federal Government was into absolute surplus. 

And when the Bush Administration is criticized for the deficits that 

it ran up, what is usually left out because it starts at a zero baseline is the surpluses that they were in line for, had they really kept 

the Clinton policies going. 

Our calculation, for what it is worth, is that the net effect of the 

difference between the Bush policies and where CBO, at the day 

that Bush took office, projected the economy and the deficit to go 

is nearly $9 trillion, which is an absolutly astonishing amount of 

fair weather debt at a time when none of the Keynesian steps for 

supporting an economy in steep contraction through Federal spending made any sense. That is my observation. 

My recommendation is this: Back, I guess quite a while ago, 

James Carville observed that it is the economy, stupid. 

When it comes to the deficit, it strikes me that it is health care. 

To the extent that it is location, location and location in real estate, 

it is health care, health care and health care on the deficit. I see 

you nodding, and I know that you agree with that. 

The reason that I did not support the statutory fiscal commission 

is that it looked like it came at the health care question too much 

with fiscal knives and not enough with comprehensive delivery system reform. As you know, I am a very keen advocate of delivery 

system reform. 

I think the goals and the extent of the target are very enormous. 

I mean really astonishing. If there is a trillion dollars worth of 

waste every year in our health care system, or $850 billion—or, as 

the President’s Council of Economic Advisors guesstimated, north 

of $700 billion—whatever it is, it is a very big number, and there 

is a great deal of very good stuff in the health care reform legislation that targets that. 

CBO was not able to score it because it takes a lot of management and a lot of experimentation and a lot of executive effort to 

deploy those tools, but they are there. 

In the event that the Republican blockade of significant health 

care reform persists, and now at 41 votes they have the ability to 

make it absolute, I would urge that you investigate—and I am 

happy to participate in any way you think I would be useful—how 

much of that stuff you can get done through executive order. Really 

push it because the clock is ticking on this stuff. If we do not get 

started now with these programs, in the out-years we will have lost 

critical time, and that critical time turns into critical dollars. 

I think anybody who is serious about the deficit has to be serious 

about moving the delivery system reform part of the health care 

agenda, and you simply cannot be serious about the deficit with the 

one hand and continue to blockade that section of the legislation 

on the other. 

117 

The question is this: Looking out long term at the economy, if we 

continue to subsidize carbon pollution and continue to lag behind 

the emerging clean energy technologies in international competition, particularly with the Chinese but also with many of the European Union companies, what long-term effects do you anticipate on 

our economy if we are slow to make that transition from subsidizing carbon pollution to adequately and competitively supporting clean energy emerging technologies? 

Mr. ORSZAG. There are two effects. One is the effects of failing 

to address climate change and the effects that has on the economy, 

and the second effect is as the rest of the world moves to a clean 

energy future we would be losing opportunities to be the world 

leader in a crucially important market. That is why we, in this 

budget, propose eliminating fossil fuel subsidies, and it is why we 

have more than $6 billion in funding for clean energy research and 

development related activities, so that we can leapfrog and become 

the world leader in a green energy future. 

Senator WHITEHOUSE. I appreciate that. 

Thank you, Chairman. 

Chairman CONRAD. Thank you, Senator Whitehouse. 

Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chair. 

And thank you for your presentation, in particular, the emphasis 

on creating jobs and helping the middle class. I want to see us be 

as bold and aggressive in assisting working American families as 

we have been in assisting major financial institutions, and in that 

regard I did want to ask you about housing because housing is a 

key component of the success of our economy and the success of our 

families. 

Just a quick review here, in the budget: Discretionary spending would be down $2 billion. Mandatory spending would be down $11 

billion. Guaranteed loan commitments would be down $170 billion. 

Direct loan disbursements would be down $145 billion. USDA’s program for multi-family activity in rural areas would be zeroed out. 

And then we have the HAMP program that very little money has 

actually been disbursed on because of the great difficulty in families getting through the trial period and into permanent programs. 

Taken as a whole, I am very concerned that this is not the bold, 

aggressive outreach, in a very important part of our economy that 

would be equivalent to the bold, aggressive outreach there was to 

save our major financial institutions. So I just would like you to 

spend a couple minutes on that if you could. 

Mr. ORSZAG. Sure. There actually is a significant amount of 

housing-related activity in this budget, including an important 

measure to address homelessness through the HEARTH Act, significant expansions in the Department of Housing and Urban Development’s activities surrounding assistance for people including 

tenet-based assistance, project-based assistance and related activities, some increase in programs that are dedicated to assisting the 

elderly with their housing. 

And then more broadly, and this returns to some of the earlier 

discussion, but as you know the Administration’s efforts, working 

with the Congress and others, to stabilize financial markets has 

helped to stabilize mortgage rates and generated more than a thouVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00123 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
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sand dollars savings for the average borrower in terms of their 

mortgages. That is a crucial step. 

Now with regard to the HAMP program which you mentioned, 

there are in excess of 800,000 families that have experienced a 

modification through that program. The problem really is in taking, 

expanding that number and then taking the temporary modifications and making them permanent. Under Secretary Geithner’s 

leadership and working with Secretary Donovan and others, there 

is very active effort to try to streamline that program, so we can 

get the temporary modifications not only expanded but also make 

them permanent. 

Senator MERKLEY. OK. Let me just say I am not satisfied with 

your response. The housing for the elderly is being dropped from 

$825 billion in 2010 to $274 billion. While some of the other increases you mentioned are here, as a total, we still have a $2 billion drop in the discretionary spending. So I think picking out just 

a few that are plussed up presents a misleading picture of our 

overall housing effort. 

Also, the monetary policies you referred to that decrease the cost 

of the home mortgage for families, this is very true, but it is also 

being phased out of the next 3 months. So that change would also 

contribute to a change in the picture as we approach this. 

So I will not spend more time on that, but I just wanted to raise 

it because I think it is an important component, and it looks like 

it falls short. 

I wanted to turn from that to interest, and on Page 149 of the 

budget there is a presentation of the interest, net interest in 2009, 

looking at $187 billion. By 2020, it rises to 912. 

So I thank you for having interest in here, but I also wonder 

since many of us are very concerned. It has been mentioned by 

some of my colleagues that our assumptions about interest rates 

are critical because not only is our debt increasing, but interest 

rates are at a historic low, and there is certainly the possibility of 

those interest rates increasing dramatically which would further 

amplify what is now about a fourfold increase in the cost of interest 

that is in this budget over a 10-year period. 

So maybe you could just mention the interest assumptions—— 

Mr. ORSZAG. Sure. 

Senator MERKLEY [continuing]. And what higher assumptions, 

the impact higher assumptions might have and the risk that poses 

to us. 

Mr. ORSZAG. Sure. First on interest rates, if you turn to Table 

S13 which is on Page 177 of that same document, you can see the 

path of interest rates on, for example, the 10-year note which 

might be the most illuminating, rising gradually over time. And 

that is mostly because again, as I had mentioned earlier, as private 

borrowing picks up and there are alternative investment opportunities, one should expect investors to diversify their portfolios to 

some degree, and that puts upward pressure on treasury yields. 

Senator MERKLEY. Thank you for pointing me to those assumptions. I appreciate that, and I hope that the 5.3 percent assumption 

holds because otherwise we are in a much worse condition. 

I am out of time, so a last sentence, and that is I am wholeheartedly behind taking funds and moving them to support our 

119 

community banks. That is a proposal that I have been advocating 

for. But I would recommend that we take that $30 billion out of 

the $200 billion currently unspent rather than the funds that are 

being returned. It seems to me that that would address some of the 

issues that are being raised right now. 

But I think we could all—we ought to all be able to get behind 

the notion that if our community banks are not recapitalized and 

they cannot lend to small businesses, our small businesses are not 

going to thrive, our communities are not going to thrive. It is going 

to be a very long recession. 

Thank you. 

Mr. ORSZAG. If the Chairman would allow me just 30 seconds, 

just to clarify one thing because I did not have a chance to fill in 

the detail, with regard to housing and the Department of Housing 

and Urban Development’s budget, the decline that you see is mostly because there is an offsetting receipt. You can see it in the Federal Housing Administration line in 2011, and that is the primary 

explanation for the apparent decline in the HUD budget. But we 

could followup in more detail. 

Senator MERKLEY. That would be terrific. Thank you. 

Chairman CONRAD. I thank the Senator. I thank all Senators 

who have participated today. I especially thank the Director for 

being here. 

Just before you leave, I want to kind of recap. Again, as I look 

at what happened, my own belief is that the United States had a 

series of policies on both the monetary side and the fiscal side that 

led us to the brink of collapse. 

I believe there was an overly loose monetary policy by the Federal Reserve after 9/11. It was understandable for some period of 

time after 9/11, but it continued too long. 

Simultaneously, there was an overly loose fiscal policy under the 

control of Congress and the Administration, and this goes to the 

previous administration. That was on their watch—massive deficits, a doubling of the debt, a dramatic increase in foreign borrowing. 

And it is the combination of an overly loose monetary policy and 

overly loose fiscal policy, all within a context of deregulation, that 

created the seed bed for bubbles to form. And bubbles did form. 

And it was not just a housing bubble, although we certainly saw 

that. There was also an energy bubble, a commodity bubble. I distinguish an energy bubble from a commodity bubble because, for 

example, wheat went up tp almost $20 a bushel. 

Bubbles ultimately burst, and when they do there is enormous 

economic wreckage. It was critically important for the administration, the previous administration at its end and this administration 

at its beginning, coupled with the Federal Reserve, to provide liquidity because there was not economic activity on the private sector side. Had government not stepped forward, there would have 

been an absolute collapse. 

On the question of what history teaches us, with Japan, I can 

only cite top Japanese economists who have advised us: Do not try 

to cut your deficit too quickly. 

Now this is coming from me. I am a deficit hawk. I am very concerned about long-term debt. But I also recognize if government 

120 

does not step into the breach when the private sector, because their 

balance sheets are impaired and because they do not have demand, 

pulls back—if the government does not step forward, there is no 

one to keep the economy from going right off the cliff. So, yes, these 

policies added to deficits and debt in the short term. They were exactly the right thing to do. 

The argument that I have is the longer term—the longer term— 

because my concern is when I look beyond 5 years I see deficits of 

a trillion dollars a year as far as the eye can see, and I see debt 

continuing to grow as a share of the gross domestic product in a 

way that is clearly unsustainable. Part of it fueled by demographic 

changes. Part of it fueled by economic changes. Part of it fueled by 

structural changes in the economy. 

If we do not face up to it, I believe that will fundamentally 

threaten the economic security of the United States. I believe that 

will create another seed bed, a seed bed that could lead to a run 

on the dollar, which would then require very precipitous action. 

The former Secretary of the Treasury, Robert Rubin, who I think 

has, from all observers, gotten very high grades for the economic 

policy that he pursued as Secretary of the Treasury under the Clinton years, has called me several times in the last years, warning 

about his concern about the long-term growth of debt and what it 

could mean for interest rates. 

Senator Merkley, I am very pleased that you raised that issue 

because these forecasts tend to flow from what is happening now, 

and typically forecasters miss it at the turn. We saw that when 

things were going down. We have seen it repeatedly when things 

were going up. The forecasters miss it on the low side, they miss 

it on the high side because they are forecasting from what is. 

Unfortunately, none of us can predict with clarity what will be. 

What we do know is that we are running outsized risks. That is 

the point former Secretary Rubin has made to me repeatedly. It is 

what I personally believe. 

I believe we are running on the long term, outsized risks, and we 

have got to right-size this budget. 

And again, I give the Administration high marks on what they 

have done to respond to this crisis. I think history will show they 

helped avert a global financial collapse. 

Anybody that was in that room, and this was with the previous 

Secretary of the Treasury under the previous administration, as 

the news came in on the weekend we were negotiating the first 

TARP, it was truly perilous times. I do not think the Country has 

ever really been made aware to how close we came to not just a 

financial collapse here, but a global financial collapse. 

I see that Senator Wyden has arrived. 

Senator WYDEN. Thank you very much, Mr. Chairman. I want to 

welcome the Director as well, and I want to express my appreciation, first of all, to the Director for the support in the budget for 

management and also restoration of forestry. This is going to be 

particularly important because in eastern Oregon, as the Director 

knows since we have talked about this, we have been able to 

achieve a real breakthrough in the timber wars. We have been able 

to get the timber industry and the environmental community together on a proposal that we believe will get saw logs to the mills, 

121 

help us generate biomass, a clean source of energy, and also protect 

old growth. So I am very appreciative of the Director and the folks 

in your office for working closely with us on this because I think 

that particular account for management and restoration work will 

be a huge plus. 

Just a couple of questions, if I might. In the Build America bonds 

area, which, as the Director knows, I authored and I have championed now for a number of years, we have been able to achieve 

a remarkable success. What we thought might generate about $5 

billion worth of bonds, since the program really did not start until 

late in the spring, ended up at the end of the year with just under 

$64 billion worth of bonds being issued, and it is projected to rise 

to about $130 billion this year. 

I am very pleased that the administration looks to make this program permanent. I think that is a real plus. I have just one question. There appears to be a proposal to modify it to allow for operating expenses to be included and also refinance, and, Mr. Director, 

I would like to continue to work with you in that area because 

what we envisioned when I and Senator Thune and Senator Talent 

and others worked on this is that you got the most on the job creation side with new efforts. Would it be possible to continue this 

dialog with you? 

Mr. ORSZAG. Absolutely. Yes. 

Senator WYDEN. That would be great. One last question, and I 

gather a couple of my colleagues touched on the issue of military 

spending. I just want to read you a quote that was in an important 

article by George Wilson, who I think consistently is one of the 

most knowledgeable people who writes on this subject. He said a 

couple of days ago, ‘‘Two-thirds of our casualties in the Iraq war 

were inflicted by hidden bombs that the bad guys set off by cell 

phones or other simple devices available at Radio Shack.’’ 

So what has become clear to me is that to best protect the country in a dangerous time when we deal with terrorist threats is to 

try to address a lot of those kinds of concerns rather than some of 

these big projects of dubious value that seem to always manage to 

make it through the Congress because they have got support in a 

variety of congressional districts. 

Tell me, if you would, particularly since the President said that 

the overall budget would not be cut, how can you, as you all go forward with budget decisions, advance the kind of thinking that I 

think George Wilson lays out correctly in this article and help us 

to steer clear of these projects that to me, when you hold them up 

to the light, get you a lot more spending and not the value we need 

to protect our troops in a dangerous time? 

Mr. ORSZAG. Well, Secretary Gates in particular is very focused 

on reforming the procurement part of the budget, the defense budget, which is where those big projects or big weapons systems are. 

You will hear more from him about this year canceling or terminating things like additional purchases of C–17 cargo aircraft, 

which are not seen as being militarily necessary; canceling the alternative engine for the F–35; eliminating the CGX ship for the 

Navy, and so on and so forth. There is a whole series of terminations and reductions that the Defense Department has put forward, and what he is trying to do is reform the procurement budgVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00127 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
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et, in particular, to avoid those overbudget and militarily unnecessary projects that seem to get—or weapons systems that seem to 

get funded even though the military does not ask for them. 

Senator WYDEN. Mr. Director, I will only say I am anxious to 

work with you and Secretary Gates in that area, because that 

image of the bad guys in effect, whether it is Radio Shack or somewhere else, going on out there. I sit on the Intelligence Committee, 

obviously cannot get into anything classified, but I think what that 

article that I quoted lays out is one of our biggest challenges, and 

it is not going to be achieved with these huge weapons systems 

that end up costing us billions but a much more focused kind of 

attack on the kind of example that I cite, and I am anxious to work 

with you and the Secretary on it, and I appreciate the chance to 

continue this discussion in the days ahead. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator Wyden, and thank you 

for your leadership on this Committee. 

Very few Senators dig into as many topics and as in-depth a way 

as Senator Wyden. Whether it is tax reform or health care reform, 

Senator Wyden listens to his colleagues and then really does his 

homework. And it is very important to this Committee, and I appreciate it very much. 

Dr. Orszag, thank you again for your willingness to serve. It is 

not always easy. There are a lot of strong emotions, as we could 

see here today, a deep concern about the direction that we are 

headed long term, and I know you share that concern, and your 

record is very clear on that subject. 

I just want to make clear that this Committee fully appreciates 

not only your professionalism but your integrity, and we are very 

fortunate to have people of your character and your quality in public service. Thank you, and we look forward to working with you 

in the days ahead. 

Mr. ORSZAG. Thank you, Mr. Chairman. 

Chairman CONRAD. The Committee will stand in adjournment. 

[Whereupon, at 11:42 a.m., the Committee was adjourned.] 

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QUESTIONS FOR THE RECORD 


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(151) 

THE PRESIDENT’S FISCAL YEAR 2011 BUDGET 

AND REVENUE PROPOSALS 

THURSDAY, FEBRUARY 4, 2010 

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The Committee met, pursuant to notice, at 10 a.m., in room SD– 

608, Dirksen Senate Office Building, Hon. Kent Conrad, Chairman 

of the Committee, presiding. 

Present: Senators Conrad, Murray, Cardin, Sanders, Whitehouse, 

Gregg, Sessions, Bunning, Crapo, and Alexander. 

Staff present: Mary Ann Naylor, Majority Staff Director; and 

Cheri Reidy, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. 

I want to welcome Secretary Geithner back to the Budget Committee. We are here today to review the administration’s budget 

and revenue proposals. 

When President Obama took office last year, we were in the 

midst of the worst recession since the Great Depression. The President and the administration, moved quickly to avert an even sharper economic decline, and his policies, I believe, are working. 

I also credit the previous administration for the steps that they 

took at the end of their administration to begin dealing with what 

I believe could have been a global financial collapse. 

152 

The actions taken by the Federal Government over the last year 

I believe have clearly helped us back from the brink. We have seen 

steady improvement in the jobs picture. In January of last year, 

the economy was losing more than 700,000 private sector jobs a 

month. By the end of the year, the economy was losing 64,000 jobs 

a month—a dramatic improvement. Now, clearly, that is cold comfort to those who are still struggling to find work, and we need to 

focus on assisting the private sector create jobs like a laser. I think 

most of us understand that job creation is primarily a function of 

the private sector, but we can do things to provide incentives to 

them to help them in that effort. 

I want to take a moment to outline some of the job creation proposals that are in the President’s budget. These are temporary recovery measures that he proposes. 


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No. 1, $100 billion to be devoted to new jobs initiatives, including 

$33 billion for a new tax cut for small businesses to encourage hiring and better wages. And, by the way, late last year I asked the 

Congressional Budget Office to evaluate options and alternatives. 

This option, a tax credit for hiring by business, was one of the two 

top contenders in terms of the Congressional Budget Office’s assessment of what would be most effective. So I am pleased that the 

President has included it in his package. 

Two, $67 billion for investments in infrastructure and clean energy, as well as other tax relief. 

He proposes extending Making Work Pay, costing $61 billion. 

He proposes extending bonus depreciation, small business expensing, and tax credits for clean manufacturing, clean energy 

manufacturing, costing $6 billion. By the way, again, CBO, in rating what would be most effective, said for 2010 the jobs credit 

would be the most effective, biggest bang for the buck. They also 

gave a very solid, positive rating to small business expensing, Section 179. 

The President also proposes extending unemployment insurance, 

COBRA assistance, assistance to States in aid for needy children 

and families, costing $87 billion. Most of that, of course, is the unemployment insurance extension. Again, the Congressional Budget 

Office in their assessment said that would be one of the two most 

effective measures to be taken in terms of assisting with jobs in the 

short term. 

And he proposes providing $250 payments to retired and disabled 

Americans costing $12 billion. That is in light of the formula not 

providing any increase to those who are Social Security beneficiaries. 


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In total, those measures cost $266 billion over 10 years, with 92 

percent to be spent in 2010 and 2011. 

The President’s budget also includes a number of other measures 

to assist small businesses, and they include assisting in increasing 

small business lending by community banks; providing for additional small business loan guarantees; eliminating capital gains 

taxes on long-term investments for many small businesses; and 

providing funding to promote small business exports. 

Let me just say in terms of my own reading of things from my 

constituency, credit to small business is critical. If there is one 

place that there is a hole in what has been done, it is in getting 

credit flowing to small businesses. I hear it repeatedly. I have had 

two of the most successful entrepreneurs in my State who are both 

close personal friends call me, and they are very well-to-do. They 

can finance their own deals. But they said, ‘‘If there is one thing 

that is clear, it is that the flow of credit to small business is a very 

serious problem.’’ And one of them is a banker; one of them is involved not only in banking but a series of other enterprises who 

has said to me that at his own bank, because of regulators saying 

to them, ‘‘You have got to rebuild your balance sheet,’’ even though 

their balance sheet was never very impaired because they never 

got into the risky loan business, they are still finding it difficult to 

extend credit even to worthy borrowers. So I think this is an issue 

we do need to focus on. 


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I also want to highlight that the President’s budget includes a 

net tax cut of $1.9 trillion over 10 years. Here are some of the key 

revenue provisions: in terms of a tax cut, the budget includes $3.1 

trillion to extend the 2001 and 2003 tax cuts for those making 

under $250,000; continue the estate tax exemptions at the 2009 

level; and provide alternative minimum tax relief to prevent a tax 

increase for those folks who would otherwise face increases this 

year; $293 billion for other tax relief for families and businesses; 

and $83 billion for the revenue portion of the temporary recovery 

measures that I noted, including the new job creation tax credit 

and extending Make Work Pay and bonus depreciation. 


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In terms of revenue raisers, it includes $743 billion as a place 

holder for health care reform revenue provisions, $291 billion from 

the President’s proposal to limit itemized deductions, $122 billion 

from international tax reforms, $90 billion from a financial crisis 

responsibility fee, and $309 billion in other loophole closures and 

reforms. Again, the net is a tax cut of $1.9 trillion. 

Let me put up another slide. This chart depicts the projected deficit under the President’s budget over 10 years. It shows the deficit 

coming down from a high of $1.56 trillion, reaching a low of $706 

billion in 2014, and then slowly climbing back up to $1 trillion in 

2020. It is that second period that I raised the day before yesterday 

in a hearing with Dr. Orszag and indicated personally that while 

I strongly support the President’s proposals in the short term, I am 

very concerned about them for the longer term. 


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The next chart that I want to show depicts gross Federal debt. 

It shows the debt more than doubled under the previous administration to $11.9 trillion. Under the President’s budget, gross debt 

would continue climbing to $25.8 trillion by 2020 absent our taking 

additional action. 


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The long-term debt outlook is even more dire. According to CBO’s 

long-term budget outlook, over the next 50 years with rising health 

care costs, the retirement of the baby-boom generation, and the 

permanent extension of all the 2001 and 2003 tax cuts, the Federal 

debt could climb to more than 400 percent of the gross domestic 

product. 

I believe we need a two-pronged strategy. We need one in the 

short term to prevent going back into recession. We also need a 

longer-term pivot to deal with our long-term debt. That is why Senator Gregg and I proposed a statutory commission. I was delighted 

that we received 53 votes, but it required 60 votes. Fifty-three is 

not 60. And so now we are left with the alternative of perhaps offering our colleagues another chance at a statutory commission, 

which I would fully support. The President has said if there is not 

a statutory commission that he is prepared to create one by Executive order. That is what the Greenspan Commission was that dealt 

successfully with Social Security in the 1980’s. That was an Executive order commission. And the Vice President has provided a letter 

to me outlining the commitments from the Majority Leader and the 

Speaker of the House assuring us that there would be a vote on 

the recommendations of the commission if it had to be established 

by Executive order. 

With that, I want to close by again welcoming Secretary 

Geithner to this panel, back to this Budget Committee, and we will 

turn to Senator Gregg for his statement, and then we will go to 

Secretary Geithner and then open it up for 5-minute rounds. And 

if we need a second round, we will do that. 

Senator GREGG. 


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OPENING STATEMENT OF SENATOR GREGG 

Senator GREGG. Thank you, Mr. Chairman, and thank you, Secretary Geithner, for being here today. 

Let me identify myself with the Chairman’s remarks relative to 

the two-pronged approach. I agree 100 percent. The only problem 

is that the second prong does not exist in this budget. 

The budget as it comes to us, as I have said on numerous occasions, and which is obvious, I think, to anybody who takes even a 

cursory look at it, does nothing about the long-term fiscal insolvency of our Nation; the fact that we are on an unsustainable 

course; and the fact that $11 trillion of new debt will be put into 

the system over the 10 years of this budget; and that the deficits 

never fall to a level that is sustainable and, in fact, expand rather 

dramatically, and continue to expand even at the end of 10 years, 

so they are growing. 

Ironically, also, the unemployment levels under this budget are— 

the presumption is that they never, during the President’s term, 

get back to the unemployment level that existed in 2008. They 

never get back to below 7 percent. They are at the end of 4 years 

still around 8 percent, and I do not think that is a good unemployment level. And I think a lot of that is a function of the fact that 

the economy cannot be expected to recover robustly if we are putting on the economy a debt service and a debt burden which basically soaks up the capital of the Nation and uses it for the Government as versus for the productive side of the ledger. I would argue 

that that is exactly what we are doing with this budget, because 

we are not putting in place the difficult decisions that need to be 

done in order to accomplish fiscal responsibility and to pass to our 

kids a better Nation, a more prosperous Nation. 

Since we have the Secretary of the Treasury here, I think we 

should focus a little bit on the revenue side in this bill. There is 

$2 trillion of additional revenue in this bill, and just to list a few 

of them—obviously these are philosophical decisions that the administration has made, which I tend to disagree with, but they 

raise the marginal rate from 35 to 39.6 percent; they limit tax deductions for itemized deductions to 28 percent; they reinstate the 

‘‘Pease limitation’’, a phase-out, which is basically another hit on 

people who itemize; they raise the capital gains rate; they raise the 

dividend rate; they assume significant tax increases as a result, or 

fee increases, however you want to describe them, as a result of 

health care reform; there are new taxes on financial institutions 

which, of course, have been in the public domain for a while and 

discussed; and they change a number of tax events, including LIFO 

and IRS programs and reductions in tax gap, fossil fuel taxes—all 

of which add up to $2 trillion of new revenue. 

So it is not as if there is not a fairly significant push toward generating revenues. The problem is that at the same time that they 

are generating revenues—can you put that chart up? 

160 

The problem is that at the same time that this bill is generating 

significant revenues as a result of tax increases and taking revenues well above their historic norm—revenues have historically 

been about 18.2 percent of GDP since 1940, and under this budget 

it is presumed that they will get up around 20 percent of GDP. At 

the same time, the explosion in spending is allowed to continue, 

and basically the size of the Government grows exponentially, and 

that is where the problem is, as these lines show—the red line 

being the rate of growth of the Government, the blue line being the 

rate of growth of taxes. 

Obviously, in the short term, tax revenues have dropped precipitously. Spending has gone up precipitously because of the recession. But it is the out-years, the second step, which the Chairman 

was talking about, where there is no serious effort to try to get 

those lines to converge, because if you do not get them to converge, 

you end up with all this deficit and debt, which is going to drive 

our Nation into a point of insolvency. 

And so I guess I go back to my basic theme, which is that this 

budget plays small ball—bunts, singles, you know. The Senator 

from Kentucky could explain to me better what another term might 

be, but, you know, hit and run—of course, he never allowed anybody to hit a single. But, in any event, small ball is being played 

here. We are not taking on the big issue, and the gorilla room, 

which is very significant, is the fact that we are raising the level 

of debt of this country to an unsustainable level—‘‘unsustainable’’ 

being the term that I believe the Secretary has even used. And so 

we need another approach, and that is why we have supported this 

commission, and I believe it has to be statutory in order to be effective. So I look forward to hearing from the Secretary. 

I also hope the Secretary will address where he sees the banking 

system today. This is important for us to know, because obviously 


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there is a fair amount of money available to the Secretary—I hope 

it does not have to be spent—to continue to shore up the banking 

system. My hope is that instead it can go to reduce the debt, which 

is what it was supposed to do. And I hope that we are sort of— 

as a result of the Secretary’s efforts and the prior administration’s 

efforts, Secretary Paulson, and the overlapping effort of Chairman 

Bernanke, I hope that we have stabilized the system to a point 

where there does not appear to be any significant disruption headed in our way in the financial system. I hope the Secretary will address that issue, how he sees the health of the basic financial system vis-a-vis where we were in 2008 and early 2009. 

So I thank the Secretary for being here today. 

Chairman CONRAD. Thank you, Senator Gregg. 

Again, welcome, Secretary Geithner. Please proceed with your 

testimony, and then we will go to questions. 

STATEMENT OF THE HONORABLE TIMOTHY F. GEITHNER, 

SECRETARY, U.S. DEPARTMENT OF THE TREASURY 

Secretary GEITHNER. Chairman Conrad, Ranking Member Gregg, 

and members of the Committee, it is a pleasure to be back here 

today. This Committee is the guardians of fiscal responsibility, and 

in some ways you hold here in your hands this critical challenge 

of how we balance the critical priorities of supporting growth, fixing what was broken, doing so in a fiscally responsible way, addressing our long- term fiscal problems, and trying to do that in a 

way that is fair—fair to the American people. 

A year ago, as you both said, when the President took office, our 

Nation was in a deep recession, and we faced a deficit of $1.3 trillion and projected deficits—and this is very important. Before the 

new Congress took any steps, projected deficits, according to CBO, 

would more than double the Nation’s debt over the succeeding decade. And this recession, of course, has cost tremendous damage, 

and I think we all know that the road to jobs and to greater economic security and to fiscal sustainability does have to start with 

economic growth. And today I think it is important to recognize 

due in large part to the actions of the Congress, the executive 

branch, and the Federal Reserve, the economy is growing again. 

One just brief comment on this morning’s productivity numbers. 

You are seeing extraordinarily high rates of productivity growth in 

the second half of last year. In many ways, those are a testament 

to the dynamism and strength of the American business community. It is important for people to understand that. But there was, 

I think, an encouraging shift if you saw the composition of that. Instead of that coming significantly from reducing payroll and hours 

and employees, it is now coming in the former of higher output. 

And I think there is encouragement in that. We should take encouragement from that. But we have got a ways to go still. 

So this is progress. It is not enough, and our priority remains, 

our priority has to remain job creation, investment, and innovation. 

Now, we are proposing to extend Recovery Act tax relief for small 

businesses, and we are proposing, as the Chairman said, a new 

credit for small business job creation, which combined a $5,000 

credit for every new employee hired in 2010 with payroll tax relief 

for firms that add hours and increase wages. 

162 

We are proposing to extend small business tax relief that goes to 

encourage new capital investments, investments in research and 

development. We are proposing again to eliminate taxes on capital 

gains for investors in small businesses. 

Just one brief note. That specific proposal would reach, our view 

is, 2 million small businesses, and we think it is a good, powerful 

type of step to help encourage investment and innovation. 

Now, of course, we understand that Government needs to be 

smarter, and in the President’s budget we have laid out a comprehensive agenda to invest in innovation. The responsibility of 

Government is to create the conditions for the private sector to 

grow, to invest, and to create new jobs. This requires financial reform. It requires more support for American innovation. We need 

to increase exports, and we need to invest in education, and we 

need health care reform so we can help provide greater economic 

security for tens of millions of Americans and to help businesses reduce the growth in the health care costs. 

Now, alongside these steps, we need to work to continue to improve access to credit for American families and businesses. Over 

the past year, the broad strategy we embraced to stabilize the financial system has been remarkably effective in helping repair 

what was broken, bringing a measure of stability to the system, 

and we have done that largely by encouraging private capital solutions to come in and replace the investments the Government of 

the United States had to make. And we have achieved those results 

in terms of stability, lower borrowing costs, better access to credit, 

at much, much lower cost to the American taxpayer than many had 

anticipated. 

We have already recovered two-thirds of TARP investments in 

banks which are being used, as Senator Gregg said, to bring down 

our deficit. The expected cost of stabilizing the financial system has 

fallen by more than $400 billion. We expect it to fall further, and 

if we can work with Congress to adopt a fee on the financial system, then we can say to the American people that American taxpayers will not face a penny of loss on the actions the Government 

had to take under the TARP. 

The financial system today is much more stable. As I said, credit 

conditions are significantly better. You can see that in terms of the 

price and access to credit for municipal governments, for companies, for homeowners, and for families. 

But critical parts of the financial system are still damaged. No 

surprise. The crisis caused a lot of damage. And I think it is very 

important that we continue to use the authority the Congress provided us under the TARP to continue to help small banks expand 

credit to small businesses and to help continue to work to stabilize 

the housing market. 

Now, when you talk to small business owners across the country, 

as I know you do, they tell a similar story, that their ability to expand and to hire depends on better access to credit. And I think 

we all know that to get loans for small business to rely on, you 

have to make sure that small banks, community banks, are in a 

better position to provide that credit. 

Now, on Tuesday, the President announced that we will support 

new legislation to create a small business lending fund, and we will 

163 

support legislation that would take existing authority that we have 

reserved under the TARP and use that authority to help make sure 

we can provide assistance and support and capital to small community banks that are prepared to work to expand lending to small 

businesses. 

These banks, these small banks, have been at the center of small 

business lending in the past. They still account or they typically account for more than half of credit to small businesses, and I do not 

believe it is possible to try to work to address the credit problem 

small businesses face in this country without helping small business community banks do a better job of helping their customers 

grow and expand. 

Now, we want to complement that with stronger authority for 

the Small Business Administration, with higher loan limits, lower 

guarantee fees temporarily. That can be very effective, too. And, 

again, I think it is important for people to recognize that even as 

we grow and recover, you need credit to make sure recovery is 

going to be as strong as possible. 

Now, as we repair the damage caused by the crisis and we work 

to reallocate resources to investments in innovations—and, of 

course, we operate with scarce resources, we need to commit to 

work together to reduce our long-term fiscal deficits. Future deficits 

are too high, and the American people, along with investors around 

the world, need to have confidence in our ability as a country, as 

a Government, to work together to bring them down over time. I 

think failure to do so would weaken recovery. It would mean higher 

interest rates for families and businesses. It would limit the Government’s capacity to deal with the many challenges we face. This 

is a critical economic imperative for the country. 

Now, the President’s budget proposes some important steps toward that objective. We do not claim to have solved this problem, 

but we need to work together to identify ways that are going to put 

us on a path to fiscal responsibility. We, as a country, need to go 

back to living within our means again. 

The President has proposed a cap on non-security discretionary 

spending for 3 years. We have proposed to restore the basic disciplines of budgeting that all families live with today that we call 

pay-as-you-go. We propose ways to make our tax system fairer and 

begin the process of cutting those long-term deficits. You are both 

correct to say that the Adminstration has proposed to allow the tax 

cuts for the most fortunate 2 to 3 percent of Americans expire. But 

we are also proposing to extend not just the Make Work Pay tax 

credit for 1 year that goes to 95 percent of working Americans, not 

just to extend permanently the middle-class tax cuts, but to extend 

a number of very important provisions for business investment and 

for small businesses which we think are important not just for the 

near term but for our long-term economic strength and innovation. 

Now, the budget proposes to bring down our deficits as a share 

of GDP dramatically. We propose ways, specific ways, to bring 

them down to below 4 percent of GDP, I believe 4 years out. And 

while I think we all recognize that Government support for the 

economy is still very important, we cannot let our future deficits 

and debt continue to grow faster than our economy without making 

our country weaker in the future. 

164 

This is going to be enormously challenging, and that is why we 

have proposed building on the model, as you said, Mr. Chairman, 

of both the bipartisan Greenspan Commission established by President Reagan and the proposals both of you have worked so hard 

to create, defend and explain, and that many of your colleagues 

support. We proposed a bipartisan commission charged with trying 

to build consensus on a set of policies that can address not just our 

deficits over the next 10 years, but the long-term deficits which everybody recognizes are fundamentally unsustainable. 

Now, I just want to close with encouragement, with some measure of optimism and confidence. I think if you listen today to how 

people talk about our economic challenges, you hear a lot of common ground on a set of core things. People recognize that deficits 

matter. They recognize they are too high. I think people recognize 

that tax cuts are not free. I think people recognize that we have 

to pay for programs we propose. And I think everyone recognizes 

that our priority right now, as you both said very well, is to make 

sure we are repairing the damage caused by this recession and getting this economy back on its feet, getting people back to work, and 

restoring their confidence, the confidence of businesses and families 

in our capacity as a country to work together to solve these longterm problems. 

Thank you. I look forward to answering your questions. 

[The prepared statement of Secretary Geithner follows:] 

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Chairman CONRAD. Thank you, Secretary Geithner. 

I would like to go back and just share with colleagues and those 

who might be listening experiences I had at the end of the previous 

administration. I remember vividly being called to a meeting in the 

Leader’s office with leaders of Congress, Republicans and Democrats, with the then-Secretary of the Treasury, and with the Chairman of the Federal Reserve. And in that meeting, we were informed—we were not being consulted; we were being told—that the 

administration intended to take over AIG the next morning, and 

they told us they believed, if they did not do that, that a financial 

collapse would be inevitable and would come soon. 

And I remember my own reactions listening to the then-Secretary of the Treasury and the Chairman of the Federal Reserve. 

Again, they were not there to consult us. They told us they were 

taking over AIG, and they told us they believed they had the legal 

authority to do it, and they told us they believed if they did not 

do it that there would be a financial collapse that would not be limited to the United States. They made very clear they thought there 

would be a global financial collapse. 

That then followed, Senator Gregg will remember well, the discussions on rescue legislation. I remember, too, that long weekend, 


58153.112
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again, with Secretary Paulson, who told us if we did not come up 

with a plan by 6 o’clock Sunday evening, the Asian markets would 

open and they would pancake, and we would then see our own 

markets crumble the next day. 

And however imperfect those solutions were—no question they 

were imperfect; they were devised under extraordinary time pressures—I believe history will record that they were largely successful. I believe the evidence is really quite clear. 

The economy of this country contracted in the first quarter of 

last year by over 6 percent. We were losing 700,000 jobs a month. 

That is the reality. In the last quarter, economic growth increased 

by 5.7 percent. That is a dramatic turnaround. If one reads economic history, it would be hard to find a circumstance in which 

there was a more dramatic turnaround in the positive direction 

during this last year. And job loss went from 700,000 a month to 

65,000 in the most recent month. Now, we do not have January’s 

numbers yet. Hopefully that will have improved. I do not know. 

But I believe the record is really quite compelling that the actions 

that were taken by the previous administration at the end, by the 

new administration in their beginning days, and by the Federal Reserve were absolutely essential to preventing a collapse. And it has 

worked. I think the evidence is undeniable. 

Is it imperfect? Absolutely. Were there enormous mistakes made 

that led to this crisis? Absolutely. And I believe fundamentally it 

was an overly loose monetary policy by the Federal Reserve and 

overly loose fiscal policy by Congress and the President that created the seed beds for bubbles to form. And when bubbles form, 

they burst. And when they burst, there is enormous economic 

wreckage. And on top of it all, we had deregulation that left no one 

watching derivatives markets that had trillions of dollars flowing 

around the world unregulated, unchecked, even unrecorded. 

Let us not repeat the policies that led to that collapse—an overly 

loose monetary policy, an overly loose fiscal policy, and deregulation that left us without any kind of oversight of extraordinarily 

risky measures. 

My question is simply this: Looking ahead, this is where I have 

a bone to pick with this budget, and I certainly support what is 

being done in the short term, but the longer term, what if the commission, for whatever reason, is not formed? If the Republicans 

refuse to participate, for example. Some have said they would not. 

Then what? 

Secretary GEITHNER. Mr. Chairman, the idea of the commission, 

as you both have said so well, is to get people together, removed 

from politics, to try to take a fresh look at how to dig our way out 

of this unsustainable hole. And for it to work, it is going to require 

Democrats and Republicans coming together, and people are going 

to have to come fresh and open because it is too hard. 

So we are going to do as much as we can to try to design it in 

ways that will command that broad support, and I think it is important to underscore, again, how important it is that people recognize now that we have to start to build that broader consensus. It 

is not something we can put off indefinitely. I know many of you 

would like us to be more ambitious in this budget in terms of identifying ways to bring down those long-term deficits. That is a fair 

176 

point. I think it is important to underscore that we are recognizing 

in a very clear, direct way that we have to get the deficits down 

over the medium term to a level where our debt burden as a share 

of the economy is no longer growing and stabilizes at a rate we can 

afford and bear. And we are a long way from that point. 

Next year is not too soon to begin that process, and in some ways 

our capacity to be helpful now, to continue to work to help encourage job creation and investment, our ability to do that now depends 

directly on how much confidence we create that we are going to 

find the political will as a country to bring those deficits down over 

the medium term. 

Now, of course, we could do that successfully and still face 

unsustainable long-term fiscal deficits. And as you know, our view 

is that the only way and the necessary way to begin to deal with 

those things starts with reducing the rate of growth in health care 

costs. So that is not something that we can responsiby defer. 

Chairman CONRAD. My final question to you: Will Republican 

leadership be consulted on the make-up of any commission? 

Secretary GEITHNER. Yes. 

Chairman CONRAD. I think that is absolutely essential. And will 

there be the assurances that the Vice President has provided in his 

letter of the Majority Leader and the Speaker bringing the recommendations of the commission to a vote in the Congress? 

Secretary GEITHNER. Yes. The basic design of this, as you know 

and have worked so closely on, is you bring Democrats and Republicans together, ask them to step back from politics, make recommendations that help solve these problems, and the Majority 

Leader and the Speaker of the House have committed to the President that they will bring those recommendations to a vote. 

Chairman CONRAD. Senator Gregg. 

Senator GREGG. Thank you, Mr. Chairman. And you have said 

a lot of things, Mr. Secretary, which I do not have time to discuss 

them all, so I will just pick a couple of the highlights. 

I do want to congratulate the Chairman for his history lesson. It 

was accurate and correct, in my opinion, but with one caveat, one 

footnote. It was actually the Chairman of the New York Fed who 

took over the AIG, and it was the right decision, and it remains, 

in my opinion, the right decision. 

But you said, Mr. Secretary, something that I think you said it 

in a way that I am not sure people focused on it, but I think it is 

at the core of the issue, and that is, until the world community and 

our own markets believe that we are putting in place actions which 

will fundamentally change the out-year instability of our fiscal situation and the unsustainable path that we are on, we probably will 

not get robust recovery because people will not be willing to invest 

and people will not be willing to buy American bonds at a rate that 

is reasonable. Our costs are going to go up here dramatically, I 

think, within 4 or 5 years if we do not do something. We may find 

ourselves—Moody’s just yesterday said they may downgrade us. 

But we may find ourselves in the same situation as Japan is in 

today, and we will be in trouble. The path we are on is 

unsustainable and I believe leads to insolvency. And, regrettably, 

the budget that was sent up—you know, you mentioned the freeze. 

177 

I am for the freeze. But it is $10 billion on a $1.6 trillion deficit. 

It just does not get us there. You mentioned the tax increases, $2 trillion. I do not happen to support them, but as a practical matter, you still have $11 trillion 

of deficit on top of that after your tax increases. 

And as I said earlier, the taxes are getting well above our historic norm, but spending continues to be unsustainable at these 

levels. So it is really a Never-Never-Land budget when it comes to 

the out-year problem that we confront. It is almost as if it does not 

admit that it exists in many ways. 

We can debate later the commission and how you structure it, 

but I believe the best way to approach it is another vote so that 

it is statutory. 

I guess I want to go, however, to this issue of your new proposals 

on small business because I do not really understand them. On the 

one side, you are raising the top marginal rates from 35 to 39.6 

percent. Those rates are primarily paid by small businesses. Those 

are mostly subchapter S corporations. They represent the majority 

of people who fall into that rate category. So you are raising significantly the tax rate on small business subchapter S. At the same 

time you are claiming you are going to energize small business activity by a $30 billion capital infusion into banks with assets under 

$10 billion. 

The two do not—the two are going in opposite directions, No. 1, 

but more importantly—equally important, I cannot understand 

why any bank in America that is not in serious trouble would ever 

want another capital infusion from the Federal Government after 

what they have been through during the experience with TARP. 

And, therefore, how are you going to get healthy banks to take the 

money, No. 1? I mean, I can understand where weak banks will 

take it, but that is not going to cause lending because they are 

weak. And, No. 2, why do you think a capital infusion into banks 

under $30 billion with under $10 billion of assets, even if they take 

it—and I would like you to explain to us why you think they will 

take it unless you are going to force it on them through regulatory 

oversight, which I hope you are not—why you think that offsets 

these very significant increases in taxes on small business that you 

are proposing, which I think weakens the energy out there to invest and create new jobs and capital because people have to use the 

money to pay their new tax bill? 

Secretary GEITHNER. Those are excellent questions, and let me 

try to respond. 

The proposal we have made to allow the tax cuts on Americans 

earning more than $250,000 a year to expire will only affect 2 to 

3 percent of small businesses across the country. Now, it is 2 to 3 

percent. These are independent estimates. They are not our estimates. 

Now, you can—— 

Senator GREGG. But isn’t it true, though, that 60 percent of the 

revenues, approximately, from people paying more than 35 percent—a 356-percent tax rate comes from subchapter S corporations? 

Secretary GEITHNER. Well, I guess, again, the way I would say 

it is—— 

178 

Senator GREGG. Which is small business. 

Secretary GEITHNER. It is only 2 to 3 percent of small businesses. 

That is the best measures of the overall effect. You need to look 

at those alongside what we are proposing, which is we are proposing to make permanent tax cuts that will affect 97 to 98 percent 

of small businesses to give them additional tax relief for business 

expensing, for accelerated bonus depreciation—— 

Senator GREGG. I support all those. 

Secretary GEITHNER [continuing]. Zero capital gains rate on—— 

Senator GREGG. Great idea. 

Secretary GEITHNER. Those are things we think make a lot of 

sense, that are good policy, and they are important. But I want to 

come to this point about credit because it is very important, and 

so I want to try and respond to your questions about credit. 

One of the most effective things we can do to help credit markets 

is to make sure that small and community banks have the basic 

resources to expand to meet what will be growing demand for credit as the economy recovers. 

One of the most cost-effective ways to do that is to give them a 

dollar of investment capital with a dividend for the taxpayer. Every 

dollar we give them should expand lending capacity, their ability 

to lend, by a factor of 8 to 10. I am not aware of any public policy 

investment that offers that kind of a return. 

Now, you are right. We cannot force them to come and take these 

investments. In fact, what we saw across the country over the last 

10 months or so that is quite damaging is we had 650 small and 

community banks withdraw their applications from the Treasury to 

capital for a lot of reasons. I would say the two principal reasons 

they cite is concern about the perception that they would be stigmatized for doing that—some of their competitors ran ads against 

the people that took capital—but also because they were very concerned about actual and prospective conditions that might apply 

that might make it impossible to run their institutions. 

So we are not going to be effective in trying to open up those 

credit pipes unless we can design a program that makes it more 

likely that they will come and use that capital to expand small 

business lending. 

Now, we have been able to—because we helped recapitalize the 

financial system with private capital, stabilize the system as a 

whole with using much less authority than Congress gave us at 

much, much lower cost. And so what we propose to do is we have 

reserved some of that authority—and it is a very modest share of 

our remaining resources—so we can design something together 

that would meet that basic test. 

But you are absolutely right. We have learned something. They 

need to be willing to come take advantage of that. If we can it 

right, and I do not think it is that complicated to do. It is a very 

high return. And I do not believe it is possible, since—small banks 

are 50 percent of the credit to small businesses,to be responsive to 

that credit problem without working alongside the SBA to help 

small banks and small businesses. 

And, I am sorry, one more comment, Senator. I think people— 

it is important to get the balance right. Even though we have put 

out the financial fire, and even though the actions of my predeVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00184 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
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cessor, the Chairman of the Fed, the Congress in the fall of 2008, 

and the first 6 months of the year were incredibly effective in putting out that fire, I do not think anybody can look at this system 

today—and say that the challenge is really over for small community banks, for our housing markets. There are parts of our system 

that still reflect the basic scars of this crisis, and we want to work 

with you and figure out how to address that. And the architects of 

the authority—and I know they are in this room—were very careful 

and pragmatic in trying to make sure that we had the ability to 

work through those basic credit pipes of the system. You cannot 

work around them completely. You can do some things around 

them, but if you do not work through them, I do not think anything 

is possible. 

Senator GREGG. Well, my time is up, but I just do not see how 

any board of directors sitting around in a small bank in North Dakota or New Hampshire, unless they are in financial trouble with 

their capital structure, is going to want to get the Government into 

their bank after what happened relative to compensation, relative 

to loan quality, relative to all the chaos that was created as a result of the Government stepping into—I just do not see how this 

program probably is taken advantage of, but maybe I am wrong. 

Secretary GEITHNER. That is probably why we proposed the legislation. And, Mr. Chairman, could I say just one more thing on this? 

Chairman CONRAD. Yes. 

Secretary GEITHNER. When I hear from small community banks, 

what they say is something like the following: They are very worried that financial reform is going to come out in a way that is 

going to put huge new burdens on them. They say, we were not the 

cause of the problem in subprime lending or the huge predatory 

abusive practices in consumer credit, and we do not want you to 

solve those problems on our backs. They say they are facing enormous pressure from their supervisors, and there is always a risk 

in recessions that people overcorrect after a period where credit 

was too easy. And they say they cannot raise capital from the private markets, even though the capital markets are much more 

healthy and open to many large companies and major banks. 

So those are things we have got to work on all fronts, and, the 

tests of how governments deal with financial crises are really 

three: Do you limit the damage effectively? And, Mr. Chairman, 

you were right that we have brought it back from the brink of collapse very, very quickly. The question is can you do so at low cost 

to the taxpayer, and our judgment is we have a very good shot at 

having solved this in ways that, in financial terms, are a fraction 

of the S&L crisis, at a much, much lower cost, in a fiscally responsible way. And the third test, which is still before us: Are we going 

to deal with the moral hazard risk created by our response to the 

crisis? Are we going to reform the system in ways that will prevent 

these abuses in the future? And I think it would be important for 

the banking system as a whole and for businesses to try to bring 

the financial reform legislation to earth as quickly as possible so 

people know what the rules of the game are, and I hope we can 

work with you and your colleagues on how best to do that. 

Chairman CONRAD. Senator Murray. 

180 

Senator MURRAY. Thank you very much, Mr. Secretary. I met 

with you last year when you were seeking Senate confirmation, and 

I told you that people all across my State were hurting, and small 

businesses were coming to me and saying they could not meet their 

payroll and could not get loans, and families who had always had 

good credit could not get college loans or loans to buy a home or 

car, and they were pretty angry that their tax dollars were being 

used to cover the consequences of years of recklessness on Wall 

Street and failures of a regulatory system. At that time, you talked 

to me about the need to have transparency and accountability and 

said that you would focus on Main Street as well as Wall Street. 

Well, we are sitting here today, we are here a year later. As Senator Conrad said, we took steps to prevent a major economic collapse. But Americans are still really struggling, and, frankly, I 

have not seen enough accountability to Main Street. 

My constituents tell me all the time that they are not feeling the 

benefits of the bailout programs that are paid for by TARP, and I 

really understand that frustration. We provided assistance immediately to Wall Street, but a year later, we do not see it on Main 

Street. Frankly, I am pretty angry, too, because I see these Wall 

Street banks that have returned to their bonus-as-usual mentality, 

and that creates a lot of tension in America. 

In my State in the past 6 years, over six community banks have 

failed, and a lot more are struggling. We just woke up this morning 

to another headline from Cowlitz County, and a small town, Longview, where Cowlitz Bank is being ordered by FDIC to reduce lending and cut dividends and raise capital. Those are all stemming 

from bad assets on their books. This is a community with over 13 

percent unemployment, and their lending has now dropped by 20 

percent, which means those little businesses and those families in 

that community are really feeling the pinch. 

So, you know, I am glad that the President is announcing a plan 

to jump-start small business lending. I do have some concerns with 

the approach. 

Now, back in the fall of 2008, Treasury began providing billions 

under the Capital Purchase Program to small and medium-sized 

banks, and the goal was to expand lending. Now, we know that did 

not work. Instead of expanding lending, banks that received those 

capital injections put it in to strengthen or buffer against losses. 

In fact, I want to quote from the Congressional Oversight Panel 

that said, ‘‘Uncertainty about risks to balance sheets caused banks 

to protect themselves by building up capital, including devoting 

TARP assistance to that end. One consequence was a reduction in 

funds for lending and a hesitation to lend even to borrowers who 

were formerly regarded as creditworthy.’’ 

Now, I know you understand that reality, and I know that you 

have stated many times, including in your testimony to the Banking Committee last summer, and you said, ‘‘Troubled legacy assets 

are congesting the U.S. financial system,’’ and that ‘‘simply hoping 

banks work off these assets would prolong the economic crisis and 

increase the costs to the taxpayer.’’ I assume you are still there and 

you agree with that. 

So you can see now my concern with the administration’s approach. You have made some adjustments, and the new small busiVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00186 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
181 

ness lending proposal is very similar to a tactic that did not work 

in the past as it was intended. I think, if we are serious about expanding credit availability to small businesses, that we have got to 

do it in a more permanent way. 

Last year—we talked about this yesterday—you rolled out the 

Public-Private Investment Program, and some progress was made 

on the securities side, but we need a renewed focus on getting the 

legacy loan programs working. 

Now, I have introduced legislation and I have made some proposals that I think can help achieve that. I think there are two 

things that are pretty clear that we need to make: adjustments to 

the pricing mechanisms to make it economical for banks to sell impaired loans, and adjustments to the requirements for participation, including dividend rates, executive compensation limits, and 

other factors. Those are improvements that can be made quickly, 

and, frankly, they do not require legislation. 

So I wanted to ask you if you agree with that and hear your comments. 

Secretary GEITHNER. I think I agree with everything you said, 

but I want to make one point before I respond directly to that question. 

I believe that the capital investments that were placed in the 

U.S. banking system were exceptionally effective in improving overall credit conditions, and the best measure of that is what has happened to the cost of credit for all businesses, homeowners, and municipal governments. 

Now, as I said—and I completely agree with you—there are still 

a lot of challenges ahead for the banking system and for small 

businesses, but the capital programs were exceptionally effective in 

trying to make sure you did not have a crisis accelerate and to 

make sure that the recovery was not going to be choked off because 

of access to credit. 

Now, I completely agree with you that there are things we have 

the authority to modify under the TARP that affect the economic 

terms that banks get on investments from the Treasury. I think 

those are necessary, but I do not think they are sufficient. 

As Senator Gregg said, there is enormous fear and uncertainty 

about the broader stigma and conditions that come with the program of the TARP. 

Senator MURRAY. Right. 

Secretary GEITHNER. I know you have thoughtful legislation in 

this area designed to try to get directly at the legacy assets that 

are still in the banks, in the banking system. I would be happy to 

work with you on that. As you know, we did design—and I think 

it is a very effective program on the securities side. We have made 

less progress on the bank side, and partly because we have to work 

in partnership with the FDIC, and I respect their reservations. 

They have some understandable concerns about this stuff. But I 

would be happy to work with you on how best to solve it. 

Senator MURRAY. Well, I would really like to work with you on 

this because of what I see. Just like the Cowlitz Bank that we are 

reading about today, these banks have troubled assets on their 

books, and as a result, they are not lending. Then they get in trouble, and then they get closed down, and before you know it, we are 

182 

not going to have any community banks left. And I am deeply concerned about that. 

We helped the Wall Street banks, and there is a real anger at 

home right now that now we are ignoring what is happening in 

everybody’s neighborhood, and it is affecting their little barbershop 

and their restaurant and their grocery store and everything else 

that they count on for employment in those small communities. 

Secretary GEITHNER. I completely agree with you about that concern, and we share the basic objectives. And I just want to point 

out just one clarifying remark. You know, I think a lot of the American people have been left with the impression that this administration came in and put hundreds of billions of additional dollars 

into our Nation’s largest banks. And that is not what we did. In 

fact, what we did is very quickly make sure that the taxpayers’ investments in those banks were repaid, replaced with private capital, so that they were going to be in a stronger position to support 

recovery. 

The only checks this administration, this President has written 

in terms of investments in our Nation’s banking system were not 

to the large banks but to small community banks and regional 

banks. It is important to note everything we did to try to make 

sure that we were pulling the economy away from the abyss and 

stabilizing people’s confidence in their savings in banks across the 

country, were designed to meet exactly the challenge you said, 

which is that the only thing that was guiding what we did. We 

were trying to make sure we were fixing what was broken in our 

broader system, so that businesses and families across the country 

would benefit from more credit on fair terms. And, again, the best 

test of that—and there are enormous challenges ahead—is to just 

look at what has happened to credit terms and the price of borrowing for a mortgage. 

Senator MURRAY. All right, Mr. Secretary. My time is up, but I 

would like to work with you, because unless we get to the root of 

this problem, we are not going to see those banks lending. 

Secretary GEITHNER. I agree with you. 

Senator MURRAY. OK. Thank you. 

Chairman CONRAD. Thank you. 

Let me just indicate to my colleagues, we have gone really effectively from 5-minute rounds to 8-minute rounds or even something 

beyond that. So let me just say to our colleagues, I will extend their 

time as well so they do not have to feel as though they are going 

over, since all of us have. So, Senator Bunning, I would recognize 

you for an 8-minute round. 

Senator BUNNING. Thank you very much. 

Welcome, Secretary Geithner. The Federal Reserve has been out 

in the press talking about how they are going to make money on 

their AIG loans. What a joke, making it sound like a good idea for 

the taxpayers. However, that is not the whole truth because Treasury has committed some $70 billion to the AIG bailout. So the taxpayers are still exposed to AIG and, in fact, are likely to take 

losses. 

What is your current estimate on the taxpayers’ losses from AIG? 

183 

Secretary GEITHNER. Senator, you are exactly right, and I have 

made that point as clear as I can. The Government is still exposed 

to substantial risk of loss in AIG. 

Now, the CBO put out an estimate just a few weeks ago. It says that those losses may amount to $9 billion. Our estimates are 

somewhat higher than that. We do not actually know at this point. 

And you—— 

Senator BUNNING. Well, isn’t it true—and I do not want to interrupt you, but isn’t it true in the budget submission that you made 

you anticipate $30 billion in losses? 

Secretary GEITHNER. Exactly. As I said, our estimates of losses 

are significantly higher than in the CBO’s. They may be right. We 

are trying to be conservative about it. But I want to just underscore two things. They are a fraction of what those estimates were 

6, 9, 12 months ago. They are much lower cost than any of the alternatives we could have considered at that time. And, again, to 

make sure we can tell the American people they will not pay a 

penny of the costs of what we had to do in AIG. That requires—— 

Senator BUNNING. Well, that is if the Congress acts—— 

Secretary GEITHNER. If the Congress acts, that is right. 

Senator BUNNING [continuing]. As you want us to. 

Secretary GEITHNER. Well, as the law requires us to, proposed 

ways to recoup those losses, which we have done. Now, there are 

different ways to do it—— 

Senator BUNNING. Mr. Secretary, the law requires you to take all 

AIG-or not AIG, but TARP money and use it for deficit reduction. 

All returned money, that is what the law says. 

Secretary GEITHNER. That is exactly right. The earnings on 

this—and they have actually been substantial in most of these programs—go directly to the budget—— 

Senator BUNNING. What about the cost as far as interest? 

Secretary GEITHNER. Repayments, interest, too, also, dividends, 

interest, warrants. But repayments also, as the law is designed, go 

to reduce our deficit. And, again, it is very important for people to 

understand that when I took office, independent estimates of total 

costs of solving this thing were $400 billion above where they are 

today. Now, that is good for our long-term fiscal challenges. That 

means there are resources available today that were not foreseeable at that time to try to deal with our—— 

Senator BUNNING. You spoke earlier about the cost of money and 

the cost for the taxpayer, homeowners, borrowers, businesses, 

schools, municipalities. Would that have something to do with the 

zero monetary policy of the Federal Reserve? 

Secretary GEITHNER. It is very important—and you are exactly 

right—that what has helped bring stability, improve access to credit, and reduce borrowing costs is the combined effect of three very 

important instruments: one is what the Fed did and is still doing; 

the second is what Congress did in passing a Recovery Act and putting a floor under a collapsing economy; and the third is what we 

did to help make sure there was capital back in the financial system and people were not living with the acute fear that we were 

going to let things fall apart. 

All those things mattered. They were all reinforcing. Again, just 

one example. I believe even in March of this year, people expected 

184 

house prices across the country to fall another 30 percent. What 

happened in fact was you have now had 6 months of initial signs 

of basic stability in housing prices, and those go directly to how 

people think about their basic economic and financial security. The 

value of their pension savings today in an average 401(k) is 35, 

maybe even more, higher today than it was at the law. You are 

right that—— 

Senator BUNNING. Don’t speak too soon because it depends on 

the recovery continuing. 

Secretary GEITHNER. It does. Exactly right. You are exactly right 

about that. 

Senator BUNNING. Well, if you look at today’s market, you would 

not be as optimistic maybe as you were yesterday. 

Secretary GEITHNER. Oh, I am a very careful person, Senator, 

and I would always—— 

Senator BUNNING. It is up 200 points today. 

Secretary GEITHNER. I always underscore the fact that we are 

still living with a lot of damage caused by this recession. And these 

problems took a long time to buildup; they are going to take a long 

time to repair and dig our way out of. And it is a responsibility I 

think we all share to make sure we are doing things that are going 

to help repair that damage. And we have made a lot of progress, 

but there are a lot of challenges ahead. 

Senator BUNNING. I just want to read from Moody’s Investors 

Services as of this morning. ‘‘Unless further measures are taken to 

reduce the budget deficit further or the economy rebounds more 

vigorously than expected, the Federal financial picture as presented in the projections for the next decade will at some point put 

pressure on the triple A government bond rating.’’ 

‘‘‘Freezing part of discretionary spending for a three-year period 

beginning in the next fiscal year is a positive step from a rating 

perspective,’ says Moody’s Senior Credit Officer Steven Hess. However, the deficits projected in the budget do not stabilize debt levels 

in relation to GDP, and the portion of government expenditures 

going to pay interest on the debt shows a steady increase.’’ 

So that brings out exactly what our Ranking Member and our 

Chairman have said. Short term, OK. Long term, really not OK. 

Secretary GEITHNER. I agree with that. But let me just underscore one important thing again. We are proposing clear, specific 

ways—things that are going to be very unpopular—to cut our deficits dramatically as a share of our economy. We bring them below 

4 percent of GDP, but as I said, that is not far enough. And that 

is why we want to have a commission that is bipartisan try to work 

together to figure out how to deal—to get us that further distance 

so we do not have a debt burden that is going to make us weaker 

in the future. 

Senator BUNNING. Somebody brought up the Commission that 

Chairman Greenspan headed up on Social Security. In my opinion, 

it was a failure in the long run. It was a very successful Commission for the short term. In the long run, Social Security goes negative in 2017, and it pays only 73 percent of our benefits if you 

project out to 2042. 

185 

Just in very little changes in the recommendations of that Commission, extending the retirement age from 67 to 70 would have 

put that out to 2075, 2080 rather than 2042. 

So creating commissions is not always the answer to our problems, especially one that is mandated by the Executive. I agree 

with both my Chairman and my Ranking Member that if it is going 

to be done, it has to be done in the Congress of the United States 

to get everybody cooperating, both Rs and Ds. If we get that, then 

there will be a coming together on that fiscal problem. 

Secretary GEITHNER. Senator, I think you said it right, and I 

think that 53 votes was not enough. On the other hand, 53 votes 

signals pretty broad bipartisan support for the basic recognition. 

You said it very well, which is that you are going to need Democrats and Republicans to come together and propose ways to deal 

with this. But ultimately Congress has to act. And, you know, commissions do not themselves create consensus. You have got to build 

consensus across the aisle. 

Senator BUNNING. I have gone a minute over, so go right ahead. 

Chairman CONRAD. I appreciate the Senator. We went from 5- 

minute rounds to 8 minutes, and this was 9, and that is really 

what it is running, so I will allocate 9 minutes to Senator 

Whitehouse, and I hope he will not go a minute over. 

[Laughter.] 

Chairman CONRAD. It was completely fair of Senator Bunning to 

do so because, really, we were at 9 minutes with others. So 9 minutes, Senator Whitehouse, Senator Sanders, Senator Alexander. 

Senator WHITEHOUSE. Thank you, Chairman. 

Just to followup on the discussion that Senator Bunning was 

having, I would be an achievable vote on the Conrad-Gregg bill if 

it were clear to me that the most important part of this, which is 

health care reform, was going to be handled in a health care-specific way that put reform first and did not bring in a lot of bloody 

minded fiscal hawks with their knives to just cut away at benefits 

because they frankly do not understand the technique and the 

issues of delivery system reform, and if it were clear that there 

would be a very solid process going into it where people like me 

could have their voices heard. I could not have made that clearer. 

I have made that clear in letters to everybody in sight. Those do 

not seem to be unreasonable requests. We have never been approached on that subject. So I think there are more votes to be had 

on that. 

But if enough Republicans who are actual cosponsors of the legislation, who have put their names behind it, can be directed by their 

leadership to vote against it when it comes up as soon as it is clear 

that President Obama supports it, that is a pretty strong sign that 

there is mischief afoot, and it is very hard to work around that 

mischief. 

Two different points. One is on carried interest. As you well 

know, there is a loophole that has allowed the wealthiest and best 

compensated people in America, the big hedge fund managers, to 

pay income tax rates by pretending that it is capital gains at a rate 

that is lower than their secretary pays, at a rate that is lower than 

their driver pays, at a rate that is lower than their gardener pays. 

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186 

lions of dollars a year sitting in their private jet and looking out 

the window at the father of four who is busy loading their luggage 

in the rain into that private jet and the guy inside the private jet 

with the champagne glass is paying a lower income tax rate than 

the fellow out working hard, showing up every day and loading luggage in the rain, to me that is just something that is very, very 

wrong with America. And it is in the Obama administration’s budget to fix this. I applaud him for that. 

What I would like to ask you, Mr. Secretary, is: What will the 

Treasury’s position be on this? Are you just going to run up a flag 

saying we nominally support this? Or when it comes to the real 

crunch on this politically, are you going to be there with us? Are 

you going to be in there fighting in the political scrum that it is 

going to take to get this change made? 

Secretary GEITHNER. Absolutely. Absolutely. And I personally am 

very supportive of this. In fact, it is just a basic thing of fairness. 

Senator WHITEHOUSE. It is sickening, frankly, not to have it 

straightened out. 

Secretary GEITHNER. Why should somebody running a private equity firm or a hedge fund face lower taxes on income than a teacher and firefighter. It is a simple thing. And, you know, I think this 

is a very compelling thing to do. We had decades where we had an 

alarming, damaging, corrosive rise in income inequality across this 

country. Changes to the tax system made that worse. 

It is a very important thing to public confidence in our system 

that we restore a sense of balance and fairness to this. And even 

though that measure does not produce a lot of revenue, it is good 

economic policy, and I think it is fairer. And I frankly hope that 

we can work with our colleagues in London as well to try to make 

sure they are making comparable changes, too. 

So I think it is good policy, and I personally am very supportive 

of it, and we will fight for it. 

Senator WHITEHOUSE. Good. Well, it is very important to me to 

hear you say that. Like Ronald Reagan, I intend to trust but verify. 

And I very much hope that you and the administration can be as 

powerful in the fight as in the starting efforts. 

The other point that is very important to me is the continuing 

problem of foreclosures. I have had several hearings on foreclosures 

in my Judiciary Subcommittee. The stories are just appalling. 

When somebody has to go and tell their daughter that she is going 

to lose her bedroom and that all the stuffed animals have to be 

packed and that they are going off, it is a terrible family catastrophe when that happens. 

When they then have to deal with a servicing company that is 

not the bank, that cannot answer their questions—Joe Burlingame, 

a firefighter from Woonsocket, told me at one of the hearings about 

the absolute nightmare that his family was put through just trying 

to deal with the bank. Another guy, Joe Verdelotti, who is an electrician in West Warwick, told me about his wife and he having to 

basically pass the phone when he came home from work and she 

went off to work because they were stuck on the phone going from 

voice-mail to voice-mail to push button 2 to push button 3 for so 

many hours, 6, 7, 8 hours. Over and over again, the personal cost 

of these foreclosures really comes home to roost on people in ways 

187 

that are agonizing, in ways that are frustrating, in ways that are 

painful. And it strikes me that we have a clear and simple way, 

a market way to find the floor, the actual market floor on the 

prices of these houses, and to move on and to cut through all of 

the clutter, all of the delay. 

And, by the way, this is not non-HAMP banks. This is people in 

the so-called HAMP program still getting just crushed by it. And 

that is to enable somebody when they are frustrated enough to say, 

‘‘You know what? To hell with it. I am going to go to bankruptcy 

court, and we are going to get this straightened out once and for 

all.’’ 

I think the instant that that can happen, the entire industry will 

adapt. You now have a solid, fair, neutral marketplace to decide exactly what that real value is and everybody else has to adapt. Instead, the procedure that you have followed has been to put it on 

the banks to make the decision about how much money they are 

going to lose. That is a very hard call to ask a bank employee to 

make. It is very easy to kick that down the road. And as they kick 

it down the road, that family continues to be tormented because 

they are on the other end in a lot of misery. 

Will you please support the change in the law that would allow 

a residential primary mortgage to be reset in bankruptcy the way 

every other debt can be and not just give it lip service but get in 

there and fight with us for this? I think in the long run it will actually be better for the banks because of the long agony that they are 

going through, frankly, it does not help anybody to have this artificial circumstance. There is a price for that house. The bankruptcy 

court will set it. It is a market and you move on, and that is the 

discipline that we should be pursuing. 

Secretary GEITHNER. Senator, I completely agree with you that 

housing still seeing enormous devastation, and it is a basic symbol 

of all what was wrong in this crisis, what is unfair in it, because 

you saw people that were completely responsible that are the victims of the fact that other people were taken advantage of, lived 

beyond their means, and you are seeing it directly affect the value 

of their house, the prospect of keeping their house. It is deeply unfair, fundamentally unfair, and I completely agree that we have an 

obligation to do as much as we can to make sure that people who 

can afford to stay in their house do so as well. And it is not something that you can solve with a single instrument, and you know 

the President has been supportive of carefully designed bankruptcy 

reform to reinforce this objective. 

Now, we are trying very hard—— 

Senator WHITEHOUSE. The President has been supportive, and he 

actually supported the legislation when he was a Senator. 

Secretary GEITHNER. He did. 

Senator WHITEHOUSE. But when we actually tried to bring it up 

last year, I would describe the support that his administration officials provided that effort as nominal at best. 

Secretary GEITHNER. Senator, I just want to say that we are committed to continue to work to do everything we can to be helpful 

in trying to not just put stability on things, but try to make sure 

that we are reducing, to the extent we can, the amount of foreclosures out there still ahead of us. And I completely agree with 

188 

you that we need to get—that banks and servicers need to do a 

much better job of trying to make sure they are converting these 

modifications to permanent modifications, and they are very substantial benefits—— 

Senator WHITEHOUSE. They would not need to do a better job or 

they would immediately do a better job if the consumer could go 

to the bankruptcy court and force that process, at least for those 

that are service mortgages and not held by a bank. 

I apologize. I am 20 seconds over. Thank you, Chairman. I appreciate the indulgence. 

Chairman CONRAD. Senator Alexander for 9 minutes. 

Senator ALEXANDER. And 20 seconds. 

[Laughter.] 

Senator ALEXANDER. I will give back 20 seconds. 

Mr. Secretary, welcome to the Budget Committee, and thank you 

very much for your service to our country. You mentioned in your 

testimony how entitlement spending and the contribution that has 

made to our deficit, and particularly those in the last administration. I remember going to an entitlement summit that the President had last year. 

How much of the debt problem, getting it under control in the 

long term, will have to do with getting control of entitlement 

spending? 

Secretary GEITHNER. The long-term problem, once you look beyond the next 10 years, is really overwhelmingly a combination of 

two factors. One is the fact that our economy is aging, more people 

are retired relative to how many people are working. But that is 

much less important than what has happened to health care costs 

and what is still projected to happen to health care costs. And that 

is why I think many people believe that the best path and the only 

path to fiscal responsibility over the longer term has to go through 

health care reform that reduces the rate of growth in costs. 

Now, in the near term, the next 10 years are not the near term, 

but the near-term factors are overwhelmingly the consequences of 

a bunch of policies that were adopted over the last decade and just 

the huge damage to our revenue base and the interest costs associated with this recession. 

Senator ALEXANDER. But, Mr. Secretary, I happen to think entitlement spending is the big gorilla that we need to work on. But 

if that is true, then why would the administration’s budget propose 

moving a half trillion dollars over the next 10 years into new entitlement spending in the Pell Grant program? We all like college 

scholarships, but isn’t this an example of just saying I see the problem, the boat has a hole in it, and so what I propose to do is just 

put some more holes in the boat? Wow could we possibly be thinking about adding a half trillion dollars in 10 years to new entitlement spending, no matter how worthy the goal? 

Secretary GEITHNER. Senator, the President’s view, is that a dollar of help to make higher education more affordable, again, has 

very high returns to the overall American economy, and that is the 

judgment we are making. Again, the test we all face is to do things 

that have a high return for every dollar we are proposing to ask 

the taxpayers to put up. And I think making higher education more 

189 

affordable absolutely meets that test and is one of the most effective things we can do. 

Senator ALEXANDER. The President mentioned free trade in his 

State of the Union address as one part of job growth, and he mentioned Colombia. Does that mean we are likely to see the Colombia 

Free Trade Agreement resubmitted to Congress? 

Secretary GEITHNER. Senator, we believe that the three agreements pending can be strengthened and, if enacted with the right 

set of protections, would be good for expanding exports. But as the 

President also said in the State of the Union, we want to work with 

countries around the world on a new multilateral agreement that 

offers those same basic protections, expands markets, and we want 

to make sure we are in the game in Asia, too, as other countries 

move to work on that. But, of course, for these to work, they have 

to provide strong protections for American workers, and they have 

to provide a level playing field for American companies. 

But one of the best things we can do for future growth is try to 

make sure that we are part of this, economies that are growing 

most rapidly, and American companies and workers are able to 

share in those gains. 

Senator ALEXANDER. In looking for ways that Democrats and Republicans can work together, I was especially pleased to see the 

President’s comments about a new generation of nuclear power 

plants, about his recommendation for $54 billion of loan guarantees 

for nuclear plants, and his appointment of a commission for dealing 

with used nuclear fuel. I have been afraid that we are going to 

have an energy policy that amounted to the energy equivalent of 

going to war in sailboats by using windmills for this big economy. 

And I am very encourage by this. 

I am wondering if as this policy evolves and matures we will ever 

get to the point where we can support—as Senator Webb and I do 

in our legislation on alternative energy and doubling nuclear 

power—technology-neutral policies rather than this subsidy for 

wind and this subsidy for solar and this subsidy for geothermal and 

this subsidy for nuclear, where we have loan guarantees and production tax credits and other appropriate things that led us toward 

carbon-free electricity, if that is the goal, rather than picking and 

choosing winners and losers. 

Secretary GEITHNER. Senator, I cannot speak to the specifics of 

that proposal, but I agree with the general principle that our job 

should be to get the incentives right to encourage people to use energy more efficiently and make sure that we are encouraging cleaner sources of energy use. But we want the technology—we want 

there to be innovation in technology, and we want to make sure 

that technologies that offer the best return on those two objectives 

are the ones that end up dominating the field. 

Senator ALEXANDER. What is the plan for getting rid of the Government’s investment in General Motors? I had suggested that we 

just declare a stock dividend and give the stock back to everybody 

who paid taxes last April 15th. Senator Warner and Senator Corker have a different proposal. It seems to me the sooner the taxpayers get out of the auto business, the better. What is your—— 

Secretary GEITHNER. I could not agree with you more. 

Senator ALEXANDER. So when are we going to do that? 

190 

Secretary GEITHNER. We are going to do it as quickly as we can, 

and I think that there is a lot of merit in what Senators Warner 

and Corker have described, have proposed, which is to try to make 

sure that we are managing down those investments as quickly as 

possible. And, of course, our obligation is to try to make sure we 

are getting the Government out of that as quickly as possible, but 

doing so in ways that offer really the best return for the taxpayer. 

A lot of merit in those suggestions, though, and we are working 

very closely with them. 

Senator ALEXANDER. I still like the idea of the stock dividend. 

That would get rid of it quickly, and it would make everybody a 

fan of General Motors who happened to own a few shares of GM 

stock, and maybe they would go buy a GM car. 

Secretary GEITHNER. Senator, just again as a test of our basic 

theory and approach, if you look at what we have done in the 

major banks, we have been very successful in making sure private 

capital came in to take us out, leaving them in a better position 

than if the Government was in there. And the return to the American taxpayer, in terms of dividends, warrants, on those investments was very high. It does not do anything close to capturing the 

full cost of the crisis to the economy as a whole, but it shows a 

basic principle that has guided our approach, and we are going to 

bring that to everything we have done. 

Senator ALEXANDER. My last question is as much an observation 

as a question. Senator Gregg has suggested that the President 

might consider encouraging another vote on the Conrad-Gregg commission. I hope you will take that seriously. The fact of the matter 

is that the President’s support came over the weekend before the 

vote. I understand it was difficult because there are 23 Democratic 

Senators who were opposed to it, some of them very senior, and 

many senior Members of the House. It is a big decision to make. 

And it was sort of a general endorsement. 

A President of the United States who is a Democrat, who has 59 

or 60 votes in the Senate, who has 17 or 18 Republican votes for 

something that is important to him, ought to be able to pass it. 

And perhaps a way to do that is to say we did pretty well there, 

a Democratic Senator is leaving and a new Republican Senator is 

replacing him; you are gaining one vote in support there. The Democrat voted no, the Republican said he will vote yes, so you are up 

to 18 Republicans who have said yes, they will vote for it. 

So it might be that with an amendment or two and some consultation that it would pass, and my own judgment is, looking at 

what happened to President Bush’s tax reform commission, for example—which was a pretty good report by some pretty good people, 

but it just never went anywhere. It just went up on the shelf like 

a lot of commission reports. I think we are much more likely to get 

down the road toward deficit reduction with a statutory commission modeled along the lines of the Conrad-Gregg commission than 

we are with any Presidential commission, no matter how well intended. 

Secretary GEITHNER. I agree with much of what you have said, 

Senator, and, again, we are trying to take the best of ConradGregg, Gregg-Conrad, and the Reagan-Greenspan Commission, 

which, I think is the only really successful example we have. And 

191 

in its structure, it is fundamentally different from all the other 

commissions in between, and I think because of that we think it 

has a pretty good chance. 

Now, before the President made that statement that Saturday, 

he and the Vice President had been working very hard to try to 

build consensus on an approach. And, again, I would take some encouragement from the fact that you see people on both sides of the 

aisle now say again that deficits matter, that our deficits are 

unsustainable, that our recovery today and our long-term economic 

health depends on dealing with these kinds of things, and the 

world is watching us and they want to know whether we are going 

to have the capacity to build consensus on these things. 

Chairman CONRAD. Senator Sanders is recognized for 9 minutes, 

and with a little slop over on the last one, so we will allow that 

here as well. Senator Sanders. 

Senator SANDERS. Thanks very much, Mr. Chairman, and, Mr. 

Secretary, thanks for being here. 

Mr. Secretary, the name of this Committee is called the Budget 

Committee, and obviously every member of this Committee is concerned about record-breaking deficits and a $12 trillion national 

debt. I have to say—and I say this to my friend Senator Gregg, as 

I suggested through the Chairman last week—that I get a little— 

I understand that we have got to look forward and not backward. 

That is clear. We are all in agreement on that. But I do get a little 

bit tired of being lectured about how serious the deficit crisis is 

today by, in many instances, the exact same people who caused the 

deficit crisis. And I want to make this clear so I do not have to repeat it at every meeting that we are in. I—and many of us—did 

not vote for the Bush tax breaks which cost $600 billion over a 10- 

year period without any payment for them. I believe Senator Gregg 

and many others on the other side did vote for those. 

I did not vote for the war in Iraq for a number of reasons, not 

least of which there was no mechanism to pay for that war. I believe my Republican friend Senator Gregg did vote for that war. 

I did not, when I was in the House, vote for the insurance company and drug company prescription drug Medicare bill, which 

could have been paid for by negotiating pharmaceutical prices with 

the drug industry. Many of my Republican friends voted for that. 

Senator Gregg, you voted against it. But you voted to waive the 

budget rule so that it, in fact, did not have to be paid for. I did not vote for the Wall Street bailout of $700 billion, and, in 

fact, I brought forth an amendment which said that if you were 

right, if the Bush administration was right, let us pay for it. Let 

us do a surtax on the very wealthiest people in this country so that 

if it was needed, it could be paid for. 

I do not support, as Senator Gregg does, the repeal of the estate tax which would provide $1 trillion in tax breaks to the wealthiest 

three-tenths of 1 percent over a 10-year period. 

So all that I say—and Senator Gregg is a good friend of mine. 

We are neighbors. He is a serious guy. But please do not lecture 

us when many of us voted exactly in opposition to running up the 

huge deficit that we have. 

My question is: Do you agree? 

[Laughter.] 

192 

Secretary GEITHNER. I agree that Senator Gregg is a careful, 

thoughtful person with a great record on fiscal responsibility. And 

I agree with you— 

Senator SANDERS. Ohhh. 

Secretary GEITHNER. And I agree with you—— 

Senator SANDERS. You agree with Senator Gregg and myself. 

Now, that is a tough one, right? 

Secretary GEITHNER. We are all trying to find common ground. 

And I agree with you that it is important for people to recognize 

that we are living today with the choices made over a long period 

of time to not pay for new things that are very expensive. 

Senator SANDERS. Well, that is true, but I think you are being 

too gentle in saying there were people who voted to run up a huge 

national debt and some people of us did not. 

The past is the past. I acknowledge that. We have got to look to 

the future. But it is not fair to say all of us did this. Some of us 

did not. All right. Now let me get to areas where you do not agree 

with me. 

I applaud the President for keeping in his budget a proposal to 

let all of the Bush tax breaks for the wealthiest 2 percent expire 

at the end of this year. My question is: Why didn’t the President 

propose repealing these tax breaks for the wealthy right now, 

which I understand would have brought in another $100 billion in 

that 1-year period? 

We have, as you know, Mr. Secretary, the most unequal distribution of income and wealth. I think Senator Whitehouse made some 

very appropriate references to the outrage that the American people are feeling as the middle class collapses and the people on top 

get, you know, tens of millions of dollars in bonuses. 

What is the problem with beginning to address that problem 

now? 

Secretary GEITHNER. Well, Senator, I just want to say—and I 

completely agree with you, our tax system today is not fair and the 

burdens are not shared equally. 

Senator SANDERS. So why aren’t we moving aggressively to address the—— 

Secretary GEITHNER. Well, they are scheduled to expire at the 

end of this year, and we think that is the right time for them to 

expire. 

Senator SANDERS. Why? 

Secretary GEITHNER. But it is not—— 

Senator SANDERS. Why? I mean, in other words, you are right. 

They are schedule, but you could have—— 

Secretary GEITHNER. I do not think it was necessary to pull them 

forward, and as you know, we are trying to balance the basic imperative of trying to make sure that we are all focused on doing 

everything we can to fix what was damaged in this recession. We 

are going to keep our priority on that, but we think the country can 

afford to let those tax cuts expire, and we think it is time to do 

some modest things to make the system more fair, and that is part 

of it. 

Senator SANDERS. Well, I do not know that I agree with you. I 

do not—— 

193 

Secretary GEITHNER. I did not expect you would on this, but I 

think that is the best way to state the rationale. 

Senator SANDERS. OK. I think underlying, everybody here knows 

that there is a tremendous amount of anger out there, and it is 

manifested in many ways. I think the Wall Street bailout and the 

bonuses given to the people who helped cause the worst recession 

in the modern history of America is certainly an integral part of 

that appropriate outrage. And I think that the faster the Obama 

administration says that we are going to address the reality—all 

right? You say we cannot move faster. We have 19 percent of our 

children living in poverty. That is the highest rate of childhood poverty in the industrialized world. Right? That is an international 

disgrace. And yet we have a totally inadequate child care system, 

totally inadequate education system, as the President understands. 

So I do not think it is a good enough response to say, well, you 

know, we are moving along a timeline. People are increasingly frustrated about income and wealth inequality in America. You are 

doing some steps that are right. But I would hope that you would 

be more aggressive on that. 

Now, let me ask you a next question. We bailed out our friends 

on Wall Street whose dishonesty and greed has resulted in some 

17 percent of our people being unemployed or underemployed, a 

total economic disaster. One of the outrages, when we talk about 

why people are angry, one of the reasons is we bail out these 

banks—Citigroup, Bank of America, et cetera—and then they 

charge people 25, 30 percent interest rates on their credit cards. 

Will the administration come forward and say that is usury, that 

is immoral, that is wrong, we should do with the private banking 

system what credit unions do, have a cap of 15 percent, except 

under exceptional circumstances go to 18 percent? Can the administration come forward and say, thanks, no more than 15-plus–3 on 

your interest rates on credit cards? 

Secretary GEITHNER. Senator, I support what Congress took last 

year in putting in place sweeping reforms of consumer credit practices to try to end the abuse and predation that we saw across the 

system. That was a tragic failure of Government. I am very supportive of those changes. We would be happy to work with the Congress on additional reforms like we are doing in financial reform. 

I personally do not support the imposition of a cap on interest 

rates because I do not think it is the best way to try to make sure 

we are preventing abuse and predation. But I understand why you 

support that. I respect your views on it. 

Senator SANDERS. Well, it is not hard to understand. Talk to anybody, talk to any of the hundreds of people who have called my office, and you will understand it. Tell me why we should not address 

a situation where a working person—do you agree that 25- or 30- 

percent interest rates is usury? 

Secretary GEITHNER. What I believe very strongly—and I think 

this is a deep failure of Government—is that we allowed a level of 

abuse and predation to happen across the system with appalling, 

terrible consequences. And I think it is very good that Congress 

moved last year, even in the depths of the crisis, to start to address 

that. But that is why we are working so hard to try to make sure 

that we are putting in place a broader set of reforms—— 

194 

Senator SANDERS. You are not answering—well, I guess you are 

answering. You do not agree. I mean, you could do all the kind of 

talking you want, but people will still be paying 25 or 30 percent—— 

Secretary GEITHNER. We have to act. We cannot talk about it. I 

agree with that. 

Senator SANDERS. But you do not agree with me. You do not support a cap on interest rates. 

Last question. We are running out of time. There is widespread 

support for more transparency at the Fed. Above and beyond the 

TARP, we lent out trillions of dollars at zero-interest loans. Secretary of the Fed Bernanke refuses to tell us who received those 

loans. Do you believe that the American people have a right to 

know who received trillions of dollars, which financial institutions 

received trillions of dollars of zero-interest loans? 

Secretary GEITHNER. I personally am very supportive and will 

work to help support broader improvements in transparency by the 

Federal Reserve System. But I think it is very important we not 

take steps that would undermine—and you are not proposing this, 

I do not believe—the independence of the Fed or put us in a position where the Fed’s ability to do what was absolutely essential in 

this crisis—— 

Senator SANDERS. Do you support letting the American people 

know who received trillions of dollars of zero-interest loans? 

Secretary GEITHNER. Well, again, as I said, there is a very good, 

constructive set of reform proposals now working its way through 

the Senate that would bring substantially greater transparency, 

and I will support those. But the two qualifications I would put on 

that, just to be direct—and I am disagreeing with you respectfully—is not to threaten the independence of it and not to limit the 

Fed’s capacity to do the essential thing in future crises. 

Senator SANDERS. All right. Thank you. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Senator Cardin, for 9 minutes and some. 

Senator CARDIN. I thought it keeps on accumulating, so I thought 

I would get more. That is why I came in a little late. Secretary 

Geithner, I was here during your testimony, and let me thank you 

for your service to our country and thank you for your presence 

today and your testimony. 

Your opening statement is very clear about the need to create 

more jobs in America, and everything seems to be centered around 

how we can get job creation in America and get our economy back 

on track. 

You also talked about international trade. The President talked 

about international trade in the State of the Union address. He 

wants to double our exports, and I think each one of us would 

agree with that. I appreciate the comments you made in response 

to one of my colleague’s questions about strengthening international understandings, particularly on a multinational basis. And 

I strongly support that as it relates to labor and environment, but 

I would also add as it relates to dumping and other enforcement 

issues that we should be equally aggressive about. 

Let me raise what I think is the largest single issue. China is 

the largest growing market. Currency manipulation is well known. 

195 

If we are going to have a level playing field, why won’t the administration be more aggressive on the currency issue so that we truly 

have economics dealing with the market penetrations, allowing us 

greater access to the Chinese market? 

Secretary GEITHNER. It is a very important issue, and I agree 

with you about the importance of China moving. And I think it is 

actually quite likely China will move. I think they recognize this 

is important to them in their interest as well, and it is an important part of what we are trying to do generally, trying to make 

sure that the world is growing, not on the basis of an investmentled, export-heavy model again, but growing with stronger consumption, stronger domestic demand, and that requires a level playing 

field for American exporters generally. We are going to work very 

hard to encourage those changes. And I share your view about the 

importance of seeing more progress across the board in this area. 

Senator CARDIN. I would make one final observation. You are an 

economist in that you understand—— 

Secretary GEITHNER. I wish—I do not think I wish I was, but I 

am not an economist. 

Senator CARDIN. You have a strong background in economics and 

finance. 

Secretary GEITHNER. Fortunately, I am not an economist. 

Senator CARDIN. You certainly support allowing currency to 

reach its true level. I cannot believe that you would feel otherwise. 

So the only issue is transition. How do we get there? It seems to 

me that we have just been dragging our feet on this and have not 

made it the priority it should. 

I am certainly sympathetic to allow transition time so there is no 

major disruption of markets. But if we are not more aggressive on 

this and we solely depend upon the Chinese to decide when they 

are going to allow their market to fluctuate, we do a disservice to 

U.S. manufacturers and producers, and it is going to be extremely 

difficult to double our exports, as the President wants. 

I want to address a second point here, which is health care, 

which has come up several times during this hearing. Businesses 

in my community have a tough dilemma. Small business owners 

are really deciding whether to hire another employee or pay their 

insurance premiums. Consumers thinking about buying an automobile have to look at the medical bills they have on the counter 

that have to be paid. And I can tell you about people who are 

locked in their jobs because they cannot get insurance anyplace 

else, and they could well have more productive employment, but 

they cannot change jobs because of our health care system. I could 

also talk about the burden of health care costs on businesses in 

America trying to compete internationally, or about how health 

care expenditures are affecting our budget deficits in large measure. 

We need to be clear with the American people about what will 

happen if we do not get health care costs under control. We have 

an opportunity in this Congress to get it done. But we cannot continue this current trend—in my State, we are expecting in the next 

8 years the cost of a family’s health care plan to double from 

$12,000 to $24,000 a year. That is going to be a huge drain on our 

economy in creating jobs. 

196 

We could all do a better job of articulating the importance of 

health care reform in getting our economy moving. 

Secretary GEITHNER. I could not agree with you more. I thought 

you said it perfectly. The current system is enormously unfair and 

puts huge, vivid costs, conspicuous costs, and hidden costs on small 

businesses, not just on people that do not have health care, but on 

the businesses we depend on to grow as an economy as a whole. 

You said it exactly right, and if people said it the way you did, then 

you might see broader support for this. 

But it is good long-term fiscal policy, it is good policy for the 

American economy and American business, and it is fair and just 

for people who are denied coverage, do not have access to health 

care now, and this is something that should be very important. 

Again, if you just go back a few months ago, you would see 

health care costs by businesses cited as their principal concern 

about their ability to grow and compete. 

Senator CARDIN. I want to get to the deficit, because everybody 

here has talked about the deficit. The deficit is way too large. We 

have got to get it under control. And Senator Sanders made a 

strong point about opposing the policies that led us into this deficit. 

I can cite my opposition to many of the policies that led to these 

deficits, including the unfunded tax cuts. 

But the point is that entitlement reform starts with health care. 

It is very tough to say we are going to reform Medicare and Medicaid without dealing with the underlying cost of health care. All 

you are doing is cost shifting in that case. Maybe seniors will pay 

more for their health care. They are already paying too much. But 

if we are going to get entitlement reform that is going to help the 

Federal Government with health care, I do not know how you it 

can be done without getting health care costs under control. 

Secretary GEITHNER. You are exactly right. If you care about fiscal responsibility, if you are worried about our long-term deficits, 

as everybody has to be, there is no path to address that does not 

go through health care reform that reduces the rate of growth in 

costs. That is very hard to do, but there are some very sensible, 

powerful approaches that have moved through this body that would 

make a huge contribution to that goal, and you said it exactly 

right. 

Senator CARDIN. I want to talk about small business. You talked 

about small business. I very much appreciate that. You talked 

about community banks, and I strongly support what you are doing 

in trying to help our community banks. 

I would make one observation. If you look at the banks that received the funds from the bailout, and you look at the amount of 

moneys that they have received in assistance and the amount of 

loans they made to small business in 2008, is less than 1 percent. 

The total number I have is $238 billion in bailouts, and the number 

I have for small business loans is $1.26 billion in small business 

loans in 2008. I know they got the money in 2009, but I am just 

trying to say they do not have a good history of loaning moneys to 

small businesses. 

Secretary GEITHNER. Actually, they got the money in 2008. We 

took it back and replaced it with private capital in 2009. 

197 

Senator CARDIN. They do not have a good record. We are all 

going to keep the pressure on the larger banks to make small business loans, but it is going to be a struggle. 

Secretary GEITHNER. Right. You are exactly right. Again, about 

half of small business lending comes from small community banks. 

The other half comes from larger institutions, and we are working 

very hard to make sure that we are improving those credit channels that are opening up again. And I believe we are making some 

progress. 

Again, the most important thing for a business is: Is there going 

to be demand for my products? What all small businesses cite 

today, their first concern is: Are we going to be growing? Are we 

going to face growing demand for our products? But credit is part 

of that, and that is why we should work on this front, and I agree 

with what you said. 

Senator CARDIN. You are focused on it now, and we thank you. 

It is going to require a continued focus. 

Secretary GEITHNER. I completely agree. 

Senator CARDIN. It is not going to be solved in the next couple 

months. 

Secretary GEITHNER. I agree. The costs of these things go on for 

years, and you cannot stop early. 

Senator CARDIN. And the last thing I would say—and you pointed this out—helping community banks makes sense. I believe we 

have got to strengthen the SBA even more. I agree with the reforms that you are asking of SBA. I would give them more resources in addition to this. 

But if you do not deal with the regulators and the pressure that 

the regulators put on the community banks, on the loans that they 

are making, even though these loans are guaranteed by the Government, it is going to put a lot of pressure on them not to make 

the loans to the small businesses. So it has to be done in conjunction with an overall strategy that will release money to allow small 

businesses, which are the economic engine of America, to be able 

to create the jobs we need. 

Secretary GEITHNER. I agree with you. It requires capital, SBA, 

clarity in the rules of the game, and reform, and we want to make 

sure there is a balanced approach taken by supervisors across the 

country so that they are not getting in the way of banks meeting 

demand of viable businesses to expand. 

Senator CARDIN. Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator Cardin. And you actually 

came in under the overage. So you get a special commendation. 

[Laughter.] 

Senator CARDIN. I will take it another time. 

Chairman CONRAD. Let me go back to the question of credit, if 

I could, and Senator Gregg has got a few more questions as well. 

You know, if we look at what happened to the TED spread, the 

difference between the Fed can borrow for and what the London 

Interbank Overnight Rate is, during the height of the crisis that 

was 9 times normal. That has come back to normal. That is a remarkable change, critically important. 

198 

I cited earlier the turnaround in economic growth from a negative 6 percent the first quarter of this year to positive 5.7 percent 

the last quarter. That is a remarkable turnaround. 

The job losses from 700,000 a month at the beginning of last year 

to 60,000 a month in the last month. 

So those who assert none of this is working are to me detached 

from reality. Clearly, this is moving in the right direction. But we 

have got two issues. 

One is the credit front because small business continues to report 

to us, and you heard it all around the table here today. I had a 

case brought to my attention. The guy had a $10 million line of 

credit. He never missed a payment, never late in a payment, and 

he has his credit line pulled. He goes to his lender and he says, 

you know, ‘‘Hey, I am making all my payments, always have, will 

continue, continue to be profitable.’’ And the bank says to him, his 

primary lender, ‘‘This had nothing to do with you. It is a circumstance in which our balance sheet has been impaired by other 

bad loans, and we have to‘‘—‘‘we have made the judgment, you and 

others are having their credit lines pulled because we have got to 

rebuild our balance sheet.’’ 

That continues out there, and I think you have heard it loud and 

clear here today, and obviously you have a plan to respond. 

You know, the question in my mind is: With the $30 billion from 

TARP to help small business, if those small lenders, for whatever 

reason, are not willing to take that money, what is the back-up 

plan? What is the alternative? Is there a way—I had a bank in my 

State that took money and then had ads run against it by their 

competitors that they had taken these funds. 

So if that is an overhang in the market, how do we make certain 

that this is effective in terms of getting credit out? 

Secretary GEITHNER. I think you said it exactly right. I think we 

have just got to keep working on it, and we need to help make sure 

that people up here understand that this is good policy, it is good 

for business, it is fair. And if you scare them to death, they are not 

going to come. Banks will not come. Strong banks will not come. 

So it will take work. It just takes some work, but I do not think 

this is beyond our capacity to solve. 

Again, I was in Minneapolis last week, and there was a small 

bank there that could stand up and say, as many, many banks can 

say, ‘‘I got some capital from the Government. I substantially expanded lending because of that. It was very helpful, very effective.’’ 

And they can point to their business customers that have loans 

today, can expand today because of that. We cannot solve these 

problems if we stigmatize or scare the people we have got to work 

with to make credit more available. 

Chairman CONRAD. Senator Gregg. 

Senator GREGG. Thank you, Mr. Chairman. 

I suppose I should respond to Senator Sanders, even though he 

is not here, and I appreciate that the Chairman does not want exchanges, so I did not participate in that. But, you know, in court 

proceedings, there is something called judicial notice, you know, 

such as that water runs down hill. I think we can take judicial notice of the fact that a socialist Senator from Vermont and a conVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00204 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
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servative Senator from New Hampshire are not going to agree, and 

I am going to accept that. 

This issue of recruitment, as you know, under the TARP language this tax on banks, which you are proposing to recoup the 

cost of the underlying event, was not supposed to occur until 5 

years. Now, we picked that date because we had presumed we 

would have a better sense of exactly what we needed to recoup. 

It appears from your numbers that you have testified to here 

that for the most part you are going to get the bank lending—to 

the extent you capitalize banks, you are going to get that money 

back with interest. And you have gotten from the big banks almost 

all of it back with interest. From your middle-sized banks, you 

have still got some out there, and you are talking about putting a 

little more out. 

The real place where we have not recouped yet is the automobile 

companies. Now, I saw where GM said they may pay back at least 

some portion, maybe their preferred but not their equity positions. 

So isn’t this premature to initiate this recoupment exercise in a 

context—in fact, AIG is another example. You said it is going to be 

30. CBO says it is going to be 9. Chairman Bernanke said it was 

going to be zero. 

Secretary GEITHNER. I agree with what you said, and we do not 

really know fully the ultimate cost of this thing. It is unclear. And 

the costs will come overwhelmingly from the combination of what 

we had to do in AIG, what the previous administration initiated in 

autos, and what we are doing in the housing side. And you are 

right. We will not ultimately know the full costs for some years to 

come. 

But there is a basic—— 

Senator GREGG. Doesn’t the law also say the recoupment exercise 

is supposed to start 5—— 

Secretary GEITHNER. No, it said I did not have an obligation to 

propose how to recoup until, I believe, 3 years out. But you may 

be right about the law thing. Let me just say why I think this is 

fair and important. A basic principle we are trying to underscore 

in financial reform is to say that we are going to create a system 

in the future where taxpayers are not exposed to the risk of loss 

if the Government has to act to put out a financial fire, and we 

want to make sure that the industry that benefits from those actions is bearing the costs of solving the crisis. 

We have proposed that in financial reform. We want to make 

sure that you are going to have a system that can put these large 

institutions through something like bankruptcy, and to make sure 

as that happens taxpayers are not exposed to any risk of loss. 

So we thought it was very important consistent with that principle, building on the model the FDIC uses now, to try to make 

sure that the large institutions that benefited the most are bearing 

the costs of the crisis and that we do so in a way that can help 

address this broad ‘‘too big to fail’’ problem by putting a fee on leverage and on risk. And we think we can begin that process now 

without putting at risk the broad progress we have achieved in trying to stabilize the system and bring down borrowing costs. 

Senator GREGG. Yes, but first off, the law is pretty specific, and 

I understand you are not familiar with it, but it is Section 134. It 

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says the recoupment exercise, the President shall submit a legislative proposal that recoups from the financial industry an amount 

equal to the shortfalls in order to ensure that the relief program 

does not add to the deficit or to national debt. That is supposed to 

be submitted 5 years from now. 

Secretary GEITHNER. Right. I apologize about the 5-year thing, 

but I think it is important to remind people of that obligation. We 

are trying to meet that obligation. We are doing this a little sooner 

than we needed to. 

Senator GREGG. Yes, but there may not 5 years from now be anything to recoup. In fact, we may actually have a positive cash-flow. 

So that is why we put it out 5 years. 

Secretary GEITHNER. That would be great, but—— 

Senator GREGG. So are we going to return this tax if we have a 

positive cash-flow? 

Secretary GEITHNER. Again, we think that there is still significant risk of loss, and we need people to understand that taxpayers 

are not going to bear a penny of that. 

Senator GREGG. Well, I appreciate that, but right now the people 

that you are asking to pay for it have for the most part paid their 

money back with interest. If you really are assessing this against 

significant potential for loss, it should be assessed against the auto 

industry, right? 

Secretary GEITHNER. Well, I do not think there is a fair way to 

do this. It is important for people to recognize—and I know you 

do—that the large institutions got enormous benefits from this not 

captured by the return to the taxpayer in dividends and warrants. 

And the costs of this crisis go well beyond the financial accounting 

costs that you see reflected in CBO estimates of losses. And so 

there is just a basic principle of fairness and fiscal responsibility 

to underpin what you helped write into law to say taxpayers should 

not be exposed to loss. We proposed what we think is a fair way 

to do that. 

Senator GREGG. Well, are you setting a precedent now that every 

time we have a recession of significant proportions that basically 

there will be a special tax assessed against entities which may 

have had a major part in playing the—in creating the recession 

after those entities have already repaid the debts that were used 

to stabilize the system with interest? 

Secretary GEITHNER. I think we are creating a different precedent. Again, this is modeled on what has existed for a long time 

for banks across the country under the FDIC—— 

Senator GREGG. Yes, but they have an insurance fund. This is 

not going into some sort of insurance—— 

Secretary GEITHNER. No, but even beyond that, the way that law 

works is if the FDIC has to take action to protect the stability of 

the system—or it has to recoup those costs in the form of a fee on 

institutions, so the precedent we are establishing I think is a good 

precedent, and it is a good precedent for incentives and behavior 

to make sure that people understand that the big institutions that 

benefit the most will bear the costs of future crises in some ways 

proportional to their benefits and their size. 

Senator GREGG. Well if that is true, then the automobile companies should be included in your tax. 

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Secretary GEITHNER. I understand that perspective and we are 

going to work very hard to make sure that we recoup as much of 

that loss as possible from what we had to do in the auto industry, 

again building on the actions that President Bush took in that context. 

There are different ways to cut this. You know, you could have 

done it much, much more broadly. You could have done it narrowly. And we would like to work with the Congress on the best 

design. We have made what I think is a very acceptable proposal 

but we know there is going to be different views on that. 

Senator GREGG. Thank you. I see Senator Sessions just arrived. 

Chairman CONRAD. Senator Sessions. 

Senator SESSIONS. Did I disappoint you? 

Chairman CONRAD. Yes. 

[Laughter.] 

Chairman CONRAD. You ask an honest question. But that is fine. 

We are always glad to have—— 

Senator SESSIONS. I was in the Judiciary Committee. 

I am sorry, Mr. Secretary, I could not be here. We just have a 

lot of big issues. I would just ask a few things. 

We are on track, according to CBO, and I do not think you would 

argue with it, to triple the public debt in 10 years. And their score 

is to show that interest on the debt would go from $187billion in 

1 year—I think last year—to $800 billion year in 1 year in 2019. 

I believe you have been quoted, so many have, as saying that is an 

unsustainable path. Would you maintain that? Is that your view? 

Secretary GEITHNER. I agree completely. I just would make one 

point of fact, which is that in January 2009, CBO also projected on 

reasonable assumptions about policy that we were on a path to 

double and triple the national debt. 

Now we are not consigned to that future. It is our responsibility 

to prevent that from happening. And that requires us to work together to try to make sure we are doing things that will bring 

those down. And that is within our capacity to present. 

But the largest part of that projected increase was baked into our 

fiscal future because of the choices made over the previous 10 

years, 8 years, because of the damage of the recession. 

Senator SESSIONS. Well, at some point you cannot just borrow 

your way out of a recession. If it is such a great idea, why didn’t 

we borrow three times as much? 

But let me ask you, a man told me at a town hall meeting in Evergreen, as my daddy says, you cannot borrow your way out of 

debt. 

Secretary GEITHNER. I think that is well said and I agree with 

that. 

Senator SESSIONS. Now the President’s budget projects that the 

debt held by the public is growing, as I understand it. And would 

you explain to us what it is that the Europeans have on their rule 

that debt should not exceed 60 percent of GDP? And how do they 

enforce that? And what is their view about that? 

Secretary GEITHNER. You are right about that, and it is a little 

uncertain how good their enforcement mechanisms are because I 

think we’d recognize like they do, they’d recognize like we do, 

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which is ultimately it is about political will and we need to find 

that will together to try to figure out how we prevent that. 

But I am glad you cited that because we have said very clearly 

in this budget, and we said in the last budget, that our economic 

strength as a country depends on showing a path to get those deficits down to the level where our debt burden is no longer growing 

and it stabilizes at an effective level. 

Now we have proposed policies that take us a long way to that 

goal, not far enough in part because we inherited a very large 

structural deficit. But you are right to underscore the fact that the 

basic test of policy and obligation of government is to make sure 

we are showing a path that the deficits are low enough so that our 

debt burden is no longer growing and stabilizes at an acceptable 

level. 

Again, this is something we can do. We have enormous benefit 

strengths they do not have. 

Senator SESSIONS. I just had—I do not want to keep our colleagues a lot longer. But the fact is your budget does not do anything about it. This is the course your budget has put us on. And 

it seems to me, according to our calculations—well, I guess CBO’s 

numbers—that the debt held by the public will exceed 60 percent 

of GDP this year and begin approaching 90 percent of GDP by 

2020. That is 10 years from now. 

Secretary GEITHNER. I think we can avoid that and I think we 

need to work to avoid that outcome. And I think that is within our 

capacity to do. 

Senator SESSIONS. Well, my view is that we all have spent too 

much. But I do believe the President has got to seriously talk about 

it. He made reference to it in the State of the Union. But to me 

it should have been a core part of his entire address, to alert the 

American people that changes are going to have to occur and they 

are not going to be pleasant for everybody who is used to getting 

so much money. 

I have to be critical of it. I think it was not sufficiently realistic— 

and I think if they are told that we are here, we have got to change 

this trajectory, and it is going to require us to do these things, and 

if we do them we can leave our country a healthy place for our children and grandchildren, there would be political support for it. I 

have not seen that talk yet. 

Secretary GEITHNER. I think that is well said and I agree with 

that, and I know the President does, too. But it is important to recognize also that to get there we need an economy that is growing. 

We need a sustainable recovery. We need to make sure Americans 

are more confident they are going to have a job and earnings are 

going to grow in the future. 

That is critical to everything we need to do to restore the damage 

caused to our long-term fiscal health. So I would just say, as you 

recognized, and you said it very well, about the importance of dealing with those long-term fiscal perils, there is no path to that without starting with making sure this economy is growing again and 

we have repaired the damage—— 

SenatorSESSIONS. I just would challenge one thing. There seems 

to be an assumption here, and the President has said it—perhaps 

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you have—that we know we have got a debt problem. We will 

worry about that next year. Right now we have got a recession. 

I was with a German official recently and they have not gone 

into this much debt and they are worried about other European nations such as the Brits, even, as I have heard them explain. 

Secretary GEITHNER. Actually, the Germans are actually doing a 

lot of very substantial government support for their economy now. 

So in many ways, they are doing what you would expect. Now they 

are going to do it differently. 

But I think you are exactly right. You are not going to make recovery sustainable, people confident in recovery, unless they are 

confident we are going to be able to move to bring them down. But 

you cannot solve the wreckage problem and the growth problem 

today by trying to focus right now on those long-term things. 

Again, we have proposed bringing down that deficit from over 10 

percent of GDP to below 4 percent of GDP in a relatively short period of time. And the measures we have proposed just for next year 

would reduce it by 2 percentage points of GDP. And we have been 

very honest in our budget to say that we get it below four, but that 

is not far enough. 

So I agree with much of what you said. I would just underscore 

again—— 

Senator SESSIONS. Well, the Europeans believe it ought to be 

below three, don’t they? 

Secretary GEITHNER. Oh no, we say in the budget also for an 

economy—we have different economies. 

Senator SESSIONS. I mean, that is their rule. 

Secretary GEITHNER. Yes, for an economy like ours, we are very 

similar—we are saying to be sustainable over time, the deficits 

need to be in the range of three. We get them, again, below four. 

Senator SESSIONS. It is not very comforting in 10 years when we 

are—well, we could talk about this more, but I will not belabor it. 

Mr. Chairman, thank you and I look forward to working with you 

as we strive to figure a way to do better. 

Chairman CONRAD. I thank the Senator. I thank him for his 

courtesy, as well. 

And I want to thank the Secretary for being here and, once 

again, at our invitation appearing before the Committee. I think 

you could hear around the table concerns about—especially concerns about the long term, concerns that I shared again this morning, as did the ranking member, as did members around this table. 

And certainly about the credit issues, which again when I think the 

history of this period is written, you will fare very well for what 

you have done in this first year, responding to a crisis that threatened a global financial collapse. 

I will never forget, as long as I live, being with the former Secretary and we were in a conference room over in the Capitol, being 

asked to come up with a recovery plan. And this was all night, I 

think it was all night on a Friday night, perhaps it was all night 

Saturday. I know I was here virtually all night both of those 

nights. 

And I will never forget, as long as I live, the stream of information that was coming in to us through the Secretary, your predecessor, with respect to what was happening to financial institutions 

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around the world, major institutions on the brink of failure in Germany and the German government moving to rescue them. Major 

institutions in Ireland, in England, in other European countries on 

the brink and their governments rushing to rescue them with an 

understanding that we all had to act. And we had to act together 

to prevent a collapse which could have taken us down a road far 

more severe than anything we have ever seen before, matching the 

Great Depression of the 1930’s. 

I believe we were perilously close to that. I believe the turnaround is really quite remarkable. That the credit spreads have 

now gone back to normal, that is amazing in 1 year. That we have 

gone from a negative 6 percent growth to a positive 5.7 percent in 

1 year. The job losses have gone from 700,000 a month to 60,000 

a month. That is a remarkable improvement. 

But it is also true, we have got more to do. In the short term, 

we have got to strengthen this recovery. In the longer term, we 

have got to pivot and we have got to deal with this debt threat. 

And I am very hopeful that this commission approach will work. 

After all, Senator Gregg and I worked 2 years to try to convince 

our colleagues. We are delighted 53 of them, a majority, voted with 

us on that matter. But 53 is not 60, and it requires 60. 

So now perhaps we will have another vote on that. But the President has indicated if a statutory commission is not put in place, he 

is prepared to put in place a commission by his executive order. 

And you have indicated that he will consult and you will consult 

with Republican leaders on how that is formulated. 

I appreciate that. I think it is critically important because if the 

Republicans are unwilling to participate, then we have got to find 

another way. 

And I must say, I was disappointed that seven of our colleagues 

on that side of the aisle, who were original cosponsors of the 

Conrad-Gregg proposal, when the roll was called, voted against the 

proposal that they themselves cosponsored. You know, let us be 

frank about everybody’s responsibility here. Let us be frank about 

everybody’s responsibility here. 

And the responsibility to get out of this ditch is not the administration’s alone. It is on both sides of this aisle. It is on both sides 

of this aisle. 

Again, I thank the Secretary for his leadership, for dealing with 

the extraordinary pressures that are on him and on this staff and 

on this administration and on this Congress and on this country. 

And we have got to work together to dig out. 

Senator Gregg and I, I think, have demonstrated that we are 

prepared to do that. Mr. Secretary, I think you have demonstrated 

that you are, as well. 

We thank you. The hearing will stand in adjournment. 

Secretary GEITHNER. Thank you, Mr. Chairman. 

[Whereupon, at 12:09 p.m., the committee was adjourned.] 

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CRISIS AND AFTERMATH: THE ECONOMIC 

OUTLOOK AND RISKS FOR THE FEDERAL 

BUDGET AND DEBT 

TUESDAY, FEBRUARY 9, 2010 

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:02 a.m., in room 

SD–608, Dirksen Senate Office Building, Hon. Kent Conrad, Chairman of the Committee, presiding. 

Present: Senators Conrad, Cardin, Whitehouse, Merkley, Grassley, Sessions, and Graham. 

Staff present: Mary Ann Naylor, Majority Staff Director; and 

Cheri Reidy, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. Welcome. The hearing will come to order. 

First of all, I appreciate very much our witnesses being here with 

conditions as they are, and I appreciate colleagues who are here 

and who are on their way. I especially want to thank Senator Sessions for being here to represent the Republican side of the aisle. 

Senator Gregg informed us that he has not been able to get back 

to Washington at this moment and hopes to be with us soon. But 

airports, as you know, have been closed, so anybody that was out 

of town has had a difficult time getting back. 

I do not know whether the votes scheduled this afternoon for the 

Senate are actually going to come off for not. For those who are 

thinking about tomorrow, we have a hearing scheduled for tomorrow. We are going to make a decision about that very soon because 

we have witnesses lined up. One thing we are considering is moving tomorrow’s hearing to the next day in light of the threat of additional snow this afternoon and through the evening and into tomorrow. If we do get another 10 or 12 inches, it would probably be 

very difficult for witnesses to get here. I am fortunate. I live about 

ten blocks away, so I can always get here. 

I want to again thank the witnesses very much. This is an important hearing on the economic outlook and risks for the Federal 

budget and debt. We are joined by an extremely distinguished 

panel of witnesses: 

Dr. Carmen Reinhart, Professor of Economics and Director of the 

Center for International Economics at the University of Maryland. 

Welcome. Good to have you here. 

230 

Dr. Simon Johnson, the Ronald A. Kurt (1954) Professor of Entrepreneurship at MIT’s Sloan School of Management, and Senior 

Fellow at the Peterson Institute for International Economics. 

Simon has appeared before this Committee in the past. We have 

always enjoyed his commentary and his testimony. 

And Dr. Donald Marron, a Visiting Professor at Georgetown’s 

Public Policy Institute and the former Acting Director of the Congressional Budget Office. Always good to have you back before the 

Committee as well. Dr. Marron is somebody who has served in a 

very distinguished way at the Congressional Budget Office, and we 

have always been indebted to him for his service there. 

This is Dr. Reinhart’s first appearance before the Budget Committee, so we especially want to make her feel at home. We look 

forward to her testimony, and Dr. Johnson and Dr. Marron are, as 

I have said, both well known here before the Committee. 

As the title of our hearing suggests, we are going to focus today 

on the Nation’s economic outlook and the risks we are facing that 

could affect the outlook, the Federal budget, and the Nation’s debt. 

I would like to begin with just a brief review of our economic situation. I think we all know that, when President Obama took office, we were in the midst of the worst recession since the Great 

Depression. The President moved quickly to followup on the steps 

that had been taken by the previous administration to avert an 

even sharper economic decline, and those policies, I think, are 

clearly working. 

The actions taken by the Federal Government over the last year 

have clearly helped pull us back from the brink. We have seen a 

dramatic turnaround in economic growth. Economic growth in the 

first quarter of last year was a negative 6.4 percent. By the last 

quarter of last year, it had improved to a positive 5.7-percent 

growth. 

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Now, I think it is very important to say none of us anticipates 

that that level of economic growth will continue. Many of us see a 

more tepid level going forward. 

We have also seen a steady improvement in the jobs picture. According to the revised estimates we received last Friday, in January of last year, the economy was losing more than 800,000 private-sector jobs in 1 month. Now, that is up from a previous estimate of about 700,000 jobs lost. So looking back, we can see in January of last year the job loss was running about 800,000 a month. 

By January of this year, the economy was losing about 12,000 jobs 


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in a month—a dramatic improvement, but still short of where we 

need to go in terms of dramatically reducing unemployment. 

And I must say all of these numbers, to those who are suffering 

the consequences of a weakened economy, are just numbers on a 

page. If you are someone who is unemployed or cannot find sufficient work or are underemployed, these numbers are cold comfort 

to you. It is important to recognize that things are improving. At 

least the free fall that we were in has been stabilized, and we are 

starting to move back in the right direction. 

According to estimates we received last Friday, the unemployment rate did fall to 9.7 percent, but that is still far too high. Last 

year’s recovery package is still providing stimulus. We know that 

its impact on economic growth likely peaked during the third quarter of 2009. According to an estimate from Goldman Sachs, the recovery package provided about 3.3 percent of increase in real GDP 

at its peak during the third quarter. Following the third quarter, 

the contributions to growth of last year’s recovery package began 

to diminish. 


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Given the high unemployment rate, the continuing concerns 

about the economy, and the fact that the impact of the recovery 

package has started to wane, I think it is appropriate for us to be 

considering additional job creation measures at this time. So I 

would like to hear from our witnesses their views on the benefits 

of enacting such measures at this time. 

The economic downturn and the Federal response to it has contributed significantly to the worsening of our budget outlook. Now, 

this is the other side of the picture. In the short term, measures 

that were taken to stabilize the economy and stop a precipitous colVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00240 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH

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lapse have been effective. But we know there is a price to be paid, 

and the price to be paid is increases to our deficits and debt. 

This chart depicts the projected deficit under President Obama’s 

proposed budget over the next 10 years. It shows the deficit coming 

down from a high of $1.56 trillion in 2010 to $706 billion in 2014, 

and then slowly resuming its climb back to $1 trillion in 2020. 

I have said before that I can understand increases in deficits and 

debt in the short term to deal with an economic weakness and to 

prevent an economic collapse. But I am increasingly concerned 

about the out-years because we are already on an unsustainable 

path, and I am concerned the President’s budget does not focus sufficiently on our long-term need to deal with the debt threat. 

The Nation’s debt outlook is even worse, particularly over the 

long term. The fact is we are on a completely unsustainable course 

long term. I personally believe we need a two-pronged strategy 

going forward—one for the near term, one for the long term. In the 

near term, I believe we must emphasize policies that encourage job 

creation in the private sector. But for the long term, we must pivot 

to controlling our debt. The economic security of our Nation depends on it. 

With that, I will turn to Senator Sessions for any opening remarks he might want to make, and then we will go to our witnesses, and then we will have a chance for questions of the panel. 

Again, Senator Sessions, thank you so much for being here. It 

speaks very well of a man from Alabama to be here with the 

weather conditions we are currently experiencing in this city. In 

North Dakota, this is no big deal, but I am sure in Alabama this 

would be an all-out emergency. 


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OPENING STATEMENT OF SENATOR SESSIONS 

Senator SESSIONS. It was fun for me to be out a little bit Sunday, 

to walk around and see the beauty of the snow. It is really a stunning sight. But it does cause difficulties for travel. 

Chairman CONRAD. Well, if you like the beauty of this snow, I 

would like to invite you to North Dakota. 

[Laughter.] 

Chairman CONRAD. Anytime in January or February of next 

year. In fact, maybe spend all of January and February. 

Senator SESSIONS. Maybe we can invite you south. That would 

be a better idea. 

I thank all of you for coming, and I look forward to your discussion. I frankly do not know how well our actions worked after the 

collapse in the financial markets. Those who supported it, promoted it, funded it, ran it, all tell us if we had not done it, we 

would be so much worse than we are today. But forgive me if I am 

not sold. I just believe that a lot of things had to be done, and I 

have supported a number of things, but the fundamental actions 

that we took were troubling to me. 

The Fed had to act. We know that. And the Congress has some 

things that we needed to do. But I am troubled by it all. The 

TARP, $700 billion, had to pass before the Asian markets opened 

the next morning, they originally told us. And then when President 

Bush had left office, he had not spent his $350 billion half of it yet. 

And one man was allocating $700 billion. So forgive me if I am uneasy about that. 

That $700 billion was distributed in ways directly contrary to 

what Congress was told. We were told it was to buy toxic assets, 

and within a week they were buying stock in companies, insurance 

companies, then buying automobile companies. So forgive me if I 

am not happy and the American people are not happy. 

Second, the stimulus package, the $787 billion, it is now 840 because we are spending more under the commitments made than we 

intended when we passed it. I think it has produced little. In fact, 

I think it is one of the great tragedies in the history of the country 

that we have gotten so little out of such an incredibly large expenditure, the largest single expenditure in American history. I do not 

think it has gone very well. I do not think it has created the jobs 

they projected it would create, even. 

The bill that some of us supported that Senator Thune and Senator McCain offered for half the cost, according to Christina 

Romer’s own analysis, would have created twice as many jobs and 

half the debt impact on our country. 

So we have got some serious problems. One of the things that 

happens with budgets that, Mr. Marron, as Director CBO at the 

time you were over there—you might be aware of this; most Americans are not—that the only year that really counts is the year you 

are in. And the year we are in, for example, has a gimmick if the 

President’s job stimulus package were passed, like the one similar 

to the House version that he praised in the State of the Union, it 

has $100 billion more in ten. He is counting $170 billion in the 

next 10 years, but he is not counting the 100 in this year. It is a 

violation of last year’s budget. But we will have to have a vote sufVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00242 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
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ficient to raise the spending level through emergency designation, 

I guess, to spend that money this year. 

So I guess what I am saying is what I am hearing from the incumbent administration that concerns me is that , it is always next 

year. Next year. We have got to do all this this year. We are not 

going to worry about how much debt is being run up this year. We 

will worry about it next year. And the chart you put up, Mr. Chairman, is, however, the budget that they are citing. So we have got 

to reduce the budget. 

Now, I offered legislation and have 16 or 17 Democrats who support it which says let us take that budget we passed last year and 

let us follow those numbers, which were basically 1- and 2-percent 

increases over the next 5 years. But we did not get the 60 votes 

necessary to pass it. But that would have been a real step, I think, 

that would help us send a message to the whole world and to our 

own American people that we are going to contain discretionary 

spending, at least for a while, and then we absolutely, as, Mr. 

Chairman, you have led on this, have to discuss how we can reduce 

our entitlement spendings, and all spending, really. But we have 

got to act. That is all I am saying. 

I look forward to hearing from you. The American people are unhappy with us. They are not happy with us. Unemployment is high. 

The numbers were not good this last week, another 20,000 increase 

in unemployment. And I think it takes about an 800,000-increase 

to begin to reduce the total unemployment numbers. So I am really 

worried about unemployment. We want to have growth, and hopefully we can. 

Mr. Chairman, thank you. I am sorry Senator Gregg is not here. 

I know he has got a difficulty, but I know you and he have worked 

on a number of issues that are important, and I hope to be able 

to work with you, too. 

Chairman CONRAD. Thank you, Senator. Again, thank you very 

much for being here. Now we will turn to the witnesses. Dr. Carmen Reinhart, Professor of Economics and Director of the Center 

for International Economics at the University of Maryland. Very 

timely for you to be here given the developments on the international front. Please proceed with your testimony. Then we will 

go to Dr. Johnson and Dr. Marron. Dr. Reinhart. 

STATEMENT OF CARMEN M. REINHART, PH.D. PROFESSOR OF 

ECONOMICS, AND DIRECTOR, CENTER FOR INTERNATIONAL 

ECONOMICS UNIVERSITY OF MARYLAND 

Ms. REINHART. Thank your, Chairman Conrad and other members of the Committee, for the opportunity to comment on the U.S. 

economy and the risks for the budget and debt. I am a professor 

in the Department of Economics at the University of Maryland. I 

suspect that I was invited here today because, for more than a decade, my research has focused on various types of financial crises, 

and that includes their fiscal implications and other economic consequences. One of the main lessons emerging from this work is that 

across countries and over time, severe financial crises follow a similar pattern. 

In a paper written over a year ago with my coauthor Ken Rogoff, 

we examined the depth and duration of the slump that invariably 

238 

follows financial crises. The recessions following severe post-World 

War II crises tended to be protracted affairs. Asset market collapses were deep and prolonged. On a peak-to-trough basis, real 

housing prices declined, on adviser, 35 percent, and this decline 

stretched out over 6 years. Equity prices collapsed on an average 

of 55 percent; the recovery from the bottom was quicker. To put it 

in context, in the present downturn, here in the United States real 

housing prices have already fallen 36 percent from their February 

2006 peak. 

Not surprisingly, banking crises are associated with profound declines in output and employment. The unemployment rate rises an 

average of 7 percentage points over the down phase of the cycle, 

which lasts an average of 4 years. We are following this track: the 

U.S. unemployment rate bottomed at 4.4 percent in December 

2006, about 6 months before the crisis broke; and by its recent 

peak level in October of 2009, the unemployment rose 5.7 percentage points. 

Historically, these conditions produced a marked deterioration in 

budget deficits. Correspondingly, the real value of Government debt 

soars after financial crises of this order of magnitude, rising an average of 86 percent in the major post-World War II episodes. The 

main cause of the debt explosion is not the widely cited costs of 

bailing out the banking system. Nor is it the fiscal stimulus, as 

many countries in our sample did not implement such policies. In 

fact, the critical factor is the collapse in tax revenues that follows 

in the wake of deep and prolonged economic contraction. Our estimates of the rise in Government debt are likely to be conservative—the 86 percent—as they do not include increases in Government guarantees, which also soar. 

Government debt has been soaring in the wake of the recent 

global maelstrom, especially in the epicenter countries. In related 

work with Rogoff I completed only a few weeks ago, we calculated 

the increase in inflation-adjusted public debt that has occurred 

since 2007. And for five countries with systemic financial crises— 

which include the United States and the United Kingdom—average 

debt levels are up by about 75 percent. Even in countries that have 

not had a major financial crisis, debt rose an average of 20 percent 

in real terms between 2007 and 2009. 

So our main focus is on the longer-term macroeconomic implications of much higher public and external debt. We examine in this 

work the experience of 44 countries spanning up to two centuries 

of data on central government debt, inflation, and growth. Our 

main finding is that across both advanced countries and emerging 

markets, high debt-to-GDP levels, debt levels, gross debt above 90 

percent, are associated with notably lower growth outcomes. Above 

90 percent, median growth rates fall by 1 percent; average growth 

rates fall considerably more. In addition, for emerging markets, 

there appears to be a tighter threshold for external debt, a lower 

threshold, so that when external debt reaches 60 percent of GDP, 

annual growth declines by about 2 percent, and for higher levels 

of debt, growth is cut in about in half. Our international and historical shows that seldom do countries simply grow their way out 

of their debt burdens. 

239 

There are also thresholds in debt. Why 90 percent? While the 

exact mechanism is not certain, we presume that at some point, interest rate premia react to unchecked deficits, forcing governments 

to tighten fiscal policy. Higher taxes have an especially deleterious 

effect on growth. We suspect that growth also slows as governments turn to financial repression to place debts at sub-market interest rates. 

Of course, there are other vulnerabilities associated with debt 

buildups that depend on the composition of the debt itself. One 

common mistake as debts soar is for governments to ‘‘play the yield 

curve,’’ shifting to cheaper short-term debt to economize on interest 

costs. Unfortunately, a government with massive short-term debts 

to roll over is ill positioned to adjust if rates spike or market confidence fades. 

Even aside from high and rising levels of public debt, many advanced countries, particularly in Europe, right now are saddled 

with extraordinarily high levels of external debt, or debt issued 

abroad by both the government and private entities. In the case of 

Europe, the advanced country average exceeds 200 percent of GDP. 

In private debts, U.S. debts exceed 300 percent, and they are at 

their highest level since 1916 where the historical statistics of the 

United States began to record this data. Current high private domestic and external debt burdens would also seem to be an important vulnerability to monitor. Downgrades, ratings downgrades, 

usually follow debt. 

Given these risks of higher government debt, how quickly should 

governments exit from fiscal stimulus? This is not an easy task, especially given weak employment, here in the United States and 

elsewhere. In light of the likelihood of continued weak consumption 

in the U.S. and Europe, rapid withdrawal of stimulus could easily 

tilt the economy back into recession. To be sure, this is not the 

time to exit. It is, however, the time to lay out a credible plan for 

a future exit. The sooner our political leadership reconciles itself to 

accepting adjustment, the lower the risks of truly paralyzing debt 

problems down the road, the likes of which we are seeing in Europe 

right now. Although most governments still enjoy strong access to 

financial markets at very low interest rates, market discipline can 

come without warning. Countries that have not laid the groundwork for adjustment will regret it. 

This time is not different. Thank you. 

[The prepared statement of Ms. Reinhart follows:] 

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Chairman CONRAD. Thank you for your excellent testimony. 

We go to Dr. Johnson next and then Dr. Marron, and then we 

will open it up to questions. Dr. Johnson. 

STATEMENT OF SIMON JOHNSON, PH.D., RONALD A. KURTZ 

(1954) PROFESSOR OF ENTREPRENEURSHIP, MASSACHUSETTS INSTITUTE OF TECHNOLOGY, SLOAN SCHOOL OF 

MANAGEMENT, AND SENIOR FELLOW, PETERSON INSTITUTE 

FOR INTERNATIONAL ECONOMICS 

Mr. JOHNSON. Thank you, Senator. 

About a year ago, I testified before this Committee, and I think 

our discussion together at that point came to the conclusion that 

we faced a pretty tough year, and I think that that discussion 

turned out to be exactly right. 

My recollection is that we discussed contraction in the global 

economy for the first time since World War II, roughly around a 

1-percent decline on a year-on-year basis. The IMF’s latest number 

for 2009 is a minus 0.8 decline, so I think we were exactly in the 

right place there. 

Now, of course, at this stage we should be discussing a recovery. 

We have a sharp decline. The post-war experience for the global 

economy and for this economy is you have a fairly rapid recovery. 

And the numbers that you showed us for the third and fourth quarters for last year, of course, are encouraging in that direction. 

But I am worried, again, about the dynamics that we face during 

this year. I think there is a great deal of volatility ahead, some of 

which is domestic for the reasons that Professor Reinhart just 


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talked about; some of which has a global origin that I can expand 

on in a moment. And I think that while the headline numbers for 

this year, the year-on-year average growth numbers, will indicate 

recovery, a modest recovery, if you look at the fourth quarter-onfourth quarter numbers, so look at the dynamic within 2010, you 

are going to see something quite different. 

In particular, in the second half of this year, I think there is 

going to be a slowdown. I am not suggesting at this point that we 

will have a double-dip recession. That would imply an actual decline in output in the second half. But I do think that the pace of 

growth will slow. I think the pace at which jobs come back will 

slow. And I think this is a major concern for the budget and for 

job creation, as you mentioned at the beginning, Senator Conrad. 

My overall projection on the fourth quarter-on-fourth quarter 

basis, which is, I would suggest, the number we might focus on 

today, is that the global economy will grow around 3 percent. Now, 

traditionally, that is where the IMF would draw a line on global 

recession. They have moved the goalpost, given what we have seen 

in the past 2 years, so that now they will call it global recession 

at perhaps a 1-percent rate. But 3-percent global is fairly slow, and 

this rate would be mostly held up by what is happening emerging 

markets. And I think if we have time we can probe to what extent 

that is sustainable also beyond 2010. 

Now, I think the weaknesses in the U.S. economy are well known 

to you, and Professor Reinhart already mentioned the main points. 

Let me just flag for you that the consumer sector is weak. Lowerincome households in particular have a substantial debt overhang. 

Housing prices seem soft in most parts of the world, and asset 

prices, based on particularly the global picture that I am painting, 

will remain volatile. So households do not feel their wealth has 

gone back up matching their recovery in stock prices, for example. 

Residential investment is almost certainly not going to lead this 

recovery. Business investment I think may be stronger. There are 

issues of credit availability for the small business sector, which I 

imagine we will talk about later, but in any case, this component 

of final demand is not big enough to pull the U.S. back to the kinds 

of growth rates we want. 

Now, in addition to all of that, net exports, which has been a 

brighter part of the picture in the United States over the past 12 

months, is likely not to be so strong over the next 12 months for 

the reasons that I will talk about in a moment. 

The fiscal stimulus, as you said, continues, but its impact on 

growth weakens. I agree with the Goldman Sachs analysis on that. 

And, of course, we should expect the Federal Reserve to withdraw 

its support for mortgage-backed securities as we go into the spring. 

Despite the weakness of the economy, despite the continuing high 

unemployment, this is what the Fed, I think, is very clearly indicating, both directly and indirectly. So all this adds up on domestic 

grounds to a difficult second half. 

But that is not the worst part of the picture. The worst part of 

the picture is, I am afraid, that a serious crisis is brewing in Western Europe where there are many people who actually claim this 

time is different, and I agree—well, I would apply Professor 

Reinhart’s book and conclusions to suggest that it is actually not 

244 

that different. Greece has a serious sovereign debt problem. These 

issues are spreading also to Portugal and Spain, without doubt. 

There may be implications for Ireland and even Italy. 

There is a great reluctance on the part of the stronger European 

countries to help the weaker European countries. We can discuss 

the details if you would like, but basically, they do not have an institutional mechanism in place. They are not good at creating one 

quickly. They will not, in my assessment, bring in the International 

Monetary Fund. And I was, as you know, chief economist at the 

IMF through August of 2008, and I am very happy to expand on 

both the procedures and the politics behind that assessment. 

But if you put all of this together, you are looking at a substantial shock to government credit, which you will see in credit ratings, you will see in interest rates, you will see in credit default 

swap spreads. And the big unknown in this picture is what will 

happen to the financial sector. 

Now, we obviously have still too-big-to-fail banks. In fact, I think 

we can reasonably argue that certainly as we wait for financial reform to come through, this problem has not been addressed. If anything, it has gotten worse. The Europeans have this problem on a 

much larger scale, by the way. Their big banks are much bigger 

relative to their economies, and some of these very big banks are 

in quite small economies that cannot, in my assessment, sustain 

from a fiscal point of view an additional big financial shock. 

So Switzerland, for example, has two massive banks currently 

with assets and liabilities roughly 6 or 7 times the GDP of Switzerland, looking at the global picture. We can argue about the right 

metric there. But if the bank fails, it is the size of the bank’s global 

balance sheet relative to your domestic fiscal position. 

The situation in the United Kingdom is not much better. There 

is a massive contingent liability on their balance sheets, as, I would 

argue, there is on our balance sheet. And I think Senator Sessions 

was exactly right to stress the TARP experience where you were 

asked to provide money to buy toxic assets and then it turned out 

to buy shares in banks and other companies. I do not think that 

is off the table now in Europe, and I fear that it will come back 

to haunt us and come back to you as a budget matter in the United 

States. That contingent liability is very big. I would say it is at 

least 40 percentage points of GDP based on our recent experience. 

If you follow Professor Reinhart’s book carefully, I think you would 

even say it is larger than that. We are still carrying that liability; 

so are the Europeans. 

Now, how this will spread through the financial system is very 

hard to say. My current estimate is that some of it will spread 

through the credit default swap market, which is, again, 

unreformed, completely opaque, and actually has not been addressed. The issues of derivatives and off-balance-sheet liabilities 

have not been addressed since the crisis of 1999 when Long Term 

Capital Management failed. We are a long way behind this, and 

this all has fiscal implications. 

And, in conclusion, I would like to stress and reinforce what you 

said, Senator, and what Senator Sessions said and what Professor 

Reinhart said, about the necessity of a medium-term framework. 

You do not want, I think, to have fiscal austerity now. That would 

245 

not be the right measure. If Europe swings into fiscal austerity because of their inability to manage their way through this crisis, 

that would be bad for growth. The euro will weaken substantially 

anyway, in my assessment. That is part of what is going to hurt 

our next exports. They and we need an exit strategy, a mediumterm framework that tells you how entitlements are going to be 

handled over a 5-, 10-, 15-year framework and what the tax base 

is and what the gap is between those. And, of course, Senator 

Conrad, when you said that the debt has to be controlled, you are 

absolutely right. I would just add to that the foreign dimension, because we have not just a large domestic debt, which, of course, 

Japan sustained for a long time and now it really catches up with 

them. That is 20 years of struggling with that debt. Most of their 

debt is held domestically. An increasing amount or a large amount 

of our debt is held by foreigners, and this has, I think, both economic and geopolitical consequences. 

Thank you. 

[The prepared statement of Mr. Johnson follows:] 

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Chairman CONRAD. Thank you very much for your excellent testimony. 

Dr. Marron, welcome back. It is always good to have you here. 

Please proceed. 

STATEMENT OF DONALD MARRON, PH.D., VISITING 

PROFESSOR, GEORGETOWN PUBLIC POLICY INSTITUTE 

Mr. MARRON. Great. So thank you, Chairman Conrad and the 

members of the committee, for having me up to talk about the economic outlook and the fiscal situation. 


58153.140
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I guess on a personal note, I want to say that I have previously 

appeared before you in a professional capacity working for the Congress, and now I am appearing as a private citizen, and I must 

admit I find it incredibly liberating. So I am now free to have my 

opinion, so watch out for what you have asked for. 

[Laughter.] 

Mr. MARRON. So as this committee and all its members are very 

well aware, our nation is on an unsustainable fiscal path. If current policies continue, we will run trillion-dollar deficits in the 

years ahead, even after the economy recovers, which is quite striking, and the public debt will rise faster than our ability to pay it. 

Persistent deficits and rising debt will undermine American prosperity, threaten beneficial social programs, and weaken our position in the world. 

Those threats deserve immediate attention, but as this committee is also well aware, our economy remains fragile. Payroll employment has fallen by about 8.4 million jobs since the start of the 

recession and long-term unemployment is at record levels. Recent 

data, as the Chairman mentioned, have provided some glimmers of 

hope, strong GDP in the fourth quarter and a decline in the unemployment rate in January, but our economy has a very long way 

to go. You thus face a very difficult challenge of balancing concern 

about current economic conditions with a meaningful response to 

our looming fiscal crisis, and in thinking about that balance, I just 

want to make five points. 

So the first, and this will now repeat what the Chairman said 

and what my fellow witnesses have said, we should not expect a 

rapid recovery. It is a good sign that the economy grew strongly in 

the last quarter of last year, but for a whole host of reasons that 

we have already heard discussed, I would not anticipate that to 

continue. We are on a recovery path, but I think the Chairman 

used the word tepid. I would call it moderate—modest, not one 

where we should expect rapid. 

Second is that uncertainty is actually one factor that has been 

holding the economy back. Uncertainty discourages investment and 

hiring and thereby undermines growth, right. If you put the shoes 

of someone deciding whether to make an investment, whether to 

hire someone, that is a much easier decision to make if you have 

some visibility into what the future will hold. 

Now, the good news is that economic uncertainty has gone down 

dramatically, that the economic environment has improved and is 

more conducive to growth. The bad news, though, is that policy uncertainties are very high. Senator Sessions, you mentioned that 

some of your constituents are mad with you. I sort of tried to talk 

to all the business people I know before I came up for this testimony to ask them what was on their minds and what would encourage job creation, and for better or for worse, a lot of them are 

very upset about just the uncertainty they face. They don’t know 

what is happening with tax policy. They don’t know what is happening with health care, in addition to what they don’t know that 

is happening with the economy. 

Having worked up here in government for a long time, I understand why some of these uncertainties exist and are necessary, but 

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ties and give people some more clarity about what the future holds. 

The extreme example of that would be what is happening with the 

estate tax, which is more of a personal thing, but in some cases a 

business thing, but obviously there are many other examples on 

the tax side. 

No. 3, persistent deficits and rising debts pose a serious risk to 

long-term economic growth, and so again, as my fellow witnesses 

have said, concerns about the near-term economic outlook should 

not deter Congress from taking steps to strengthen our fiscal positions over the next decade. Again, you know, major steps toward 

fiscal consolidations shouldn’t take effect immediately, right. We 

are not looking for cuts in 2010 and 2011. But Congress should 

begin now to plan for deficit reduction and debt stabilization in 

later years. We need an exit strategy, and that exit strategy should 

include clear goals and a credible means for achieving them. 

President Obama outlined some steps in that direction in his 

budget, but to be honest, I feel that they fell far short of what is 

required. Indeed, under his budget, the debt would grow faster 

than the economy in every single year of the budget window. 

To address that concern, the President also proposed the creation 

of a fiscal commission that would be tasked with stabilizing the 

debt-to-GDP ratio in 2015 and beyond. I have two concerns about 

this proposal. First, I don’t think the target is aggressive enough. 

If you took it seriously, as written, it would have the effect of stabilizing debt-to-GDP around 71 or 72 percent of GDP. That is obviously better than exploding and growing, but my own personal 

preference would be to see it come down to some number like 60 

percent of GDP by the end of the budget window. And so I would 

like to see a commission’s target be more aggressive. 

And then second, obviously, as you know, there are institutional 

features of the proposal that are troublesome. My preference would 

be what you, Chairman Conrad and Senator Gregg, have proposed, 

of having an actual statutory commission that is backed by the political legitimacy of being passed by the Congress, signed by the 

President, with all the things that go along with that. And I have 

concerns and questions about whether a non-statutory commission 

can get there. 

Obviously, what I would be looking for is something that has the 

power to obviously be paid attention to in Congress, something for 

which everything would be on the table. I am very troubled when 

I hear some people say that Social Security ought to be off the 

table, other people saying that tax revenues ought to be off the 

table. I think if we are seriously trying to address our fiscal concerns, you ought to let this commission pull on all the levers and 

they can judge how to balance them. 

Fourth, and this is a short one, just bringing the long-term to the 

present day, a credible plan to reduce future deficits is not just 

about the future. If we do it well, it will help keep long-term interest rates low today, thus strengthening our current recovery. 

And then fifth and finally, in the long term, bringing our deficits 

under control will require both spending restraint and increased 

revenues. Spending restraint should receive greater emphasis, I 

think, both because spending is the primary driver of our long-run 

budget imbalances, and because higher government spending may 

254 

slow economic growth. Given the government’s existing commitments, however, it is unlikely that spending restraint alone can put 

our nation on a sustainable fiscal trajectory. 

As policymakers consider how to finance a larger government, 

they should, therefore, give special attention to figuring out ways 

to make our tax system more efficient. For example, think about 

ways to tax consumption rather than income. Think about ways to 

broaden the tax base rather than increase rates. And, to the extent 

possible, think about ways to tax undesirable things, like pollution, 

rather than desirable things, like working, saving, and investing. 

Thank you. 

[The prepared statement of Mr. Marron follows:] 

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Chairman CONRAD. Excellent testimony, all three, just terrific, 

and I appreciate it very much. 

So let us go right to it. This committee has a special responsibility to our colleagues with respect to the budget, and it is pretty 

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mittee was formed, when budget policy can have such a profound 

effect on economic issues, economic growth, and all the rest. 

So, Dr. Reinhart, if you had this responsibility, what would be 

the strategy that you would pursue, short-term, long-term, with respect to deficits and debt, with keeping the eye on the effect of the 

economy? What would you advise this committee to do, both shortterm and long-term? 

Ms. REINHART. Let me begin by saying that the—in my remarks, 

I highlighted that I think this is the time to lay out a credible plan 

for deficit and debt reduction, but it is not the time to start implementing that, and I would like to just elaborate on that remark, 

especially as it pertains to the experience of other episodes, including here in the United States, in which victory was declared prematurely and stimulus was withdrawn. This was the case in 

Japan, which has had a decade-long lingering crisis. It was the 

case in the Great Depression. My work with Vincent Reinhart has 

documented these episodes— 

And that risk is one that should be borne in mind and that is 

why I stress the credible path, and the credible path, I think, could 

benefit from looking also at the experience of our neighbor to the 

north, Canada, in the mid-1990’s, which implemented a very significant debt reduction program. 

Chairman CONRAD. And what was the result? 

Ms. REINHART. The result was very—I would describe it as threefold. One was they achieved their intended goals in bringing their 

deficits and their debts, the Canadian debt profile. That has been 

reflected in the risk premium. Canada’s risk premium had risen 

and, in fact, was moving in tandem with emerging markets by the 

mid-1990’s. 

Chairman CONRAD. Higher interest rates? 

Ms. REINHART. Higher interest rates. Higher interest rates, higher debt servicing costs, more volatility. 

Let me add that a second element of their program was also— 

which I highlighted briefly in my remarks—is paying a lot of attention to how when you have a lot of debt, how debt is managed and 

reducing their vulnerability to and reliance on short-term debt, and 

in the Canadian case, on foreign currency debt, which, of course, 

we don’t have. 

Chairman CONRAD. Dr. Johnson, same question to you. What 

would your advice be to this committee, short-term and long-term? 

Mr. JOHNSON. Well, Senators, as I think you know, I am not in 

general a fan of fiscal stimulus. In fact, I testified before this committee and some other Congressional committees more than a year 

ago saying that it was only the extraordinary circumstances we 

faced due to the collapse of our credit system, due to the problems 

brought on by the reckless behavior of our big banks, that led me 

to suggest that we should at that point have a stimulus around 

$500 billion. Roughly speaking, I think we ended up in the same 

ballpark. 

I now would hold back again from further stimulus. I think we 

need to see what happens. I think within the menu that the Congressional Budget Office, for example, has assessed for you addressing employees’ payroll taxes, if we come to that, may be an 

appropriate measure to consider. But I am not yet ready to do that. 

263 

So in terms of the short-term, I am not advocating further stimulus at this time. And in terms of the longer-term, I think that the 

fiscal commission idea is an important one. I think Dr. Marron hit 

a couple of key points, including nothing being left off the table. 

And, of course, Medicare is the big item. Now, this is not a call for 

fiscal austerity immediately. Professor Reinhart explained why 

that is a bad idea. I fear that may happen in Europe, which will 

have a negative impact on the global economy that should be avoided, and I am calling for them to not do that in Europe and to find 

ways to help themselves. 

But I do think that a fiscal commission that explains to the holders of our debt where the trajectory is going, and perhaps you 

would argue—we can argue technically and we could argue politically about what will be the priorities, but everything should be on 

that table. I think that is absolutely critical. If you had that in 

place, if you had a credible medium-term framework in the United 

States now, you would have a lot more room for maneuver on 

short-term measures. In fact, I might even right now call for reduction in payroll taxes if we had the medium-term framework, but we 

don’t. That is dangerous. 

Chairman CONRAD. So you are in some ways linking the two in 

your mind. That is, it would be a lot more credible to do something 

with respect to payroll taxes to provide additional lift to the economy if you had some credible process in place to deal with the 

longer-term debt. 

Mr. JOHNSON. Absolutely. Using fiscal stimulus, as you know, is 

something that we have moved away from, actually, in general, in 

industrialized countries over the past 20 years because it comes 

with long and variable lags and it tends not to hit the economy exactly as you hope and when you hope. But there is a case for using 

it on a temporary basis, particularly if you can persuade the financial markets, which includes the Chinese government. 

I mean, let us be frank. If you can persuade everyone that your 

debt is not on an explosive path and you have the legislative or 

other institutional mechanisms in place to ensure this is not just 

a vague promise—the British government today faces a huge problem because their commitments on the fiscal side are, in my assessment, not credible. We don’t have that problem yet in the United 

States, but you need a fiscal commission to really assure that going 

forward. If you had that commission, it would create a lot more 

room for short-term maneuvering. 

Chairman CONRAD. Dr. Marron, same question to you. If your responsibility was to advise this panel short-term and long-term, 

what would your advice be? 

Mr. MARRON. Sure. So starting with the long-term, as I hinted 

before, what I personally personally would like to see is a numerical target that lays out what is it that in the latter part of the 

budget window we want to accomplish, and—— 

Chairman CONRAD. What do you think it should be? 

Mr. MARRON. We can obviously negotiate numbers, but just to 

make up numbers that are plausible for discussion purposes, say 

something like you want to cap the growth of debts to GDP at, say, 

70 or 72 percent in 2013—— 

264 

Senator SESSIONS. Mr. Chairman, could I interrupt? I am sorry. 

I see some of my students from Alabama, St. James School. 

Chairman CONRAD. Absolutely. 

Senator SESSIONS. That is an excellent school in Montgomery. 

You see that lady on the front row with her red hat with an ‘‘A’’ 

on it? That is the No. 1 football team in America, University of Alabama. So St. James is—— 

Chairman CONRAD. Well, wait a minute. Wait a minute. Wait a 

minute. In North Dakota, we make that same claim. 

[Laughter.] 

Senator SESSIONS. You have a good, competitive team. We usually lose to them in the playoffs. But thank you for coming. 

Chairman CONRAD. Thank you, and thanks for—— 

Senator SESSIONS. They had a hard day in the snow, but I think 

they are probably enjoying it. 

Chairman CONRAD. Thanks for acknowledging them. 

Senator SESSIONS. Sorry to interrupt you, Mr. Chairman. 

Chairman CONRAD. No problem at all. Glad that you did. 

Dr. Marron? 

Mr. MARRON. Sure. So, say, 70 percent of debt-to-GDP ratio in 

2013 is a nominal goal, and then, as I said, to then bring it down 

through the budget window. I suggested—— 

Chairman CONRAD. Seventy percent by when? 

Mr. MARRON. In, say, 2013, as a cap. 

Chairman CONRAD. OK. 

Mr. MARRON. And then 60 percent by the end of the budget window. Now, you may be familiar with the Pew-Peterson Commission 

on Budget Reform recently. They put out a goal of getting to 60 

percent by 2018, so I’m being slightly less aggressive than they are. 

Chairman CONRAD. Yes. 

Mr. MARRON. And again, you know—— 

Chairman CONRAD. Let me just say, I just this morning looked 

at a plan that would get us on that path. It is daunting. 

Mr. MARRON. It is. 

Chairman CONRAD. It is truly daunting. I hope that my colleagues understand how serious the situation is that we confront, 

because it is dire. The long-term circumstance that we confront is 

truly dire. Now, certainly, we are not in as bad of shape as Japan, 

debt-to-GDP. We are not in as serious of shape as parts of Western 

Europe that confront a debt crisis today. But it is very clear that 

we could, in very short order confront our own debt crisis, and the 

consequences to this country would be enormous. 

I wish it weren’t so. I wish it weren’t so. But if you have studied 

the trend lines—Dr. Marron, you have, Dr. Johnson, you have, Dr. 

Reinhart, you have—if there is anything that jumps out at you is 

long-term. I am talking now 10 years and out. We are really facing, 

if we don’t do something about it, consequences that could have 

enormous adverse impact on this nation’s economy. 

Do you agree with that statement, Dr. Marron? 

Mr. MARRON. Oh, absolutely. 

Chairman CONRAD. And what leads you to that conclusion? I just 

said something that in some circles is very controversial. Why do 

you think it is true? 

265 

Mr. MARRON. Well, and this is something I have relied a lot on 

the research by Carmen Reinhart and Ken Rogoff, that if you look 

at history, which is our best place to look, for examples of other 

countries that have experienced these things, getting on a path 

where the debt grows faster than the economy persistently, right, 

ends in tears. And it is something where we remain a very strong 

economy and a very strong nation that in principle can head this 

off and that that is a beneficial thing to do. You know, we haven’t 

even covered all of the reasons. Carmen talked about how you have 

to worry that if interest rates go up, all of a sudden there is a 

snowballing effect and you find yourself in much worse circumstances than you imagined. 

From the United States point of view, our ability to borrow is basically our rainy day fund and we have used it—it has been raining, right, so we have used up a lot of the rainy day fund and that 

is appropriate. But you need to walk that back down so that if 

something unforseen happens 8 years from now, you can go to the 

world capital markets again and say, by the way, I need $2 trillion 

because something terrible happened. And you lose that flexibility 

if you don’t get on a more sustainable path. 

Chairman CONRAD. All right. I have used my time. 

Senator Sessions? 

Senator SESSIONS. Dr. Marron, I agree with that last statement 

very strongly. In other words, there is only so much margin that 

you have before you are in a crisis and we are using that up today 

as if we are never going to be in another crisis. And I am a little 

disappointed that you seem to be going along with the idea that we 

can’t begin to ask about spending now. I just do not believe that 

we can afford to throw another $270 billion of stimulus package 

when we got so little from the one that we have done. Dr. Johnson, 

you said you recommended $500 billion. Well, $845 is a good bit 

over $500 billion, in my view. So we have used this margin up. 

I would just criticize the thinking during the Bush administration. It seemed to be, and this word leaked out, that deficits don’t 

matter. That is what those of us who worried about—— 

Mr. MARRON. Not from me. 

Senator SESSIONS. But it did, and one of the—Mr. Greenspan has 

talked about that, actually. But he didn’t realize what was occurring politically and morally in the country. What was happening 

politically and morally was we were losing our discipline and people were buying into that language. Yes, we could have carried 

more debt than we were carrying in 2001, 2002, but once you lose 

your discipline, it just seemed like we just roared forward as if it 

didn’t matter at all, and now we are reaching this level of debt 

above which we are really endangering our nation if we go above. 

I just am really worried about it. 

And Dr. Marron, you mentioned one thing that is important, and 

I just need to put it on the table to economists—masters of the universe, I call them affectionately—who think they can just pull the 

strings to manipulate this massive international economy, and that 

is a lot of us and a lot of American people do not believe in a growing government, and you mentioned that in your remarks, about 

that question, and if we get a bigger government, how it ought to 

be. But I would just say a lot of us oppose that. We don’t believe 

266 

in that. So some modest containment of spending today is maybe 

not enough to satisfy my concerns. 

Dr. Reinhart, you read commentators and the essence of a lot of 

things you see in financial magazines and newspapers and articles 

and all is a concern in the real world out there where people are 

buying and selling and loaning money is that this could lead to a 

devaluing of the currency and a surge in debt can lead to a difficulty as the Brits have had in selling their debt and could drive 

up interest rates and deflate the currency. As one man caught me 

after a speech last week when I was expressing concern about the 

debt, he said, well, we will just inflate our way out of it. That is 

what we always do, and don’t worry about it. 

Would you share with us any thoughts you have about the danger of that kind of thinking? Is that a danger? 

Ms. REINHART. I think the danger that I tried to—I think there 

are two kinds of dangers that I would like to highlight. One is what 

I mentioned about perceptions of higher risk. That will translate 

into higher interest rates, which we are taking for granted the very 

low, near zero interest rates over which we can finance and we 

should not take that for granted. So we are on the same line. 

I think the second risk that I would like to highlight, which I 

briefly mentioned in my remarks, is the growth. Even absent a 

gloom and doom scenario, one has to take very seriously that at 

high levels of debt—and we are close to gross debt being at that 

90 percent threshold, we are very close to it—growth declines by 

about 1 percent. This is a fairly robust result. So lower potential 

output growth is, in and of itself, even absent a crisis scenario, a 

source of concern. 

Let me add, though, that a weaker dollar would not hurt us. One 

of the things that has been a drag on this recovery from the crisis 

is if one looks at the typical recovery from such a crisis, exports in 

other episodes have led the way. We haven’t had that benefit, in 

part because a good chunk of the rest of the world is also in crisis, 

and in part because the dollar has not really, relative to other experiences, budged. 

So my concerns have to do with the interest rate, the risks, and 

with the growth. What happens to the dollar? Well, the dollar has 

been known to go up and to go down. That is less of a—there is 

less of a lesson there, as far as I can make it. 

Senator SESSIONS. Dr. Johnson? 

Mr. JOHNSON. Well, Senator, I think the situation in what we are 

calling the out-years is actually considerably worse than you might 

think for three reasons. First of all, I think that the debt numbers 

that we were discussing a moment ago are Federal Government 

debt, whereas if you look on a comparable basis across countries, 

the IMF usual procedure is to look at general government debt, 

which includes other levels of government, and that would increase 

the debt target, I think, in Dr. Marron’s picture and push us closer 

toward the danger threshold identified by Professor Reinhart. 

Second, there is, I think, almost a taboo subject around these 

issues which is Fannie Mae and Freddie Mac. Now, in the absence—again, let me speak as a former IMF official, what the IMF 

would say to you if the IMF were in a position to speak freely to 

the United States—they would say, well, unless you show us a plan 

267 

for privatizing these entities, which you talk about, but we haven’t 

seen the plan, we have to start thinking about these as liabilities 

of the U.S. Government. Now, that is a substantial increase. And, 

of course, they hold assets, right, and I wouldn’t exaggerate the 

losses. But if you are talking about debt owed by the public sector, 

then Fannie and Freddie would enter into that picture. 

And third, what I worry about most of all is—— 

Senator SESSIONS. So that is not being scored in the numbers 

that we are looking at today—— 

Mr. JOHNSON. It is not in the headline numbers. Obviously, the 

CBO can give you a number on that. That is not an unknown number. But it is not in the headline numbers and it is not, I think, 

in Dr.—— 

Senator SESSIONS. But when we talk about the tripling of the 

debt in the next 10 years based on the chart that the Senator 

showed earlier, that is not being scored? Is it or isn’t it? Does anybody know? 

Mr. MARRON. I mean, there is a small—in the official budget that 

the President put out, there is a small amount of money in there 

which are the future cash-flows from our support from the two of 

them. But the several trillion dollars’ worth is not in the debt 

there. 

Senator SESSIONS. All right. 

Excuse me, Dr. Johnson. 

Mr. JOHNSON. If I could finish, in exactly that vein, the ‘‘too big 

to fail’’ banks are also an implicit contingent liability of the U.S. 

Government, right, which is not—that is absolutely not scored in 

any way, because if those banks fail, they will come to you again 

and say, oh, we need TARP 2, Senator, and we will tell you later 

what we are going to use it for. That part—and in speaking of it, 

I understand this is usually considered part of the jurisdiction of 

the Budget Committee—the Banking Committee, and I did speak 

to them last Thursday, but I think this is a budget issue, too. A 

contingent liability of this magnitude—an avoidable one—I mean, 

these other—reforming Medicare, obviously, is a huge conversation, 

as you said, Senator. We have to discuss that and the tax base that 

people are going to generate to support paying for health care for 

people over 65. 

But the contingent liability of the banking system is completely, 

largely avoidable if you take it on, and if you regard it as a budget 

matter, I think that is a major step in the right direction. 

Senator SESSIONS. Dr. Marron? And before you proceed, I would 

like to welcome the same group of kids from Montgomery, Alabama. We are glad that this group could join us this morning. 

Chairman CONRAD. Welcome. 

Senator SESSIONS. As we are talking about things, Mr. Chairman, as you just said earlier, that affect how much debt they will 

have to pay as they grow up. 

Go ahead. 

Chairman CONRAD. If I could just interrupt for one moment, on 

this question of Fannie and Freddie, my understanding that the operations of those institutions are included in the CBO budget numbers now, but not in the OMB numbers. And Senator Gregg and 

I have made a determination that we would follow CBO. We would 

268 

put them in our numbers, because we think that has got to be on 

budget. You can’t say this is somewhere off in the wilderness, not 

accounted for. So we have made a determination that it would be 

included in the numbers that we have—— 

Senator SESSIONS. But that has not been in the past, or—— 

Chairman CONRAD. No. It was not in the past. 

Senator SESSIONS. Thank you for that decision. 

Mr. MARRON. And so just on the Fannie and Freddie, my understanding is that CBO’s numbers—so they have, like, larger numbers in the deficit for the conservatorship, if you will, of Fannie and 

Freddie. But when you look at their publicly held debt numbers, 

they haven’t suddenly gone up, whatever, $5 trillion yet, if I understand it correctly. So they have taken a step there, but they haven’t 

gone quite as far as Dr. Johnson would suggest. 

I wanted to go back to—the very beginning of your question, Senator, was about inflation and about the concern that our fiscal troubles might lead us to pursue inflation as a strategy for dealing with 

it. That is certainly a legitimate concern given what folks have 

done around the world in the past. I just want to point out that 

it won’t actually work very well for the United States, the reasons 

being that, A, on the spending side, we have an enormous number 

of spending programs, Social Security being the most obvious, that 

are indexed, and that if inflation goes up, there is a one-for-one increase in our spending, and that is also true in many of the payment rates in Medicare and other programs. 

And then, No. 2, increasingly, we have started issuing inflationindexed debt. So it is probably smaller than it ought to be, but we 

have Treasury indexed protected securities whose interest rate will 

rise if inflation takes off. 

And then, in addition, we have a decent portion of our debt that 

is relatively short-term, and so its value could go down for a couple 

of years because of surprise inflation, but then you have got to go 

out in the market and the market is going to charge you a premium interest rate and say, you know, you fooled us once, but this 

time we are going to charge you a much higher rate on your 3-year 

bonds. 

And so for all those reasons, actually, in practical terms, right, 

inflation is not going to be an effective strategy, right, even though 

it may be a legitimate concern that some folks have. 

Senator SESSIONS. Well, thank you. We do expect, according to 

CBO’s score, interest on the debt last year, the public debt, was 

$187 billion and they are projecting in the tenth year of this budget 

an $800 billion annual interest payment. Interest rates, therefore, 

are hugely significant as to how much that would actually be in the 

out years. Thank you. 

Chairman CONRAD. Thank you, Senator Sessions. 

Senator Merkley? 

Senator MERKLEY. Thank you very much, Mr. Chair. 

Professor Reinhart, you note that Government debt tends to soar 

in the wake of a financial storm, and also that often that is as a 

result of a drop of revenue rather than spending on stimulus. 

Could the deficit that we incurred here in the United States have 

been even larger if we had not invested in building a financial 

bridge through the stimulus? 

269 

Ms. REINHART. One of the things about this situation, to answer 

you honestly, is we do not know what the counterfactual. We know 

that at the time in the fall of 2008, confidence, worldwide confidence, was shattered and that the stimulus package played an 

enormous role, not just the stimulus package in the United States, 

the stimulus packages that went into effect in different orders of 

magnitude, in restoring confidence. So it is very difficult, you pose 

a very difficult question for me to answer. 

I do think that, absent the stimulus—I cannot quantify, I cannot 

give you a counterfactual. Absent the stimulus, it would have been 

worse. Our GDP decline relative to declines in other severe financial crises is smaller. Our unemployment increases are pretty much 

close to the average but are still below the average. 

I would have to imagine that, given the magnitude of this crisis, 

which we have not seen the like since the 1930’s, because of its 

global nature as well, absent those actions, we would not be below 

the average in growth declines and unemployment increases. We 

would be doing much worse. 

Senator MERKLEY. So for me to restate that, although you cannot 

prove the counterfactual, it is possible we could have had the same 

levels of debt, but had no signs of the recovery that have been created partially by the stimulus, or that we might have even had 

lower levels of employment and had additional current-year deficits, which would be the worst of all cases. 

Ms. REINHART. Which is why I tried to highlight the Japanese 

experience in that regard. Japan, in the mid-1990’s, assuming that 

the crisis was over, withdrew stimulus, saw a double dip, and 

wound up with the worse of two worlds. It is important to remember Japan’s debt, which today stands at about 200 percent, was 

around 70 percent of GDP before the crisis started, so they wound 

up with both. 

Senator MERKLEY. Thank you. 

Professor Johnson and Mr. Marron, would either of you like to 

comment on that same question? 

Mr. JOHNSON. Yes. I would give the stimulus a very positive assessment. I am not a fan of stimulus in general, but I think this 

was a very unusual set of circumstances, and I think it saved jobs, 

and I think it prevented damage to potential output that you would 

have seen otherwise. 

The crisis of confidence, when we met a year ago, was extraordinary. As Professor Reinhart said, it was global, it was everywhere. And the fiscal stimulus was an essential part of U.S. leadership in turning the world economy around. If you remember the G– 

20 summit in April where President Obama took a very positive 

broad role and brought a lot of countries with him, for example, in 

recapitalizing the IMF, that also helped to rebuild confidence. That 

would not have been possible or it would have been very hard and 

not credible without the U.S. Fiscal stimulus. 

I do not think that debt necessarily would have been higher in 

the short term if we had not done the stimulus. But I think the 

medium-term prospects would have been much bleaker for this 

country. And let us face it. The medium-term budget issues which 

we face, these out-year budget deficits, are mostly—not entirely 

about Medicare, but mostly about Medicare, and that is a longVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00275 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
270 

standing problem that we have not got around to addressing even 

though it has obviously in the cards for a while. That is mostly 

driven by demographics and by the rising cost of health care, itself 

driven by technological progress. 

And I would say also in contrast to other countries, other industrialized countries are almost all in the same place. They just do 

not recognize it. The European Commission’s accounting for future 

technological progress in health care is much less honest than the 

CBO’s accounting. So we are looking very directly at our future, 

this bleakness of the future, getting growth back on track. Preventing the destruction of potential output is very important and 

helpful, so the stimulus was worth doing. And hopefully it will help 

us tackle those medium-term problems. 

Senator MERKLEY. Please be very brief, because I have a bunch 

of other questions and I am running out of time. 

Mr. MARRON. Sorry. I just wanted to say that with the standard 

models that, say, CBO uses or the administration uses to analyze 

the stimulus, those have in technical terms multipliers in them 

that would imply that stimulus does not pay for itself. And so the 

choice is you do end up with more debt, as Dr. Johnson suggested, 

but you also get the economic bang in the short run, and that there 

is a trade-off. 

Senator MERKLEY. Thank you. And, Mr. Marron, you had noted 

that uncertainty is a problem. You mentioned resolving the status 

of the estate tax. What about the rules of the road in general? And 

I believe, Professor Johnson, you had noted that we still have not 

addressed credit default swaps, and, in general, we have not addressed proprietary trading, derivatives, leverage, and many of the 

risk factors that were inherent and kind of completing the trio 

here. Professor Reinhart, you noted that following banking crises 

there are profound declines in output. Certainly all that argues for 

having rules of the road for our financial community that do not 

result in high risk taking followed by a collapse. How important is 

it that we get the rules of the road back in place to address these 

risk issues within our financial structures? And anyone who would 

like to jump in on this, I would appreciate it. Yes? 

Mr. JOHNSON. Senator, I think it is fundamentally essential because the problems that you just laid out, they are all wrapped up 

in what happens if there is another financial crisis, what happens 

if substantial financial players—it could be banks, it could be 

hedge funds, it could be something else—fail. How does that amplify it for our system? And then if it is a big enough shock, you 

will be called upon either to do a discretionary fiscal stimulus or 

to use, of course, the automatic stabilizers that are a good thing. 

But, again, it would mean our debt is increased. 

The problems that you identify are fixable. They are not being 

fixed. They must be fixed from a responsible budgetary point of 

view. That is what I would argue. 

Senator MERKLEY. And I believe in your testimony, your written 

testimony, you addressed at length issues in Europe and Greece 

and Germany and so forth, and the argument that the stress test 

we put our banks through has not been a highly—was not a high 

level of stress, if you will, and that if we do not prepare for that, 

271 

we may have another wave of stress coming that could result in a 

second financial crisis. Is that a fair summary? 

Mr. JOHNSON. Yes. My view is that our financial system is 

undercapitalized. The stress tests were not tough enough because 

the stress scenario was not that stressful. And I do not think we 

are facing at this point—my baseline view is we are not facing 

more financial collapses, but we are facing banks that do not have 

big buffers against future losses. They are going to hunker down 

and be more careful. You will see tighter credit conditions in the 

second half as a result of throughout the United States, and this 

is the global side. It is the commercial real estate impact, too; it 

is the continuing weakness in the consumer sector. 

Senator MERKLEY. Thank you. I am not out of time, so I will 

leave it up to the Chair whether—— 

Chairman CONRAD. Senator Merkley, let me just say, because 

others have gone over and because of the attendance we have because of the weather, I think you should feel free to use another 

2 or 2–1/2 minutes. Is that OK, Senator Whitehouse? I would do 

the same for you, obviously. 

Senator MERKLEY. Thank you very much, Mr. Chairman. 

Mr. Marron, would you want to address that same issue? 

Mr. MARRON. Certainly. The issue is that we need good rules, 

and, if possible, it would be good to get the good rules sooner rather 

than later so that everyone can begin to plan what the new environment looks like. So in my testimony, particularly in my written 

testimony, I emphasized that there are a lot of policy uncertainties 

that are hanging over people at the moment that make it difficult 

for them to plan. Some of them were, frankly, you know, in both 

the previous administration and the current one, that when we finally fell into this financial crisis, we fell back on a lot of discretionary government actions, a lot of confusion. There was confusion 

about what the role of TARP was and various other things. 

Those may have been necessary in the heat of the moment, but 

they have created doubt about how we actually run parts of our 

system. And clarifying that, and then clarifying it in a way where 

incentives are being created for these firms to behave appropriately, is very important. 

Senator MERKLEY. Let me throw out as my final question two 

issues that we face. One is the challenge in the commercial real estate world that will be coming up—well, it is here now, but it will 

continue the next year or two. And the second is undercapitalized 

community banks and their inability to do additional lending. 

On the community bank side, I have proposed and the administration has proposed recapitalizing banks in order to enable them 

to do more lending to small businesses to enable those firms, the 

small businesses, to recharge the economy. 

On the commercial real estate side, though, I have heard very 

few ideas for how we address the challenge of the fact that folks 

are rolling over balloon mortgages, but they are trying to do so 

with a drop in the value of their asset and often decreased cashflows due to tenants who they have lost during this recession. 

So should we pursue strengthening our community banks to lend 

more to small businesses? And what can we do about commercial 

real estate? 

272 

Ms. REINHART. Let me say that the issue of recapitalization, I 

think helping banks recapitalize should come with a carrot-andstick approach. One of the concerns that I have about the way that 

we have gone about addressing the toxic loans is that it is too Japanese, meaning there is too much forbearance. I think the forbearance issue is very pertinent for lending behavior going forward. If 

you feel you have a lot of bad debt overhang, it will be reflected 

in your lending practices. That is a lesson that I have taken from 

the very long Japanese experience. 

So I think the idea of helping the banks that lend to small businesses recapitalize, with a proviso toward more aggressive 

writedowns, is important. 

Senator MERKLEY. Thank you. 

Commercial real estate, small bank lending? 

Mr. JOHNSON. I think that commercial real estate should be left 

to sort itself out. Honestly, I think it is very hard for the Government to get involved terrorism. 

I am sympathetic to this idea of trying to recapitalize the community banks. I think what Professor Reinhart said makes a lot of 

sense. It will be difficult because the banks will worry about the 

stigma, and they will worry about what the signal is they are sending if they take more capital. I would be surprised if you can do 

it, run a program big enough to have a macroeconomic impact, unfortunately. 

Senator MERKLEY. Thank you. A final comment? 

Mr. MARRON. Oh, I would just say, just building on the uncertainty point, another issue for the community banks will be to what 

extent there are strings attached with the assistance, both known 

up front and then possibly, you know, future ones that are difficult 

to predict. And that also may discourage them. 

Senator MERKLEY. Thank you all very much. 

Chairman CONRAD. Thank you, Senator Merkley. Excellent questions and very interesting responses. 

Senator WHITEHOUSE. 

Senator WHITEHOUSE. Thank you, Chairman, and thank you to 

the witnesses for being here on this challenging day for travel in 

Washington. 

We are sort of caught between the scissor blades here of, on the 

one hand, wanting to support the economy so that people are employed and that we can begin to have the nascent recovery we are 

seeing work for everybody and not just financiers, but have it hit 

Main Street; and, on the other hand, having this overhang of debt 

that has sort of dominated our discussion today. 

It strikes me that where we have very significantly degraded 

core infrastructure—in Rhode Island, for instance, we have a 

bridge through one of our major cities, through Pawtucket. It carries Highway 95, a major national artery, and it is under a weight 

restriction so that big trucks have to actually take a circuitous 

route around it. That is going to have to be fixed sooner or later. 

We cannot have that. It is getting worse, not better. There is a bypass in Providence that the Department of Transportation is refusing to put any more maintenance money into because it is so degraded. It needs to be replaced. But local budgets are so stressed 

that it is very hard for people to get those jobs done. 

273 

Does it make sense to focus under the old-fashioned theories of, 

you know, if you are going to have to fix it anyway, it is not really 

adding to your debt, and the proverbial stitch in time saves nine, 

when you do maintenance more quickly, it tends to reduce the 

overall or ultimate cost, to focus particularly intently on degraded 

infrastructure that is going to have to be repaired sooner or later 

anyway as a way to increase employment without adding to the 

Nation’s overall actually liabilities? Dr. Reinhart? 

Ms. REINHART. Let me say that the remarks I am going to make 

have to be taken with a grain of salt because they are weighed 

heavily with the experience of one country. 

Infrastructure spending was at the forefront of the Japanese 

stimulus plan. The streets of Tokyo were repaved every other week, 

and it does add to the debt. 

Senator WHITEHOUSE. Well, let me just challenge you right there, 

because the streets of Tokyo do not have to be repaved every other 

week. 

Ms. REINHART. Right. 

Senator WHITEHOUSE. If you are creating make-work, if you are 

building bridges to nowhere, clearly that is, to me, a different proposition. That is why I focused so much on things that you have to 

fix anyway. If my roof has a hole in it and the rain comes in, the 

sooner I fix that, the less my family’s long-term cost of that repair. 

If at the same time my son also needs to make some money for the 

summer, to send him up to do that now would seem to make a lot 

of sense. Why doesn’t that sort of simple wisdom prevail—or does 

it—when you are dealing with truly irreplaceable, necessary infrastructure work like bridges that are condemned? 

Ms. REINHART. Well, if we are talking about things that need to 

be replaced is a subset of the more general proposition of infrastructure as a way to go forward in terms of channeling, which is 

what my remarks were addressing. I think, however, that in the 

end, anything—be it infrastructure or be it a transfer, it does impact debts. I cannot discriminate across types of—they add debt. 

But if this is the—— 

Senator WHITEHOUSE. But don’t we have, in effect, a capital liability to fix that bridge, that if we were accounting in a full kind 

of all-in way, we would recognize some way? I mean, if I were 

budgeting and it was my house and I had a hole in the roof and 

I had to put together a family budget, I would put in got to fix that 

hole in the roof sometime, and whatever it costs, if I am doing a 

fair family budget, I would put it in, even if it was 5 years or 10 

years, if I figured I could not afford it right away and had to put 

something, you know, to cover it in the meantime. 

Ms. REINHART. I understand and I take your point. I would just 

add that we really should go toward—and looking at any activity 

as activities that do have debt consequences over the short run. 

Senator WHITEHOUSE. Well, since I have used a lot of time on 

that question, I would like to shift to another one. Since it is just 

the two of us, if you do not mind, I will take—— 

Chairman CONRAD. No, I will give you some additional time. I 

think you were on a very—— 

Senator WHITEHOUSE. I have two eager hands up, so let us give 

both gentlemen a chance. 

274 

Mr. JOHNSON. Very quick points. First of all, as a way to score 

the economy, I would look at the CBO’s scoring, and I would look 

at the advantages of payroll taxes over infrastructure spending. 

Second, I think your points about having a proper capital budget 

are essentially right. We should do that. And one way to think 

about it in the context of the specific instances you are talking 

about is toll roads and tolls. So as Dr. Marron said, we should be 

discouraging with our tax system things that are bad, like congestion on major roads. And as somebody who uses, is a willing and 

happy user of an EZ-Pass scan tag on my car, if you move—and 

I understand this is not all a Federal Government issue. But if you 

move people toward a system where people are paying to use roads, 

paying to use very busy roads, paying to use roads that are more 

expensive to maintain, that will help address your issue; that will 

help raise revenue for the specific issues which are much broader 

than just Rhode Island, obviously infrastructure decaying. 

Mr. MARRON. I would just add that—so I agree with you entirely 

on the theory, which is if you can identify things you would have 

done anyway and move them up, that is almost—you know, that 

is incredibly logical stimulus. But there were some if’s in there. 

The first would be, you know, do you have budget discipline that 

says, wow, if I spend an extra $1 million today I literally will commit myself to spending $1 million less in 2013? You know how 

highway funding works. That is a hard discipline to institute. But, 

in principle, you could do that. 

The second concern is that in our political system—I do not want 

to be—this is the mean, flippant version, right? The mean, flippant 

version would be suppose there are 50 projects like that, but our 

system requires us to fund 435. So that the theory you have described may be true for a handful of projects, but it is difficult for 

our system to focus the money just on those. 

Senator WHITEHOUSE. The theory is true, but the politics around 

it make it hard to adhere to the discipline. 

Mr. MARRON. Yes. 

Senator WHITEHOUSE. OK. Let me jump to health care quickly 

because, Dr. Johnson, you have said twice that Medicare is the big 

item, and—— 

Mr. JOHNSON. Well, it is the Congressional Budget Office that 

says that. 

Senator WHITEHOUSE. I am not disagreeing with you, and I just 

think it is very important that we look at that. This is an eternal 

point that I keep insisting on making. Medicare is the big item, to 

quote you, Dr. Johnson. According to a variety of different sources, 

the amount of waste, duplication, excess cost, and inefficiency in 

the health care system runs between $700 billion and $1 trillion a 

year. We have ways to get at that. But as CBO has testified to us, 

they require a certain amount of flexibility, experimentation. There 

is a continuing executive management problem to work your way 

through that, and it requires providing the executive branch with 

some new tools. But I happen to believe that very, very significant 

savings can be achieved that way, and when they are achieved that 

way, they are achieved in a beneficial way, because it is the extra 

test that you did not, in fact, need. It is the, you know, hours in 

the hospital waiting for your paper records to get there and having 

275 

tests redone in an emergency. It is all of the clutter and all of the 

clunkiness of our existing health care system. 

What I worry very much about is that if we get into a fiscal commission, a statutory commission, and it gets very narrow and it is 

given a really urgent charge—because this is an urgent problem— 

if you do not have people who understand the possibilities of taking 

advantage of those efficiency gains in the health care system—and 

they are hard to quantify. CBO cannot quantify them effectively. 

They sort of quantify dribs and drabs around the corners. But they 

will admit it is not the kind of thing you can quantify because it 

requires executive administration to make it succeed, and they cannot predict executive administration. 

But it really worries me that what we are laying out is an incredibly easy shortcut for fiscal hawks to take hold of this thing 

and say, ‘‘I can document that we will have real savings in the 

Medicare system if we just throw these people off the system.’’ And 

the pressure to do that becomes irresistible because we have 

whipped up this great panic about the debt and we have given people who only understand those tools the controls over this expedited, high-powered system. And I think that would be a terrible, 

terrible, terrible mistake when you look at a system that is as 

wasteful and as complicated and as grotesque, where doctors are 

paid for doing more procedures rather than for outcomes—I mean, 

every way you look at it, our system is, well, somewhere between 

$700 billion and $1 trillion a year in waste and excess cost. 

How do you go at that in the timeframe—let us say it takes 4 

to 5 years to really build out an effective way of dealing with that. 

How would you relate that into the urgency of dealing with our fiscal debt given the primacy of the Medicare problem in that fiscal 

debt equation? 

Mr. JOHNSON. Well, Senator, I do not disagree with anything you 

have said. I think we have time. The fiscal situation that we are 

worried about here, as a number of you have said already, is something that approaches us over the next decade or decade and a 

half. But we are fortunate, and we should look at the countries in 

Europe that are now beset by pressing crises, for example, in the 

United Kingdom. They do not have a decade or a decade and a 

half. So I would strongly support your proposal that we find ways 

to control the costs and manage Medicare better. 

I would point out—— 

Senator WHITEHOUSE. Is there any doubt that the efficiency gain 

could be somewhere between $700 billion to $1 trillion a year if we 

could get it all out? Obviously, there are problems of gaining it, 

but—— 

Mr. JOHNSON. I am not an expert on the details of Medicare, so 

I would not want to comment on that. I would go—— 

Senator WHITEHOUSE. Well, it is systemwide. That is not just 

Medicare. 

Mr. JOHNSON. I do not have sufficient expertise, but it would 

make sense to me that some process of rationalization there would 

make sense. Also, I am sorry that your colleagues have left, but 

passing an unfunded prescription medicine component for Medicare 

under the Bush administration was most unfortunate in this conVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00281 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
276 

text. And, you know, there are going to be some very tough choices 

about who gets access to what kind of care. 

As I said, the big difference between our projections and the European projections is the expected cost of technological change for 

treating patients, which has been very much the same across the 

U.S. and other industrialized countries. We are more honest about 

looking out in the future and saying we expect for something of the 

same. The Europeans only take into account their demographic 

changes. 

So there are very tough choices ahead, and I am not on the size 

of saying throw people off Medicare. I think that would be completely objectionable and unacceptable. But it is a budget issue that 

we cannot duck forever. 

Senator WHITEHOUSE. I have gone well over the time that even 

the Chairman allowed me, and I thank him for his courtesy. 

Chairman CONRAD. Let me just say to the gentleman from Rhode 

Island, I believe the risk is just the flip of what you see. I believe 

the risk to Medicare and Social Security recipients is a failure to 

act in a timely way to deal with the long-term debt trajectory that 

virtually every expert that has come before this Committee says is 

unsustainable. That is, as I look ahead—and, you know, I am a 

beneficiary of Social Security. I lost my parents when I was young. 

Social Security helped me through college. I have seen it in the 

lives of my family. I have seen Medicare in the lives of my family. 

And I have seen it in the lives of my constituents. 

My great fear, for the very positive things that those programs 

do, is that our failure to act to deal with the long-term trajectory 

is what really threatens them. That is my belief. 

Senator WHITEHOUSE. Mr. Chairman, I could not agree with you 

more, and I think that we have a window of time, as the witnesses 

have said—we are fortunate. We have a window of time to address 

this. The wolf is not fully at the door right now. The fiscal knives 

do not have to come out in the kind of emergency ways that you 

are suggesting they will have to if we do not get ahead of this. And 

it is one of the reasons that watching this health care bill be delayed and strung out and attacked and that we have lost an entire 

year of this administration already before we can really deal with 

this is so agonizing for me. Because I do think that while we are 

in this window, we should be focusing relentlessly on that delivery 

system reform area while we can, because that is the tool that 

evaporates as the emergency gets closer. The fiscal knives will always be there. You can always throw people off programs. You can 

always shut programs down. It would be a human tragedy to do 

so, and we can avoid it if we are responsible about delivery system 

reform in the time that we now have. 

Chairman CONRAD. Well, I agree with the gentleman, that, for 

some reason, delivery system reform got almost no attention in this 

debate on health care, and yet every serious expert that came before us told us it is the single most important thing. And, frankly, 

I think the media have done a grave disservice to the American 

people for getting distracted—chasing every rabbit of an issue that 

matters very little to dealing with what has to be done. I largely 

point the finger of blame on network media that have a minute and 

a half for a story and never have a chance to explain to people 

277 

what are the things that really matter to this debate. Instead, they 

obsess on things that are complete side issues. And I think that 

has been an enormous disservice to the American people. 

I would also blame ourselves for not doing a good job of coming 

back to what really matters. And it is that delivery system reform 

that every serious expert that came before us said is the No. 1 opportunity to get costs under control. But it is almost nowhere in 

the debate, almost nowhere. Instead it is death panels and things 

that do not even exist that get the attention. 

Let me, if I could, go back to the question of where we are. Dr. 

Reinhart, you testified that once you get to a debt of 90 percent of 

GDP, your research shows that that has an adverse effect then on 

economic growth of roughly 1 percent. Is that correct? 

Ms. REINHART. That is correct. 

Chairman CONRAD. My calculus tells me that me that this year 

we will hit gross debt to GDP of just over 90 percent. And if we 

stay on the path we are on, that will continue to rise, with no policy changes—no policy changes—to 97 percent in 2012 and then 

start coming down only very, very gradually—very gradually, almost imperceptibly. 

So that tells me that, according to your research, we already face 

a consequence of reduced economic growth in the future because of 

debt levels today. Would that be a correct interpretation of your 

testimony? 

Ms. REINHART. That would be a correct interpretation. I tried to 

highlight in my remarks and in my written statement that while 

the plan should not necessarily start today because of weakness in 

economic activity, a conception of a clear plan to reduce the debt 

would be or should be forthcoming today. Let me say one thing we 

can say with a fair amount of certainty. We never know when the 

wolf will beat down our door. The wolf is very fickle and markets 

can turn very quickly. And a high debt level makes us very vulnerable to shifts in sentiments that we cannot predict. 

Chairman CONRAD. I thank you for that. Let me just say, what 

I have heard the three of you say—and I will get to you, Dr. Johnson, just momentarily—what I have heard from each one of you 

very clearly is that you would not take immediate steps to reduce 

deficits and debt because of the risk that could create to a doubledip. But what I also have heard each of you say is that you do have 

to put together a credible long-term plan to deal with the debt 

threat. And, if we do not, that will fundamentally threaten the economic security of the country going forward. Is that a correct restatement of the testimony here? If anybody disagrees with any 

part of that—Dr. Johnson? 

Mr. JOHNSON. If I could just clarify, my position would be, following what I think is the IMF practices, the focus on net government debt, or the general government, which the numbers would 

be slightly lower than your numbers, but—— 

Chairman CONRAD. Yes. When I talk gross debt—we probably 

should just say that for people that might be listening. When I talk 

about gross debt, I am talking about the debt that is owed to the 

public plus the debt that is owed to the various trust funds of the 

United States. I use that figure of gross debt because, in a budget 

278 

context, that is what matters the most, because all of that debt has 

to be serviced. It has to be serviced out of current income. 

Economists like to look at what is called publicly held debt, 

which is a lower percentage, in the 60 percent range now of GDP, 

because they look at the effect of government borrowing on the 

public sector. Dr. Johnson? 

Mr. JOHNSON. Well, 60 percent is the Federal Government number. If we are again on a comparable basis, general government 

would push it higher, toward 80 percent. The IMF position is that 

all industrialized countries face a similar situation and require a 

fiscal adjustment either of taxes or revenue between four and 8 

percentage points of GDP over the medium term. That is my position, also, which I think is not at all inconsistent with the spirit 

of what you are saying. 

Chairman CONRAD. Yes, and that is the position—I can’t speak 

for Senator Gregg, but he and I have gone on this effort to have 

a commission, because we have been convinced you have got to 

have an overall plan for the longer term, and one that takes account of where we are headed in recognition that Dr. Reinhart’s research is accurate, that as you add debt, you fundamentally weaken economic growth. 

Let me go to the next point, if I can, and we are going to come 

back. Senator Cardin has joined us, and I will stop and recognize 

him next because he has not had a round. 

As we look ahead to this medium- and long-term plan, spending 

has got to be adjusted, and yes, that means Social Security and 

Medicare have to get on a lower growth trend. It has to be, because 

that is where most of the spending is. And I also think the revenue 

side can’t be exempt because we now have the lowest revenue— 

right today, we have the lowest revenue as a share of the Gross 

Domestic Product in 60 years. We have the highest spending as a 

share of GDP in 60 years. So we have got the lowest revenue as 

a share of the economy in 60 years, the highest spending as a 

share of GDP in 60 years. I don’t know of any logical reason that 

you don’t have to deal with both sides of the equation. 

But then it goes to the question as to what should the balance 

be, and I would like each one of you to answer this question. Going 

forward, in the longer term, should most of the emphasis be on the 

spending side? Should most of the emphasis be on the revenue 

side? Or what do you think the appropriate balance should be between spending and revenue, contributions to dealing with this 

long-term debt? Dr. Reinhart? 

Ms. REINHART. I think both the spending and the revenue side 

have to be addressed. I had mentioned in my earlier remarks that 

looking at actually what Canada did would be useful, and no stone 

was left unturned. From decisions that involved unemployment insurance to decisions that involved retirement age, everything—and, 

of course, on the revenue side, as well. When one is dealing with 

the gaps that we are dealing with right now, even extracting from 

the cyclical component that is obviously very big right now, you 

cannot leave any stone unturned. 

Chairman CONRAD. Dr. Johnson? 

Mr. JOHNSON. Well, as we have been discussing, unless, as you 

just said, Senator, unless you bend the curve for Medicare, unless 

279 

you change that growth rate, that swamps everything, OK. So that 

is first and foremost. 

Chairman CONRAD. That is the 800-pound gorilla. 

Mr. JOHNSON. Absolutely, and it is a very unfortunate thing and 

it is more about—perhaps more about ethics than economics to decide what to do there. That is a very hard social conversation. 

On the taxes, though, I think we also have to address it. I mean, 

honestly, this is a fantastic country. The hope for our nation is 

based on a very thin and small fragile tax base. If the United 

States wants to be one of the leading powers in the world, I don’t 

see any alternative but tax reform. And in this context, I would 

emphasize what Dr. Marron said before, which is we don’t—our tax 

reform kind of grew in a very particular history. We have not redesigned it in a long time and not tried to think about what do we 

tax to discourage, rather than taxing income, which we actually 

want people to go out and earn. 

And I think we have to address in this context the low private 

savings rate in the United States. We have built a system in which 

people don’t feel that they should save, and this is clearly a counterpart to our foreign borrowing. One thing is our budget deficit. 

The other thing, which we haven’t talked about today, is that we 

finance so much of that budget deficit not with private savings, 

which is what they do in Japan, but by borrowing from China and 

essentially from the Chinese government. That makes no sense at 

all in geostrategic terms. 

And even if you address—even if we come up with a strong medium-term fiscal framework, you have still got the current account 

issue. You have still got the low private sector savings. Tax reform, 

fundamental tax reform to be addressed by your fiscal commission, 

strikes me as inescapable unless you wish the United States to slip 

into the ranks of second-rate powers, which, of course, has happened to other countries many times in the past. 

Chairman CONRAD. I couldn’t agree with you more. I think if this 

fiscal commission does its work, one part of it should be fundamental tax reform. We have a tax system that is inefficient, and 

by that I mean a high percentage of what is owed is not being paid. 

We have incredible leakage through offshore tax havens. If anybody doubts it, go punch in ‘‘offshore tax havens,’’ see what you get. 

Just Google that and see what you get. 

We also have a tax system that was never designed for the period we are in. It was designed when America was completely dominant in the world, and we did not have to worry about our competitive position. And we have a tax system that now 

disincentivizes savings, therefore disincentivizes investment, and if 

you don’t have investment, you can’t grow. I mean, it is almost an 

upside-down system given the circumstance that we are in today. 

Dr. Marron? 

Mr. MARRON. Thanks. So the first point, which I think the members of this committee will appreciate, is a geeky budget process 

one in answer to your question of where should the emphasis be, 

on taxes or on spending, which is we are actually in a situation 

where it is going to be difficult to have an intelligent conversation 

about that because of the disparity of views as to what the baseline 

is, and that there is one view of the baseline that has various tax 

280 

provisions expired and definitely there is another view of the baseline that has them all notexpiring. As you saw in CBO’s recent report, if you add all of them up, the difference is almost 3 percentage points of GDP in 2012. 

And so I am not going to have an answer for you, which one is 

wrong. I am just going to say, politically, that is going to be a hard 

conversation to have kind of intelligently because people will differ 

in what they choose. 

In terms of substance, the basic story is once the economy is on 

a recovery path, what happens every year is spending makes our 

situation worse because it grows faster than the economy and tax 

revenues make our situation better because they grow faster than 

the economy. And so it has to be the case that spending is going 

to get more of the emphasis than the revenue side, just because 

they are growing faster and that they are the thing that is causing 

the challenges. 

However, if you look ahead and ask yourself, you know, can we 

go back to a historical 18 percent of GDP tax level and finance the 

types of things that our government, you know, our society appears 

to want our government to do, my answer to that is no, right, that 

the arithmetic doesn’t add up, and that finding a way to raise more 

tax revenues in the future seems inevitable given the trajectory 

that we are on. 

And then I am right back with my colleagues here in just saying 

that if you are going to do that, scaling up our existing tax system 

is not an intelligent way to do that, and that as you just described, 

what you want to do is go revisit it and ask what tax system makes 

sense for the economy we have today if we have decided that instead of 18 percent we are going to raise 20 percent or whatever 

of GDP in tax revenues. 

Chairman CONRAD. Senator Cardin? 

Senator CARDIN. Well, Mr. Chairman, let me thank you for calling this hearing. I think this discussion is critically important to 

our committee and to our country, so thank you for doing this. I 

welcome all three of our witnesses, particularly Dr. Reinhart from 

the University of Maryland. It is nice to have you here. I thank all 

three of you for your testimony and for focusing on how we can get 

our economy back on track with the amount of debt that we have 

incurred. But the bottom line is, what are we doing about the 

standard of living for the American people? 

I know we can’t rewrite what happened in the past, Mr. Chairman, but we need to understand and learn from our mistakes. I 

find it inexcusable that when we had a growing economy, we still 

allowed the debt to increase. There was no excuse for cutting taxes 

and increasing spending without paying for it when we had a 

booming economy. 

Dr. Johnson made a point about savings—when our economy was 

performing the strongest in the world, by far, when we were leading on every good economic indicator during the 1990’s and into the 

2000’s, our savings ratios during that time were among the worst 

of the industrial nations of the world. Unfortunately, we said, oh, 

that is OK. We don’t have to worry about saving; because Americans are actually saving because the value of their homes is inVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00286 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
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creasing by such a dramatic amount. Then we found out what happened to the values of their homes. 

So we really need to learn from the mistakes that we made when 

our economy was growing: the mismanagement of our debt and the 

failure to enact policies that encourage savings. Many of us, including the Chairman, tried during that period. I am proud of the work 

I did in the House with Congressman Portman to focus on policies 

that would increase our national savings. Congress didn’t do as 

much as we should have. 

Now, we are in a recession, when it is difficult to get attention 

to reducing debt, cutting spending, or increasing taxes. It is even 

difficult to develop policies for Americans to save because we want 

Americans to spend during a recession. 

So my concern is that as we look at how to deal with the national 

debt, and the Chairman’s commission is by far one of the most 

credible proposals, I am concerned that the focus may be shortterm rather than on long-term, because we are in a recession, so 

we need to grow. We need to create jobs and we need to spend and 

we need to make taxes less burdensome in a recession, but that 

may not be in America’s best long-term interest. It certainly is not 

if it allows the debt to increase, and if we don’t deal with issues 

that the Chairman raised about a tax policy that encourages savings. 

My friend, Senator Whitehouse, raised the issue of health care 

in this context. The good news about the bills that passed both the 

House and the Senate is that their two principal goals are to reduce the growth rate of health care costs in America, and at the 

same time to reduce the Federal Government’s budget costs. 

My concern is that if we look at health care costs solely in light 

of the Federal Government’s budget exposure, and say that we 

have succeeded if we can reduce entitlement costs to the Federal 

Government, but we don’t look at how much seniors might be 

asked to pay, how much businesses might be asked to pay, or what 

individual workers are going to be asked to pay, at the end of the 

day, we might, in fact, be weakening our economy. We may be 

strengthening the Federal Government’s budget commitment as far 

as reducing its costs, but we would be reducing our economy, certainly reducing the standard of living for the American people. 

So I am concerned as to how we focus today in a recession on 

reducing our debt. We are all saying the right things. We want to 

bring the debt down. We want to increase national savings. We certainly want to increase the standard of living for the American people. But if we tunnel vision this health care debate into the Federal 

budget and don’t look at health care costs as growing rate, I think, 

long-term, we are doing a major disservice to the people of our 

country. 

So how do you put this in context? How do you deal with the current recession? How do you deal with the current crisis that Americans are facing and still allow our economy to grow and to deal realistically with the problems that Americans are facing, whether 

it’s the small business owners trying to maintain health insurance 

for their employees or the seniors struggling to decide whether they 

can afford their medicines, or workers finding themselves falling 

further and further behind when they look at their paychecks. 

282 

They are wondering what happened during this prosperous time 

when America grew and why they should trust us now to get this 

right when government didn’t act responsibly when the economy 

was growing. 

Any advice you have for us? Dr. Johnson? 

Mr. JOHNSON. Senator, my view is that if you create the fiscal 

commission with everything on the table, both the spending side 

and the tax side, and people regard that as being a credible step 

forward, which I think they would if it came with the right legislative framework, that gives you the scope in the short term to take 

measures that will help the standard of living—— 

Senator CARDIN. If the commission’s charge is to deal with the 

Federal budget deficits, which is its charge, and if we are in a recession when this commission is required to issue its ruling, how 

does it overcome those two major obstacles to the long-term issues 

that you raised regarding our tax code, for example? 

Mr. JOHNSON. Well, the good thing about being the United 

States, in our current position in the world, and, in fact, we have 

the only reserve currency, really, at this point, particularly given 

the problems we have been discussing in the Euro zone—the Euro 

is seriously under pressure from a broader point of view where the 

countries want to hold their reserves—this gives us time. It means, 

to go back to the Chairman’s math, we will be able to run up more 

debt. The markets will let us do that at lower interest rates than 

they would otherwise. This buys us time to tackle the medium-term 

issues around health care spending, around Social Security, and 

around a sustainable tax base, which I think we are agreeing is 

about tax reform. 

So we have 10 years or 15 years, maybe if you push it we have 

20 years to confront those issues. The fiscal commission’s mandate, 

I think, would not be slash the budget deficit now, because that 

won’t help our economy. It will be, get the medium-term budget 

onto a sustainable basis, take the debt off this explosive path, according to the CBO projections, and if people feel that you are moving in that direction, then the markets will allow us to finance a 

greater budget deficit. You will be able to spend money on various—— 

Senator CARDIN. I am not sure we have other options. I am not 

challenging that. I am not sure there are any better suggestions 

that have been made than the Chairman’s suggestion, quite frankly. So I am not sure there is a better suggestion. 

All I can tell you is a lot of us worked on savings issues, and we 

didn’t have a lot of support out there to do things to bolster national savings. We got some things done, relatively minor things 

when you look at the overall problems we had as a nation, and it 

wasn’t easy getting that done. I just hope that the political will will 

be there to deal with some of the fundamental issues that have 

been raised here. 

We shouldn’t be talking about how much revenue we want to 

raise, but how we want to raise it. I believe that our tax code really 

does need major revisions. We need to rely more on consumptionbased revenues than income-based revenues and we have to do it 

in a progressive way. So I will be interested to see whether the 

type of political support exists for that—Dr. Reinhart? 

283 

Ms. REINHART. I would like to address the issue you raised that 

in good times, our policies have tended to be procyclical. Namely, 

in good times, the government—there are two things the government can do. One is it can save during good times directly, and 

then it can create incentives for the private sector to save. During 

the last boom, we didn’t really do either. I think the role of the 

commission to ensure that during boom periods we don’t congratulate ourselves too much—the seeds of the next crisis are sown during the boom. That is when overspending has historically tended to 

take place. 

I do completely agree that—which as I said earlier, no stone left 

unturned—that the tax code particularly—this is also Simon Johnson’s point that we need to address the issue of low savings rates 

and dependence on borrowing from abroad as part of the mediumterm issue. 

One very last comment I have to say is I don’t know that we do 

have ten, 15, or 20 years. We just don’t know. And so the sooner 

that we can articulate a plan—you raised the issue of uncertainty. 

People today, if the debt is perceived to be growing out of bounds, 

that will create uncertainty not only about future investment, but 

what people expect as to future benefits. And so a credible plan 

cannot be articulated too soon. 

Senator CARDIN. Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you. I would just say this to my colleagues. I have just gone through an exercise to get the deficit 

down to 3 percent of GDP by the fifth year of the budget period 

and to balance by the end of a 10-year budget window. I have just 

gone through that exercise. I ask all my colleagues to go through 

that exercise before we get into our budget negotiations. I think 

you will find it as sobering as I have. I think you will find it as 

sobering as I have, what it really takes in 10 years to get to balance on a very modest downward trajectory of deficits and debt to 

GDP. It is very sobering. 

Let me go to the question of political will. What is going to be 

necessary to get this under control, and that means to get back 

down to 60 percent of GDP on a publicly held basis. That is very, 

very sobering. 

Senator Sessions? 

Senator SESSIONS. That was an insightful challenge to us, Mr. 

Chairman. I think you are correct. I would just share a few 

thoughts, that the tension is—I think we have too light a treatment to the need to contain wasteful spending now, that is not producing much for the economy. The $800 billion, I mean, was Medicaid, welfare, many things that may need to be strengthened, but 

the extent of it was so great that we haven’t had enough emphasis 

on job creation which will pull us out of this, I think. 

And I would just ask you to think about how will we pay back $800 billion? I mean, the organization proposed at the State of the 

Union saving $15 billion this year and that might amount to $250 

billion over 10 years. That is a lot less than $800 billion. And now 

we are talking about another $200-plus-billion stimulus package. 

So, I mean, these numbers are so large, you are just not going 

to be able to spend today unlimitedly. We will pay this back, one 

way or the other. It is going to be a burden. My Democratic colVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00289 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
284 

leagues have got to recognize, we just can’t ignore the year we are 

in and the next year as if we are in this severe recession, therefore, 

all the rules don’t apply. The money we borrow is going to be a burden on us. It will be a burden on us. 

Dr. Reinhart, I would like to followup with your comments and 

that of the Chairman about the amount of the debt that we have 

and the question—maybe all of you discussed it generally—between 

the internal debt and the public debt. Would you not agree that 30 

years ago, 20 years ago, there was a bigger difference than there 

is today because we did not see quite the dramatic actuarial unsoundness of our entitlement programs. Now that we see those programs are actuarially unsound and we are going to have to call the 

debt that they loaned to the government for discretionary spending, 

any addition to the internal debt really is, for anybody analyzing 

the soundness of the United States financial condition would consider the internal debt too. 

Did I make that clear? In the debate over health care, the President asserted, I believe, this plan in 10 years would have a $130 

billion surplus, but that was not true, really, and CBO eventually 

made that quite clear, because it created about a $300 billion surplus in the Medicaid account, but it spent it on a new plan. And 

they didn’t score the internal debt going back to the Medicare 

Trust Fund. It is a reality. And since Medicare is clearly heading 

to default and will call that debt pretty soon, it seems to me we 

have got to understand that this is not—the reality of the internal 

debt is more significant than it may have been when Lyndon Johnson first started doing this. 

Would you comment on that and if you think it is significant? 

Ms. REINHART. Well, I certainly think it is significant in a major 

way. The work that I have done emphasizes gross Federal debt. Ultimately, we feel that it is ultimately the Federal Government, 

whether the debt is held by other branches of Government or by 

the public, that we care about. I would say about gross—even using 

gross Federal debt, that it does not take into account all these important liabilities, hidden debts that are associated with our Social 

Security system and all other implicit guarantees even outside our 

Social Security system, such as Simon Johnson mentioned, Fannie 

Mae and Freddie Mac. But—— 

Senator SESSIONS. But your gross debt that you figure does include the internal debt that the Treasury owes to Medicare and Social Security? 

Ms. REINHART. Partially. Partially. 

Senator SESSIONS. But not totally. 

Ms. REINHART. Not totally. Partially. 

Senator SESSIONS. And for us who are worrying about the health 

of the American economy, you think we should consider the gross 

debt more than just the public debt? 

Ms. REINHART. I think that when one looks at the debt issue, we 

are going to be looking at very different measures of debt. I would 

start out with gross debt, but I would not end with gross debt. I 

think to take into account medium-term debt sustainability, a lot 

of these other hidden debts need quantification along the way. It 

just so happens that gross debt is something that we can measure 

285 

more readily and more transparently than some of these other explicit or implicit liabilities that we have. 

Chairman CONRAD. Senator Sessions, would you allow me just to 

interject on this point? 

Senator SESSIONS. Yes, please. 

Chairman CONRAD. Because for those who are listening, I think 

it is a hugely important point that you are making. The publicly 

held debt—that is, the money that we have borrowed from the public—is at 60 percent of GDP today. The gross debt is at 90 percent. 

The difference is the gross debt that you are referring to includes 

the money that we owe to the trust funds of Social Security and 

Medicare. I think for people who are watching, this is always confusing. And it is important so that they understand the gross debt. 

The reason you are focused on it, I am focused on it, is because all 

the debt has to be repaid. And from a budget standpoint, debt can 

only be paid out of current income. By definition, the only money 

we have to pay this debt to Social Security has to come out of current income. 

So there is a real budget consequence when those trust funds 

that have been producing more money than was needed all of a 

sudden flip and now all of a sudden they are spending more money 

in Social Security and Medicare than is coming in, trust fund income. And that has happened to both those programs today. Both 

of them are cash negative today. That is why I want to pivot—I am 

sorry for interrupting you. 

Senator SESSIONS. No, I could not agree more. 

Chairman CONRAD. But it is so important that our colleagues understand the implications of this. 

Senator SESSIONS. When I came here, I kind of acquiesced into 

the idea that public debt, well, we will just argue over it as a base, 

the public debt, and use those numbers. But as I have come to realize, the actuarial unsoundness of Medicare and Social Security, you 

really cannot do that. 

Of course, they do show up, Mr. Chairman, as you know, to be 

fair. They are showing up on the surge of the public debt’s increase 

as these bonds that the Treasury executes t these trust funds are 

called. That is one of the reasons, is it not—Mr. Marron, you have 

been at CBO. That is one of the reasons the public debt is moving 

as dramatically as it is. 

Mr. MARRON. Right. I mean the debt is subject to a limit. 

Senator SESSIONS. So it is beginning to move and transfer. We 

are having less and less internal debt, I assume because it is being 

converted to public debt, inevitably, as we go forward, because 

there is not enough money to fund Social Security and Medicare 

without calling the bonds that are out there. 

I just would say that any—maybe you would—my time is about 

up, so if any of the two of you who have not commented, I wish 

you would. 

Mr. MARRON. OK. Just a couple thoughts. So you notice whenever I speak of the debt I always focus on the publicly held debt, 

which is kind of the notion of debt that we need to go place with 

world capital markets to finance ourselves. And it is not because 

I do not worry about the other ones. It is just that I worry that 

when you are worried about the other issues, actually the gross 

286 

debt understates the scope of the problem from those programs, 

that we have raised money for Social Security and to a much lesser 

extent for a part of Medicare and labeled them as trust funds for 

budget accounting, and adding those us we can have a larger measure of debt. 

But if you take seriously the commitments that we seem to have 

made, say, for Medicare, for the other parts of it that are not covered by a trust fund, you know, you have seen these numbers millions of times. People come in with the $40 trillion number and the 

$60 trillion number, and just these gigantic numbers, which are an 

attempt to measure what the overall kind of commitment is. I will 

not call it a debt because, obviously, we can dial it up and down— 

hopefully down at some point in the future. But I think even the 

gross debt understates just how severe the trajectory is that we are 

on. 

Senator SESSIONS. Understates it. Do you agree with that, Dr. 

Johnson? 

Mr. JOHNSON. Yes, I think that Dr. Marron said it very well. In 

addition, the contingent liabilities, which we know are there, and 

as Professor Reinhart said, that does not fit our standard methodology. But if we have one or two more crises, we will be changing 

the methodology to recognize that explicitly. And I think it is right. 

Do not think of the gross debt as the full extent of our problem. 

Focus on the—I would focus, as you said, on the publicly held debt 

for what you have to sell and what you have to find what the market will or will not buy, and then you have to look at the projections going forward, including the contingent liabilities and the scenarios around that. 

Senator SESSIONS. Briefly, the uncertainty that Dr. Marron and 

others have mentioned, I believe a lot of that throughout the entire 

economy, throughout the entire financial world, is the concern over 

the debt, and would you not agree that it creates a cloud over economic growth and productivity, psychologically as well as otherwise, and that the sooner we get a clear path out of this fix we are 

in, the better it will be to restart economic growth? 

Ms. REINHART. I think one of the scenarios that I alluded to earlier is one in which if there is no plan for containing debt and deficits medium term, I think uncertainty is a factor why we get the 

results that we get that higher debt levels are associated—— 

Senator SESSIONS. So you are factoring that in your scores to 

some degree. 

Ms. REINHART. Yes. 

Senator SESSIONS. Dr. Johnson. 

Mr. JOHNSON. I think we should take events of the past few 

weeks in Europe, Senator Sessions, as a wake-up call exactly along 

the lines that you are suggesting. You need a fiscal commission. 

You need it now. If you do not have it, and the second half of the 

year is a substantial slowdown, which is what I am expecting, your 

room for maneuver, your room for sensible short-term programs to 

support the economy—and you can argue about what the programs 

are, but the route does not matter. Whichever way you want to go 

on that, you are not going to have that room because the financial 

markets are going to becoming increasingly difficult because they 

are going to push you on the lack of a medium-term credible fiscal 

287 

framework in the United States. This is what the Europeans have 

woken up to just now. Tomorrow they have a big meeting in Europe, a summit. This for them is the topic. How do you limit the 

damage? How do you make the fiscal adjustments credible? They 

are looking at a lot of austerity in Europe right now. We do not 

want to go there. Raising taxes, cutting spending—you do not want 

to do that in the second half of this year. You do not want the financial—if the financial markets force you into it, that is a disaster. 

Chairman CONRAD. Do either of the other Senators want a second round? Senator Whitehouse, would you want a second round? 

Senator WHITEHOUSE. If it is not too much of an ordeal for our 

witnesses. 

Chairman CONRAD. Well, they are here and they are ready to answer. 

Senator WHITEHOUSE. Well, thank you. 

Dr. Marron, in your written testimony, you looked at the 11 million households that are underwater on their home mortgages and 

concluded, A, that they are likely to default and, B, that that will 

eat away at the thin capital cushions of many banks. 

To what extent do you believe that the liability for these mortgages has already been written down by the banks? And would you 

distinguished between mortgages that have been securitized and 

mortgages that are actually held by the banks? 

Mr. MARRON. I do not have a good answer to your first question. 

Maybe Dr. Johnson does. 

On the second, right, so there are—as you know, some of these 

mortgages have been securitized and have moved various places, 

including circuitously back on, in essence, the Federal balance 

sheet through Fannie and Freddie. And you have got other ones 

that are out there held by the banks. And, you know, the reality 

is—and this goes back to kind of the uncertainty point and the ‘‘to 

what extent have we realized the difficulties we are in’’ point—that 

financial institutions still differ in the degree to which they have 

recognized their losses. Some have been more aggressive about it 

than others, and that that casts, you know, continuing uncertainty 

over the financial viability of the various firms. And it is ultimately 

hard to track this through. 

Senator WHITEHOUSE. Isn’t it advisable to try to move through 

that uncertainty as quickly as possible? 

Mr. MARRON. Yes, I mean, at some level, you know, the end state 

you want is where everyone honestly appraises what their losses 

are and then moves on in life. And the difficulty we faced over the 

last couple of years is it is very hard to get people to go through 

that process. 

Senator WHITEHOUSE. Go ahead. 

Mr. JOHNSON. Just to complement that answer, I think the lack 

of success that the Government programs have had, particularly 

this PPIP, which is supposed to buy distressed assets from the 

banks, it just has not got up to scale because the banks do not 

want to sell. I do not think they have written this down. In fact, 

they do not want to sell partly because they do not want to take 

the writedowns. And I think that the strategy that they have had 

and that has been encouraged by the previous administration and 

288 

this administration is sit on your losses, wait for the economy to 

recover, and then you do not have to do the writedown. Eventually 

the assets will recover. 

That works unless you have a double dip or further losses or 

more strategic default, which I think is, to my mind, what we are 

looking at here. 

Senator WHITEHOUSE. Well, the reason that I was asking that 

question is that it strikes me we are prolonging the agony by continuing to forbid the residential home owner, if they are in appropriate financial circumstances, to simply go to bankruptcy court 

and settle their debt the way everybody else does. In fact, I saw 

a news article earlier today. The Mortgage Bankers Association argued vehemently against allowing regular folks to go to bankruptcy 

court and get that debt settled the way they can with every other 

single kind of debt. And I guess it turns out that they may have 

written down their own mortgage on their building here in Washington, and because it is a commercial mortgage, they can get away 

with it. So they know it is the right thing to do. They know it 

moves you quickly to a market-based solution and then everybody 

can adapt and move on, as opposed to being in this sort of frozen 

state in which banks are asked now to determine what their losses 

are going to be mortgage by mortgage, and then the nightmare begins for the person on the other end. We do not have a balance 

sheet that quantifies the nightmare for the family that has to put 

up with this. But, clearly, it is a nightmare. We do not have a balance sheet that quantifies the loss in property values around that 

house as it gets foreclosed and abandoned and stripped. We do not 

have a quantification of what that means in revenue to municipalities that are struggling. 

There is a whole piece of collateral damage that I think gets 

avoided if we solve that problem in addition to moving quickly to 

a market base for those, and it is so disingenuous of the Mortgage 

Bankers Association to be here lobbying against it for regular people when they are doing it with their own darn building themselves. 

I would be interested in your thoughts on wouldn’t that be the 

quickest way to find the bottom, as soon as people could cut to a 

bankruptcy court and have a quick, fair, final determination of it, 

then everything adapts. There is your finality. Mr. Marron, this 

was your point, so I will start with you. 

Mr. MARRON. So I will take a stab at that. I will confess I have 

not thought about Chapter 13 and those issues for some time now, 

so my memory is a little bit hazy. I am an economist. I am going 

to invoke many hands. 

On one hand, I am generally reluctant to do things that are kind 

of, you know, changing the rules in the middle of the game. I am 

sympathetic—I may not find it dispositive, but I am sympathetic 

to the argument that the mortgages were originally initiated under 

a set of expectations about what the rules of bankruptcy were, 

and—— 

Senator WHITEHOUSE. What we have been through in the past 

year—— 

Mr. MARRON. No, no. I know. I am just—I am going to be whatever the many-handed right thing is. So I am sympathetic to that. 

289 

With the passage of time, kind of the emphasis I place on that goes 

down as we seem—I do not know what Federal program we are on, 

six or seven or eight, for trying to address this problem. And no 

disparagement to the previous administration, the current one, and 

the Congress. It is a really hard problem, so it is not surprising it 

has taken this long. 

There is an issue—and, again, I do not remember the details, but 

there is an issue that houses are different than most of the assets 

that normally go through Chapter 13 bankruptcy procedures, so 

you would need to think about ways—you know, most of those 

things are cars or boats or whatever whose asset value is depreciating rapidly, and it is easier to figure out a payment plan and 

move on. It is more challenging to apply that to housing, and you 

would need to figure out a way to do it. 

You know, I guess I would say over time I have become more 

sympathetic to the notion that some reform in bankruptcy could be 

part of the help. You know, the numbers I saw a year ago when 

I used to think about this more seriously suggested that, you know, 

even if you did kind of your dream scenario on that front, you 

know, it is still only a relatively small fraction of the homeowners 

who are facing these difficulties, but it would be a portion of it. 

Senator WHITEHOUSE. Can you think of any other circumstance 

ever in which there are actual market losses that need to be processed through and a system whereby you did not get to the actual 

market loss but instead allowed an interested party to be the definer of how much they are going to lose on something was an efficient or effective way of finding the—of letting the market operate? 

Mr. MARRON. Oh, so the first part is yes, I can think of folks who 

are trying that separately, like commercial real estate would be a 

classic example, right? As mentioned, there are plenty of balloon 

mortgages on commercial properties that are underwater for which 

the lenders are doing things like extending terms by a year, trying 

to put off the day of reckoning, hoping that a rebounding economy 

will bail them out. And so the problem is certainly not unique to 

resident real estate. 

But then at the end of it, you had the second part of your question, which is and then it works well, and history does not suggest 

that it works well. 

Senator WHITEHOUSE. Clarity is what works well and finding the 

actual value, correct? 

Mr. MARRON. Yes. 

Senator WHITEHOUSE. Mr. Johnson? Let me ask both of you to 

answer, and then I will conclude. 

Mr. JOHNSON. I completely agree that taking your mortgage 

through bankruptcy makes sense. Of course, this measure did come 

up last year, and it was defeated by the lobbies involved. And that 

is a problem. 

Look, these are not—this is not lifetime servitude. This is a norecourse loan. The more people who default, the more people who 

walk away, the lower cost for other people to walk away. And I 

honestly think that over time this will change. Most of the bankruptcy law in this country has emerged organically over the past 

200 year in response to big debt crises and exactly this kind of confrontation and this kind of crisis. This one will change, too. You 

290 

know, in 5 or 10 years, you will be able to modify first liens in 

bankruptcy. It will not do us a lot of good right now, though. 

Senator WHITEHOUSE. Dr. Reinhart. 

Ms. REINHART. Extremely briefly, I think that when we talk 

about overleveraged households and overleveraged financial institutions, restructuring is a viable way of bringing down, at least 

partially, that overleveraging. And part of my remarks about forbearance, delaying the inevitable in the case of banks, and your 

comments, delaying the inevitable on the part of households, are 

doing just that, delaying the inevitable and making the slowdown 

much more protracted than it need be. 

Senator WHITEHOUSE. Making the slowdown much more protracted than it need be. Thank you. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator. I would like to just conclude by trying to make sure that we clear up, for those who might 

be listening, the gross debt, publicly held debt, and then we got 

into unfunded liabilities, which is a third category, so that we do 

not leave that confused in the record or confused perhaps in public 

mind. 

The gross debt is all of the debt that is owed by the Federal Government to all of the entities—publicly held as well as to the trust 

funds, Medicare and Social Security, for example. 

The publicly held debt is just that debt that is due to the public. 

That does not count the debt to the trust funds. 

The unfunded liability is still another concept that looks at the 

differences between the promises that have been made in legislation versus the revenue streams that go with those spending commitments. 

Now, that is a more future-oriented look at where we are headed, 

and the unfunded liability of the United States is in the trillions 

of dollars. And the biggest part of that is Medicare. The unfunded 

liability, if my memory serves me correct, in Medicare is 6 or 7 

times the unfunded liability in Social Security. 

So they are three separate concepts. The reason that we were focusing here, I think—I cannot speak for Senator Sessions, but we 

were talking about that—is from a budget standpoint, from what 

we have to deal with, we have to produce the money in this Committee to meet those debt obligations, both the publicly held and 

the gross debt, because those obligations to the trust funds are 

backed by the full faith and credit of the United States. They are 

real obligations. But they can only be funded out of current resources. So when Medicare is cash negative, Social Security is cash 

negative, that has budget consequences. And we are the Budget 

Committee. 

So I know economists like to look at publicly held debt. Dr. 

Reinhart is demurring. She is fully prepared to talk about the 

gross debt. But we have a special obligation to our colleagues to 

deal with the revenues that are going to be needed to meet these 

requirements not only of the publicly held debt but also of the gross 

debt, the obligations to the trust funds. And that has significant 

budget consequences. 

And we have been in this long-term period where the trust funds 

were producing more money. There was more money coming in 

291 

than going out. That has been a very happy circumstance. That is 

all changing now. And I think it is when the changes occur that 

it is often least recognized. You know, it kind of gets missed by our 

colleagues. 

But this is going to have very, very significant budget consequences, and it is important for our colleagues to know that, and 

it is important for those who are watching to understand it. 

Senator Sessions? 

Senator SESSIONS. Just to followup on that, with regard to the 

way we account for the money in our Government that allows this 

confusion to continue. It was very dramatically revealed to me and 

I really did not fully understand it until just before the final vote 

on the health care bill. President Obama submitted a score from 

the Medicare that said if you raise Medicare taxes and you cut 

Medicare benefits, as they propose, it would extend the life of Medicare for 9 years, I believe. I think as it was stated, that is a true 

fact. 

But in the report from the CMS Chief Actuary for Medicare, he 

had a little parenthetical, basically, and it said, ‘‘But, of course, you 

cannot simultaneously use that money to fund a new program and 

also extend the life of Medicare.’’ 

All right. But the CBO score—Dr. Marron, you used to be at 

CBO for a period. CBO said that you could, because the CBO score 

does not score internal debt. And so the President also used the 

CBO score to say that he could fund his new health care program 

and extend the life of Medicare by 9 years. And he had a CBO 

score that agreed with him. And basically what it said—they do not 

score the internal debt. So you had an increase in revenue out of 

Medicare, and it was spent on the new health care program, and 

it did not score as increasing the debt. 

Where did the money come from? It was borrowed from Medicare. A debt instrument shows that debt. And when Medicare gets 

back into its deficit, it will call that debt. And it did increase the 

debt, as CBO eventually said, by about $226 billion. 

So the whole argument that this health care reform was going 

to save the country $130 billion was wrong. It actually was going 

to add to the gross debt of the country $200-plus billion, according 

to CBO, when they finally got the numbers straightened out. And 

we have got to watch that. Somehow that is a mix-up in the way 

we score. Both agencies scored according to their accounting conventions, but together they created a misimpression. 

Anyway, that is one of my sore sports. 

Chairman CONRAD. Senator Whitehouse? 

Senator WHITEHOUSE. I am sure that Senator Sessions did not 

want to create any misimpression himself, but I believe that he 

said that the President was cutting Medicare benefits, and I think 

it was clear that he was cutting Medicare spending. But—— 

Senator SESSIONS. Right. The President did contend that he 

could cut spending without reducing benefits. 

Senator WHITEHOUSE. Particularly in the area of the insurance 

company that is making 14 percent profits on Medicare and areas 

like that. 

Senator SESSIONS. Well, that is good argument. I would just say 

that if we can extend the life of Medicare 9 years without cutting 

292 

any benefits, let us do it today. The problem is you cannot use that 

saving to fund a new program and also extend the life of Medicare, 

of which the CBO was absolutely crystal clear. 

Chairman CONRAD. Well, you know, it is going to be an interesting year, isn’t it? 

Let me just say this: I think we do have an extraordinary challenge, and the question for all of us: Are we up to this challenge? 

There are differences among us on this issue, but I believe the testimony here has been quite clear. in the short term, it would be a 

mistake to start to reduce the deficit too soon. We have seen what 

happened in the Depression when that was done. Additionally, Japanese experience cautions us against doing that. 

At the same time, it would be a profound mistake not to have 

a plan to deal with this longer-term debt challenge, because the 

burgeoning debt fundamentally threatens economic growth, economic security, and the position of our country in the world. And 

this is not just numbers on a page. 

I want to emphasize I think sometimes people listen to us and 

they hear us talk about this number and that number. Why are 

these numbers important? The reason they are important is that 

they ultimately affect people’s lives, the ability of people to have a 

job, to buy a home, to get a college education. All of these things 

are directly affected by the strength of our economy, and the 

strength of our economy is fundamentally affected by the decisions 

the United States makes with respect to its budget obligations and 

its debt obligations. 

The Federal Government represents 20 percent of the economic 

activity of the country and it has a broader impact with respect to 

our long-term economic position, because if we take on too much 

debt, as Dr. Reinhart has testified in a very compelling way here— 

she has looked at the history for extended periods going back and 

looked at countries that have faced similar circumstances and then 

saw what happened. And what she is telling us is very clear. If you 

take on too much debt, it affects the rate of economic growth in a 

country adversely. That translates into people’s quality of life. 

So it is very important for us, I think, to connect the dots for people. This is not just numbers on a page that are just of interest to 

Government accountants. These things contribute to the economic 

strength of the country or the depletion of our strength. And that 

is going to have an effect on every single American and, more 

broadly, is going to have an effect on the global economy. 

So we have a very serious burden here, a serious challenge, and 

we have got to prove that we are up to it. We have got to prove 

that we are up to it. 

I just want to thank the witnesses today for their assistance to 

us in that task. Dr. Reinhart, you were terrific, the first time before the Committee. We certainly will invite you back. You were 

really a great help to the work of the Committee. 

Dr. Johnson, it is always good to have you here, a lot of great 

clarity of thought as well as the ability to articulate these issues 

in a way that is understandable, even to those of us who are not 

economists. 

And, Dr. Marron, always good to have you back. You are somebody with great credibility before this Committee. 

293 

I thank all of you, and I thank my colleagues for being here. The 

hearing stands in adjournment. 

[Whereupon, at 12:31 p.m., the Committee was adjourned.] 

294 

QUESTIONS FOR THE RECORD 

A. ANSWERS FROM SIMON JOHNSON TO QUESTIONS FROM SENATOR 

SESSIONS 

1. The best comparative cross-country data we have on government spending, revenue and deficits come from the IMF. They report gross general government debt, 

which is informative-but not exactly what we (rightly) focus on in the United States 

(i.e., net federal government debt held by the private sector). 

The comparison with Europe is difficult. I would strongly recommend using only 

net debt measures. 

2. Switching to accurual accounting has some appeal, but it would also introduce 

new complications. The US government has substantial assets on its balance sheet 

that are not valued at current market prices (e.g., gold holding of the Federal Reserve, various rights of way, and large land holdings.) 


58153.271
295 

Definitely we should recognize more explicitly our future liabilities. But the CBO 

already does a good job of this in its various alternative baseline projections. 

3. The fiscal position of the United States was under control around the year 

2000. It moved out of control during the following decade as a result of tax cuts and 

spending increases (including, but not limited to, foreign wars.) However, the real 

damage was done by the financial crisis-most of the increase in debt in the CBOs 

baseline is due to automatic stabilizers, particularly the fall in taxes due to the recession (not the discretionary spending). 

For more detail, please see this article and the links to other related research: 

http://baslinescenario.com/2010/10/14/there-are-no-fiscal-conservatives-in-the-unitedstates/ 

Spending caps could play a role going forward. But we also need to look at comprehensive tax reform - our tax system is antiquated and long overdue for an overhaul. 

4. A tax on banks of this nature would be unlikely to have much impact in terms 

of lending, interest rates or anything else. 

5. We face a great dilemma in our budget. If we do not address the budget deficit, 

rising levels of debt will - one way or another - choke off growth. But when and 

if we either reduce spending or raise taxes (using our existing tax system), this can 

also impact growth in the short-term. 

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298 

ANSWERS FROM CARMEN REINHART TO QUESTIONS 

FROM SENATOR SESSIONS 


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299 

QUESTIONS FOR THE RECORD FROM SENATOR 

WHITEHOUSE TO SIMON JOHNSON 

Dr. Johnson, at the hearing, you pointed out that CBO and OMB deficit and debt 

projections do not include a placeholder/estimate for future bailouts of too-big-to-fail 

firms. Would you recommend that CBO and OMB include such an estimate? In your 

view, how would this estimate be calculated? 

Dr. Johnson, at the hearing, you suggested that CBO and OMB do not properly 

score the assets and liabilities of Fannie Mae and Freddie Mac in the baseline of 

the federal budget. How should the assets and liabilities of these entities be scored? 

If scored according to your recommendations, what would be the approximate net 

changes in the deficit and debt projections over the ten-year window? 

B. ANSWERS FROM SIMON JOHNSON TO QUESTIONS FROM SENATOR 

WHITEHOUSE 

The cost of potential future crises should be estimated in the same way the CBO 

thinks about other potential events-considering the probability and the likely scale 

of what could happen. The CBO is perfectly capable of approaching financial risks 

in this fashion. 

The current balance sheets of Fannie Mae and Freddie Mac are too murky for any 

outsider to take a definite view on the ultimate final cost. Hopefully, the regulators 

have better information. Buth the principle that should be applied is clear—the 

budget should reflect the probable costs of ‘‘bailing out’’ these institutions both today 

and in the future. 

(301) 

SETTING AND MEETING AN APPROPRIATE 

TARGET FOR FISCAL SUSTAINABILITY 

THURSDAY, FEBRUARY 11, 2010 

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The Committee met, pursuant to notice, at 2:03 p.m., in room 

SD–608, Dirksen Senate Office Building, Hon. Kent Conrad, Chairman of the Committee, presiding. 

Present: Senators Conrad, Nelson, Cardin, Whitehouse, and Sessions. 

Staff present: Mary Ann Naylor, Majority Staff Director; and 

Winnie Chang, professional staff member. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. 

I want to welcome everyone here today. I especially want to 

thank the witnesses for making a special effort given the snow conditions here in the Washington, D.C., metropolitan area. It is difficult to move around. I was up very early this morning shoveling— 

and I know many others were as well—and getting a little bit of 

a late start because the trains are not running here either. I was 

in the weekly caucus, and a surprising number of Senators were 

there for the conditions. But that made having this hearing challenging. We had really intended to do this yesterday but had to put 

it off because transportation was not functioning. The witnesses 

could not get here; members could not get here. 

I can say this: that other colleagues will be joining us. There are 

still caucuses going on, and there are members in those caucuses, 

and they are discussing important jobs legislation. But they will be 

joining us as we proceed. 

Those of us from North Dakota feel right at home with these conditions, but in fairness, this city I think has done a remarkably 

good job given how much snow has fallen here. I have certainly 

found that once you are able to get your car dug out, you can move 

around. So hats off to the D.C. Government for really, I think, 

doing a remarkably good job in extremely difficult conditions. This 

would be even tough back home. 

Our hearing today is entitled ‘‘Setting and Meeting an Appropriate Target for Fiscal Sustainability.’’ We are joined by a very 

distinguished panel of witnesses: Dr. Alice Rivlin, Ms. Maya 

MacGuineas, and Dr. Rudy Penner. I really cannot think of a better group of witnesses for a hearing like this one. 

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Dr. Rivlin is the Director of the Greater Washington Research at 

the Brookings Institution. She is also now Co-Chair, along with 

former Senator Domenici, of the newly established Bipartisan Policy Center’s Debt Reduction Task Force. They are doing very important work, and it could not come at a better time. She is the 

former Vice Chairman of the Federal Reserve, former OMB Director, and she was the first Director of the Congressional Budget Office. What a remarkable series of contributions. So Dr. Rivlin 

brings an incredible amount of knowledge and experience to the 

table. 

Maya MacGuineas is President of the Committee for a Responsible Federal Budget and Director of the Fiscal Policy Program at 

the New America Foundation. Ms. MacGuineas appeared before 

this Committee last November and provided very valuable testimony at that time. We are delighted to have her back. 

Dr. Penner is a fellow at The Urban Institute and Co—— 

Chair of the Committee on the Fiscal Future of the United 

States. He is also a former Director of the Congressional Budget 

Office and someone who has very high credibility with this Committee. So we are very pleased to have Dr. Penner with us as well. 

Again, special thanks for your being here. I think this is a critically important hearing because we are about to work on a budget 

resolution for either the next 5 or 10 years. We have not yet made 

a determination if this will be a 5-year budget or a 10-year budget, 

but in addition to that, we also have most certainly a commission 

that is going to go to work to try to come up with a plan to be voted 

on by the Congress before the end of this year to get us back on 

track. And so this hearing, I think, is very much in line with the 

larger challenge that we confront this year. 

We focus today on the question of what is an appropriate target 

for the long-term fiscal sustainability for our Nation. In an ideal 

world, our budget would be fairly close to balance most of the time. 

But given the tremendous long-term fiscal challenges that we confront, we need to determine a level of deficits and debt that is sustainable over the long term. 

Our goal must then be to adopt policies that will over time keep 

our deficits and debt at or below those target levels as much as 

possible. If we fail to confront our burgeoning deficit and debt, we 

put our Nation’s economy at risk with consequences that could be 

far worse than anything we have seen in recent times. Each of our 

witnesses has been involved in efforts to identify such fiscal sustainability targets, so we have an idea panel for considering this 

subject. 

I would like to begin just briefly by outlining the problem we face 

and some of the fiscal sustainability targets that have been proposed. At its core, our fiscal problem stems from an imbalance between spending and revenue. We can see that spending in 2010 is 

projected to be over 25 percent of the gross domestic product of the 

United States—higher than at any point in over 60 years, as measured by the gross domestic product. Meanwhile, revenues are projected to be 15.6 percent of GDP—the lowest they have been in 60 

years. Whatever solution we adopt over the long term is going to 

have to involve both spending and revenue. They both contribute 

to the problem, and they both have to be part of the solution. 

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This next chart shows the deficits as a percent of GDP under 

President Obama’s budget over the next 10 years. We can see that, 

according to the Office of Management and Budget, the deficit is 

projected to drop from 10.6 percent of GDP in 2010 to 3.6 percent 

in 2018, and then it begins to creep up again after that. The deficit 

would never drop to the 3 percent of GDP that the administration 

has set as a goal last year. And I expect when CBO examines the 

President’s budget, the President’s deficit levels will be even higher. So one question we can consider today is whether a 3-percentof-GDP goal is an appropriate target in the first place. 


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The next chart I would like to put up shows that we have found 

that many outside budget groups, including the Peterson-Pew Commission on Budget Reform, which Ms. 

MacGuineas is working on, and the Committee on the Fiscal Future of the United States, which Dr. Penner co-chairs, have identified a 60-percent debt-to-GDP level as an appropriate target for fiscal sustainability. 

To be clear, that is debt held by the public at 60 percent of GDP, 

not the gross Federal debt, and we are approaching this year—we 

are going to be measured against the gross Federal debt, a debt of 

90 percent of GDP. We have not been that high since after World 

War II. 

The next chart shows the gap over the next 10 years between 

projected debt under CBO’s January baseline, adjusted for alternative policies, and that 60-percent-of-GDP level. Clearly, the debt 

gap is growing dramatically with debt held by the public reaching 

88 percent of GDP by 2020 under this alternative fiscal scenario. 


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The next chart summarizes some of the fiscal sustainability 

plans that have been proposed. Peterson-Pew proposes a goal of 

stabilizing the debt-to-GDP level at 60 percent of GDP by 2018 and 

reducing it further over the longer term. The Committee on the 

Fiscal Future of the United States proposes a goal of stabilizing the 

debt-to-GDP level at 60 percent by 2022 with a deficit of 1.9 percent of GDP in that year. The Center for American Progress proposes a goal of overall budget balance by 2020 and estimates that 

reaching this goal would stabilize debt as a share of GDP at 65 percent. The Center on Budget and Policy Priorities proposes annual 

deficits of no larger than 3 percent of GDP, which they estimate 

would stabilize the debt-to-GDP at about 70 percent. 


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Now, that is a lot of numbers. That is a lot of things to try to 

get your mind around. I provide that background to show that 

there are different goals that people have in mind, that various 

groups have in mind, as to what is an appropriate level of debt to 

be shooting for. I am not here to endorse any of those plans today, 

but I do want to highlight the six-step plan for achieving fiscal sustainability provided by the Peterson-Pew Commission because it 

provides a specific timeline for action. It recommends the Committee committing immediately to stabilizing the debt at 60 percent 

of GDP by 2018; developing a specific and credible debt stabilization package in 2010; beginning to phase in policy changes in 2012; 

reviewing progress annually and implementing an enforcement regime to stay on track; stabilizing debt by 2018; and continuing to 

reduce the debt as a share of the economy over the longer term. 


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None of this will be easy, whichever of these goals is adopted. 

And it is interesting how similar the goals are, many of them focusing on a debt-to-GDP of 60 percent, again, publicly held debt. 

Stabilizing the debt at that level will require very difficult decisions. As I said in the last hearing, I have gone through an exercise 

that I will be sharing with my colleagues of trying to get to 3 percent of GDP by the fifth year of this budget and then to balance 

before the end of a 10-year period, and I can tell you it is daunting. 

It is really striking how tough the decisions will have to be to accomplish a goal like that one. It is really striking how tough things 

are going to have to—the toughness of the decisions to be made. 

Senator NELSON. Mr. Chairman, may I ask you a question on 

that point? 

Chairman CONRAD. Yes. 

Senator NELSON. If I recall, the President’s budget projected over 

at least the next 5 years, if not over 10, 15 years, does not even 

bring down the deficit to 3 percent of GDP. Is that correct? 

Chairman CONRAD. That is correct. So getting to 3 percent by the 

fifth year, that in and of itself—you know, the President’s budget 

has got some tough things in it. But that does not get down to 3 

percent. And then it starts going up in the second 5 years as a 

share of GDP. And as I said, if one seriously goes through the exercise—which I have asked all of our colleagues to do before we get 

into the budget. I have asked everybody to do their own exercise, 

see what decisions have to be made to achieve any of these goals 

that have been outlined. I tell you, I think it will really sober people how really tough the decisions are going to have to be. 

It is clear the longer we wait, the harder these choices become. 

The chart that I want to show now shows one example of the magnitude of the difference in the level of deficit reduction required if 


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we start gradually phasing in changes beginning in 2012 versus 

waiting 3 years longer. In this example, waiting 3 more years to 

begin phasing in changes results in an additional $588 billion in 

deficit reduction needed. 

The final chart is summarizing the point that the bottom line is 

that we are on an unsustainable course. Our Nation’s foremost 

budget and economic experts have all come before Congress and 

told us this is the case. Here is what they have said: 


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Treasury Secretary Geithner said, ‘‘Our deficits are 

unsustainable.’’ 

The CBO Director, Mr. Elmendorf, said, ‘‘The Federal budget is 

on an unsustainable path.’’ 

The OMB Director, Mr. Orszag, said, ‘‘The path that we are on 

is unsustainable.’’ 

The Federal Reserve Chairman, Mr. Bernanke, said, ‘‘We cannot 

allow ourselves to be in a situation where the debt continues to 

rise, which leads to an unsustainable situation.’’ 

The former Treasury Secretary, Mr. Paulson, said, ‘‘It is clearly 

unsustainable.’’ 

The former head of the GAO, General Walker, Comptroller General Walker, said, ‘‘We are on an imprudent and unsustainable 

long-term fiscal path.’’ 

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And the former Chairman of the Federal Reserve, Mr. Greenspan, said, ‘‘The Federal budget is on an unsustainable path.’’ 

You notice the similarity—unsustainable, unsustainable, 

unsustainable? 

Look, I know that there is a sense of denial among our colleagues 

about the seriousness of this threat. I see it every day. I have just 

come from a meeting in which I see it. This is tough, but it has 

got to be dealt with. If we let this get away from us, we will rue 

the day. We will rue the day. We will regret forever the consequences for the country. 


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So, look, we have got to face up to this. Whether it is through 

the commission that the President proposed or some other method, 

we have got to deal with the consequences of a failure to act. So 

we have to act. The sooner, the better. The economic security of our 

Nation depends on it, and with that, we will hear from our witnesses. I will go to you, Dr. Rivlin. Thank you so much for being 

here. It would be hard to have a more perfect background than you 

have had for helping us understand what needs to be done in this 

circumstance. Please proceed. 

STATEMENT OF THE HONORABLE ALICE M. RIVLIN, PH.D., DIRECTOR, GREATER WASHINGTON RESEARCH, THE BROOKINGS INSTITUTION 

Ms. RIVLIN. Thank you very much, Mr. Chairman and Mr. Nelson. I am really glad to be here because I greatly admire this Committee for your persistent efforts to focus the attention of the Congress and the Nation on the dangers of projected increases in the 

public debt and the importance of moving the budget onto a sustainable trajectory. I thought it was a shame that the commission 

that you and Senator Gregg proposed did not pass. I hope that the 

President’s commission can receive strong congressional bipartisan 

support. But those of us who care deeply about this issue just cannot give up. So I really appreciate the opportunity to be here today. 

As you have pointed out, and so many others, on any reasonable 

set of economic assumptions, the U.S. budget is on an 

unsustainable track. There really is not any disagreement about 

that or about the reasons for it. In the next decade and beyond, 

Federal spending, driven by the impact of an aging population and 

rising health care costs on Medicare, Medicaid, and Social Security, 

will rise substantially faster than the whole economy can grow— 

faster than the GDP. Revenues, at any set of tax rates, will grow 

only slightly faster than the GDP, so there will be a widening gap. 

These projections are not new. They predate the financial crisis 

and the current recession. But 2 or 3 years ago, deficits, while inappropriate in a prosperous economy, were of manageable size, in 

the range of 3 percent of GDP, and the debt was not off the charts. 

It was around 40 percent of GDP. So the warnings of this Committee and the rest of us about the bigger deficits looming in the 

future were just not gaining traction. 

But the financial crisis of 2007–08 and the deep recession that 

it precipitated have changed the budget outlook dramatically. The 

deficit, as you pointed out, peaked at more than 10 percent of GDP, 

and the debt has soared to an estimated 64 percent of GDP this 

fiscal year, and climbing. The big deficits will recede as the economy recovers and the temporary spending measures expire. But 

they will not recede far enough, as you pointed out, and, moreover, 

the double impact of aging and medical spending—which we once 

thought of as a long-run problem—is already driving deficits and 

debt higher and will accelerate by the end of the decade. So solutions must be found, and soon. 

As our debt mounts, the risk grows that our creditors, especially 

the foreign creditors who own about half our debt, will lose confidence in our ability to get our house in order. We have to take 

action very soon to arrest the debt buildup. 

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Stabilizing the debt increase seems to be a sensible goal, and stabilizing the debt at 60 percent of GDP, while no magic number, has 

certainly gained credibility. Two high-level groups that you mentioned, including both Republicans and Democratic budget experts, 

have recently recommended stabilizing the debt at 60 percent og 

GDP by a date certain. The crucial question is by when. One could 

take another number, but 60 percent is good enough. 

The Peterson-Pew Commission, of which Maya and I were members, suggested getting to 60 percent by 2018. That is very aggressive. The National Academy Commission, which Rudy co-chaired, 

suggested a slightly more gradual trajectory, get there by 2022. 

Even this more gradual trajectory would require substantial 

changes in current budget policy. 

I believe that a credible, politically viable plan to stabilize the 

debt must have two characteristics: 

First, as you pointed out, it must include both reductions in projected spending and revenue increases; and it must have the support of the leadership of both political parties. 

The widening gap between projected spending and projected revenues is too large to be closed by either spending cuts or revenues 

alone. Given the rapid aging of the population, especially in the 

near term, the high demand for medical care, and other necessary 

and widely supported functions of Government, I believe it is unrealistic to bring the growth of spending into line with the growth of 

GDP in the next decade. 

In addition, our tax system is extremely inefficient and complex. 

Part of the gap should be closed by reforming the Federal tax system so that it produces more revenue with less drag on economic 

growth. 

Now, no one needs to tell a Member of the Senate that partisanship has grown more extreme in the last few years. Neither party 

wants to take the lead in proposing unpopular policies such as cutting the growth of entitlements or increasing revenues, and each is 

eager to blame the other. But putting the budget on a sustainable 

track requires unpopular actions, and the only way to accomplish 

them is for both parties to work together. I have personally never 

been a big fan of commissions. It would be much better if the Congress could stabilize the debt by using its regular budget process. 

But a bipartisan commission with fast-track authority it seems to 

me is the best hope for serious debt reduction right now. I hope 

there will be an opportunity for the Congress to reconsider its rejection of the Conrad-Gregg proposal or to treat the President’s proposal in a similar manner and to give it the force of law. 

Meanwhile, as you mentioned, former Senator and former Chairman of this Committee, Pete Domenici, and I have launched a Bipartisan Debt Reduction Task Force that we hope will demonstrate 

that Republicans and Democrats can work together to produce a 

sensible, viable debt reduction plan. Under the auspices of the Bipartisan Policy Center, which was founded by Senate Leaders Dole, 

Daschle, Baker, and Mitchell, we have launched an effort that we 

profoundly hope will show that crafting a bipartisan deficit reduction plan is not an impossible task. We have recruited an impressive group of citizens, former elected officials, and budget experts— 

I attach a list—and we will report by the end of the year. We hope 

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to support the efforts of an official commission, whether statutory 

or created by Executive order, or whatever, and in any case to 

make our recommendations available to the public and to the Congress for further discussion and debate. We will be happy to assist 

this Committee in any way that we can. 

Thank you, Mr. Chairman. 

[The prepared statement of Ms. Rivlin follows:] 


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Chairman CONRAD. Thank you very much for that testimony, 

and thank you very much for the effort, because the clock is ticking, this is the time. 

One of the things I want to emphasize is Senator Gregg and I, 

who joined together after 2 years of working together on a proposal, were delighted to get 53 votes in the Senate. That is a majorVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00325 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH

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ity. But all of us know it takes a super majority to pass. And we 

would have passed if everyone who had been an original cosponsor 

had stuck with us. But we had a number who did not. We had a 

number of other who had committed to supporting it who did not. 

And so that leaves us with a circumstance that either we go back 

and offer a statutory commission again, with the hope that some 

others will be persuaded to join us; or the President goes forward 

with his Executive order commission, which has now been buttressed by very specific pledges by the Speaker of the House and 

by the Majority Leader, that the recommendations of that commission will be brought to a vote in the Senate and in the House. And 

that is a very, very important difference from the way other commissions have operated. 

Ms. MacGuineas, welcome. It is good to have you here. Please 

proceed with your testimony, and then we will go to Dr. Penner. 

STATEMENT OF MAYA MACGUINEAS, PRESIDENT, COMMITTEE 

FOR A RESPONSIBLE FEDERAL BUDGET, AND DIRECTOR, 

FISCAL POLICY PROGRAM, NEW AMERICA FOUNDATION 

Ms. MACGUINEAS. Thank you. Thank you so much, Senator 

Conrad. It is really a privilege to be here again, and I think it is 

such an important topic because this is kind of moving toward 

helping people understand the specifics of what it is going to take 

to put the budget back on a sustainable path. 

What I would like to touch upon today is the need to pick a fiscal 

goal, how to think about the right goal, how to think about the 

right policies to achieve that goal, the types of policies that will be 

needed, and the consequences of failing to act. 

First, the need for a fiscal goal. Clearly, the Federal budget is on 

an unsustainable path, and while nobody can predict at exactly 

what point excessive debt would lead us to a fiscal crisis, we can 

all agree that we would rather not find out, so we need to get out 

ahead of this first. 

There are a number of compelling reasons to have a specific goal, 

and the first is to reassure credit markets that the U.S. is serious 

about controlling its debt and dependency on borrowing. While history and international experiences show us that cutting government spending or raising taxes too early when coming out of a recession can be destabilizing, we have also seen that announcing 

and committing to a credible plan can have positive economic effects and that an announcement effect can actually buy you some 

time. 

The second reason to commit to a fiscal goal is that it allows policymakers to say no. Even when there are new priorities that are 

compelling and have lots of good points that you want them in the 

budget, we can no longer afford to deficit finance additional policies, and I even believe that by picking a fiscal goal, it elevates the 

issue of coming up with a plan even before other policies that are 

paid for. So it really elevates that to a top-level priority. 

Third, having an agreed-upon goal allows comparisons of the 

tradeoffs between different approaches. So, for instance, health 

care reform only slows the growth of health care slightly. Much 

greater sacrifices will have to be found in other parts of the budget. 

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ing would have to take a tremendous hit. If the plan protects all 

beneficiaries over a certain age, then people who are younger will 

have to sacrifice more, and so on. So right now, it is much too easy 

for anybody to demagogue, and you can say, well, your plan would 

cut Social Security by X amount, or that would be the largest tax 

increase ever, and it is not fair to compare those against the option 

right now, which is staying on an unsustainable course. So this is 

really a way to level the playing field of options. 

I would also like to take this opportunity to thank you and Senator Gregg for the really important work you did on putting forward the plan for the commission, and I am sorry that some of 

your colleagues changed their minds and didn’t support it, but I 

hope we will be able to turn that into some productive mechanism 

to move forward. 

So in terms of picking the right goal, there is no single right goal. 

As you mentioned, the Peterson-Pew Commission has recommended stabilizing the debt at 60 percent of GDP by the year 

2018, and over the long term, we think it is critical that we continue to bring the debt down closer to historical levels at below 40 

percent because of the fiscal flexibility that you need to have by not 

having excessively high debt levels. That is one of the things that 

helped us respond to this economic downturn. 

So we base the 60 percent target on international, economic, and 

political factors. Global markets are more likely, we believe, to embrace a goal that has international credibility, as the 60 percent 

number does. We also believe that it is the most ambitious and economically sensible target that can be achieved in the timeframe. 

Given the significant risks of high U.S. debt, a less aggressive target might be insufficient to reassure markets. We also worry that 

if a timeframe is too long, policymakers might not stick to the plan 

and they would change course in the middle of it. 

The goal really requires two pieces, bringing the debt down to a 

reasonable level of 60 percent or whatever target is picked, and 

then stabilizing it so it doesn’t come back up in the longer term. 

We don’t get into this in the report, but I think it is quite likely 

that you will need to have different kinds of policies to achieve 

those. So the medium-term target is going to need policies that can 

be implemented more quickly and they may well come on the discretionary and revenue side of the budget, while the longer-term 

goal, so that the spending side of the budget doesn’t turn back up 

again, is going to have to really get at the drivers of growth, the 

policies that are a result of aging and health care problems, Social 

Security, Medicare, and Medicaid. 

When I had the opportunity to talk about the commission here, 

the bottom line, I felt, was that the most important thing is that 

the structure of the commission have widespread buy-in, and I 

think the exact same principle applies to a fiscal goal. But the most 

important thing here is that there is widespread buy-in to it so 

that we can have that be the first step and then move into the specifics of how you achieve it. 

So whatever fiscal goal we do end up picking, the starting point 

really, really matters. It will be greatly affected by whether policymakers let policies that are slated to expire do so, or whether they 

322 

renew them but pay for them, or whether they are made permanent in a way that is deficit financed. 

If we assume the fiscal goal of stabilizing the debt at 60 percent 

in 2018, it would require roughly—and you showed this in your 

posters, in your charts—it would require roughly $1.5 trillion over 

9 years that we don’t assume you would start immediately under 

current law to get there. And it would take $5 trillion under current policy. That just shows you the huge additional debt that is 

layered on by extending a lot of policies without attempting to offset any of those costs. 

We include in our report a budget blueprint that is purely illustrative. It is not a plan that our commission endorsed, but it shows 

all the policies. We lay out the policies under both scenarios that 

it would take to get to that 60 percent target, and it is here and 

it is included in my written remarks. 

I also wanted to put forth a couple principles that I thought were 

helpful in coming up with the specific policies. The first is that 

changes should be conducive to economic growth, or at least minimize the degree to which it hinders growth, whenever possible. 

The second is that spending growth is the crux of the long-term 

budgetary problem, but that both spending and revenues will probably have to be part of any budgetary solution. 

Third, reform should, indeed, focus on the drivers of programmatic growth, particularly for the long-term stabilization portion of a goal. 

And finally, the sluggish economy should not be used as an excuse to delay coming up with a plan, even though we need to be 

sensitive about implementing a plan too quickly. 

So the Committee for a Responsible Federal Budget doesn’t endorse specific policy changes, so I will go ahead and speak only on 

my own behalf when I put forward a couple examples of what I 

think we should be talking about. And I do think it is so important 

to talk about specifics, because the kinds of things that are in the 

political discussion right now are much smaller than the types of 

policies it is actually going to require, and I think policymakers 

and the public have to come to an understanding of exactly what 

it is going to take. 

So some of the most promising policies that I would recommend 

are, first, raising the retirement age. As life expectancy increases, 

we just can’t afford to support people in retirement for as long as 

we have currently under these programs. Increasing the retirement 

age also has positive labor market effects. 

Second, restructuring some of our entitlement programs so that 

we slow the growth of benefits for people who need them the least. 

Given that entitlement programs will have to change, you can either reduce benefits across the board or you can reduce them more 

for people who need them less, and I certainly think we should do 

that in terms of Social Security. We should look at ways to slow 

the growth of benefits at the upper end. And in terms of Medicare, 

it makes an awful lot of sense to ask people who can afford to contribute more to the cost of their benefits to do so. 

Third, we are going to have to do more on health care. No matter 

what happens with the health care bills that are being considered, 

as we have seen, they haven’t done enough to control costs to really 

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take a lot of pressure off the rest of the budget. So I think it is 

very important that we look at the pieces of the Medicare reforms 

that would be most likely to slow the growth of health care costs, 

including the Medicare Commission, including the tax treatment of 

employer-provided health care. 

And we need to have a rational discussion in this country about 

who should pay how much for health care. We are constantly kind 

of shifting it around so you pay for your health care, you pay for 

your health care, and people don’t think that the costs come down 

to them. We need to have a more sensible discussion about it and 

bring people closer to the costs so that we can help control them 

in the longer term. 

I think reintroducing discretionary spending caps makes an 

awful lot of sense. In the past decade, discretionary spending grew 

faster than the economy, even excluding defense spending. That is 

the case. And so I think to ensure that politicians make tough decisions in this area of the budget, we can have strong, enforceable 

spending caps. They have always been the traditional counterpart 

to PAYGO and I think both of them should be in place as we go 

forward. Nobody thinks that they replace an actual budget deal, 

but they can certainly help us stay on track. 

Broadening the tax base, I think is a critical piece of this. Right 

now, the tax base is replete with credits, exemptions, deductions, 

exclusions. All told, tax expenditures lead to $1 trillion less in revenues collected by the Federal Government than would otherwise 

take place, and they are what account for the great complexity of 

the tax code. So I think we can do a lot of reforms on the tax base 

to simplify, make more efficient, make more progressive our tax 

base. 

Finally, even after all spending cuts have been put in place, it 

is very likely that there will still be a budgetary gap, and I think 

we are going to have to talk about what kind of broad tax reform 

should be on the table. I think it is likely that that discussion is 

going to look at a number of different revenue options, from increasing rates, to a transaction tax, which we have just started to 

hear a little rumbling about and you see more of that discussion 

going on in Europe right now, to a VAT, to an energy tax. My preference would be to look at an energy tax or a cap-and-trade which 

doesn’t return all of the revenues back to families or to businesses. 

But I think it is important to think about if you can’t get there on 

spending, you have to fill it in with revenues. What is the most efficient way that you can do that? We know that the higher taxes 

are, the more they can hurt the economy, so we want to be very 

thoughtful about that. 

Finally, two process recommendations. The first is that I think 

a budget deal should be enforced with a debt trigger. The type of 

trigger that we recommended in our commission report was one 

that is broad-based and applies equally to revenue and spending. 

Triggers have not been particularly effective in the past, and one 

of the reasons is that so many parts of the budget are exempt from 

that trigger. We wanted to have a trigger that was uncomfortable 

enough that nobody wanted to pull it, but possible that if it had 

to be pulled, it could actually be put in place. So we did a lot of 

thinking about how to construct that trigger. 

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Second, we have the expiration of the 2001–2003 tax cuts coming 

up. I think that can serve as a very useful lever right here, where 

we have members of both parties who want to extend at least the 

bulk of the tax cuts. I think delaying doing that until we have a 

budget deal in place makes a good deal of sense. If we continue to 

give away all the sweeteners in the budget, it makes it so much 

harder to take the tough medicine. 

So just finally, the risk of inaction is becoming more and more 

apparent every day. We see what is going on around the world. We 

hear what Moody’s and other credit agencies are warning to us. 

And we know that excessive debt can harm the economy in terms 

of interest rates, in terms of jobs, in terms of standard of living. 

The most prudent course of action would be to commit to a credible plan as quickly as possible and to phase in gradually as the 

economy is recovering enough so that it can accommodate that. If 

we don’t get our fiscal house in order, we know that, ultimately, 

we will face some sort of fiscal crisis, either a steady deterioration 

of our standard of living or an abrupt crisis brought on by some 

external action. Clearly, nobody wants to see that happen, and so 

I once again thank the committee for holding this hearing and 

starting to talk about the specifics as we move forward. 

[The prepared statement of Ms. MacGuineas follows:] 

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Chairman CONRAD. Thank you. Thank you for really excellent 

testimony. 

Dr. Penner, welcome. It is always good to have you here. We appreciate very much all of the effort that you have extended helping 

us understand the alternatives going forward. Please proceed. 

STATEMENT OF RUDOLPH PENNER, PH.D., INSTITUTE FELLOW, URBAN INSTITUTE CO-CHAIR, COMMITTEE ON THE FISCAL FUTURE OF THE UNITED STATES 

Mr. PENNER. Well, thank you, Mr. Chairman. I would like to 

thank the committee for the opportunity to testify on this report, 

‘‘Choosing the Nation’s Fiscal Future’’. It was organized by the NaVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00343 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH

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tional Research Council and the National Academy of Public Administration and I co-chaired the report with John Palmer of Syracuse University. I share Alice’s admiration for the work of this 

committee and it is a particular privilege to be here. 

Like a number of other reports, this one makes the argument 

that today’s budget policies are, indeed, unsustainable. As you 

noted, you have heard that argument many times before, so I won’t 

go into it here. The arguments are in my prepared testimony. 

As recommended in the report, ‘‘Red Ink Rising’’, our committee 

believes that Congress should set a target for the debt-GDP ratio 

and not exceed it. We believe further that a prudent target would 

be to hold the debt to 60 percent of the GDP. If the Nation experiences good fortune while holding the debt to this level, it would be 

wise to lower the target further. 

Now, as Maya has said, the choice of 60 percent as a target is 

a matter of judgment. The committee had to balance the risks of 

choosing a higher target against the political difficulty involved in 

getting to something lower. 

A higher debt-GDP ratio means running higher deficits. To make 

the arithmetic easy, for example, if the GDP grows at 5 percent per 

year, then arithmetically, a 60 percent target implies holding the 

deficit to 3 percent of the GDP, whereas if we went to 80 percent, 

the deficit consistent with that would be 4 percent of the GDP. 

As the target for the deficit and debt-GDP ratio is raised, government would draw on a higher proportion of the available supply of 

domestic and foreign saving, and interest rates would rise. To the 

extent that the deficit was financed out of domestic savings, there 

would be less available to finance U.S. private investment and that 

would mean lower productivity growth than otherwise, and therefore lower wage growth and lower standards of living. 

To the extent that foreign saving are used to finance deficits, 

Americans would have to devote a growing proportion of their incomes to paying interest and dividends to foreigners, and again, 

American living standards would suffer. 

And a higher debt-to-GDP ratio also raises the risk of a total 

meltdown in the market for our bonds. Problems would arise if recession, wars, or some other emergency pushes the ratio above the 

target and potential buyers of our bonds begin to doubt our ability 

to put fiscal policies back on a sustainable path. 

If people want to see what could happen next, they should look 

to Ireland and Greece. In the face of a debt crisis, Ireland has been 

forced to raise taxes quickly and slash spending. Civil service pay 

has been cut more than 7 percent and social programs have been 

decimated. Tax increases and spending cuts have amounted to over 

5 percent of GDP, a huge negative stimulus that exceeds the value 

of our recent positive stimulus program. 

Greece may yet be bailed out by the EU, but I suspect that any 

lender is going to impose harsh conditions on their fiscal policies, 

and it raises a question, who would bail us out? The IMF? What 

would the American people think about having our policies dictated 

by a lender? 

All this suggests that it might be much better to choose a target 

for the debt-GDP ratio considerably lower than 60 percent. However, as you suggested, Mr. Chairman, when you look at the poliVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00344 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
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cies necessary to get even to that level, they are extremely difficult 

politically. 

I believe that the most important contribution of our committee 

was to outline a rich menu of policy options that would get us from 

here to there. We group the options into four packages. At one extreme, the committee asked what spending cuts would be necessary 

to stabilize the debt-GDP ratio at 60 percent if the total tax burden 

were maintained at its historic level between 18 and 19 percent of 

the GDP. That package is called the low spending option. 

At the other extreme, the committee estimated what tax increases would be necessary to finance currently promised Social Security, Medicare, and Medicaid benefits while other programs grew 

as determined by current law. There did eventually have to be 

some slowdown in health costs because they can’t be allowed to 

consume the whole of the GDP. But such a slowdown could be put 

off for a long time. 

Two middle paths were also delineated. They differed primarily 

in the degree to which benefits were maintained for the elderly 

population. In the path that was relatively generous to the elderly, 

spending on infrastructure, research, and other types of spending 

had to be constrained, while the other middle path, non-elderly 

spending could be treated more generously. 

The four packages were put together for illustrative purposes 

only. The numerous policy options contained in those packages 

could be put together in an infinite variety of combinations. 

The package that avoided any significant increase in the tax burden required that the rate of growth of Social Security benefits be 

held to the level that could be financed with the current payroll tax 

structure. That required accelerating by 5 years the speed with 

which the full retirement age reaches 67 and indexing it to longevity after that. It involved reducing the indexing of initial benefits for the top 70 percent of earners and also switching to an experimental price index which has been developed by the BLS and 

which most people expect to grow more slowly in the long run than 

the current index. 

In assessing such a package, it is important to differentiate an 

absolute reduction in the purchasing power of benefits compared to 

today’s level from a reduction in the rate of growth of benefits. Although the package seems severe, it would more than maintain the 

purchasing power of today’s level of benefits for all but the most 

affluent. It would, however, reduce replacement rates considerably 

below the levels promised by current law. 

The rate of growth of health spending in the low-spending option 

had to be held back to that caused only by the aging of the population. That is to say, all other causes of excess health cost growth 

had to be wiped out. We divide health options into two categories, 

those that can be readily scored by the CBO and those that are so 

uncertain that CBO does not provide estimates. 

It would probably involve using every option mentioned in the 

chapter to some degree to achieve the health target for the lowspending path. To the degree that options with uncertain effect actually worked, the scorable options could be implemented less painfully. 

340 

Another more radical approach to achieving the health cost target would be to put Medicare and Medicaid on fixed budgets. Fixed 

budgets are used in the universal coverage systems of Canada and 

the United Kingdom. In Canada, every hospital must work on a 

budget and physicians are limited as to their gross income. The rationing methods that go with the fixed budgets are anything but 

transparent. 

A different approach to a fixed budget would be to use a voucher 

system to provide Medicare. The voucher would be used by the elderly and disabled to buy insurance and the value of the voucher 

would vary inversely with income. Medicaid could be put on a fixed 

budget by shifting to a block grant. 

The low-spending option also implies severely constraining all 

other spending, as well. The low-spending defense path would 

allow the Pentagon to maintain the current personnel policies but 

would allow very little investment in new weapons systems. Although it would allow small foreign interventions, nothing as large 

as the current effort in Iraq or Afghanistan would be possible. All 

other non-defense spending would have to be lowered considerably 

below today’s share of the GDP. 

In the package that attempts to maintain current law benefits, 

that is the high-spending option, two different financing mechanisms are proposed. In one, we just proportionately raise all tax 

rates in the current system until you hit 50 percent for the top 

rate. That happens by 2020. We don’t want to go above that because of the inefficiencies and inequities that would cause, so we 

introduce a Value Added Tax at that point, at first at less than 1 

percentage point, but ultimately reaching 7.7 percent by 2040. 

In the other approach, which I think is much preferable, the income tax is radically reformed. Almost all tax expenditures would 

be eliminated. The employer-provided health exclusion would be 

capped. There would be only two rates, one at 10 percent and the 

other at 25. The top would start at $44,950. They would rise temporarily, but the elimination of all the tax expenditures, especially 

those related to health, generates so much revenue in the long run 

that the rates could actually be lowered over time. 

Besides large increases in income tax revenue, the high-spending 

scenario would require a doubling of the Medicare HI tax, and considerable increases in the Social Security payroll tax. The payroll 

tax cap would be gradually raised until it covers 90 percent of 

earnings. The payroll tax rate would have to go from 12.4 percent 

ultimately to 14.7 percent by 2080. And there would have to be a 

second tier surtax that didn’t earn you any benefits, which would 

start at 2 percent and ultimately rise to 5.5 percent. 

So this high-spending option would raise the overall Federal tax 

burden by 50 percent compared to the 17.7 percent of 2008 and it 

would continue to rise after that. If you add a reasonable estimate 

of State and local taxes, the U.S. tax burden, which is now considerably below the OECD, would go significantly above the average 

by mid-century. 

Now, speaking for myself and not the committee, I think when 

you see the extraordinary spending cuts that would be required to 

keep the tax burden constant and the extraordinary tax increases 

that would be required to keep all of our promises to the elderly 

341 

and others, I can’t help but agree with you, Mr. Chairman, that 

some mixture of those two things would be required. But I certainly am not speaking for the committee on that point. 

We did, therefore, have these two middle options, which as I said 

before differ in their degree of generosity to the elderly. I can discuss those in detail later if you like. 

The testimony concludes by looking at a lot of process changes 

that our committee considered. We don’t think process changes can 

cure the problem all by themselves, but we think they might be 

helpful in helping the Congress deal with this extraordinarily difficult task. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Penner follows:] 


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Chairman CONRAD. Dr. Penner, thank you for that excellent testimony, and even more for the outstanding work to lay out specific 

options. I tell you, I think if our colleagues go through the exercise 

you have just gone through, the exercise I have just gone through 

with my staff, it will be so sobering to them that I think it will help 

advance the need to act soon, to begin the process. 

We know that in the midst of an economic downturn, in terms 

of good economic policy, you don’t cut spending or raise taxes. 

Those both have a tendency to further jeopardize recovery. But 

very soon here, as recovery takes hold, we have to pivot and focus 

like a laser on this debt threat. All of you have made that abundantly clear. 

Senator Sessions has joined us. I know that he was in another 

committee. I am delighted that he is here. I want to recognize Senator Sessions for any opening statement that he would want to 

make—— 

Senator SESSIONS. Thank you. 


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Chairman CONRAD [continuing]. And then we will open it up to 

questions. 

OPENING STATEMENT OF SENATOR SESSIONS 

Senator SESSIONS. I will be brief. First, thank you for the series 

of hearings you have been holding, Mr. Chairman, because we are 

hearing from some of the best people in the world, in America, on 

perhaps the biggest threat we have to our country at this time. I 

look forward to working with you and believe we are going to have 

to take some steps. 

On the question, you note that we shouldn’t cut spending or raise 

taxes in a time of economic downturn. I think the real question we 

have is how much can we increase spending. $800 billion that was 

passed—over my objection. Every penny of that will add to our 

debt, and I truly believe we did not get the kind of job creation and 

economic stimulus that was projected for it, and I think many people predicted that. I believe Nobel Prize winner Mr. Becker wrote 

that he saw that you should hope to get over $1 stimulus for $1 

invested. He thought we would be well below that. That is why he 

opposed it. And apparently, reality has indicated that is so. 

I just would say to you wise thinkers sitting there—and I don’t 

speak for other members of my party. This is such a big issue and 

it is very personal. I am not for a permanent increase in the size 

of the U.S. Government. I believe we have a culture, a history, a 

heritage of limited government and we have accelerated our debt 

situation through a number of bad decisions, in my view, and now 

the answer is, well, we just have to have a tax increase and this 

will raise up somewhat the percentage of GDP the government extracts every year and I don’t like that. 

So you might say, well, Sessions, we are willing to cut a little bit, 

but you have got to raise taxes a little bit. Well, I am not too sure 

about that. I mean, that is not what my people are saying. They 

think government wastes too much money, spends too much 

money, and it needs to take a shave and not grow. 

So I guess I am being honest with you, Mr. Chairman. We have 

got a big problem here because this isn’t an easy thing for me to 

say I am going to vote for tax increases this deep, in my view, of 

what I was sent here to do on behalf of my constituents. And that 

is not going—I think a lot of other people feel the same. 

So what we will do, I don’t know, but we are going to have to 

deal with the reality that you are laying out for us and I will do 

my best to think about it. 

Ms. MacGuineas, thank you for the support—and Ms. Rivlin—of 

the bipartisan bill we offered to contain spending at the 2-percent 

or so level that the budget calls for. I think 17 Democrats voted for 

that, close to the 60-vote majority needed to pass it, and maybe we 

can somehow get that across the hump. 

Finally, the containing spending is always about next year. We 

have just got one more year to keep thing going. And that is concerning to me. I think we have got to look at this year’s budget and 

make sure that not a dime is spent that isn’t critically important 

that it be spent. Thank you. 

Chairman CONRAD. Thank you, Senator Sessions. Let me just say 

to my friend, you know, what we have is a circumstance in which 

353 

those who are on the more liberal side of the spectrum do not want 

to change the trajectory on Social Security and Medicare by a nickel, and we have got those on the more conservative of the spectrum 

who do not want to raise taxes by a nickel. And we are in a circumstance, I believe, that is going to require both. I personally believe we are going to have to do more on the spending side long 

term than on the revenue side, because if you look at the long-term 

trajectory, the reality is I think more is going to have to be done 

on the spending side than on the revenue side. But I believe if we 

really set the kind of goal that we need for the country in terms 

of level of debt, that if we just did it on the spending side of the 

equation, as Dr. Penner said, the cuts would have to be so deep, 

so draconian, that it would not be sustainable. 

And, on the other hand, I know that there are passionate feelings 

about revenue, not raising revenue. I think the first place we look 

on the revenue side is a more efficient revenue system, because my 

calculation—and I know the Internal Revenue Service will not 

agree with this, but I believe we are only collecting 76 percent of 

what is owed under the current system. If we actually collected the 

money we are supposed to collect under the current system, we 

would not need any tax increase, we would not need additional revenue. We would have additional revenue, and we would in large 

measure eliminate the gap. We would still have very serious problems on the spending side of the equation because of the baby-boom 

generation, and the undeniable fact is we are going to double the 

number of people eligible for Medicare and Social Security. 

And I have had people who are on the more liberal side of the 

equation attack me and say I am for cutting Medicare and Social 

Security and that is what my whole goal is. I would just say to 

them, if they are seriously concerned about Medicare and Social Security beneficiaries, then they better get serious about how we deal 

with the utterly unsustainable course that we are on, because the 

fact is both of them are cash negative today. Medicare, according 

to the trustees, is going to go insolvent in 8 years. Social Security 

is not far behind. Both of them are now putting pressure on the 

general fund because we owe out of the general fund to the trust 

funds of Medicare and Social Security the money that we borrowed 

from them, and we have borrowed in the hundreds of billions of 

dollars. And that has got an immediate budget effect, which was 

the part of the conversation you and I were having the other day, 

that those who just focus on the publicly held debt—and I think it 

is important to repeat, because there is a lot of reference here to 

various debt stabilization levels, and the 60 percent of debt-toGDP, gross domestic product, is based on the publicly held debt. 

That is the debt that we owe the public. It does not count the 

money that we owe the trust funds. 

When you look at all of the debt, the gross debt, which you and 

I were advocating we have to do—certainly from a budget perspective we do—because the reality is the debt that is the gross debt 

of the United States includes what we owe to the public; it also includes what we owe to the trust funds of Social Security and Medicare. 

When you look at it on a gross debt basis, we are already this 

year going to have a debt that is going to be 90 percent of the gross 

354 

domestic product of the United States. Ninety percent. We have not 

been that high since after World War II. 

As a share of the publicly held debt, our debt is going to be over 

60 percent of GDP, and what most of the witnesses here are advocating is a debt stabilization goal of 60 percent of GDP, which I 

think is a worthy goal. 

Senator SESSIONS. Which is using the public debt. 

Chairman CONRAD. Yes, of the publicly held debt. 

But, again, I think it is very important for members of this Committee to know from a budgetary standpoint that gross debt has to 

be very much on our minds, because we have got to come up with 

the money to pay back those trust funds, and that can only come 

out of current income. 

Now, let me go to the witnesses, and let me ask you this question. You have done the scenarios, and I applaud you for going 

through and actually coming up with alternative scenarios. And, 

boy, it is sobering, is it not, Dr. Penner? 

Mr. PENNER. It certainly is, Senator. 

Chairman CONRAD. And you are well known as beining conservative financially. You are somebody that has been very clear with 

respect to the long-term trajectory. When you go through the effort 

to come up with a plan that stabilizes the debt at 60 percent of 

GDP, there are just a whole lot of very unhappy choices. Isn’t that 

the case? 

Mr. PENNER. Yes, sir. I think any reasonable path involves significant changes to what you might call the sacred cows of Social 

Security and Medicare and, as I said, I think some increase in the 

tax burden. I do think that the best way to go about it, as you implied, is through a radical tax reform, because the way economists 

see it, the inefficiency of the tax system increases with marginal 

tax rates. And if we can get rid of a lot of tax expenditures, we can 

lower those rates actually below today’s level and still raise additional revenues. 

Chairman CONRAD. But let us be very clear. When we are talking 

about that, we are talking about things like the interest deduction 

on mortgages. We are talking about the fact that today health care 

benefits are untaxed. You get, as we all do, benefits—or more of us 

do, benefits from our employers. Those are not taxed. That is $2.5 

trillion, by the way of tax benefits for health care over the next 10 

years—$2.5 trillion. That is real money. 

Mr. PENNER. And it grows over time. 

Chairman CONRAD. And it grows geometrically over time. 

So let me ask you, Dr. Penner, with respect to that—and I will 

go to the other witnesses as well. We are going to have to deal with 

Social Security and Medicare. Medicare is the 800-pound gorilla. It 

cannot be allowed to continue to grow at its current rate without 

swamping the whole system. And to those who say they care about 

Medicare beneficiaries—and I believe all of us do—and to those 

who say they care about Social Security beneficiaries—and I believe all of us do—and to those who say they care about the tax 

burden on our taxpayers—and I believe all of us do—isn’t it true, 

Dr. Penner, that we are headed on a course that threatens all of 

those interests? 

355 

Mr. PENNER. Yes, it is, sir, but I think we should not exaggerate 

the pain involved in this too much, because as I noted, even in our 

most severe cuts to Social Security, most of the population ended 

up with higher real benefits than they get today. Now, that was 

not true with the most affluent because of our progressive indexing 

system. But in either of our middle-ground scenarios, the real value 

of benefits does continue to go up over time. 

Chairman CONRAD. But isn’t Social Security the easiest one here 

to deal with? 

Mr. PENNER. That is true. With regard to Medicare, that is much 

more difficult, both conceptually and politically—conceptually because we do not know how well a lot of the frequently suggested 

options would work, politically for very obvious reasons. 

But, again, after you do what you can to get rid of the inefficiencies in the system, the major driver here is technological change, 

which makes health care more expensive every year. And so what 

we are talking about is improving quality of health care over time, 

and we should not lose sight of that. It would be easy to finance 

the quality of health care we have today, but it is what is promised 

for the future that is so difficult. 

Chairman CONRAD. Let me just go right to the 800-pound gorilla, 

because it is Medicare. Dr. Rivlin, what would you recommend to 

this Committee and to the Congress that we do to deal with Medicare and its threatened insolvency? 

Ms. RIVLIN. That is the hardest question, but I think there are 

a lot of partial answers. We do not know really how effective some 

of the things that have been suggested in terms of making the 

health care system more efficient can be, but they ought to be 

tried. We should put in place a strong Medicare commission that 

picks the best ways of changing the reimbursement rates so that 

they favor better, more efficient health service delivery, and cannot 

be overridden by the Congress—which has been happening time 

after time, as you well know—and other kinds of ways of reducing 

the rate of growth of Medicare spending. We are lucky in a sense. 

We have a very inefficient health system. That may sound 

counterintuitive, but compared to some other countries, we have 

very large opportunities to make this system more efficient in the 

near term. And in the end, we are going to have to worry about 

rationing. But I do not think we are going to get there for a couple 

of decades. We have the opportunity to be more efficient. 

Chairman CONRAD. Let me ask you this question, and I will ask 

all the witnesses this question. Senator Gregg and I wrote the Congressional Budget Office, and we said, ‘‘What would be the most effective things that we could do to contain exploding costs in health 

care?’’ Their answer to us was clear and compelling. 

No. 1, they said, ‘‘You have got to begin to tax Cadillac plans. 

You have got to reduce the tax exemption for health care.’’ 

No. 2, they said, ‘‘You have got to reform the delivery system. Instead of paying for procedures, you have got to begin to pay for 

quality outcomes.’’ 

They said those are the two most important things you can do. 

Do you agree with that? 

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bracing Senator McCain’s notion that the tax exclusion of employer-paid health insurance from income should be gradually 

phased out. That is, I think, a better approach, actually, than taxing the Cadillac plans, although they—— 

Chairman CONRAD. Well, in fairness, that is really what CBO did 

recommend. I morphed it a little there to taxing Cadillac plans. 

They really said phaseout—— 

Ms. RIVLIN. Well, they get to the same objective. 

Chairman CONRAD. Yes, they do. In an economic sense, they do. 

Ms. RIVLIN. Yes, and I think you could do it either way. But it 

is really important that we not have the tax system favoring excessively generous health plans which encourage people to use too 

much health care and encourage the providers to deliver it in an 

inefficient manner. And the other piece is all of the things that go 

with making the health care delivery system more efficient, not all 

of which we know yet. We need to experiment with that and figure 

out how to do it better, because it can be done better. 

Chairman CONRAD. We know it can be done better because here 

in this country we have got systems that are relatively low cost 

that have the best outcomes: Mayo Clinic, Cleveland Clinic, 

Geisinger. They are operating at much lower costs and getting the 

highest quality outcomes. 

Ms. RIVLIN. Right. And we know something about how they do 

it. 

Chairman CONRAD. Yes, we do. 

Ms. RIVLIN. It is a question of spreading it to other systems. 

Chairman CONRAD. Maya, what would you say? With respect to 

Medicare, because I want to go right at the 800-pound gorilla, what 

do you think would be leading alternatives for us to consider to 

deal with the exploding costs? 

Ms. MACGUINEAS. Yes, well, I tend to always regularly bow to 

the reports of CBO, which I think are phenomenal, and so it is always nice to sit between two former CBO Directors. I think that 

report that you and Senator Gregg requested was really, really important, and it focused exactly on the right things. 

Clearly, our tax preference for health care is one of the things 

that is driving up the cost. It is putting us into insurance systems—we are demanding more health insurance and less in wages, 

which is not a rational policy normally, but that is what the tax 

incentive is to do when it is pushing up costs. 

So it is unfortunate that we have not been able to go at that 

head on. I am of the camp that you pull that back as much as possible. I basically say the things in the report, the things that make 

sense. I think paying for outcomes rather than procedures makes 

sense. I think the comparative effectiveness studies which were put 

in place, looking at what works, are very important. But you have 

to understand there is a second step of that. It is not just that you 

study it and then put the report on the shelf. You then have to use 

what we find to limit what health care would be compensated for 

by Medicare, Medicaid, or other insurance. 

And I think one of the things, like Alice said, rationing does not 

have to happen immediately. But we cannot make it a bad word. 

Rationing happens in a system like this. You cannot have everything paid for in an unlimited way. And we need to be able to have 

357 

a discussion about what should be covered and by whom. And, unfortunately, health care is one of the most explosive discussions 

that is out there, and so while I do not think we need to go to any 

extremes right now because there are so many inefficiencies that 

could be wrung out, it needs to be acceptable to talk about the 

tradeoffs in health care just like in other areas of our economy. 

Chairman CONRAD. All right. Senator Sessions. 

Senator SESSIONS. Thank you. We had an excellent hearing 

Tuesday, and Dr. Reinhart from the University of Maryland testified, and Mr. Johnson and Mr. Marron. But one of the things we 

discussed and we should get on the same page about is: What do 

we mean when we say debt-to-GDP ratio? What is the best number? 

The European Union uses a 60 percent debt-to-GDP. In a meeting we had with some German leaders a week before last, one person noted they count local government debt, too, in that. Is that 

right, Dr. Penner? 

Mr. PENNER. It is indeed. 

Senator SESSIONS. I did not know that. And, second, I assume 

their 60 percent would include the internal debt, the non-public 

debt, too. I do not know if they have such a situation. Ours is driven by the unique accounting procedures we use, I think the CBO 

letter said. 

So I guess what I am saying to you is when we discuss this with 

the American people, what is the best number that we should start 

using? I have used the public debt simply because nobody disputed 

that that was a bottom-line debt figure. But what I have learned 

in the latest flap over health care legislation and my belief that the 

President understated the cost of the plan, it is because CBO does 

not score the internal debt. But since we now know that Medicare 

and Social Security are on an insolvency trajectory that is very 

real—not like it was 20 years ago when this reality was not so 

close—don’t we now need to re-evaluate that and perhaps begin to 

discuss the issue by utilizing the gross debt rather than the public 

debt? Dr. Rivlin? 

Ms. RIVLIN. I think you are stuck with using both numbers, because they have different significance and both are important. If 

you talk about the public debt, that really is what we owe to the 

public, including other countries, and roughly half of it is owed to 

other countries. They hold our debt. And it is important to—— 

Mr. SESSIONS. When you say other countries, is that individuals 

or nation states? 

Ms. RIVLIN. It is mostly nation states. It is—but—— 

Mr. SESSIONS. I am sorry I interrupted you. 

Ms. RIVLIN. Yes. It is governments and central banks in other 

countries. China and Japan are the largest ones, but not the only 

ones. And it is important to keep that in mind. That portion of the 

public debt makes us very vulnerable to the policies of those countries, and it is one of the reasons for worrying about the public 

debt. 

There are, I think, different reasons for worrying about the total 

debt because we are now at the point at which we are going to 

have to start redeeming that debt, and that means that we will be 

358 

buying back those bonds—we, the taxpayers—in order to make 

sure that the Social Security and Medicare payments are made. 

So that total debt is important, too, and I think you cannot oversimplify the thing by saying there is only one important number. 

There are two important concepts and two important numbers 

here. 

Senator SESSIONS. Dr. Penner, it seems to me that what we are 

doing is, since we are not raising revenue or cutting expenses, we 

are converting the internal debt to public debt, inevitably, inexorably, because both of our trust funds are not in surplus or soon 

will not be in surplus. Is that the danger of the internal debt? 

Mr. PENNER. That is exactly right, sir, and I wanted to point out 

that when we, in this report, do our baseline, that baseline implies 

that the debt in the trust funds is going to gradually be sold so 

that trust fund debt becomes debt held by the public. And, actually, 

it is not all that many years before the distinction between the 

gross and net debt essentially disappears because the two biggest 

funds, Social Security and Medicare, are emptied over time. 

Senator SESSIONS. But to keep us from being too overawed by it, 

Mr. Chairman, CBO is scoring that, I believe, are they not? In 

other words, CBO is scoring in their surging of the public debt the 

transfer of internal debt to public debt. If we focused on public 

debt, we do have some sort of a projection of the direction we are 

going. But when we increase, as the health care bill would have 

done, the internal debt, I do not think we can any longer suggest 

that that is not a cost, an increase in the debt of the country. 

Following up on debt, I believe it was Stephen Moore who has 

made the point, I do not know if this has been fully proven economically, but if we had a 1-percent greater growth rate than our 

projections now have for the American economy, Social Security 

would not go into default. Whatever, we know that growth makes 

a big difference, particularly, I think, in Social Security, and so 

does economic growth in the economy. And, of course, when you 

raise taxes, it diminishes growth and debt diminishes growth. Dr. 

Reinhart testified that the level of debt we are in will take us to 

a reduction in economic growth by 1 percent of GDP, which is a 

stunning figure, if that is accurate. And I think all the panelists 

agreed that it was accurate. Actually, the three of them did not dispute that and acknowledged that. 

So it seems to me we are caught between this ‘‘damned if you do 

and damned if you don’t’’ to a degree. I am inclined to think that 

we have got to contain spending now, not let this money get out 

the door, like the stimulus package, when you get so little for it 

and make sure that every dollar gains us something in terms of 

growth and increases the debt as little as possible. 

But what is your thinking about the comment about growth and 

the size of debt, Dr. Rivlin? 

Ms. RIVLIN. Growth is a very good thing. We are all for growth, 

I think, and the more the economy grows, the easier it will be to 

solve this problem. 

One of the illustrations of that is what happened in the several 

decades after World War II where we had a very large debt, over 

100 percent of the GDP, and the economy was growing rapidly. 

Over that period the debt-to-GDP ratio came down primarily beVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00364 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
359 

cause the economy grew so fast, not primarily because the 

debtcame down . 

But, I just wanted to say one thing about Social Security, and 

that is, yes, growth is good for bringing the revenues into the Social Security trust fund. But our benefits are indexed to wages, and 

growth pushes up wages. So unless we change the way the formulas are calculated, growth does not help us all that much on Social Security. 

Senator SESSIONS. Do you think the index should be more fairly 

inflation rather than wages? 

Ms. RIVLIN. I think it is not exactly a question of fairness, but 

if we are going to bring down the rate of growth of Social Security 

benefits in the distant future—not for people who are retired now— 

then I think we could index the benefits, the initial benefits, to 

prices for people above the middle or above the 60th percentile or 

something. One way to do that would be to phase in an indexing 

which would be less generous for people at the top than people at 

the bottom, and that would help a lot. 

Senator SESSIONS. Thank you. I would say that I just read a Fortune magazine that had four of the top investing people. One was 

Mr. Gross at PIMCO and Jeremy Siegel and two others. Three of 

the four said the new normal is low growth, and they attributed 

the low growth for the next decade to debt. Mr. Siegel took a more 

optimistic view thinking productivity, technological advancements 

could be the breakthrough that could help us not do this. But that 

was pretty grim. These are people who are telling their customers 

how to invest their money, and they were not optimistic about the 

future. 

Chairman CONRAD. Let me just say on the point that you made, 

here is my rough recollection—because I was going over this with 

some intensity last year, and my rough recollection was if we have 

1 percent more growth than the actuaries are estimating—because 

they are estimating very low growth for the next 50 years in the 

United States. They are—— 

Senator SESSIONS. Two percent is it? 

Chairman CONRAD. Yes, it is 2.2 percent, something like that. 

And if you had 1 percent more economic growth, my recollection is 

that takes care of about 75 percent of the problem. 

Here is the dirty little secret. From a budgetary standpoint, it 

does not take care of the problem at all, or very little of it, because 

we still have this circumstance where we have borrowed from the 

general fund, we have borrowed money from the Social Security 

trust fund. Now that money is going to have to be paid back. The 

only way it can be paid back is out of current receipts. 

This is a concept that most of our colleagues have not gotten 

their mind around. This is going to have a significant effect on the 

rest of the budget, because we have been in this very happy circumstance where the general fund has been able to, in effect, borrow from the Social Security trust fund $150, $180 billion a year. 

Now that is ending. That source of money is ending because Social 

Security right now is cash negative. It is going to be permanently 

cash negative in 2016. 

So now where is that money going to come from? Now where is 

that money going to come from when the situation is reversed and 

360 

the general fund has to start paying off these bonds that represent 

the borrowing that has occurred? And somehow we have got to help 

our colleagues understand we are headed for a very different budget circumstance. 

Senator WHITEHOUSE. Senator WHITEHOUSE. Thank you, Chairman. Thank you for 

holding this hearing, and I thank all the witnesses, who I think 

gave very valuable testimony. I want to extend my particular appreciation to Dr. Rivlin for being here and for her many, many 

years of service in the budget and economic environment. 

But my questions, I would like to particularly focus on Dr. 

Penner. I want to thank you for being here. I thank you very much 

for presenting from your Choosing the Nation’s Fiscal Future Report. It is the first time that I have seen a budget document address in anything other than a very cursory way the value that can 

be achieved from reform in the health care delivery system. 

You put it in the context on pages 85 to 86, and then later on, 

95 to 102, of the Medicare system, but if we are, in fact, engaged 

in achieving those—what did Dr. Rivlin say—very large opportunities to make the system more efficient in the near term, if we are 

engaged in capturing those, it is my understanding that because 

they are systemwide reforms in many cases, if a hospital increases 

quality, reduces hospital-acquired infections conceivably to zero, is 

no longer paying—we are no longer paying $70,000 per hospital-acquired infection, then it is not just the Medicare system that saves, 

it is everybody who is paying for health care that saves. 

I would like to ask you, if we are good at that, and I take the number as being somewhere between $700 billion a year in excess 

cost and waste, which is the White House Council of Economic Advisors number, and $1 trillion a year in excess cost and waste, 

which is the Lewin Group and Treasury Secretary O’Neill number, 

that if we can get a significant chunk of that—and I know it will 

take time, and I know, to use your, I think, very accurate phrase, 

it will be an ongoing learning process—I think Dr. Gawande wrote 

a very good, similar description of that recently—isn’t it true that 

many of the benefits of that will fall outside of the Medicare and 

Medicaid system and will help with the overall burden of health 

care costs that the economy has to bear helping, in fact, private 

companies that are buying in the private market in parallel with 

the assistance to Medicare and Medicaid? 

Mr. PENNER. I think that is absolutely right. You can categorize 

Medicare options into two categories. One contains the sort of options that you are talking about. If we could get rid of infections 

in hospitals or reduce the readmission rate, that would help the 

whole system, including private insurance. 

There are, however, other kinds of options, like increasing the 

eligibility age for Medicare, that are essentially means of shifting 

costs out of the government budget and onto the private sector. 

Senator WHITEHOUSE. That, to me, is one of the real values of 

focus on delivery system reform, because it is really a win-win. It 

is not a zero-sum game in which you are shifting costs off of government and onto the private sector, and because people resist that 

and build new devices to prevent it, you are actually probably adding to net health care costs in some of those circumstances as the 

361 

insurance mechanism develops to try to continue to game the system and create additional costs for people in the system gaming behavior. 

But it is important to me that you said it. I think it is sort of 

discouraging, in a sense, that it is only two pages and five pages 

out of the whole volume when I consider how valuable it is. But 

I have to say, this is the high-water mark to me in the budget discussion, and I know that Senator Conrad and Senator Gregg are 

extremely keen on getting this statutory commission going, and I 

have to say that my single greatest reservation about it is that I 

worry that it will be populated with a lot of people who are fiscal, 

economic brilliant people but who don’t really have the specialized 

sense of how delivery system reform can and must take place, who 

don’t understand, as you do, the executive management function of 

developing it. 

It will be an ongoing learning process. It requires multiple building blocks to achieve. And that it will be overlooked. In the same 

way that CBO, as you point out, couldn’t really score it effectively 

because of the nature of the process, that when we look at this 

going forward, people will say, well, you know, if we can just chuck 

some people off of Medicare, boy, we can count those savings right 

away and we can put them right in the bank. It is harder work to 

do the other thing, and therefore, there will be a bias in favor of 

what I would call the fiscal hawk. 

You said the two alternatives. I describe them as sort of the 

bloody Civil War surgeon’s bucket of tools, you know, of saws and 

knives and things like that, and then a more modern doctor’s tool 

kit with modern technologies and non-invasive procedures and 

pharmaceuticals and things like that. And we can do it the modern 

way, but there seems to be a huge firewall between the people who 

understand delivery system reform and the people who are looking 

at the fiscal problem. They are completely different silos. I see almost no overlap. How do we break down and penetrate those silos 

and get the more expert discussion of the delivery system reform 

happening in the fiscal budget context? 

Mr. PENNER. Well, I think while I agree that the system is terribly inefficient and that if we could improve the efficiency, we 

could save enormous amounts of money, I wouldn’t want to say it 

is easy, either. I mean, I think the very fact that we don’t understand the cost savings that go with a lot of these proposals suggests how hard it is. We have got to do our best to learn more. As 

Alice said, maybe that can be done to some degree through various 

demonstration experiments and so forth. 

Senator WHITEHOUSE. Let me ask her to chime in in my minute 

remaining so I get a chance to hear from her on this. Dr. Rivlin? 

Ms. RIVLIN. Well, I agree with you, but I am a little less discouraged. I think there are quite a lot of people that are thinking very 

seriously about systemic reform and about budget problems at the 

same time. One of them is my Brookings colleague Mark McClellan, whom I believe you know. He and others, Dr. Fisher and the 

people who have worked on the Dartmouth Project, are definitely 

in this camp. They are people who deeply care about delivery system reform but who care about the economics, as well. 

362 

Senator WHITEHOUSE. I just want to try to populate the fiscal 

prudence camp—— 

Ms. RIVLIN. Good. 

Senator WHITEHOUSE [continuing]. With more of those people 

who understand that and to make sure that that is the way that 

we proceed first on this. 

Ms. RIVLIN. Yes. 

Senator WHITEHOUSE. As the Chairman said very, very correctly 

yesterday—I think it is a critically important point that he made— 

you can go after Medicare with fiscal knives anytime you like. You 

can overnight chuck people off it. You can overnight cut benefits. 

You can overnight use the bloody Civil War tool box. 

Ms. RIVLIN. You might not get reelected. 

Senator WHITEHOUSE. In a crisis, who knows what people will 

do. But what is different about the delivery system reform piece is 

that it will take time to develop it. The building blocks have to be 

applied, to use Dr. Penner’s testimony. The ongoing learning process has to take place, again using his words. And so every minute, 

every hour, every day that goes by that we are not very deliberately engaged in that is time lost against whatever that day of 

reckoning or moment of reckoning might be, as I think it was Ms. 

MacGuineas said. It could be an abrupt crisis that provokes this 

and we don’t want to waste the time between now and then. 

So I would urge all of us to be as proactive as possible in urging 

that, and that includes the Obama administration, which I hope is 

not waiting around for the health care bill, which has a lot of important building blocks in it, to pass. 

I have gone beyond my time. I apologize, Chairman. 

Chairman CONRAD. No, that is fine. I would just say this to you 

and for those who might be listening. One of the greatest frustrations I have had in being a participant and in some ways a witness 

to the health care debate is big chunks of the news media paid almost no attention to the things that the people who are most 

knowledgeable about health care have told us were the most important things. 

CBO told us phasing out the favorable tax treatment for health 

care, employer-based health care, is one of the most important 

things that needs to be done. They also said one of the most important things that needs to be done is this reform of the delivery system. Did you see any of the national media spend 30 seconds on 

that issue, on reforming the delivery system, to stop paying for 

every procedure, instead to pay for quality outcomes? Did you see 

one story that talked about that? I didn’t. Instead, they chased 

every rabbit, everything that is a side show, a side issue, most of 

which doesn’t matter a hoot, according to the experts, in solving 

the problem. 

And I will tell you, I don’t know what is happening as a culture, 

but when we have the national news media obsessing on Michael 

Jackson and obsessing on side issues and giving no basis of information to people to make judgments on things that really matter 

to our economic future, we have got a very big problem. My plea 

to the national media is, look, I know it is a ratings game on TV. 

I get it. But you have got some obligations. You are using the pubVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00368 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
363 

lic airwaves here. You have got some obligation to talk about 

things that are serious, that really matter to our future. 

Senator Cardin? 

Senator CARDIN. Thank you, Mr. Chairman. I again thank you 

for having this hearing and thank you all for being here. 

The question really is how we can have a fiscally sustainable 

budget, so let me stay on health care for one more moment because, Dr. Rivlin, I might not agree with you on the politics of this. 

Cutting Medicaid may not be a terribly unpopular thing. I don’t 

know. We are certainly having a hard time extending FMAP help 

to our States now where it is going to have a major impact on Medicaid budgets, I know in Maryland and—— 

Ms. RIVLIN. I thought we were talking about Medicare. 

Senator CARDIN. Well, my point is this. If we are looking at a 

sustainable budget, one could say the Federal Government could 

cut back on its commitments to pay for part of health care, whether 

it is Medicare or Medicaid or other health care programs, and that 

certainly would, at least in the short term, reduce our Federal 

budget deficit. But that would be the wrong thing for us to do from 

the point of view of our economy, and it would be the wrong thing 

for us to do as to what is right for the Federal Government to do. 

On the economy, if we make it more expensive for businesses to 

pay for health care, they are going to have to compete internationally, and the President is talking about doubling our exports, it just 

makes it more difficult. But small businesses are already having a 

tough time paying their health care premiums, and if we don’t do 

something to make it easier, but instead make it harder, it is going 

to cost jobs. And I can tell you, there are a lot of people in Maryland today who are withholding purchases—withholding going to a 

restaurant or buying a car—because of their concerns about paying 

health care bills, because, frankly, Medicare doesn’t cover enough 

and private insurance is not covering enough and a lot of people 

either have no coverage or they have major gaps in coverage. 

So as we talk about entitlement reform and how are we going to 

deal with the projected huge deficits at the national level, I am 

very concerned about that. I hope that we will listen to what Senator Whitehouse and Senator Conrad are saying: that if we don’t 

figure out a way to bring down health care costs in America, but 

instead just try to look at the Federal budget and say, we are successful and we can reduce our exposure, then I think we have 

missed the opportunity to remedy a real problem that we have with 

our economy, at the same time dealing with a sustainable and fiscally responsible Federal budget. 

I feel the same way that the Chairman feels about how coverage 

has been on this, and I hope the President is successful in bringing 

together Democrats and Republicans. I hope that what will clearly 

be nonnegotiable is that health care reform has got to bring down 

the growth rate of health care costs. It must be done in a way that 

is fiscally responsible for the Federal budget. And it must to provide affordable coverage for every American. That is what we 

should agree on. To me, that is how you are going to have a fiscally 

sustainable Federal budget. If you don’t do that, the problems will 

even be greater in the future. 

364 

I think that when you look at some of the proposals that are 

being suggested around here, I am concerned that we could get 

from, whether it is this commission or some other group using, as 

Senator Whitehouse said, Civil War tools to solve a problem when 

we should use modern technology. 

Ms. RIVLIN. I don’t disagree with that. I thought I was agreeing 

with Senator Whitehouse that the most important thing to do is to 

reform the delivery system and to make the health care system 

more efficient and effective for everybody. 

Senator CARDIN. I think we are all saying the same thing, 

but—— 

Ms. RIVLIN. I think we are all saying the same thing. 

Senator CARDIN. I think we are, but the Chairman started the 

hearing talking about the Federal debt, and we all talk about the 

Federal debt. It is way too big, and we know we can’t have a sustainable, fiscally responsible Federal budget unless we deal with 

the debt. I always like to remind people, let us go back and take 

a look at what happened when we had a growing economy. 

And you know, Mr. Chairman, you and I supported the statutory 

pay-as-you-go, PAYGO. We should have had that when we had a 

balanced budget so we couldn’t have passed Medicare Part D without paying for it, increasing Federal spending, or we couldn’t have 

tax cuts that weren’t paid for, so that we at least had some fiscal 

responsibility. Sometimes it is easier when you have a budget surplus to spend recklessly. And now we are paying a heavy price as 

a result of it. 

And as we found out at the last hearing, you also have another 

major problem, and that is lack of savings in America. During our 

growth time, we didn’t save. Instead, we said, well, we are building 

up equity in our homes. Well, we saw what happened to the equity 

in the homes. 

So my question to the panel is, here we are, still in the aftermath 

of the worst recession in my lifetime, and we know that the Federal 

Government has a critical role to play during a recession in creating jobs, part of which is fueled by Federal spending. We also 

know that we need consumer confidence for people to spend. And 

yet we want to look at reducing Federal spending and increasing 

personal savings. How do you reconcile those differences as we look 

at this year’s budget and the following year’s budget? Any of you. 

Ms. RIVLIN. Let me start quickly. I think you have to do two 

things at once. You have to do what is necessary to get us out of 

the recession and you have to start by enacting very soon measures 

that will bring down spending—bring down the rate of growth of 

spending. We are not going to bring down spending. We are going 

to bring down the rate of growth of spending over time. I think 

that has to include the entitlement programs. And I also think you 

have got to recognize that bringing the debt to a—stabilizing the 

debt is not going to be possible right away on just the spending 

side. You are going to have to have some more revenues, too. 

Senator CARDIN. Yes? 

Mr. PENNER. I basically agree with that. I don’t think the conflict 

between the short- and the long-run is as severe as a lot of people 

make out. I think you could today talk about passing reforms that 

perhaps would slow down the growth of Social Security benefits or 

365 

increase the payroll tax. You could today pass things that would be 

implemented, say, starting in 2012 as our report suggests. And I 

think that might even help with the short-run economic situation, 

because there is a lot of concern out there about our debt and what 

it will imply in the future with regard to tax changes and spending 

changes. And if you could reduce that uncertainty, I think it would 

help a considerable amount. 

Senator CARDIN. Thank you. 

Ms. MacGuineas? 

Ms. MACGUINEAS. To your health care and your stimulus comments, I mean, I think both you and Senator Whitehouse made 

very important points that we heard sort of in the beginning of the 

health care debate, that the No. 1 thing that we could do to get 

the fiscal situation under control is to slow the growth of health 

care costs. And unfortunately for me watching this, somebody who 

has had to learn more about health care than I ever wanted to— 

I want to be just a fiscal person, not with a bloody saw, but somebody who doesn’t have to understand the technical pieces of health 

care, but you can’t be a budget expert without learning about 

health care. 

I think one of the things that we saw which was somewhat discouraging was a little bit of the watering down of the pieces of the 

health care bills that would slow the growth. And what I would 

hope that we would see as we go back and revisit this is everybody 

who understands the importance of combining health care reform 

and budgetary reform really goes back and reemphasizes those 

pieces that we saw in the CBO report would help us the most slow 

the growth. The more that we get out of health care savings over 

time, the less we have to go to all the other pieces of the budget, 

and I think that is really important. 

I want to speak just a moment for a point Senator Sessions was 

making, which I think is about sort of mistrust of what the two 

parties are doing and standing in the way of this. But one of the 

things that you voiced a concern about is sort of Republicans looking at Democrats through stimulus and health care and feeling 

that they are trying to push an expansion of government that then 

means when we deal with a budget compromise, it puts taxes back 

on the table. And I think there is a different half of that, which 

was during the Bush era, when we decided to cut taxes before reforming entitlements, I think the other party could sort of see that 

as the same way. We chose to cut taxes before we dealt with the 

budget situation and that changes the negotiation. 

The result, of course—I mean, we know this—is a horrible high 

level of mistrust which makes coming up with the kind of compromise so, so difficult. And I come back to something that, Senator 

Conrad, you keep bringing up. Oftentimes, we try to convene members of both parties to talk through these things and think about 

what productive people can work on, and at this point, it is very 

hard, because when you get to the kind of specifics we have talked 

about in this hearing, things can get dicey. 

But I think there are three things that are really helpful for 

members to do together, and one is pick a fiscal goal. And again, 

it is not so important exactly what it is, but that there is a widespread commitment to a fiscal goal that levels the playing field. 

366 

A second one is not to insult different ideas for helping, whether 

it is on health care reform or budgetary reform. Encourage people 

to come up with all the ideas they have so that we can then have 

a discussion about the tradeoffs between those reforms instead of 

saying, you know, no, we should not raise taxes. No, we should not 

cut Social Security. We need to encourage those. 

But the third thing that I think is so important is this exercise 

that you have been doing in your office. Every member needs to sit 

down and see how they would achieve the fiscal goal that they 

think is something that would reassure credit markets, because 

when you get into the nitty-grittys of the policies, you realize everything has to be at play here. This is not earmark reform. This 

is not just waste, fraud, and abuse. This is really big structural 

changes that we have to think about. 

Just quickly in terms of stimulus, I am somebody who didn’t 

think the stimulus package was perfect, but thought it was very, 

very necessary and I was incredibly concerned about where the 

economy was headed, and I thought focusing on economy recovery 

was absolutely right. I don’t know if the right thing is another 

stimulus or jobs package right now. I know it should be economically motivated, not politically motivated, meaning we shouldn’t 

put a lot of unrelated things in the package and it should be something that is well targeted. 

It should be temporary. One of the things that has concerned our 

organization is watching how the White House has put some stimulus measures and a stimulus package into its baseline in a way 

to make them permanent without offsetting the costs. That 

shouldn’t happen. These are temporary policies. 

And I do think now we have such a high level of debt, it may 

be worth thinking about offsetting the cost of stimulus measures 

over a long time period. So if there is something we need to do this 

year and/or next year and it is the right thing to do, you do it, but 

you also should include an offset so it is repaid over time, because 

the debt doesn’t really care why—what the dollar is borrowed for. 

Sure, you want it to grow the economy, but in the end, we are 

bumping up against our debt limit, so we need to figure out a way 

to bring down the debt once we get the economy strong again, as 

well. 

Senator CARDIN. Well, I thank you for that response to not only 

my question but the other members’. That is good advice. A lot of 

what you are saying is what our Chairman has been urging us to 

do, including the exercise to try to balance the budget. I thought 

that would be a fun thing to do during the Presidents’ Day holiday, 

so I will take my Chairman up on that. 

[Laughter.] 

Ms. MACGUINEAS. It is fun. 

Chairman CONRAD. I would just say, even if one doesn’t get to 

balance, in some ways it is less important than finding a way to 

get the debt stabilized, which is the testimony of this group after 

a lot of work that they have done. Perhaps a more appropriate goal 

than reaching balance is stabilization of the debt and then working 

it down over a longer term, because, frankly, we are at a debt level, 

I believe, that is going to be too high. Even that exercise is very 

daunting. 

367 

I just say to my colleagues and their staffs who are here and listening, please have your member or you, as a staff, go show your 

member, what does it take. And it is not just dealing with earmarks, and it is not nibbling around the edges here and there in 

domestic spending. No, no, no. It is going to take bold strokes to 

deal with this challenge. It is going to take big ideas and it is going 

to take political courage, because it is every hot-button issue that 

is out there. It is Social Security. It is Medicare. It is revenue, all 

of them. 

We have got an obligation. I mean, history is going to judge us. 

History is going to judge us, whether or not we were up to this 

challenge and whether or not we were true patriots. Were we really 

concerned about the country, or are we just concerned about our 

own political hides? You know, history will judge. History will 

judge. Do we come through at a time our nation really needs us? 

I believe we can, and I hope that we will. But it is not going to 

happen nibbling around the edges. And it is not going to happen 

unless we find a way to come together, because political control 

switches. 

You know, I have been here 23 years. I am a Democrat. Sometimes we have been in control. A lot of times, we haven’t. And it 

goes back and forth and it is going to go back and forth again. That 

is why, in my own personal belief, we have got to find a way to 

do this together, because when the political winds change next, if 

we don’t have a plan that all of us basically think has got merit, 

it will be abandoned. 

If you look at the trend lines, it really is sobering. This is no joking around now. I mean, we are headed in a way that could take 

this nation to second-class status. That is how serious this is. 

So I just urge my colleagues, let us really make our best, best 

effort to work together and try to come up with solutions. And I 

know we can do it. I know we can. It is going to take all of us to 

give. I mean, I have got all kinds of things. 

Let me just say, I come from a farm State, one of the most heavily dependent States on agriculture programs of any State. I am 

ready to take on farm support and to reduce even what was in the 

bill that I just helped pass. That is how serious I am about doing 

what has to be done. So, look, it is time for all of us to get out 

every sacred cow and face up to this debt threat. 

Final thoughts, Senator Sessions? 

Senator SESSIONS. Well, thank you for this. We have got to confront the problem. You are doing so. I know you share with the administration realities that we are facing in unvarnished ways and 

I can only hope that that will help us deal with it. 

But you know, the President never was a mayor. He never was 

a Governor. He never ran a company. And he was only in the Senate a few years. It took me a number of years to begin to understand some of the complexities of our debt. So when they submit 

a budget that calls for a $170 billion jobs stimulus over the next 

several years, OK. But what is not stated is $100 billion that they 

are going to be offering this year, all additional debt, and it is really $270 billion, and all $100 billion of that would be emergency 

spending adding to our total debt. 

368 

What I am saying is, I am thinking that our President is going 

to have to lead on this issue. He can’t tell us that the health care 

bill was going to save money. He can’t tell us his bill is $170 billion 

when it is $270 billion. We have got to get straight about it. 

Mr. Chairman, I wanted to ask one question, and I think this 

came to me clear in reading these financial people, their comments, 

and I think you said it, Dr. Penner. When we surge our debt from 

$5 trillion, $7 trillion it was a year or so ago to $17 trillion in 10 

years, tripling it, that money, that is the public debt. So that is 

borrowed from either our individual Americans or other countries 

and that is money that would otherwise be available to be loaned 

into the commercial economy, creating jobs, and it crowds out and 

drives up borrowing costs for the private sector. I guess that is one 

of the factors that Dr. Reinhart was mentioning and why it slows 

our growth down. But would you elucidate on your comment on 

that? That will be my last question. 

Mr. PENNER. Well, I think you have summarized my point very 

well. The money we borrow comes out of something. There isn’t a 

free lunch here. And whether we use domestic saving to borrow or 

use foreign saving to finance our deficit, it will ultimately reduce 

our standards of living. I don’t think you can get around that. 

Whether the line is between having or not having a large 

deterimental impact as bright as a 90 percent debt ratio, I find 

that a little hard to swallow in their work. But certainly, the higher the deficit, the more it impacts negatively on our potential to 

grow. 

Senator SESSIONS. The other two? 

Ms. MACGUINEAS. Sure. I think that is a good point. I have to 

say that I was actually trapped in my car on Tuesday trying to get 

into the line to get to the grocery store to find that there was no 

food and the only thing that kept me from having road rage was 

that I got to listen to the hearing on C–SPAN, and it was really 

an excellent hearing. It was really interesting. 

And when I first turned it on, Senator Conrad, you were talking 

about the difference between the public and the total debt, and I 

think they are so important, because the reason the public debt 

matters is when you are looking at financial markets and taking 

this capital out of the economy, and that is the point you are making, Senator Sessions, that right now, when you are thinking about 

job growth, this debt dependency is a real threat to it because you 

are taking away the capital that could go to job creation. And so 

we need to weigh those tradeoffs. 

And I also think it is right to point out that especially this Budget Committee needs to be aware of the total debt, because that is 

the one that affects what we are committing to in the future, and 

we are allocating our resources in the future, losing the control 

that we have over the budget. Now, usually you say you want to 

leave flexibility for the next generation. We care about our kids. I 

just spent 4 days locked in a house with my kids. I am not sure 

how much I care anymore. I am really, really glad to have gotten 

out of the house. 

[Laughter.] 

369 

Ms. MACGUINEAS. But I know when I go back, I will look at them 

and I will feel the same sentimentality, that it is important that 

we do this for the next generation. 

But the debt right now is threatening our economic recovery in 

the short term as well as the long term, and I think that is a really 

critical and important point, and why when we think about stimulus job creation, it is not in a vacuum. The dependency on the borrowing that is allowing us to do that, we have already lost our fiscal flexibility, so it is hurting us to have stimulus programs. I think 

it is a great point. 

Ms. RIVLIN. I substantially agree with all of that, but we are in 

a very deep recession, the result of financial mismanagement. We 

are not in a situation which we can return to budget balance quickly, nor should we. Raising taxes or cutting spending to create a balance very quickly would be disastrous and I think we should remember that. 

Senator SESSIONS. I agree. Maybe we can refrain from making it 

more bad than it is. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator Sessions, and I want to 

thank the witnesses. I deeply appreciate your coming out, given 

these conditions especially. I very much appreciate the effort and 

the energy that you have put into your testimony here today and 

the committee has certainly benefited by your expertise and by 

your thoughtful consideration of these issues. 

With that, we will stand in adjournment. 

[Whereupon, at 4:02 p.m., the committee was adjourned.] 

(371) 

DEFENSE BUDGET AND WAR COSTS: AN 

INDEPENDENT LOOK 

TUESDAY, FEBRUARY 23, 2010 

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:02 a.m., in room 

SD–608, Dirksen Senate Office Building, Hon. Kent Conrad, Chairman of the Committee, presiding. 

Present: Senators Conrad, Merkley, Gregg, and Sessions. 

Staff present: Mary Ann Naylor, Majority Staff Director; and 

Cheri Reidy, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. I want to 

welcome everyone here this morning. I especially want to welcome 

our witnesses. 

Our hearing today will focus on the defense budget and war 

costs. We are joined by a very distinguished panel of outside defense experts. 

Dr. Cindy Williams is the principal research scientist at MIT’s 

Security Studies Program. She is a former Assistant Director for 

National Security at the Congressional Budget Office. 

Dr. Gordon Adams is a professor of U.S. foreign policy at American University. He is a former Principal Assistant Director for National Security at the Office of Management and Budget. 

And General Paul Van Riper is a retired lieutenant general of 

the U.S. Marine Corps. He is currently serving on the Independent 

Review Panel of the Defense Department’s Quadrennial Defense 

Review. 

Welcome to all of you. We could not have a more distinguished 

group of witnesses here this morning. We are delighted you are 

here. 

372 

I thought I would begin with just a brief overview of the defense 

budget and the war costs that we face. 

First, I think all of us acknowledge on this Committee that national security must always be our top priority. We need to do 

whatever it takes to protect this Nation and to give our men and 

women in uniform the resources that they need. The Obama administration has made that point, and made it repeatedly. 

This is what Vice President Biden said in a speech to the National Defense University just last week: ‘‘Even in these tight fiscal 

times, we will commit the resources our security requires.’’ 


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And the President’s budget backs up those words. It provides 

$549 billion for the Department of Defense in 2011, representing 

about a 3-percent increase over 2010. But given the Nation’s deficits and debt, it is more important than ever that we get the most 

out of each defense dollar. A dollar wasted on an unnecessary or 

inefficient defense program is still a dollar wasted, and we need to 

ensure the funds we set aside for defense are actually going to efforts that will make us safer. 


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The administration has taken a number of steps last year and 

again this year to refocus defense dollars in a way to make them 

more effectively spent. Here are some of the changes made last 

year, that the administration made with the support of Congress: 

F–22 production was ended; the Army’s Future Combat Systems 

was reconfigured; they halted the Army brigade combat team expansion at 45; they ended the Navy DDG 1000 destroyer production; ended production of a new Presidential helicopter; and shifted 

to regional missile defense. And this year, the administration proposes ending C–17 military transport production, ending the Navy 

CG(X) cruiser program; terminated a flawed human resources control system; and terminated a flawed command and control system. 


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Even with these efforts, the defense budget is taking up a tremendous and growing part of our national budget. In the President’s latest request, the defense budget will have increased for 14 

years in a row. The regular defense budget will have almost doubled over that time period, rising from $254 billion in 1997 to $549 

billion in 2011. And when you add war costs on top of that, we will 

be spending over $708 billion in 2011. That is a tripling, roughly 

a tripling, from 1997. 


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But to put this in historical perspective, we can see that our defense funding, including war costs, is far higher than during the 

Reagan defense buildup and the Vietnam War, and it has exceeded 

the Korean War peak for the last 6 years. 


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I think it is important to recognize what Secretary Gates has 

said in testimony before the Senate Foreign Relations Committee. 

He said, and I quote, ‘‘July 2011 is the beginning of a process of 

drawing down in Afghanistan. That process will be based on conditions on the ground. The President has not put deadline in terms 

of when our troops will be out, but clearly he sees July 2011 as an 

inflection point where we begin to drawn down those forces in Afghanistan, and with a view to transferring this responsibility to the 

Afghans over a period of probably 2 to 3 years.’’ 

So under the timeline, we would presumably have a military 

presence in Afghanistan until at least the middle of 2013 or 2014. 

We also need to remember the context within which we consider 

these defense requests. Our Nation is deep in debt. This chart depicts the projected deficits under the President’s budget over the 

next 10 years. It shows the budget deficit coming down from a high 

of $1.56 trillion in 2010 to $706 billion in 2014, but then starting 

to go back up. It is that pattern that is of great concern to this 

Committee. 

In the near term, I think we all understand what we confront. 

But what is of very deep concern to this Committee, certainly this 

member, is the long-term outlook of the President’s budget. That 

is unsustainable, and it is going to have to be addressed. I am delighted that he is going forward with a commission to make recommendations and that those recommendations will come to this 

Congress for a vote before the end of the year. I think that is critically important. 

But we also understand we have a responsibility now to look at 

all spending that is proposed, to scrub it, to review it, and that is 

part of this process. 


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We are joined by my colleague, the Ranking Member, Senator 

Gregg, and we will have his statement now, and then we will go 

to the panel for their testimony. Welcome. 

OPENING STATEMENT OF SENATOR GREGG 

Senator GREGG. Thank you, Mr. Chairman, and I thank the 

panel for being here today to give us their thoughts on the defense 

procurement issues and specifically the defense budget, and I appreciate your holding this hearing. 

Obviously, defense is the first responsibility of a national government. Having a strong defense capability and making sure that the 

people who serve us in the military are fully supported is absolutely a priority for us as a Congress. But that does not mean that 

we should not look at the way these dollars are being spent and 

make sure that we are getting the most for the dollars that we are 

spending in all functions of Government, including defense. And, 

thus, I would be interested in this panel’s thoughts in this area, 

but especially as it relates to, as I see it, defense spending being 

divided into three areas. 

First, obviously, is fighting the war. What does it cost us to fight 

this war? What will it cost us to fight this war? What is a fair assessment of that cost? Whatever it takes, we are going to have to 

spend. That is just a fact of life because of the fact that we have 

troops, soldiers in the field, and they deserve our full support. 

Second, of course, is the issue of purchasing weapons systems to 

support our troops and the question of which weapons systems we 

should be supporting, whether we should be changing our focus— 

the entire military structure is changing its focus—and whether 

our focus is too much in a historical mode with strategic systems. 

And third is the cost of personnel, and specifically the cost of personnel post-service, and what are the real costs and what percentage of the defense budget is basically being locked down and put 

in place in a manner that basically cannot be adjusted as a result 

of those costs being put in place, and other things we should be 

looking at to try to bring those costs under control, especially in the 

area of health care in the Defense Department and in the area, obviously, of retirement benefits. 

So those are the three areas I am interested in hearing from the 

panel, and I appreciate the Chairman having brought them before 

the Committee today, and I look forward to their testimony. 

Chairman CONRAD. Thank you, Senator Gregg, and we will proceed with Dr. Williams. Again, Dr. Williams, the principal research 

scientist at MIT’s Security Studies Program, former Assistant Director for National Security at the Congressional Budget Office, 

and, of course, we rely on the CBO very much for estimates that 

we rely on. 

Dr. Williams, welcome. Please proceed. 

STATEMENT OF CINDY WILLIAMS, PH.D., PRINCIPAL RESEARCH SCIENTIST, SECURITY STUDIES PROGRAM, MASSACHUSETTS INSTITUTE OF TECHNOLOGY 

Ms. WILLIAMS. Thank you, Mr. Chairman, Senator Gregg. I appreciate the opportunity to appear before you today to discuss the 

379 

Nation’s defense budget. I have provided a written statement, and 

I am hoping that it will be entered into the record. 

The United States is privileged to have a military vastly more 

powerful than any other in the world, and our future national security demands that we provide it with adequate resources. But the 

Nation’s resources are not unlimited, as you pointed out, and as in 

other areas of the Federal budget, the choices you make for the 

next decade will influence the choices available to the Nation in the 

future. 

Mr. Chairman, you already highlighted the rapid rise in defense 

spending since 1997. The administration’s budget for fiscal year 

2011 calls for additional real increases for the next 5 years. 

It seems to have become conventional wisdom that the defense 

budget must continue to rise in real terms just to keep the armed 

forces intact. Those who see increases as inevitable often argue 

that the same factors that have pushed portions of the budget upwards in the past must be unavoidable in the future. That is not 

the case. Rather, what seem like unavoidable increases often reflect 

specific policy choices that do not have to be repeated. In some 

cases, they actually augur an opportunity to spend less, not more, 

in the future. 

I would like to focus here on two examples: operation and maintenance, and the equipment purchases attributed to the wars in 

Iraq and Afghanistan. 

First, operation and maintenance. A glance at the raw trends 

does indeed leave the impression that the DOD’s operation and 

maintenance budgets have nowhere to go but up. The Congressional Research Service estimates that O&M funding per activeduty troop climbed an average of 2.5 percent a year since 1955, as 

shown in Figure 4 of my written statement. But there are reasons 

for past increases, and generally they do not portend unavoidable 

budget growth in the future. 

These reasons include the expansion of infrastructure on military 

bases during the 1950’s and 1960’s as the U.S. turned to a large 

peacetime military. They include the added operational costs of the 

Vietnam War. They include the shift in 1973 to the all-volunteer 

force. The creation of the all-volunteer force prompted the Department to improve support of all kinds and showed up in the O&M 

budget. It also led to a major expansion of the population of military retirees. Their health care costs show up in the O&M budget. 

Another important factor was the transfer of work from uniformed personnel, whose pay is charged to the military personnel 

account, to contractors, whose costs are generally in O&M. During 

the 1990’s, O&M budgets were also pushed billions of dollars higher by new missions like drug interdiction, cooperative threat reduction, and environmental cleanup. 

During the past decade, the biggest O&M cost driver was health 

care. We are all aware of the rising costs for health care across the 

United States, but the defense situation is made worse because of 

deliberate choices during the past decade to expand the benefits 

and hold to a fee structure that makes military health care much 

cheaper for retirees than other options available to them and, 

therefore, draws large numbers of military retirees into the military medical plan when they have other choices. Other factors durVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00385 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
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ing the past decade include the expansion of installation security 

and force protection measures and other changes made in response 

to 9/11. 

Factors like the adoption of the all-volunteer force, the shift of 

work to contractors, added missions like drug interdiction, and expanded missions like force protection are likely here to stay. Reducing their costs in absolute terms will require choices and tradeoffs, 

but there is no reason to expect that their costs will rise uncontrollably in the future just because they added to budgets as they were 

introduced. One thing is certain, though. Assuming that O&M costs 

face an unavoidable rise simply because they went up in the past 

is the surest way to make it so. It is also an invitation to waste. 

Now let me turn to the costs of equipment reset due to the wars. 

It seems, again, to have become conventional wisdom that huge 

amounts of military equipment have been destroyed, damaged, or 

just plain run into the ground by operations in Iraq and Afghanistan. To compensate, so the argument goes, the Army and Marine 

Corps will need major new investments in equipment during the 

coming decade. In fact, the evidence points in the opposite direction: the services are actually better off in terms of equipment as 

a result of the wars than they would otherwise have been. 

Since 2002, the Department has budgeted more than $230 billion 

for procurement ostensibly related to the wars. A sizable share of 

that money went not to replace equipment lost in battle but to outfit the forces with entirely new equipment. Some examples include 

the Army’s restructured brigades, modern equipment for the 

Guard, and the MRAPs. Moreover, the fraction of deployed equipment that has been destroyed in combat is actually quite small. 

There is also little reason to believe that the equipment is being 

ground down at a particularly rapid rate by being used heavily in 

the wars. In short, rather than signaling the urgency of a fresh 

round of procurements to fix things that broke in the wars, the 

wartime procurement should put the services in a better position 

to face the future. 

Let me summarize by saying that rising defense budgets are not 

a new law of physics. Assuming that they are will inevitably lead 

to waste that the Nation cannot afford. 

Mr. Chairman, Senator Gregg, that concludes my remarks. 

[The prepared statement of Ms. Williams follows:] 

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Chairman CONRAD. Thank you very much. 

And now we will go to Dr. Adams. Dr. Adams is a professor of 

foreign policy at American University and a former Assistant DiVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00399 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH

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rector for National Security at the Office of Management and 

Budget. Welcome, Dr. Adams. 

STATEMENT OF GORDON ADAMS, PH.D., PROFESSOR OF 

INTERNATIONAL RELATIONS, SCHOOL OF INTERNATIONAL 

SERVICE, AMERICAN UNIVERSITY 

Mr. ADAMS. Thank you very much, Senator. Mr. Chairman, Senator Gregg, it is a pleasure to see both of you this morning, and 

I thank you for the opportunity to appear and talk about the defense budget request and the issues that you have raised from the 

dais. 

You are discussing today one of the most sensitive and difficult 

spending issues you face: how to fund appropriate defense needs 

while ensuring essential budgetary discipline to our national defense budget at a time of continuing overseas combat operations. 

The administration has sent you a budget request that is historically high and has asked that it be exempt from the discretionary 

spending freeze it proposed for the remainder of non-defense discretionary spending. 

I will argue instead, and do in my statement—which I would appreciate being entered in the record—that the defense budget 

should be included in any budgetary freeze or overall discretionary 

budget caps or reductions the Committee is considering. 

I make four points in my testimony. First, although Secretary of 

Defense Robert Gates, who has done some remarkably good things 

at the Defense Department, has described this request and the accompanying QDR as ‘‘bracing dose of realism,’’ which makes significant tradeoffs, it actually, in my judgment, reflects very little discipline in defense planning and budgeting. 

Second, the QDR, which was just released with the budget, continues mission expansion for the military, broadening defense requirements in a way that makes budget discipline even more difficult. 

Third, the reluctance to impose planning discipline and make 

choices now will lead to pressures for continuing high defense 

budgets, a point that my colleague Cindy Williams has already underlined, with serious implications for deficits in the out-years. 

And, finally, you do have options to set limits on the mission and 

budgetary expansion. Let me briefly say a few things about each 

of those points. 

First, with respect to the lack of budget discipline, the budget 

you have received follows in the tradition of being based on the appropriation DOD received last year, plus more funding growth, and 

I would associate myself with Dr. Williams’ comments about there 

is nothing inexorable about this kind of law. Defense has, in fact, 

been unconstrained relatively for the past 10 years, and it is now, 

as your own chart points out, higher than the 1952 Korean War 

budget peak, higher than the peak defense budgets of 1985, higher 

than the Vietnam budget peak for defense. 

By increasing defense resources to this level, the budget avoids 

priority setting, choice making, and tradeoffs. It would increase resources for near-term challenges, as described by the Secretary, but 

it does not rebalancing by reducing funding for longer-term priorities. Instead, it funds both. The procurement, operations and 

395 

maintenance, and military personnel increases are not offset elsewhere in the budget. There are virtually no significant procurement programs eliminated this year. The two that are flagged—the 

C–17 and the F–35 engine—provide no savings, as they were already not in the long-term defense plan. 

While overseas contingency operations would decline slightly, 

there is every prospect of a future supplemental, and the budget 

plug of $50 billion for the out-years is continued as the tradition 

in this budget as well. There is no visible effort to restrain O&M 

costs. Military personnel costs grow as well, with end strength continuing to increase, even if temporary, which sets a long-term track 

for budget expansion throughout. And the administration deserves 

credit for seeking more clarity and discipline in OCO budgeting— 

overseas contingencies—but there are a number of programs, as 

Dr. Williams suggests, that need to be examined closely in the 

OCO request as to whether they are, in fact, directly related to war 

costs. I particularly underline in my testimony the $2.8 billion in 

funding for long-term reconstitution, which is something, arguably, 

that has gone on in the $230 billion or so that Dr. Williams mentioned. 

The second point on the link with the Quadrennial Defense Review, I suspect the dilemma you are going to face is being exacerbated by the new Quadrennial Defense Review. It has had an influence, I think, on the budget request, but I would suspect that the 

impact was not so much to restrain the budget as to encourage its 

continued growth. 

Secretary Gates has said that this shifts away from two major 

regional contingencies near simultaneously as a planning algorithm, but, in fact, it does not. As Secretary Gates himself has said, 

‘‘What I wanted to convey was a much more complex environment 

in which you have to do not just two major conflicts, which does 

not rule them out, but a broad range of things as well, or in the 

future one of those conflicts and a number of other contingencies.’’ 

The many missions and objectives offered in the QDR are not 

given any relative priority. Rather, the discussion of the risk in the 

document seems to support the idea that defense planning and 

budgeting needs to lower every risk at the same time. 

The QDR also fully endorses the mission expansion begun under 

the prior administration, pushing the military into missions and 

capabilities that have future implications for the expansion of the 

U.S. military role, the size and composition of our armed forces, future defense budgets, as well as the roles and capabilities of our 

foreign policy institutions. 

The third point, future pressures on the defense budget. Dr. Williams has mentioned pressures that are particularly coming on the 

procurement side. Let me add to that that mission expansion is 

going to cause upward pressure. Operations and maintenance 

spending unrestrained will exercise upward pressure, especially as 

the civilian work force expands. Health care costs, as she pointed 

out, are rising even more rapidly than those for Medicare. The mission expansion will lead to demands for force expansion, which is 

the underlying driver of most of the defense budget. And the administration will encounter continuing war costs and will have to 

adapt that $50 billion plug to a more realistic estimate. 

396 

Finally, the QDR itself and the budget point out that the Department has no way to scrub its underlying budget requirements in 

part because its budgeting and accounting systems are not up to 

the task, which means it is one of the sources of building the budget on top of last year’s number. They are not really looking at what 

last year’s number can save. 

Fourthly, options for the Congress. Do you have options? You 

know, defense budgets, as you will remember, Senator, were not 

exempt from past efforts at deficit reduction. They were including 

in Gramm-Rudman-Hollings. It helped seal the deal, in fact. They 

were included in the Budget Enforcement Act of 1990. Both first 

President Bush and President Clinton made sure that defense was 

included, planning was included under the caps that existed between 1990 and 2002. So there is no ipso facto reason for saying 

that defense ought to be exempt. 

In my statement—I will not detail them here, but I offer several 

areas where you might want to look, the Congress as a whole 

might want to look to include defense in an overall discretionary 

freeze, including the budget resolution as a freeze level itself, military personnel freeze, reducing the rate of growth in operations 

and maintenance spending, limiting base budget procurement 

growth, further reductions in R&D, and the careful scrub of the of 

the procurement part of the OCO budget I mentioned before. 

You face, as you yourself have pointed out, Mr. Chairman, very 

broad budgetary and economic challenges, and I think it is important for you to consider how you might include defense in dealing 

with this challenge, I believe at no sacrifice to our national security. A freeze at this point, combined with clear out-year caps in 

discretionary spending, could, in fact, provide the incentives for 

more disciplined planning and budgeting at DOD. 

Thank you very much, Mr. Chairman. 

[The prepared statement of Mr. Adams follows:] 

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Chairman CONRAD. Thank you very much, Dr. Adams, for your 

testimony. 

Now, we will go to General Van Riper. General Van Riper is a 

retired Lieutenant General of the Marine Corps, currently serving 

on the Independent Review Panel of the Defense Department’s 

Quadrennial Defense Review. Welcome. Thank you very much for 

your service. Thank you for being here today. 


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STATEMENT OF PAUL K. VAN RIPER, LIEUTENANT GENERAL, 

UNITED STATES MARINE CORPS (RETIRED) 

General VAN RIPER. Mr. Chairman, thank you for providing an 

opportunity to speak to you today. As you noted, I am a member 

of the Independent Panel to Assess the Department of Defense 

Quadrennial Defense Review. Because deliberations of the panel 

are ongoing with a final report not due to Congress until July 2010, 

my remarks today will center on material contained in the seven 

chapters of the Fiscal Year 2011 Defense Budget Overview, not the 

one chapter that summarizes the QDR. 

The defense budget request specifies what the Department’s senior leaders believe is needed for our national security. In other 

words, this budget identifies the means that the American Armed 

Forces will require, and in many cases use, in the coming years to 

protect our nation and its interest. 

More important than the identification of the means, however, is 

an explanation of why the Nation requires these means and how 

the Armed Forces will make use of them. Our national strategies, 

security, defense, and military, are to explain the why behind the 

means. That is, they are to give good reason for the purposes that 

underpin the strategies, goals, and objectives and describe how 

they relate to the resources the Department of Defense is requesting. The Joint Force and service concepts should explain how the 

force will use these means operationally. 

If we fail to get the strategies and the concepts right, we are unlikely to get the means right, either. A clear and compelling logic 

of ends, ways, and means must run through all of these strategic, 

budget, and operational documents. In the final reckoning, the 

quality of our thought will prove more significant than the quantity 

of our means. 

My written statement is based on an analysis of the defense 

budget overview using this ends, ways, means construct. 

In the 14 years after Congress enacted the legislation that required the President to transmit to Congress each year a report on 

national security of the United States, the administration submitted a national security strategy fairly regularly, but often not 

at the time specified. However, the last administration submitted 

only three national security strategies in 8 years and the current 

administration has yet to offer one. A national security strategy informs the budget. In its absence, we must seek other sources of 

strategic thought. 

To judge the thought behind the fiscal year 2011 defense budget 

request, I turned to President Obama’s speeches that address his 

administration’s strategic approaches. In addition, I read Secretary 

of Defense Gates’ 2008 National Defense Strategy and his article, 

‘‘A Balanced Strategy in Foreign Affairs.’’ To determine if the defense budget request leads to a force that can implement Admiral 

Mullen’s vision of how the Joint Force circa 2016–2028 will operate, I looked to his Capstone Concept for Joint Operations. 

Let me place my conclusions up front. In general, I find a common theme and consistency among all these speeches and documents linking goals and objectives to the specific capabilities and 

capacities enumerated in the defense budget request. Furthermore, 

I am confident that achievement of those capabilities and capacities 

411 

will, for the most part, support current and future operational 

ideas. This is not to say that room does not exist for improvement 

of selected aspects of the budget request. In my written statement, 

I identify several shortcomings. 

One of the most positive aspects of the defense budget request 

is a long overdue recognition of the real reasons for military innovation and change. Recent predecessors to this defense budget request made too many groundless assertions, positing that transformation would render obsolete current technology and methods of 

warfare. These unsupported claims revealed their authors’ fundamental misunderstanding of why and how militaries alter or improve the means and methods they intend to employ in combat. 

For a decade and a half, U.S. military endured demands from 

senior defense leaders, supported by pundits on the sideline, that 

undertake transformation for transformation’s sake alone. The effect was to draw most of the service’s and joint community’s intellectual energies into fool’s work at the expense of thinking critically 

about how our forces might operate to meet emerging security 

problems. In my view, the Department of Defense wasted hundreds 

of millions of dollars in the name of transformation. For the most 

part, all we have for the money spent is a handful of vacuous concepts and disingenuous reports on flawed experiments. 

Recent leadership changes within the Department of Defense and 

U.S. Joint Forces Command have been a breath of fresh air, as this 

has allowed subordinates to think about and plan for war as it exists in reality, not as the uninformed wish it to be. 

I also find the defense budget request agreeable that it largely 

avoids focusing on many of the meaningless adjectives recently 

used to modify the nouns ‘‘war’’ and ‘‘warfare,’’ examples being 

fourth generation warfare, asymmetric war, netcentric warfare, et 

cetera. 

Promptly, the defense budget request starts to rebalance our 

forces, capabilities, and capacities between the only two forms of 

warfare that exist, regular and irregular. I find strong evidence in 

the defense budget request that it supports both acquisition and refurbishing of needed weapons and equipment. Unfortunately, I cannot find the same support for the professional education and training essential to reacquiring and building the knowledge and skills 

required to fight regular nation state enemies. The Joint Forces 

and the services too often look to training and education accounts 

as bill payers when funds and personnel are short in other areas. 

In closing, I urge this committee and the entire Congress to 

evaluate carefully the national security strategy when the White 

House submits its report in the near future, ensuring that it, in 

fact, does relate to and support the Department of Defense fiscal 

year 2011 budget request. Additionally, I entreat you to monitor 

closely the new national defense strategy that should flow from the 

Quadrennial Defense Review and the subsequent national military 

strategy that ought to draw from the defense strategy and defense 

review. 

Once more, I thank the committee for the opportunity to share 

my thoughts and concerns. 

[The prepared statement of General Van Riper follows:] 

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Chairman CONRAD. Thank you, General Van Riper. 

I first want to go to you, because you have really raised strong 

words about these concepts of transformation that were bandied 

about so widely for a number of years. I must say, I agree with 

much of your assessment. After having consulted with top military 

leadership, uniformed leadership, both those still on active service 

and those retired—those retired, obviously, were in a much better 

position to speak their minds openly and candidly, as you have just 

done—and I heard very consistently from them an assessment very 

close to what you have just provided. 

That is, that in the discussion of transformation, it sort of became almost a movement and it was very hard to penetrate what 

it actually meant. It was something that had a lot of support and 

was used to justify actions that the Defense Department, frankly, 

at times, I thought were curious, especially from a budgetary 

standpoint. You said you think hundreds of millions of dollars were 

wasted. Frankly, I think you could multiply that. I think billions 

of dollars were wasted chasing a concept that didn’t have much 

meat on the bones. 

I would just be interested in your further assessment of how did 

we get going down that track and how did it gain so much, I won’t 

say credibility, but so much energy being focused on it? What is 

your assessment? How did we get into that? 

General VAN RIPER. Mr. Chairman, if there is to be change, 

transformation, some of the other words used, revolutions in military affairs, technical military revolutions, there needs to be a 


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problem that we are going to solve. And this was the failure from 

immediately after Desert Storm up until some key changes in the 

leadership in the Department and some of the larger commands. 

And that is, there was never a problem identified. There was simply the assertion that we had to change. And my question in the 

forums that I would be in is, why? What for? It never was answered. There was a focus on technology as if technology was going 

to solve our problems. There was no quality of thought. 

In terms of an organizational look at it, it is surprising, because 

the generation that I came from, the post-Vietnam generation, 

went through an intellectual renaissance led by Admiral Stansfield 

Turner, General Don Starr, and General Al Gray in the 1970’s and 

mastered conceptually the art of war, usually codified in air-land 

battle, but in a larger joint context. We demonstrated that mastery 

in Desert Storm and again in the takedown of Baghdad and then 

walked away from it for really a myth. 

Chairman CONRAD. It was really a very curious period, a very curious period, and there seemed to be during that time a lack of respect for many in the uniformed military. I observed that repeatedly. Civilians at the Defense Department and those who were— 

I don’t remember quite the words that you used—pundits, I think 

you used the word, people were brought in to advise the Defense 

Department who had no defense background. Well, maybe they had 

written books, some of them fictional books, about military involvement in the past, but it was a very odd thing to witness and I appreciate your making the point here today. 

Let me go to a point I want to talk to you all about because this 

is the Budget Committee. We have got a special obligation to our 

colleagues on taking what the President has proposed and reworking it into a budget resolution to consider all of the tradeoffs that 

we confront. 

419 

This is what we see in terms of defense spending in today’s dollars related to previous buildups, the buildup during the Reagan 

years, the buildup during Vietnam, the buildup during the Korean 

War Peak, and we see we have surpassed that now and continue 

to go up. I don’t think that is dispositive with respect to what we 

do with respect to defense spending now. It has got to be dictated 

to by the terms of what we confront and what we are dealing with. 

There is another aspect to this, and that is our long-term debt. 

Our long-term debt—I don’t know if we have that chart available— 

that is the deficit. I think I took that out. It may be in the outer 

office here, maybe if somebody could get that for me. 

We are on a course that is absolutely unsustainable as a nation 

with respect to our overall debt burden. Very soon, we will have a 

debt that will be a gross debt that will be 100 percent of our gross 

domestic product. Here is the chart I was referencing, and we are 

right at the dotted line. That is what has happened so far in terms 

of growth of debt. 


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But look what is about to happen. And this is driven by a number of factors. It is driven by health care spending that is going up 

much more rapidly than underlying inflation. It is driven by demographic changes. The Baby Boomers are going to double the number of people eligible for Social Security and Medicare. It is driven 

by defense costs and war costs. It is driven by tax policy if we extend all of the tax policies that have been cast in the Bush administration and the Obama administration. I find there is a lot of confusion about what has happened to tax policy in the Obama administration. The fact is, taxes have gone down under the Obama administration. Every tax matter that has been proposed and passed 

has been a cut in taxes. 

So we now confront a circumstance in which our revenue is at 

the lowest level as a share of GDP that it has been in 60 years. 

Our revenue is about 15 percent of GDP. Spending is at its highest 

level as a share of GDP in 60 years. It is at about 26 percent of 

GDP. So we have a gap between spending and revenue of 11 percent of GDP. That is really stunning. To have a stable debt, economists tell us you need a deficit of about 3 percent of GDP. So we 

are almost four times that. 

The reality that we confront on this committee is that we are on 

an utterly unsustainable course in every aspect of our spending, in 

every aspect of our revenue, because the gap between the two is 

utterly unsustainable, and it will lead, according to most witnesses 

that have come before this committee—in fact, every single one— 

every single one of whatever stripe, whether they were representing the Republican side of the aisle, the Democratic side of 

the aisle, or independents—every single one have told us, you are 

on an utterly unsustainable track. 


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And the consequences of being on an unsustainable track with 

respect to deficits and debt is that at some point, those who are 

lending this money, and increasingly those are foreign entities— 

last year, 68 percent of the new debt financing came from abroad. 

China is now the biggest funder of the United States—China. 

Japan is No. 2. That, too, has consequences. 

I say all of this because I feel increasingly like I am in some 

netherworld on this committee, that the whole enterprise of the 

budget of the United States is utterly disconnected from reality. We 

have now had the Chinese warn us publicly and privately that they 

are increasingly reluctant to finance this debt. We have had 

Moody’s tell us they are considering downgrading the quality of 

U.S. debt. 

And so on this committee, we confront a circumstance that, really, everything has to be on the table. Everything has to be up for 

consideration. That is clearly the charge that is being given to this 

debt commission the President has formed and is naming now. 

I saw them quizzed this week and they were asked, is this off 

the table? Is this off the table? And they said, nothing is off the 

table. Nothing is off the table. I take from that that defense cannot 

be off the table, either. 

I would just ask each of you, in turn, if you were advising this 

committee on where we could achieve savings in defense over time, 

what would be your top recommendations? Dr. Williams? 

Ms. WILLIAMS. My top recommendation is to stop the strategy 

that the Defense Department has currently embraced and that the 

Obama administration has embraced and that the Bush administration also embraced. It is hugely expensive. It encourages our allies to free ride. It encourages our other friends to behave badly toward their populations and their neighbors. It fuels the recruitment into the camp of our enemies. 

And so it strikes me that the only way that we can really turn 

defense into a sustainable operation that is going to fit within the 

kinds of budget cuts that other sectors are going to have to have 

is to cut back substantially on what we expect our military can do 

for us. Cut back substantially. If we did that, we could have enormous savings in the size of the force. We could reduce the size of 

the Air Force. We could trim the size of the Army. We could really 

get some savings. 

Short of that, we can live for the next 5 years under a budget 

that looks sort of like the administration’s plan, which I actually 

agree with General Van Riper is fairly well matched—the administration’s plan is fairly well matched to its strategy. So you can decide that you are going to have a mild freeze on defense by trimming here and there, and I will suggest some ways that you could 

do that. But if you really want to get some traction on this problem 

and turn defense into a sustainable operation for the long-term future, it has got to be with a different strategy. 

So, some things that you could do. First, the services need to stop 

choosing the most expensive of every single item, and I think the 

Navy’s cancellation of the DDG–1000 and the return to the Arleigh 

Burke, its purchase of more smaller ships, those things are a good 

start. But what about the F-35 Joint Strike Fighter? It is hugely 

more expensive than the F–18. It is hugely more expensive than 

422 

the Air Force’s F–16. We cannot keep making choices that way in 

the world of equipment. 

We can certainly do a better job on bringing the costs of military 

health care closer to the costs that people pay in the civilian world 

by changing a couple of things. The first is that we must find a 

way to start bringing the cost sharing of the health care program 

for military retirees closer to what people pay in the private sector. 

If we don’t do that, we are going to continue to have people migrate 

into the military system who otherwise would have used their second employer’s insurance or their spouse’s insurance, simply because it is so much more economical for them to be in TRICARE. 

The administration did not propose that this year. The Bush administration did propose it for the final 3 years of its budgets. The 

option was rejected by Congress. It strikes me that it is time for 

Congress to act on that, even though the administration didn’t ask 

for it. 

Another option for reducing health care costs is to decide today 

to retain fewer personnel to retirement. In other words, don’t keep 

as many people in the military all the way until they retire. Even 

if you had to pay something to encourage some of them to leave, 

we would be better off in terms of the defense budget over the 

longer term by doing that. 

Chairman CONRAD. All right. 

Dr. Adams? 

Mr. ADAMS. Yes. Thanks for the question, Senator. I think it is 

a very important question. As I said in my testimony, I think you 

struggle with the enormous burden that you have of trying to get 

the budget under control and trying to get the deficit and the debt 

under control and to deal with extraordinarily explosive elements 

of budget expansion in the mandatory and the revenue side. That 

is a major challenge. There is no question that at 55 percent of discretionary spending, defense is also something that needs, in my 

judgment, to be included in how you think about debt. 

And then I think what Congress needs to do, and this is obviously a broader test than just your committee, is to think both 

about the external and the internal sources of growth in the defense budget and how those can be gotten under control. 

The external issue is an issue of strategy. It is an issue of mission. And I think the major problem that you face in the QDR and 

the problem that you are going to face in the source, the policy 

source of budget expansion is the enormous expansion of mission 

in the Department of Defense. What we are asking the troops to 

do has grown enormously. It started with things like counternarcotics and comprehensive threat reduction, but now it is enormously expansive in areas of counterinsurgency tactics and operations, counterterrorism operations, stability operations, and even 

more broad than that in the Department of Defense, strategic information operations. We have now got a military system that is acquiring task after task after task and it has enormous built-in 

budgetary pressures. 

I think that makes it very difficult for the Congress to confront 

the external source of growth because there is so much rhetoric 

that surrounds it. General Van Riper talked about the rhetoric 

around transformation. Well, there is a tremendous amount of 

423 

rhetoric today around the threat, as well, and that threat expands 

from wars of choice—Afghanistan and Iraq, with the objective of regime change—into a rapid and expanding view that where every 

failed fragile state, insurgency, or terrorist operation is underway, 

it is the responsibility of the United States somehow to deal with 

it. 

And as I said in my testimony, we have not chosen between the 

classic state-on-state military missions that General Van Riper is 

talking about and this enormous expansion of missions that Secretary Gates has referred to in the QDR and in the budget presentation. Unless we can tackle that problem of what we think the appropriate role of the United States military is in the broader universe, it is going to be very hard to make the case for budget reductions. That amplifies the case for saying we need to grow defense 

now. 

It is not much of what you will discuss in the committee, but it 

is much of what Congress will discuss in looking at this budget on 

the defense side. What are the missions? Are these appropriate 

missions? Are the lessons of Iraq and Afghanistan and broad expansion of COIN and CT and stability operations around the globe 

or are they not? Do we need to rethink that and think about what 

the appropriately sized role of the U.S. military is, and, I suggest 

in my testimony, how we bolster our civilian capabilities to engage 

internationally in areas particularly where governance and failed 

states are causing us strategic issues? 

The only thing that I would exempt from that judgment in the 

budget today from the outside point of view is the war costs right 

now for the operations in place, and as I have suggested to you, 

even there, I think it is important for the Congress to take a very 

close look at the procurement investment. The reinvestment portion of this year’s OCO budget title is over $20 billion. That is an 

awful lot of money on a history of appropriations of $20 to $30 billion a year particularly to the Army, for what is called reconstitution and reinvestment. So from a Congressional point of view, a 

tough brush scrub of what the wars require in the way of equipment replacement is a critical starting point. 

And then there are all the internal sources, some of which I have 

mentioned in my testimony. Interestingly, I think my own experience, having been around for a previous iteration of how you deal 

with budget deficit reduction and include defense, I would argue— 

and others will disagree with this—that one of the most successful 

defense build- downs that we have had in this country in our history since the Second World War was the period from 1989 to 1995 

that we did not break a force. At the same time, we brought the 

defense budget down. 

The consequence, as I observed it from my position at OMB, was 

that the military and the Department engaged in one of the most 

sensible priority setting and management operations I have ever 

seen them engage in. In other words, there is nothing like external 

budget discipline to say you have got to focus on what your real 

tasks are. 

So one of the missions of this committee, I think, is to say we 

are going to include defense in this budget discipline. Now give us 

your best thinking of how you are going to accommodate that 

424 

freeze. How do you get to it, not as a Washington Monument exercise, oh my God, the sky is falling, but as what would you really 

do? How would you prioritize? Part of that is going to be mission. 

Part of it is going to be things like military personnel. Do you need 

to grow the force when the force will be coming down, as we know, 

in Iraq and Afghanistan? Is it important, then, to add to the size 

of the force or are there ways we can gain force savings? 

Operations and maintenance, as I said in my statement, contains 

no external discipline in the Department of Defense. Eight-and-ahalf percent growth in budget resources from 2010 to 2011 says 

somebody is not managing the O&M store. That is one of those 

areas where there are enormous opportunities to savings, but you 

have got to bear down. So when you talk with defense witnesses, 

pushing them on operations and maintenance savings, I think, is 

important. 

Procurement—as I said, I don’t think the 2011 budget makes 

many very serious procurement system choices. Mostly, it endorses 

increases in procurement, some of them highly desirable, like 

UAVs, some of them questionable. You know, Virginia-class submarine, questions need to be asked about it. Whether the F–35 

ought to proceed as quickly as it is, the question needs to be asked 

about. The Department has not yet focused on the Marine Corps 

Expeditionary Fighting Vehicle, which is in trouble, but it can’t 

somehow bring itself to cut it loose. 

Questions need to be asked about the research and development 

budget. For example, much is made of the cancelation last year of 

the Future Combat Systems Vehicle program at the Department of 

Defense. The replacement program in the budget request this year 

is $3 billion worth of R&D. In other words, there has been no budgetary resource saving to speak of in the area of vehicles for the Future Combat Systems program. It is a relabeling. It is a redrafting. 

It is the same budgetary amount. Is that a necessary program? 

And finally, I suggested in the area of overseas contingency operations, it is really important to scrub the procurement end of that 

budget request to see if there aren’t programs that really belong in 

the base budget and ought to be traded off against other programs 

currently in the base budget, and as I say, overall budget discipline 

is going to push the Department to set those priorities and make 

those kinds of choices. 

Chairman CONRAD. Thank you. 

Senator Gregg and I have made the point repeatedly, not during 

just this administration, but the previous administration, the kind 

of base budget creep that we see happening. It has enormous implications for the long term. 

You know, my colleagues get tired of us saying it, but it is true. 

We are on an utterly unsustainable course and no part of the budget will be exempt if, God forbid, we face a crisis because those who 

are lending us the money decide they are not showing up at the 

Treasury auction window weeks or months from now. Then all of 

us will be in the soup and we will be in the soup big time. 

Mr. ADAMS. Can I underline the point that you have made just 

briefly, Senator, on the base budget, because I think that is a critical point that I develop in my testimony. The Department itself 

will tell you that it cannot array its budget data by mission, that 

425 

they have no way of doing that. That said, the Secretary has said 

that of the procurement requests, 50 percent of the programs being 

bought are for long-range missions, 7 percent are closely axed on 

the war, and 40 percent—the remaining 40 or 43 percent are dualuse. Frankly, if you can’t array your budget data by mission, I don’t 

know how he knows that to be true. There is really no way the Department can measure it. 

And when you look at how they are spending money, as the GAO 

has probably repeatedly testified for you, they have said they don’t 

have the budgeting, financial accounting, and business systems 

that enable them to say, here is where we are wasting money in 

the base budget. They simply can’t answer the question. The consequence is then we pile next year’s budget on top of last year’s 

budget. 

Chairman CONRAD. You made another point that I have found— 

the truth is the accounting systems that we have at the Department of Defense are so inadequate to analyzing what is actually 

going on there that it really is impossible to say. That gives this 

Committee an extremely difficult challenge because—how I started 

is what I believe. We have got to—our first obligation is to defend 

this Nation, and we have got to provide the resources to do that. 

And we cannot be penny wise and pound foolish with respect to 

providing those resources. 

At the same time, in the aggregate we are on a collision course 

with reality, and the reality is we cannot afford as a Nation all of 

the things that we are doing. It is inescapable. It is inescapable. 

We have doubled the national debt over the last 9 years. We are 

getting ready to double it again over the next 8 years. And we are 

headed for territory never seen before in terms of a debt as a share 

of the size of our economy. That is just a reality. We are going to 

have a debt that will be unmatched since right after World War II. 

And we are headed for a circumstance, according to the Congressional Budget Office and the Office of Management and Budget and 

the General Accounting Office, that we are going to have a debt 

three times the size of the debt that we had after World War II 

as the previous record. And nobody believes that that is sustainable. Not a single witness, whether it is the previous Secretary of 

the Treasury, the current Secretary of the Treasury, the head of 

the General Accounting Office, the head of the Congressional Budget Office, the head of the Office of Management and Budget, that 

has not said to us the course we are on is utterly unsustainable. 

So I have said to my friends—and I have very close friends in 

the uniformed military—you know, we are going to have to face up 

to this in every part of the budget. 

General Van Riper, what would be your recommendations to this 

Committee? 

General VAN RIPER. Mr. Chairman, I would like to answer first 

as a retired general officer with some 41 years of enlisted and commissioned service who has remained engaged in the defense community for the last 13 years, and then I would like to answer as 

a private citizen. 

I would urge first, what I have in my statement, that we need 

to focus on the budget, but let us look at what drives the budget, 

and that is, the strategies. Do not change the budget without 

426 

changing the strategies, or you get a strategies-resource mismatch. 

So we need to trace that through, and when the White House provides you its National Security Strategy, if we are going to do 

something to the budget, then it ought to work back into that national security strategy. 

On the other end, whatever is in that budget ought to support 

the operational concepts that the Chairman has published, or that 

concept ought to be changed. So there is, as I say, an ends-waysmeans linkage here we ought to be very careful of. 

Specifically, though, in terms of the military, there would be a 

number of things. One is do not allow systems to go into acquisition with immature technologies. What began as the DD(X) became 

the DD–21, and then the DD–1000 that was just limited at three 

ships, began, as I understood it, with 18 immature technologies. It 

is just not the way to do procurement. 

Chairman CONRAD. You are saying ‘‘immature’’? 

General VAN RIPER. Immature. 

Chairman CONRAD. Immature technologies. 

General VAN RIPER. Immature, yes. 

We need to hold both the services and industry to account for 

problems. The amphibious ship the LPD–17, built by Northrop 

Grumman Ship Systems, the first one was a pure disaster in terms 

of its capabilities. It was either the second or third, the Navy accepted the ship, and then for 2 years put it into dry dock to finish 

it. No one seemed to be held accountable for these sorts of things. 

We found out with the Future Combat Systems that the lead system integrator does not work. These are Government skills that we 

need to keep. We cannot simply turn them over to industry and expect good results. 

I would suggest we take a look at lengthening our service career. 

We now look at 20 being norm, 30 for the senior officers and senior 

staff noncommissioned officers. Let us look to a 30-year career 

being normal. Twenty was when we did not understand our health 

issues, we drank too much, we smoked, we did not exercise. I am 

72. I still run. I think I could still be a fairly decent general officer. 

I retired 13 years ago. So let us look at a 30- year being normal, 

our generals and admirals going to 40. And what that would do is, 

I think, have a very narrow top and a wide base, but cut down on 

the post-retirement cost. 

I believe you have to see the consequences of what is going on, 

so I would advocate co-pay both for active and retired of all of these 

benefits that we have so you see some impact on it. 

As a private citizen, I worked very hard—I started from humble 

circumstances. My family up in Pittsburgh worked hard—both as 

a Marine and since retirement. But my wife and I are blessed that 

we probably, in terms of income, are in the top 3 percent of the citizens. You need to tax us. You need to tax all of us more. 

You need to pass health care reform because you will not fix military health care until you fix health care reform in general. And 

we need to have regulation of the financial industry. 

Chairman CONRAD. OK. Thank you for all of that. Very clear. 

Let me just say one of the things that is very striking in these 

budgets is the health care accounts, and the health care accounts 

in every sector of our society are running amuck. It is true in MediVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00432 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
427 

care. It is true in Medicaid. It is true in the private sector. It is 

true in the military. And I myself believe in co-pays. I had a very 

wise man who was a doctor in my State, who had practiced in 

India, had practiced in Europe, and had practiced in America. And 

he said the one thing—he came to one of my town hall meetings 

in North Dakota. He said the one thing he observed is that where 

you do not have co-pays, you have overutilization. It has been clear 

to me in my career. And he talked about a circumstance they had 

in a lesser developed country where they had prescription medicine 

that was given away free. And he said, ‘‘Every day we would come, 

and there would be a long line around the building and people getting free medications.’’ And they imposed a very modest, even in 

that society a very modest co-pay, problem solved. And he had observed this in England. He practiced there. He practiced in the 

United States. He practiced in India. 

So, you know, as soon as you mention it, it is controversial. People say, well, you are creating a disincentive for people to join the 

military. Look, this to me is going to have to be throughout society. 

People are going to have to be part of the solution, and we cannot 

allow this to continue to spiral out of control. 

I see Senator Merkley has arrived and would recognize him for 

a statement and questions. 

OPENING STATEMENT OF SENATOR MERKLEY 

Senator MERKLEY. Thank you very much, Mr. Chair. I was at the 

Environment Committee on the budget hearing that Lisa Jackson 

was presenting. I wanted to make sure I got by in part to give a 

warm welcome to Cindy Williams, whom I worked with going on 

three decades ago at the Department of Defense. It is good to see 

you. So I apologize that I missed your presentations, and I will be 

catching up on them in the course of the day. 

But I did want to note—and just see if you all have any comments—I just came back from Afghanistan, Pakistan, and India to 

try to get a better sense of some of the challenges we face there 

and how our defense budget might respond to that. And I must say 

I found it to be a very daunting proposition. 

I was particularly struck when we had folks presenting the challenge that corruption presents in Afghanistan, and to give you a 

sense of this, the discussion of positions being sold, from Governorships on down; then within the police, very similarly police chiefs 

selling the positions—buying the position and then selling the positions under them; and then in the military, similar practices. 

I met with a bunch of tribal leaders, and the tribal leaders said: 

Here is the problem. The central government does a series of appointments that come down to our local level, and we know who 

the fair and capable people are, but they never get the appointments. The greedy and the corrupt people get the appointments, so 

the central government’s appointees become an affliction. And they 

told story after story of this affliction. 

So it is a major dilemma for our strategy in Afghanistan, is if we 

are building a strong central government but the strong central 

government has this systematic corruption through it that results 

in the incompetent or the greedy abusing their powers at the local 

level, that is a big problem. 

428 

Now, we are attempting everything possible—and I must say, I 

was so impressed by the American forces and the American planning. I think General McChrystal has put together as good a plan 

as could possibly be made. One person briefing us pointed out that 

the challenge we face is that you can start with folks who have 

taken jobs, for example, as police because it is a chance to make 

money. And after we get through training them, then they are better trained, but they are still—they are ‘‘better trained thugs,’’ was 

the exact words that were used. And I think it recognizes that 

there are cultural designs in the system that cannot be changed 

overnight. And, clearly, we are basing our strategy on a strong central government. We are basing our strategy upon training of the 

armed forces and training of the police. And it is a fearsome, challenging task. 

I would just appreciate any insights that you all might have as 

it relates to our budget and our expenditures. 

Ms. WILLIAMS. I would like to say something about that. I am 

sorry that you were not here earlier because now everybody else 

has to hear why I think our strategy, our current strategy in dealing with the rest of the world is problematic. 

One reason is it encourages our allies to free-ride or to easy-ride. 

But another is that it encourages those who we think we are helping to behave badly, because they are getting money and they are 

getting protection for which they are not accountable to their people. And I think that, and not just the culture, is the problem in 

Iraq and Afghanistan, that we are creating friends who cannot help 

but act badly toward their people. They cannot help but be corrupt, 

because we are giving them oodles of money and oodles of protection without them having to ask for it from their people. 

So to me it is way more than culture, and a change of strategy 

would be a good thing. A complete change of strategic course for 

our national security strategy and our military strategy would be 

a good thing for the long-term future because it would save us 

money, but it would also keep us from getting into problems like 

these. 

Mr. ADAMS. Senator, I have—— 

Senator MERKLEY. Before we go on, can I just ask you to take 

that a little further? What does that look like then when you refer 

to that change in strategy? What does that look like? 

Ms. WILLIAMS. We are obviously entrenched in the two wars 

where we are and have to—at least for the time being. I think we 

heard earlier that maybe we will be out of Afghanistan by 2013. 

It looks like we will be out of Iraq next year. But over the longer 

term, it strikes me that we should not be in the business of nation 

building. We should not be in the business of regime change. We 

should not be in the business of imagining that security in every 

single country of the world is a national security matter to the 

United States. 

Instead, we should look to the immediate problems that we have. 

We should stop thinking that we can stop terrorism against the 

United States by invading other countries and running them. We 

should stop imagining that we are going to be the administrators 

of countries that are divided or countries that are losing their way 

from the point of view of their governments. 

429 

Senator MERKLEY. Thank you. I really appreciate your comments. 

Mr. ADAMS. Senator, could I add to what Dr. Williams had to say 

here? Because it brings it down to budgetary terms here. I think 

there are something like $13 billion in the current OCO budget request for security force assistance in Iraq and Afghanistan alone. 

Thirteen billion dollars for us to invest in a process which I think, 

in my judgment, you very accurately described; that is to say, it is 

not at all clear that that investment is going to pay off because of 

the nature of the societies, the way in which those forces are organized, the way in which jobs are acquired, who gets promoted, who 

gets the position. And the press reports on the Marjah struggle 

today seem to indicate a kind of a reluctance, particularly in Afghanistan, to put those security forces forward in the combat situation that they are involved. 

What that suggested to me is not that the Afghanis are somehow 

inept and that we are somehow the most capable force in the 

world. It suggests to me that the process of building states is extraordinarily hard. It takes a long period of time. And as any good 

counterinsurgency expert will tell you—and the COIN manual that 

was put out by the Army makes it very clear—most of that task, 

if it works at all is a civilian task. The ballpark figure everybody 

in uniform seems to think is right is about 80 percent. About 80 

percent of this mission is a civilian mission. 

We have given that mission in two countries—which, I hasten to 

add, we invaded, which makes the conditions of state building even 

more difficult and challenging—to the United States military, absent any other capability to engage in the U.S. Government. 

The question I think we need to ask ourselves—and this jumps 

right on Cindy Williams’ point—is: Who has this mission? And can 

we, in fact, accomplish this mission? 

I was in a Red Team panel for a proposal on a civilian intervention force that the Special Inspector General for Iraq Reconstruction has just announced, a couple of months ago, and I made the 

point in the group of 40 or 50 people—uniformed people, civilian 

people, people who have been in this mission for years—you know, 

this may be something that we are not very good at. And I was surprised at the number of heads that nodded around the room, saying, ‘‘Yeah, you know, we ought to think about whether we are 

building a major capability to do this which is something that we 

are not very good at, is very hard, takes a long time, an awful lot 

of money, and may not produce results.’’ 

It is not like there is not a problem here, because there are a lot 

of countries around the world with failed, fragile, weak post-conflict 

governance which is problematic for their security, for regional security, and ultimately for our security. 

So the real question on strategy is: How does the United States 

lead in an international community in trying to cope with the 

structures and problems of governance in weak states? It is a bit 

challenge, but it is not one we can do alone. It is not one I think 

the military is particularly skilled at doing, and we ought not be 

asking them to do it. And it is one we are going to need more partners, collaborators, private sector, NGO, international organization, 

allied countries, and ourselves to say how do we tackle what is 

430 

clearly a global security challenge, which is weak and fragile and 

failing in post-conflict states, where most of the job is a civilian investment, not a military investment. 

Senator MERKLEY. One thing I was very struck by is a number 

of very capable, very competent military trainers saying, ‘‘We have 

come for a year and we have learned a great deal in the course of 

that. We have established a whole bunch of key relationships, and 

we are really starting to understand and be able to mentor in a 

meaningful manner. But next month we leave, and a new team 

comes in.’’ 

I thought, wow, that is another difficulty I had not given thought 

to, the rotation of our trainers and mentors through the system. 

The world is very different in different places, and it does take 

time, and we do not start out even speaking the language, if you 

will, and so forth. And about the time that you might start to build 

the relationships and have a sense of trust, you are rotating out. 

And when you say we are not very good at it, I think that is one 

of the challenges that we have. 

Mr. ADAMS. I fully agree. 

General VAN RIPER. Senator, in regards to your specific question 

about tribes, I think we will be well served if we build from both 

ends for the foreseeable future. At some time we are going to have 

difficulty, and I think the moves for tribal engagement, which I am 

sure you saw out there, are the way to go. You cannot build 

straight from the top down. 

In terms of 1-year tours and then leaving, this was our difficulty 

in Vietnam. It was not a 7-year war. It was seven 1-year wars as 

we rotated our service people in and out. 

The Department of Defense now has a program that is called the 

‘‘Old Hands for Afghanistan and Pakistan,’’ where some relatively 

large number will be expected to serve there, come back to a billet 

in the United States that is related to the war, and then go back 

immediately. So their rotations will be back and forth so this expertise will be built up that perhaps it would be worthwhile to be 

briefed on. 

In terms of the so-called whole of government, I think we are 

moving in the right direction, but the reality is there are some 

parts of our Government that do not have and may not ever be able 

to gain the sort of mind-set that the Department of Defense has. 

The Commerce Department, the Agriculture Department are not 

thinking about these sorts of operations that the military is engaged in. They are worried about farming and about agriculture. 

I believe within the Department of Defense, at least for the leading edge of these sorts of other sorts of skills, it is going to have 

to be in the Department of Defense with both the plan and the 

hope that you can turn over to the civilian side as quickly as possible. But certainly insurgencies, the 80–20 percent is probably 

pretty accurate. 

Senator MERKLEY. Thank you all very much, and thank you, Mr. 

Chair. 

Chairman CONRAD. Thank you, Senator Merkley. 

I would just say I had the opportunity in life to go to high school 

in Libya, graduated from an American Air Force base there, 

Wheelus Air Force Base in Tripoli, Libya, in North Africa. And I 

431 

remember coming back and thinking to myself that if we believe 

we understand these cultures that are so different from ours, that 

we understand them so well that we can go in and meaningfully 

rearrange them, we are in a dream world. And that thought has 

followed me to this current position, and I remember some of the 

briefings we have had in 407, secure briefings where I have heard 

described what we are going to do in places with cultures very different from ours. And I have thought, boy, it sounds pretty arrogant to me that we are going to go in there and fundamentally 

change the way they operate. 

I do not think so. I personally think it is a bridge too far. I think 

we are way overestimating our ability to meaningfully alter the 

way those societies operate. And my own view has been I would 

like us to set a good example. Let us do a good job here running 

our own affairs, which currently we are not doing, in my judgment, 

and let us set a good example. On defense, I think you have got 

to deal with the terrorist threat as it comes, and the notion that 

we are going to go and rebuild nations, put me down as a skeptic. 

I think the chance that we can go and rebuild nations in a fundamental way is way beyond our capability. We just do not have the 

people with the language skills. 

If you think about that, what an amazing thought it is that we 

are going to go in where we have got very few people that even 

speak the language, and we are going to change the way they operate? Wow. Really? Is that really going to happen? I do not think 

so. 

Senator Merkley? 

Senator MERKLEY. Mr. Chair, one of the things I was pondering 

on my way back from Afghanistan and Pakistan was what might 

initially sound like a completely disconnected experience, which 

was working in inner-city Portland, Oregon, in an area that had 

been very poor and very gang affected. And I was working for 

Habitat for Humanity, and we were attempting to make significant 

changes in that community, and to do so through homeownership 

and various other groups working at nutrition, working on education, and so forth. And those efforts made an impact, but it was 

not easy. And yet we spoke the language. We had far more—we 

had surrounding areas that were affluent and successful that provided a path, if you will, of influence, an example of how it could 

be done differently. But bringing a lot of resources to bear right 

within our own community proved challenging. 

And I think that if you take an entire nation that is poverty 

stricken, now it is not just a pocket of poverty, an entire nation 

that may have a different work ethic or education ethic, the fact 

that we do not even speak the language, and you put all those 

pieces together, you now have something that is many orders of 

magnitude more challenging than tackling poverty in pockets here 

in America. And I think that from a very different angle gave me 

a healthy dose of caution about the challenge we are undertaking. 

Chairman CONRAD. You know, in my own reading of history, 

great powers bleed themselves in foreign adventures. Washington 

warned us about this in our own country, and there is a lot of wisdom in that, at least to me. I know that is maybe controversial 

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forming the rest of the world in very short order. I just do not 

think it is realistic. And when I look at just our budget circumstance, which is daunting, as every member of this Committee 

knows, the thought that we have got the will and the wallet to go 

around the world transforming cultures very different from ours 

when we do not even know the language kind of leaves me deeply 

skeptical. 

Senator MERKLEY. If I could throw in one more comment, it is 

about the law of unintended consequences. We are fighting the 

Taliban in Afghanistan, and the Taliban really had two—and the 

mujahedeen, and there were kind of these two sources. We were 

supporting the mujahedeen to take on the Soviets. Pakistan proceeded to take the students who were refugees in their country, 

train them and arm them and send them back into Afghanistan. 

And so those were the two driving forces that created the Taliban 

movement that we see now. 

I do not think in our wildest dreams at that point did we anticipate that this would become an enemy that would nurture terrorist 

attacks on the United States that would be a huge national security problem for us. 

One of the cautions that was mentioned when I was in Afghanistan, and another issue that I probably should have thought about 

but did not until it was raised, is if you create a very strong central 

military, how confident are you that that central military is not 

going to at some point say, ‘‘To heck with the civilian process or 

the parliament or the appointments, we are taking over’’? And that 

is just one example of how the path ahead might end up very different than the model that we might have in our minds as we undertake this nation building. 

Chairman CONRAD. Well, those are all good thoughts. 

Let me just again thank our panel. I would ask them if they had 

any concluding thoughts that they would want to share with the 

Committee. Dr. Williams, anything that you would want to make 

sure is on our minds as we address the budget challenge for this 

year? 

Ms. WILLIAMS. I would like to pile on to the point that Dr. 

Adams made that nothing helps people make better choices than 

the imposed discipline of a tight top line, and this is the Committee 

that could start working toward that, helping the Defense Department make better choices just by giving it a much, much tighter 

top line. 

Chairman CONRAD. Dr. Adams. 

Mr. ADAMS. Well, I certainly agree with that. I think that for this 

Committee you have such a challenge, and I think doing that kind 

of budget discipline in defense is vital to do this year, and it is 

going to be difficult in the policy and political environment we are 

dealing in, because it will be said that this is not supporting troops 

when they are deployed in the field, and that always makes it enormously difficult to do. So you will be standing kind of in front of 

a rhetorical truck if you engage in that kind of discipline, but I 

strongly encourage you to do it. 

The other thing is when you are dealing with issues that are the 

kind that Senator Merkley has raised, I think it is going to be important for you to drill down to the budgetary circumstances of 

433 

them; for example, the $13 billion or so that we are doing in security force training; for example, the Pakistani counterinsurgency 

fund, over $1 billion; the CERP program at $1.3 billion; half a billion dollar in global train-and-equip programs. There are $15 to 

$20 billion worth of spending that we are investing this way in this 

budget that is another place to look and raise questions and say: 

Is this really successful? Does it work? Where are the performance 

indicators? Can we change these countries, and ought we be a little 

bit less generous in how we go about funding them? 

Chairman CONRAD. OK. And, General Van Riper, what would 

you—— 

General VAN RIPER. Mr. Chairman, you mentioned the importance of history. History teaches no lessons, but it certainly provides a context. We cannot understand the future without that context. 

And to Senator Merkley’s question, I think we would do well to 

look at two countries we have been involved in in the past. One is 

the Philippines, where a very long period, not great success, at 

least for many years. But then the Republic of Korea, South Korea, 

where we had similar circumstances, and we build a functioning 

government, obviously doing quite well economically over the years. 

So we might learn from those. Not so much Europe because you 

had functioning democracies and we re-established them. 

In terms of as we look to the future, and particularly Afghanistan and Iraq and our problem, I have always been troubled by the 

fact that if this is a global war and it is an existential threat, what 

is our strategy for that war? In looking to the last two examples 

of global wars, World War II and the cold war, we had a strategy. 

And you could stand back and look at that and understand where 

Afghanistan fit in if Iraq should have fit in, and the campaign 

plans for them. 

I for one felt that Iraq was not the right war at that time, but 

if we decided to do it, we needed a campaign plan. All we had was 

an operations plan for the takedown of Baghdad and, consequently, 

were not prepared for it. 

But without that national strategy that is akin to what we saw 

in World War II for this global war against Islamist insurgents and 

the campaign plan to support it, I am not sure how this body or 

any other body can judge where we are and what we are doing. 

Chairman CONRAD. You know, you make a point that I think is 

very, very important. I have gone to dozens of briefings, and I am 

really left with the thought that we do not have what I would consider a comprehensive strategy to deal with what is clearly a 

threat. It is sort of an ad hoc strategy. You described Iraq as a plan 

to take down Baghdad and there was not really the follow-on, and 

I think that is true. 

It also strikes me, as we look at what happened, 9/11, the 

Taliban were providing sanctuary for those who organized the attack on us. We had to respond to that. We had to go and try to 

take down that growing insurgency. But that is not just an element 

that is in Afghanistan. That is an organization that is now spread 

around the world. I do not know what their latest estimate is, how 

many countries have an al Qaeda presence, but it is in the dozens. 

And the strategy of going to a nation state to try to deal with an 

434 

insurgency that is operating sub rosa in dozens of countries around 

the world, I am not sure we have really put together a plan or a 

strategy to deal with that threat that is still there. 

As I said, I graduated from a military base in North Africa, and 

I could see then the kind of cultural chasm that exists. It is a very 

different way of looking at the world that many of those people 

have than the way we look at the world. They are mad about 

things that happened 800 years ago, and they are really angry 

about it. 

You know, who in the United States spends any time thinking 

about something that happened 800 years ago? We are very future 

oriented, looking ahead. And it is a very fundamental difference, 

and I am not sure that we really have got a plan to deal with that. 

Senator Sessions has joined us. 

Senator SESSIONS. Thank you. I saw Ron Paul on the television 

this morning. He said we are spending a trillion dollars to defend 

an empire. Obviously, he thought it was too much. And I guess if 

you get the State Department budget and the defense budget, it is 

pretty close to a trillion dollars in total for everything that we do. 

But I don’t think we can avoid that responsibility that we have to 

defend the country, and sometimes defending the country is better 

to be done abroad and early rather than late when it is close and 

even more expensive. General, I guess that is what you spent a lot 

of your life trying to do and trying to help us do. 

Dr. Adams, you mentioned the CERP money is $1.3 billion. Ten 

minutes ago, I had General Casey at the Army’s posture briefing 

on that very budget. The way it worked in Iraq was in areas, particularly in the Sunni areas, we were able to deal with the local 

leaders and that CERP money allowed them to deliver on promises 

made and transformed really—that is what transformed Iraq. 

As explained to me by one of the Marine generals, they met with 

a tribal leader. He was tired of al-Qaeda and he asked, ‘‘What can 

do I for you, General?’’ and the general said, ‘‘I need your young 

men.’’ He said, ‘‘I will have 500 Monday,’’ and 550 showed up and 

they helped arm them and somehow they found some money to 

help them be police officers. Within weeks or a few months, they 

had run al- Qaeda out of the area, and that is really how that happened in a lot of ways. 

So I guess, to me, that is maybe money from your perspective as 

a bookkeeper unaccountable. It is going out in ways that are not 

totally micromanaged. But at the same time, that was money that 

I really believe helped. And I think that they have got too many 

restrictions in Afghanistan, which was the reason of my question 

on that. And most of the money is going through the State Department, and more of it is supposed to be used for bridges and roads 

and drainage ditches, whatever, that they do. But essentially, you 

have to have, would you not agree, General, that security is a critical thing. 

General VAN RIPER. Certainly. 

Senator SESSIONS. So if you can get the local community on 

board and can help them with a small amount of money create a 

security force that actually defends their village, valley, then that 

maybe saves a lot of money, perhaps. 

435 

So it is a difficult thing. These are life and death issues out 

there. Our soldiers are on the line. It is life and death for them, 

and it is not easy. Whatever tactic tends to work today, they figure 

a way to get around it. 

Despite the defense procurement spending, it is a job creating, 

stimulative program, and we do have a lot of defense needs in our 

country. I was very disappointed that the President’s stimulus bill, 

the $862 billion, or the new one, the $270 billion stimulus package 

that is being talked about, does not have virtually any defense 

spending. Wouldn’t it be prudent and smart on some of the systems 

that we definitely need for the future of this country to have created jobs in the short run and have advanced some of our defense 

systems through the stimulus funding? If you all briefly would like 

to comment on that, I would appreciate that. 

Ms. WILLIAMS. I will just mention that of the $800 billion in 

stimulus money last year, more than $7 billion of it did go to defense, and certainly defense spending—— 

Senator SESSIONS. That would be less than 1 percent, wouldn’t 

it? 

Ms. WILLIAMS [continuing]. Defense spending is just as stimulative as other spending. So I am not opposed to putting money into 

defense when it is going into a stimulus package. My concern is 

that defense has been so rich in recent years that there is just 

enormous temptation to waste money. Stimulus money, who cares 

if it is wasted? That is the point. Get it spent. But other money, 

I would be very concerned, and because of that, I am concerned 

about raising defense’s top line in any way. 

Senator SESSIONS. I would certainly agree that every dollar, 

every penny needs to be spent wisely. That results in some very 

tough choices—and the Secretary of Defense is making them. Some 

I agree with, some I don’t. But as to the amount we are spending 

as a percent of GDP, in the early 1980’s, we were at 6 percent of 

GDP and now I understand it is about 3.6 percent. Admiral 

Mullen, the Chairman of the Joint Chiefs, has indicated that he 

thinks a baseline of about 4 percent of GDP would be appropriate 

for our country. 

Do any of you see any value in discussing how much the Nation 

should spend on defense by matching it to the economy, the size 

of the economy, the GDP? 

Mr. ADAMS. It is an approach to defense spending, frankly, Senator, that I think doesn’t do much for defense spending or for the 

economy, either one. It is a very small percentage, as you say. 

Therefore, its overall stimulative effect is relatively small. 

But more than that, and partly dealing with the earlier question 

that you raised, my judgment is that defense budgets ought to be 

built, as General Van Riper has been saying this morning, with respect to defense strategy, not with respect to its economic impact. 

The concern that I would have with respect to a share of GDP is 

what happens when the GDP share goes in the opposite direction? 

If the GDP were to go down, would we then stick with 4 percent 

of GDP of a declining number? I wouldn’t. I would be looking at 

defense needs in terms of our strategy and our international position regardless of what the share of GDP is. 

436 

Senator SESSIONS. I think that is a good point and I would value 

that. I guess what I would say, though, for those who contend that 

we are spending much larger amounts than we have ever spent before on defense, when you look at the size of the economy, I think 

there is an argument to be made that it is considerably below even 

in the 1980’s, after Vietnam but still during the cold war. Would 

you agree? 

Mr. ADAMS. I think your data is unquestionable. That is absolutely the case. However, again, I think our choices about defense 

are choices about our security, not about the share of GDP. If we 

faced a serious major existential threat a la World War II-style, for 

example, it wouldn’t bother me to spend significantly higher proportions of our GDP. But what ought to drive it is the nature of 

the international situation that we face, not a specified share of 

GDP. I think that could be a manacle as well as a promise. 

Senator SESSIONS. I tend to agree with that, but I also tend to 

believe, by historical standards, we are not above what we have 

been spending on defense. 

General Van Riper, do you want to comment on that? 

General VAN RIPER. Senator, my wife and I are blessed with a 

son who is a Lieutenant Colonel of the Marines now and has had 

three tours in Iraq, so I come from that perspective. As I look, and 

these are data points of one as I move about various bases and engage in the defense community, I think they are in good shape. I 

am seeing things built, programs that are underway, equipment 

being bought that I never saw in my 41 years of active service. 

So as a judgmental, I was quite happy with where the stimulus 

went, the fact that it did not go to the Defense Department, and 

I am relatively happy with the budget request as we see it now. 

Senator SESSIONS. Well, do you want to cancel all our new aircraft and new naval systems? We have certainly surged our 

MRAPs. That was an immediate response. We put the money out. 

That was a lot of money that went forward and rushed those vehicles that would withstand IEDs. We have done that for our soldiers 

on the ground. 

But, General, we are adding 22,000 more troops, according to the 

President’s request and the Secretary of Defense’s, and we are authorizing more than that, I think, in the defense bill, but we are 

going to actually put on the payroll another 22,000. We are in a 

war situation and they have to be paid and all of those things. It 

seems to me what I am seeing is a real retrenchment in procurement for the weapons systems, many of which we are using today 

that were funded quite a number of years ago and brought online. 

Do you see any danger that research and development, procurement of new systems, could be threatened if we keep our increase 

at about the cost of living while we are increasing soldiers and still 

in a conflict? 

General VAN RIPER. There are certain areas of the budget, research and development being one, that I wasn’t as comfortable 

with. But in terms of the major systems which the Secretary identified, the rate at which he requests procuring them and the 

amounts, I felt comfortable with. 

Senator SESSIONS. Well, I have looked hard at a number of those 

issues and I am aware that he faces difficult choices, and I in no 

437 

way criticize him for having to make some of the tough decisions 

he must make, but I am seeing a trend that if we don’t watch it, 

we will end up, just by the natural increase in military personnel, 

expenses, their health care, their retirement, salaries, family benefits, and all of those things, with the cost of each soldier going up 

and the number of them going up. Then we may not be fulfilling 

our obligation to the next generation, as I think President Reagan 

deserved credit for, of investing in some things that now we have 

used but that he never used when he was President. So that is a 

challenge, I think, in how we wrestle with this budget. But I hope 

we can keep it down. I agree with that. We don’t have the money. 

We just don’t. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, and thank you for coming and 

thank you for your observations. 

Just on the GDP, the numbers I have show that for fiscal year 

2009, we are at 4.5 percent of GDP for defense. For 2010, 4.7. For 

2011, 4.7. That is actually higher than during the Gulf War, much 

lower than World War II. Dr. Adams made the point, if we faced 

a similar threat—World War II, we were at 34 percent of GDP for 

defense, and I don’t think anybody quibbled about a dime. 

Senator SESSIONS. Well—— 

Chairman CONRAD. We had to save the world against fascism—— 

Senator SESSIONS. Well, I thought that number was including 

the supplementals, but it must not have been. I think the number, 

3.6 is baseline defense budget, more like we were in the 1980’s. But 

it is—I am not saying we don’t cut costs. I am just saying that we 

are not at a historically extraordinary high level with a war going 

on. 

Chairman CONRAD. No. When measured that way—you know, I 

put up before the gentleman came a chart showing in dollar terms 

that we are the highest we have been in today’s dollars. As measured against the economy, that is a different measure, and even on 

that measure, we are certainly at a healthy level. 

I think, really, Dr. Adams made probably the right assessment. 

We have got to build a defense budget. I started this by saying, our 

obligation—our first obligation is to defend this country. So we 

have got to spend what it takes to defend this country. 

We have got a larger issue that you referenced just at the close. 

Our problem was our total budget circumstance is on an utterly 

unsustainable course and we are going to have to deal with it and 

we are going to have to deal with it soon. 

Again, I want to thank this panel. I appreciate very much your 

testimony before the committee. It is of great assistance to this 

committee. We are going to be having another defense hearing with 

the Department of Defense, I think next week. We certainly welcome all members to participate actively in that. 

With that, the committee will stand in adjournment. 

[Whereupon, at 11:46 a.m., the committee was adjourned.] 

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RESPONSES TO QUESTIONS ASKED BY SENATOR 

WHITEHOUSE 


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THE PRESIDENT’S FISCAL YEAR 2011 BUDGET 

FOR THE DEPARTMENT OF TRANSPORTATION 

WEDNESDAY, FEBRUARY 24, 2010 

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The Committee met, pursuant to notice, at 9 a.m., in room SD– 

608, Dirksen Senate Office Building, Hon. Kent Conrad, Chairman 

of the Committee, presiding. 

Present: Senators Conrad, Wyden, Feingold, Nelson, and 

Whitehouse. 

Staff present: Mary Ann Naylor, Majority Staff Director; and 

Cheri Reidy, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. 

I want to welcome everyone to the Senate Budget Committee this 

morning. Our hearing today will examine the President’s Transportation budget request. Our witness is the Secretary of Transportation Ray LaHood. I especially want to welcome you to the Senate 

Budget Committee. 

Secretary LAHOOD. Thank you. 

Chairman CONRAD. This is Secretary LaHood’s first appearance 

before the Senate Budget Committee, and we are delighted that he 

could be here. I would like to begin by providing an overview of 

transportation funding and the challenges we face in this area. And 

I also apologize to the Secretary because our attendance is affected. 

Members know that we typically do hearings beginning at 10. Because of your schedule and because of Senate votes that have been 

now scheduled in the middle of the hearing, which is unusual but 

unavoidable given the circumstances we are facing, members had 

previous obligations and other committee work. So that clearly is 

affecting our attendance. Our Ranking Member is delayed as well 

by other responsibilities, but we will press ahead because this is an 

important hearing for the Budget Committee. 

It is clear that transportation funding has played a role in helping to revive our struggling economy. When President Obama took 

office last year, we were in the midst of a deep recession, the worst 

since the Great Depression. The actions taken by the Federal Government over the last year. I believe, have helped pull our economy 

back from the brink. I think it is undeniable that the series of actions taken by the Congress, the President, and by the Federal Reserve have averted what could have been a global financial colVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00451 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
446 

lapse. I was in the room; I saw the reports coming in that were 

truly dire. 

One of the actions that was taken was the Recovery Act, which 

included additional transportation investments. Those investments 

were certainly not the only factor contributing to our turnaround, 

but they appear to have made an important contribution. And 

those transportation investments will have the added benefit of improving our nation’s long-term economic efficiency and competitive 

position. 

We have seen a remarkable turnaround during this last year in 

economic growth. Economic growth in the first quarter of last year 

was a negative 6.4 percent. By the last quarter, it has improved to 

a positive 5.7 percent. 

447 

We have also seen a steady improvement in the jobs picture. In 

January of last year, we now know the economy was losing more 

than 800,000 private sector jobs a month. I have previously used 

the number 700,000. We now know that, in fact, we were losing 

800,000. By this January, the economy was losing about 12,000 

jobs a month. That is a dramatic improvement. And I know it is 

cold comfort to those who do not have work or cannot find the work 

that they would like. But, nonetheless, we have to deal with the 

reality that we have seen a dramatic improvement in the jobs picVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00453 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH

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ture, and we are hoping to see positive job growth in the months 

ahead. 

Most economists agree the Recovery Act had a positive impact. 

This is what Dr. Simon Johnson, the former Chief Economist of the 

International Monetary Fund, said in testimony before the Budget 

Committee, this committee, earlier this month. He said, and I 

quote: ‘‘I would give the stimulus a very positive assessment. I am 

not a fan of stimulus in general, but...this was a very unusual set 

of circumstances. And I think it saved jobs, and I think it prevented damage to potential output that you would have seen otherwise. The crisis in confidence...a year ago was extraordinary...it 

was global, it was everywhere. And the fiscal stimulus was an essential part of U.S. leadership in turning the world economy 

around.’’ 


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I believe Dr. Johnson has that right. 

This chart highlights the key transportation investments in the 

Recovery Act. In total, it provided $48 billion to rebuild and modernize the Nation’s transportation system, including: $27.5 billion 

to build and repair highways; $8.4 billion to expand transit systems; $8 billion to develop high-speed intercity passenger rail; $1.5 

billion for investments in surface transportation projects; $1.3 billion to expand airport capacity and improve safety; and $1.3 billion 

to modernize Amtrak’s equipment and upgrade tracks. 


58153.275
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Let me just say in the debates over the Recovery Act, I was an 

advocate for $200 billion in that category. I believed we should 

have put $200 billion in the infrastructure accounts. I did not win 

that debate. I still believe, looking back, that while we all acknowledge there is a delay in infrastructure projects and getting them 

moving, the job creation that would have flowed from that size of 

a package, as well as the need to deal with the backlog that we 

confront across the country in terms of highway repair, bridge repair, airport improvement, that those are investments that would 

have wise to be made now. You cannot get a better time to bid contracts than right now. 

And the President’s budget request, I am happy to say, for 2011 

continues to make investments in transportation. The budget includes $42 billion for highways and $10.8 billion for transit and the 

extension of the Surface Transportation Program, or highway bill, 

through March of 2011 at current levels. 


58153.276
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The budget includes $16.5 billion for aviation, including funding 

to develop the Next-Generation Air Taffic Control System, which 

we simply must do. If we are going to remain competitive, we have 

got to go to the Next-Generation Air Traffic Control system. 

The budget also includes $2.9 billion for rail, continuing the investment in high-speed rail and increased funding for Amtrak, both 

very much needed. And the budget includes $4 billion for the National Infrastructure Fund to allow for investing in projects of regional or national significance. 

But we have serious highway and transit funding problems going 

forward. This chart shows that Highway Trust Fund receipts are 

projected to be lower than Highway Trust Fund outlays in the 

years ahead, and this funding gap is growing. The jobs bill now 

under consideration includes a General Fund transfer to fill this 

gap for 2010 and 2011. This is not my preferred alternative. I do 

not think—and we heard yesterday from the Ranking Member very 

clearly on this matter, and I agree with him, on the long term. It 

is not satisfactory for us not to address this long-term funding gap. 


58153.277
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On the other hand, in the short-term what is the alternative? I 

think we have to be very serious, what is the alternative? Are we 

really going to raise taxes in the midst of a continuing weak economy, one that is improving but is still not fully recovered? Are we 

going to really raise taxes in that circumstance? Are we going to 

reduce the ability to go forward in this highway construction season when we have got the opportunity to have bids at very favorable rates; to create jobs and to improve the competitive position 

of the United States? 

For those who say, well, ‘‘we ought to just shut it down, we ought 

to have dramatic cuts’’, I profoundly disagree. I think that would 


58153.278
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be wrong on every count. I think that would be wrong in terms of 

the taxpayer interest. I think it would be wrong in terms of job 

generation. I think it would be wrong in terms of economic growth. 

I think it would be wrong in terms of improving the competitive position of the United States. 

But over the longer term, we have to find another way. Given 

our nation’s dire financial outlook, we cannot afford to continue 

funding our highways and transits out of the General Fund. That 

cannot be the answer. That is why it is critical that we get a longterm highway reauthorization plan from the Administration. We 

need to know how the Administration would bridge this funding 

gap. We would like to hear from Secretary LaHood when Congress 

can expect to receive the Administration’s long-term highway reauthorization plan. 

This next chart shows some of the options that have been proposed to address the highway funding gap, and these include: increasing the gas tax, charging for each mile traveled, adding more 

tolls, continuing General Fund transfers—which I strongly oppose, 

and identifying other funding sources. 

Now, let’s be frank, none of these are popular options. But we 

have to find a way to close this funding gap. We are going to have 

to start making tough choices. 

With that, I want to go to Secretary LaHood for his opening 

statement, again, to welcome you. We are delighted that you are 

in that position; we have high regard for you. I followed your career 

when you were in the House of Representatives. You were known 

as somebody who reached across partisan divides, was eminently 

fair in the way you conducted yourself, and really I think in many 


58153.279
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ways are a role model for how Members of Congress, both the Senate and the House, ought to operate. 

With that, we very much appreciate your being here today. 

Please proceed, and then we will go to questions from members. 

STATEMENT OF THE HONORABLE RAYMOND H. LAHOOD, SECRETARY, U.S. DEPARTMENT OF TRANSPORTATION (ACCOMPANIED BY CHRIS BERTRAM, CHIEF FINANCIAL OFFICER, 

U.S. DEPARTMENT OF TRANSPORTATION) 

Secretary LAHOOD. Thank you, Mr. Chairman. Thank you so 

much for that lovely, very generous compliment. Everybody has a 

copy of my opening statement, and I know that you are under some 

time constraints because of the vote. I would be happy to just forgo 

this and go to questions, or I will do it however you want to do it. 

Chairman CONRAD. I think it would be most useful to the Committee if you would summarize, hit the high spots, what you want 

the Committee to be thinking of as we prepare the budget resolution. 

Let me just say I met with members of this Committee late yesterday and told them that we are on a fast track here to produce 

a resolution, given other business in the Senate, and so if you 

would not mind summarizing the high spots, and then we will go 

to questions. 

Secretary LAHOOD. The President’s request for next year totaled $79 billion, a $2 billion increase over Fiscal Year 2010. These resources will support the President’s and DOT’s top transportation 

priorities for safety on the road, in the air, making communities 

livable and sustainable, and infrastructure. 

Safety is our highest priority. I testified yesterday before the Energy and Commerce Committee in the House, along with the CEO 

of Toyota, and we talked a lot about safety. All last year, I spent 

a good deal of time traveling the country. When there was an air 

crash in Buffalo where 49 people were killed, the Colgan Air—we 

immediately held 12 safety summits around the country to try to 

and identify issues with small airplanes, with commuter planes. 

We came up with recommendations even before the NTSB acted. 

We held a day-and-a-half distracted driving conference where we 

have identified the epidemic in America with people using cell 

phones and texting while and driving. The President was good 

enough to include in our budget request some grants that we will 

be making, once you all approve our budget, to really make this a 

high priority. 

So I want you all to know that safety is our No. 1 priority. The 

President included in our budget 66 additional personnel for 

NHTSA. This is our safety organization. This is the organization 

that has the responsibility for working with car companies and others to make sure that cars are safe. 

We have, as you indicated, Mr. Chairman, $1 billion for 

NextGen. We have to get the next-generation technology which improve the air around airports, will relieve congestion, and will provide the safety that is necessary around airports. We are committed to doing that. 

We are seeking $1 billion to continue the 5-year $5 billion pledge 

Congress made in this year’s budget on high-speed rail. We alloVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00460 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
455 

cated $8 billion. Those announcements have been made, and now 

we have a request for an additional $1 billion. There is actually 

$2.5 billion in our current budget, for which we are grateful. 

We will also work with Congress on a transit safety bill as a result of the WMATA crash. We feel the law prohibits us from getting involved in safety when it comes to transit, which is ludicrous. 

There is a bill pending in Congress that we want to work with you 

all on that will give us the opportunity to improve safety. There is 

a request for $30 million to implement that legislation. 

Chairman CONRAD. Mr. Secretary, could I just stop you? When 

you say WMATA, for those who are listening, that relates to the 

Metro—— 

Secretary LAHOOD. That relates to America’s metro system, 

which is right here in Washington, D.C., that delivered 2 million 

people on Inauguration Day all over this city. That crash has alerted us to the fact that we need to really play a role in safety. We 

have been prohibited by law from doing that, and the new law will 

give us that—not just with WMATA, but any transit system across 

the country. 

Chairman CONRAD. WMATA stands for the Washington Metro 

Area Transit Authority? 

Secretary LAHOOD. Yes, sir. In the budget, the President is requesting $150 million to help WMATA fix their safety problems. 

Chairman CONRAD. And, you know, all of us have constituents 

coming here every week. 

Secretary LAHOOD. Correct. 

Chairman CONRAD. I have dozens of people come from North Dakota every single week to meet with members of the delegation, to 

meet with agencies, and this has become a very significant concern. 

We have one serious question after another about what is happening with Metro, and it affects people coming here from all 

around the country every day. So I do not know why Transportation was precluded from being involved in safety considerations 

for Washington Metro, but it is absolutely imperative that these 

safety issues be addressed. 

Secretary LAHOOD. Well, there is a bill pending in the Senate, 

and I would encourage all of you to have your staff take a look at 

it, and if you can, cosponsor it. It is a very good bill, and it really 

addresses these safety issues for transit programs. 

Chairman CONRAD. All right. 

Secretary LAHOOD. We have also requested over $500 million for 

our livable communities. We are working with HUD and EPA to 

really come together around the idea that people would like to have 

more transit, more light rail, more street cars, more walking and 

more biking paths. It is the first time that people can remember 

when agencies have really come together and are sharing resources. So we are grateful for that kind of collaboration. 

So, with that, Mr. Chairman, you have highlighted our budget on 

some of your charts, and I have tried to highlight it here. I think 

in order to save some time, I am willing to begin to answer questions. 

[The prepared statement of Secretary LaHood follows:] 

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Chairman CONRAD. All right. We appreciate that very much and 

let us wade right—— 

Secretary LAHOOD. Can I just also indicate, Chris Bertram is our 

Budget Director at DOT. He is a very familiar face around here. 

We are grateful that he was willing to leave his position here in 

the Senate and come to work for us, and he has done a great job. 

Chairman CONRAD. And very respected here, so we are delighted 

that he is here. Let me just begin, and we will go 7-minute rounds 

this morning, if that is all right with colleagues. We are going to 

be interrupted with a vote or two votes, I am told by Leadership, 

so we do have to be mindful of that. Let me go right to it, if I can. 

First, with respect to stimulus, as I understand it, in the recovery package, of the $48 billion that was provided in the Recovery 

Act, 75 percent of that you have already obligated. Is that correct? 


58153.242
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Secretary LAHOOD. Yes. We followed every guideline that you all 

set in the bill. We have met every deadline. There are a couple of 

deadlines coming up in early March on transit and highways, and 

we will meet those. We have gotten the money out the door in the 

States, and the transit systemsand airports have been very helpful 

in making sure—that this money has been spent correctly and on 

time. 

Chairman CONRAD. And that this money, even though this was 

part of a recovery package outside the normal process, that these 

funds are being spent in a way that we can assure taxpayers these 

funds are being spent carefully and wisely. Is that the case? 

Secretary LAHOOD. Absolutely. I know of no boondoggles, no earmarks, no sweetheart deals. All done by the book. The IG is looking 

at some of these, and ultimately there will be reports on this. I do 

not think anybody will ever be embarrassed by the way this money 

has been spent. 

I was pleased to read today that the Congressional Budget Office 

has now said that over 2 million jobs were created as a result of 

the stimulus. Now, unfortunately, it was buried in USA Today. If 

the story had been reversed, I know it would have been on the 

front page. But, look, this is a nonpartisan group. Over 2 million 

jobs created. We should all be very proud of that. 

Chairman CONRAD. Well, let me just say, I personally believe, it 

was that a perfect package? No. I mean, no work by 435 Members 

of the House and 100 Members of the Senate and a brand-new Administration is ever going to be perfect. But to me, it is very clear 

that the recovery package played a role in what is really a remarkable turnaround, both on the jobs front and in terms of economic 

growth. 

Let me go to the question further. Of the $48 billion, as I understand, $35 billion has been obligated, $9 billion has actually been 

spent. Of those obligated funds, do you have a handle on how 

quickly those funds will actually be spent in the States? I assume 

much of that will now be spent in this coming year. 

Secretary LAHOOD. It will be spent this year, and the way it 

works is we have to receive the proposals from the States. 

Chairman CONRAD. Right. 

Secretary LAHOOD. We check all the boxes to make sure. We obligate the money, and then they go out and get contractors to do 

the work. That will take place this year with the remainder of the 

money. The jobs bill that you all pass will be a great follow-on to 

our ability to continue to make progress on projects that States 

were not able to get funded or projects that were not quite ready. 

It will be a great transition. 

Chairman CONRAD. Well, I think that is the case. 

Let me go to a second issue, and that is the funding gap that I 

referenced. This chart shows what the receipts are of the Highway 

Trust Fund. Mr. Secretary, you are well familiar with this. And on 

the other hand, the red line, the dotted line, shows the forecast for 

the Highway Trust Fund outlays. And we have a gap there, a significant gap, in 2020 of $15 billion and in 2010 of $8 billion. And 

it is a gap that is growing. That is the point. 

461 

What is your strategy for dealing with that gap? When will the 

Adminstration come forward with a long-term reauthorization 

plan? 

Secretary LAHOOD. Let me say that we are grateful to the Congress for passing a bill that will extend the current program 

through December 31st, and I hope the House will adopt that because that really goes to what we talked about last year, which was 

an 18-month extension. That gives us time to work with all of you 

in the Congress on the way forward. 

Now, the President has said he does not want to raise gas taxes. 

In a very bad economy, that is not the thing that we should be 

doing to people who are out of work and can ill afford to buy a gallon of gasoline. We have talked about the infrastructure fund for 

which the President has included $4 billion in our budget request. 

An infrastructure fund, commonly referred to as an ‘‘infrastructure 

bank,’’ if you like that term, creates a fund that can fund significant projects around the country, big projects that will have national significance. That is one way. 

We know that in some parts of the country—probably not in your 

part of the world—tolling is a way to pay for additional capacity, 

and we need to look at that. You can raise a lot of money through 

the use of tolls. We have talked about the idea of public-private 

partnerships. Where roads are going to be built, there can be some 

private dollars utilized to help with part of that infrastructure. 

That is going on in certain parts of the country. 

We know the Highway Trust Fund is insufficient. People are 

driving less. They are driving more fuel-efficient cars. Your chart 

shows it. We have a huge gap. There is no question about it. So 

we are going to work with Congress, try to find the way forward 

here on how to pay for all the things we want to do. If you look at Chairman Oberstar’s bill, it costs $450 billion, and 

it is a pretty good bill. It meets a lot of infrastructure needs in the 

country, but there is not $450 billion at this point to pay for it. 

Chairman CONRAD. Yes. Well, if I would have included on my 

chart the House proposal, we would see that, where I have $56 billion, it would be $82 billion. 

Secretary LAHOOD. That is correct. 

Chairman CONRAD. So, look, the question that I have, the specific question is, when can we expect a plan from the Administration on a long-term reauthorization? 

Secretary LAHOOD. I think soon after you all pass this extension. 

We are working on it now. We are working with OMB and the 

White House. I think we will have some very good principles for 

all of you to look at very soon after the extension. 

Chairman CONRAD. All right. That is very important. It is important to this Committee. More broadly, it is important to both the 

House and the Senate in terms of long-term plans, which we now 

have a commission working on. 

Secretary LAHOOD. Yes. 

Chairman CONRAD. And it is going to be critically important to 

the deliberations of that commission as well. 

Senator WHITEHOUSE. Senator WHITEHOUSE. Thank you, Chairman Conrad, and welcome, Mr. Secretary. 

462 

Secretary LAHOOD. Thank you. 

Senator WHITEHOUSE. I wanted to ask three questions. The first 

is about TIGER grants and that program, and before I ask you the 

question, let me thank you. Rhode Island could not be more delighted to have obtained $22 million for the Quonset project, which 

will help provide vital infrastructure and support for a growing 

clean energy industry and the potential for that to be a real hub 

for offshore energy. 

Secretary LAHOOD. Well, thank you for your support, Senator. 

You and I met and we talked about some issues, and we appreciate 

your support. 

Senator WHITEHOUSE. Well, it is very mutual. My question is 

this: You were able to fund $1.5 billion in TIGER grants. 

Secretary LAHOOD. Yes. 

Senator WHITEHOUSE. When you put them out to bid, you got 

$60 billion worth of applications. 

Secretary LAHOOD. Yes. 

Senator WHITEHOUSE. That leaves, assuming all the $1.5 billion goes out, about $58.5 billion of projects that States and municipalities and others brought forward and that we have not been able to 

fund. 

In very broad strokes, how would you evaluate those $58.5 billion? How many of them, if the funding were available, are really 

worthy of going forward with now as opposed to just, you know, 

sort of a fluff project thrown in on a Hail Mary? I mean, how many 

of them—and what sort of a number should we be considering to 

take advantage of all that ready-to-go, shovel-ready work? 

Secretary LAHOOD. I would say the majority of those. Unfortunately for us, these were very hard decisions. I would say the majority of the applications were very worthwhile projects, that if we 

had had $60 billion, the majority of those would have been funded. 

They were good projects. They really were. I know there is a lot 

of disappointment around this building and the building across the 

way. I have met with some about that, and we will try to be helpful. 

We do have $600 million in our 2010 budget for TIGER, and we 

will be putting up guidance on the web. We know that some of 

these projects will come back to us, and we encourage that. $600 

million is real money, but it is not nearly enough to meet all the 

needs. 

Senator WHITEHOUSE. Yes. I have a more general point that I 

would like to ask your opinion on. We face twin problems: a dire 

need for jobs, particularly in my home State of Rhode Island but 

across the country, and a fiscal problem that is looming toward us. 

Those are in opposition. The spending and borrowing now to support the jobs adds to the fiscal problem later. 

It strikes me that there is something of a sweet spot in the middle of that where we are dealing with infrastructure that is sooner 

or later going to have to be repaired anyway. We have a Providence 

viaduct that is so decrepit that they have stopped committing—I 

think both State and Federal have stopped committing maintenance funds to it because it really needs a rebuild. We have a 

bridge that is requiring people to drive all the way around an outer 

highway loop to avoid going over the Pawtucket River because of 

463 

weight restrictions that prevents large trucks from going over. It 

is highway 95. It is pretty central. 

Those things are going to be repaired sooner or later, and under 

the old Yankee principle that a stitch in time saves nine, we all 

know that very often maintenance projects are cheaper done early 

rather than when they are left to further erode and degrade. 

Is that a philosophy that we should be following, that where we 

can identify transportation projects that are clearly going to need 

to be accomplished at some point, why not speed them up now? 

And is there not a good argument for those projects that they really 

do not contribute to the long-term fiscal liabilities of the Nation? 

Secretary LAHOOD. Absolutely. There are many of those around 

the country, and we know for the last decade we have ignored our 

infrastructure needs. We have not put the resources into them, and 

that is why we have bridges falling down around the country. We 

have roads crumbling around the country. What you all did was 

very helpful in giving $48 billion to infrastructure. That money has 

been well spent, and a lot of people have gone to work in good-paying jobs around the country. But we still have many unmet needs. 

Senator WHITEHOUSE. You have given me a great lead-in to my 

third question, which was about how we look at better capital 

budgeting, if you will, of our infrastructure needs. I really applaud 

what the President has done with the infrastructure fund. I think 

Chairman Dodd did a lot of work on that earlier. I think it is a 

great idea, very important, and it is a step in the direction, it is 

a mechanism for a form of capital budgeting. 

But our budget does not really reflect in any way that I can find 

the infrastructure deficit that we have as a country of failed and 

failing roads, water, bridges, basic infrastructure. And, moreover, 

when we go to build a piece of infrastructure that is going to last 

20, 40, 60 years, we expense it in the year that we spend it. The 

private sector would never do that. If you were a corporation and 

you did not disclose those kinds of capital liabilities, you would 

have lawsuits all over you. And if you had a major project that you 

were going to amortize over 20 or 40 years, you would not be forced 

to expense it in the same year. 

Are there ways that you, within your existing authorities, can explore ways of trying to better budget in a way that matches private 

sector budgeting so that you are accounting for real infrastructure 

liabilities and able to expense over the life of a project? 

Secretary LAHOOD. Well, what we did, in anticipation of you all 

passing another jobs bill, is develop a list, which I will be happy 

to provide to the Committee, of the most immediate and long-term 

infrastructure needs around the country. It is a long list and it is 

billions of dollars. That is our guidepost as we work with Congress 

on a new authorization bill. Here are the unmet needs and here is 

the wish list for States and others in transportation, and—— 

Senator WHITEHOUSE. My time has expired, so if I could ask you 

to take that last question for the record. If you would like to—— 

Secretary LAHOOD. OK. 

Senator WHITEHOUSE [continuing]. Answer in greater detail, I 

would appreciate it, and I thank the Chairman. 

The Federal budget process has established rules and procedures 

for accounting for infrastructure costs over the useful life of a 

464 

project, generally recognizing the project’s total costs at the beginning of a project. The Department of Transportation does not typically own the assets that we provide grant funding toward. The infrastructure constructed by the funding that DOT distributes to 

States for highway and tranist construction finances projects that 

are typically owned by the State or local transit authorities. The 

closet comparison that the Department has to match private sector 

budgeting is credt program budgeting under the Credit Reform Act 

of 1990, as amended (FCRA). The FCRA changed the budgetary 

measurement of cost for direct loans and loan guarantees from the 

amount of cash flowing into or out of the Treasury to the estimated 

long-term cost to the Government. Only the unreimbursed costs of 

making or guaranteeing new loans are included in the budget. 

Chairman CONRAD. I thank the Senator. I thank him very much 

for sticking to the time, and I ask other Senators to try to stick 

closely to the time, as well, given the fact we have a vote scheduled 

at 9:55. 

Senator Feingold? 

Senator FEINGOLD. Thank you, Mr. Chairman, and I want to join 

with you in your words about Secretary LaHood. It does get my 

cheesehead a little irritated when I hear him talking about tolls, 

though, because I would like to have all the money I have paid out 

over the years coming down to Illinois through the tolls, but that 

is just a Wisconsin-Illinois thing and I am just giving you a hard 

time. But it is good to see you. 

Secretary LAHOOD. Thank you. 

Senator FEINGOLD. Let me start by talking a little bit about 

high-speed passenger rail. I was pleased that the Adminstration included a significant investment of $8 billion in passenger rail as a 

part of the American Recovery and Reinvestment Act and continues to followup that initial investment with a proposal for another $1 billion in the Fiscal Year 2011 budget. 

Of course, I was particularly proud to support Wisconsin’s suc- cessful $822 million application to the program that will extend 

passenger rail service from Milwaukee to Madison and link our 

State’s two largest cities. Beyond the thousands of jobs that will be 

created directly, there should be numerous additional benefits from 

reduced congestion to reduced gasoline use and more desirable and 

livable communities. 

Even before the first dollar has been spent, there is already speculation on what the next passenger rail project will be to link 

Western Wisconsin and the Twin Cities to Milwaukee and Madison, or even eventually heading north to Green Bay. 

But before we get too far ahead of ourselves, I think it is important to take a little time to focus on the current project and how 

it can best fulfill its promise to create jobs, and that is, in my view, 

by ensuring that local small businesses can compete for contracts 

associated with this project. I have been hearing some concern 

about the potential for contracts to be so large or complicated that 

only huge national companies would be able to compete for the 

funding, so I would like to know, are there ways for the contracts 

for the large construction projects using this money to be structured, perhaps by breaking them up into smaller pieces, so that 

small businesses can participate? And if so, has the Department or 

465 

State Departments of Transportation been actively encouraging 

ways to put out contracts for bid that will get the broadest and 

greatest applications? 

Secretary LAHOOD. Well, first of all, let me thank you for your 

support, Senator, on this initiative, and I also want to compliment 

your Governor. He has been right there, right from the beginning. 

I have had so many meetings with Governor Doyle on this, and he 

has been a real leader. Wisconsin is in the place it is in because 

of his leadership and also because of your leadership and I appreciate that. 

We have grant agreements that we now have to negotiate with 

the States for the money that has been allocated, for example, to 

Wisconsin. I take your point on this. We want to make sure that 

those that want to get in the high-speed rail manufacturing business have an opportunity to do that. We will be working with Governor Doyle and his team at the Wisconsin Department of Transportation to be sure that small businesses have an opportunity. 

That can be done through these grant agreements that we will be 

negotiating. 

Senator FEINGOLD. I am pleased to hear that and I would like 

to be informed of any details of this as it goes forward—— 

Secretary LAHOOD. You will be. 

Senator FEINGOLD [continuing]. Because it is of vital interest to 

us and our State. 

I am also pleased to see some of the proposed spending cuts in 

the budget, including a proposal to terminate the Rail Line Relocation Program. I also included this proposal in my Control Spending 

Now Act that I introduced last fall, which would cut—the overall 

bill would cut about half-a-trillion dollars over the next 10 years. 

But if we are going to start getting our deficits under control, we 

have got to find some places where more cuts could be made. For 

example, President Bush in his Fiscal Year 2009 budget proposed 

to rescind $626 million in highway earmarks that were over a decade old and still had less than 10 percent of the funding utilized. 

I have expanded on this concept for another provision of the bill 

that I have introduced, so that all earmarks across all Federal 

agencies would be rescinded if 90 percent of the funding remained 

unobligated after a decade. 

You can get back to me with the details, but can you tell me 

whether the $626 million in old highway earmarks still remains 

unspent and whether there are similar unwanted or low-priority 

projects in other transportation accounts? And just more generally, 

would you be supportive of my proposal? 

Secretary LAHOOD. The answer is yes, we are supportive of your 

proposal, and we have identified significant—millions of dollars 

worth of earmarks. For the record, I will get you the specific number, but we support your idea, Senator. 

The amendment offered by Senator Feingold would rescing Department of Transportation earmarks if less than 10 percent of the 

appropiated funding has been obligated within 10 years (unless the 

Secretary determines that an additional obligation of the earmark 

is likely to occur in the upcoming year). The total estimated 

amount of highway projects that would be rescinded per the 

Geingold Amendment is $563.5 million. Of this amount, 

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approximatel $469 million are balances from projects authorized by 

TEA-21. 

Senator FEINGOLD. Very good. And then similarly, during reauthorization, would you oppose the special no-year contract authority and obligation limitation that means that these earmarks never 

expire? 

Secretary LAHOOD. Yes, sir. 

Senator FEINGOLD. Thank you, Mr. Secretary. Continuing on the 

issue of earmarks, I am concerned that the funding for capital purchases of buses and bus facilities under the Section 5039 program 

is typically completely earmarked. While Wisconsin’s transit agencies and State Department of Transportation work together to distribute funds from a Statewide bus capital earmark based on need, 

smaller transit systems across the country are losing out. These 

systems, of course, as you know, provide vital services to communities and they are too important to let Congressional seniority and 

committee assignments determine which projects receive funds. 

During reauthorization of the highway bill, would you support 

creating a formula or competitive program to replace the current 

system, and if so, I would encourage you to talk to Wisconsin about 

how that is done. 

Secretary LAHOOD. We will do that, and we will certainly look 

at your proposal. We set a good record with Tiger, thanks to the 

bill that you all passed for the $48 billion. There were no earmarks 

for our portion of the Economic Recovery. We did it on a competitive basis. We know we can do it. It is the best way to do things. 

It is the fairest way to do things, and we hope that working with 

all of you under authorization, we can find that path forward. 

Senator FEINGOLD. Thank you for all your very responsive answers. Good to see you. 

Chairman CONRAD. Boy, Senator Feingold is batting a thousand, 

as I count. 

[Laughter.] 

Chairman CONRAD. Senator Wyden? 

Senator WYDEN. Thank you, Mr. Chairman, and thank you for 

holding this hearing. It is good to see Secretary LaHood here. We 

love him when he comes to Oregon. He has been a great advocate 

for some of our state-of-the-art efforts in transportation. 

Let me, if I might, Mr. Secretary, start with Build America 

Bonds. As you know, Build America Bonds are selling like hotcakes. Jurisdictions large and small have essentially said this is 

the way to turn around the deep freeze that we have been getting 

in the municipal finance market. We got the program started in the 

middle of last year. We estimated that you might see $4 or $5 billion worth of Build America Bonds issued. At the end of the year, 

it was $64 billion. It is projected to be about $130 to $150 billion 

this year, and I am very pleased that the Adminstration, and I 

know of very few instances like this, after a relatively short period 

of time has actually said this program ought to be made permanent. So I am very pleased with that and your help on this effort. 

What I want to do is go over with you, just so we have it on the 

record, the issue with respect to Build America Bonds and job creation. Now, as we have seen with your general figures, the Department of Transportation estimates that each $1 billion of direct 

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spending in the transportation area creates more than 30,000 jobs. 

So my question is, why would it be any different with bond funding? In other words, when you get $1 billion spent on bond funding, 

wouldn’t that be also a tremendous shot in the arm in terms of job 

creation for our country? 

Secretary LAHOOD. Well, Chris Bertram tells me that he thinks 

that you are right, you are spot-on on this, that it wouldn’t be any 

different. 

Senator WYDEN. I appreciate that, because what I like so much 

about what the Adminstration is trying to do on this transportation 

issue is to put more tools in the tool box. You know, I never ran 

around—and I am very appreciative of Senator Thune and Senator 

Collins, it has been a bipartisan effort—and say, oh my goodness, 

I just want everybody to use only Build America Bonds. What I 

wanted to do was to make sure, as I say, jurisdictions small and 

large would have more tools in their tool box, and I think we have 

been able to do that. 

I am very grateful that the Adminstration is really using its 

bully pulpit. You all have been showing up at announcements and 

jurisdictions from New York City to all kinds of small jurisdictions 

in America, and I thank you for that. 

Let me ask you one other point with respect to this new proposal 

from the Adminstration to make it permanent. Are there any other 

issues that you would like us to have on the record associated with 

making it permanent? What I like about that is it sends a message, 

again, of certainty and predictability, that there is strong support 

for that. Are there any other thoughts you would like us to 

know—— 

Secretary LAHOOD. On Build America Bonds? 

Senator WYDEN. Yes. 

Secretary LAHOOD. Well, not other than to say thank you for 

your leadership. This is a very innovative, creative way to improve 

infrastructure. It is as we said to the Chairman earlier, we have 

got to find creative, innovative ways to do all the things we want 

to do. There is none better than this, and you will continue to have 

our support. We will work with all of you on the way forward with 

authorization and make sure that whatever we can do to make this 

permanent, we will do it. 

Senator WYDEN. Well, I am very appreciative. I have one other 

topic that I want to ask you about, and I probably ought to quit 

while I am ahead, and I thank you for your support on the effort. 

The other issue I just wanted to touch on is an area that relates 

to environmental policy but has real implications for transportation, as well, and that is the lack of recycling at airports. As you 

know, an enormous amount of trash and things travelers have and 

things generated by airports is not recycled, and it has been known 

for years that the airports don’t recycle most of their waste. There 

is evidence they could save something like $100,000 a year by 

doing so. Of course, if airports recycled as much as we are trying 

to get people to do at home, you would have a significant reduction 

in carbon emissions, as well. 

I have been working with a broad coalition on this issue. I am 

going to be introducing legislation to create incentives to promote 

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tives, the Airport Council International, the flight attendants, and 

others. I just wanted to bring this up at the hearing and would just 

ask if you would be willing to commit this morning to just working 

with us on this issue and having your staff available so that as we 

go forward, we could make sure we had the expertise? 

Secretary LAHOOD. Absolutely. We would be happy to come up 

and meet with your staff and find out how we can be helpful. I 

think it is a great idea. 

Senator WYDEN. I am not surprised at that answer, either. I remember when we were serving together in the House of Representatives, all of us felt that you were one of the people who always 

was a problem solver, always wanted to try to find common ground, 

and wasn’t long on a lot of flowery rhetoric but wanted to get results. 

Secretary LAHOOD. We want to be helpful. 

Senator can I just mention one other thing—— 

Senator WYDEN. Of course. 

Secretary LAHOOD [continuing]. That I know is near and dear to 

your heart, and also to your colleagues from your home State. 

Streetcars are taking off all over America. What you all have done 

in Portland to really ignite the enthusiasm—you, Mr. Blumenauer, 

Mr. DeFazio, and others, but primarily the three of you—you 

should be thrilled. A lot of communities around America are getting 

into the streetcar business and many of them are going to be made 

right there in your home State. So I want to compliment you, Mr. 

Blumenauer and Mr. DeFazio, for the struggles that you have gone 

through over the years and for really hanging in there, because 

streetcars are coming back to America. 

Senator WYDEN. I tell you, I think this country is falling in love 

with streetcars. If you talk to our folks at home, they are getting 

calls all over the country, all over the world. People have picked 

up on the fact that this is a chance to move people around in an 

efficient way. It is a chance to save energy. It is a winner from 

every perspective. So I thank you very much for that shout out for 

streetcars that are made in my hometown. You mentioned my 

House colleagues. We may have to form a Streetcar Caucus just to 

try to respond to all the inquiries of interest. It couldn’t happen if 

we didn’t have the support of the Adminstration and we thank you 

for it. 

Secretary LAHOOD. Thank you. 

Chairman CONRAD. Thank you, Senator Wyden, and Senator 

Wyden, thank you for your focused leadership on Build America 

Bonds. It has made a big difference. It is going to be part of this 

package, this jobs package. 

You know, it is really hard to find something, I think, that works 

better than these Build America Bonds, conceptually, financially. 

People have skin in the game, so the money is spent responsibly. 

Senator Wyden, I think, deserves a shout out here, as well, from 

all of us for pressing this over a long period of time, and it is working and it is working beyond anybody’s wildest imagination of how 

well it might work. We have actually tested it in the real world. 

This is one of those things that has actually worked and worked 

beyond what advocates claimed for it. So kudos to you. 

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I also want to recognize Brodi Fontenot, who is with the Secretary today. Brodi was the budget analyst for the Senate Budget 

Committee for transportation and veterans. Now he is a Deputy 

Assistant Secretary of Transportation for Management and Budget 

and we welcome him back to the Committee. He is somebody that 

has a great deal of credibility with the Committee. Brodi, if you 

would stand and be recognized, we are glad to have you back. 

Secretary LAHOOD. Thank you for doing that, Senator. That is 

very nice. 

Chairman CONRAD. Well, Brodi, as you know, is top notch. We 

are delighted when people leave here and move up because of their 

own good work, and we are delighted that you recognized it. 

Secretary LAHOOD. You have trained him well. 

Chairman CONRAD. He is tight with a buck. 

[Laughter.] 

Chairman CONRAD. If I can go to a question that I think is important that we get on the record before we end, and we are going 

to be better than our word to you, given the votes that are going 

to occur shortly, we won’t ask you to wait while we go and vote and 

come back. We will just shut down the hearing. 

Let me ask you this because I think it is important for us to 

know. What is your assessment of how big the backlog is with respect to high-priority transportation projects around the country? 

Have you put a number on what the backlog might be? 

Secretary LAHOOD. Between $80 and $100 billion, and I will be 

happy to share the list with the Committee that we put together 

in anticipation of you all passing another jobs bill. 

Chairman CONRAD. Between $80 and $100 billion. I tell you, I 

wish so much when we did the Recovery Package, those of us who 

believed it ought to be larger to accommodate this backlog, I wish 

we had been more successful in persuading our colleagues to have 

a bigger package, because you are talking about $80 to $100 billion, not just of requests that are out there, I assume, but the 

projects that have real merit. 

Secretary LAHOOD. Absolutely. As I said to Senator Whitehouse 

for a decade, we have really ignored infrastructure. We just haven’t 

put the resources into it. There are a lot of lousy bridges and roads 

that need to be constructed—these are good projects, they really 

are. 

Chairman CONRAD. Yes, they are good projects, and not only do 

they create jobs, and jobs that are here in America-—— 

Secretary LAHOOD. Exactly. 

Chairman CONRAD. I mean, you are building a road in the 

United States. Those are jobs that are going to be right here in this 

country. 

Secretary LAHOOD. Right, and the spin-off in terms of the materials that are needed and all the things that go into building a road 

or a bridge are all American jobs. 

Chairman CONRAD. And it helps improve the competitive position 

of the United States. I would say anybody who goes to any major 

city and at four o’clock in the afternoon goes to try to get home— 

you can see it here in Washington, D.C. You get out on that Beltway, it is a total crapshoot. I often think when I am driving, what 

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ing, all the businesses that depend on the ability to move freight 

being ground to a halt? What is the economic cost of that? What 

does that do to our competitive position? 

Obviously, that involves not only roads and bridges, it involves 

our airports: it involves our rail systems. And what is happening 

with the Metro system here? 

In my home State, we are a major energy producer for America. 

Most people don’t think of North Dakota that way. They think of 

us as an agricultural State, which we are proud to be, in many 

areas the No. 1 agricultural State in America. But we are also a 

major energy State. We produce the electricity for nine States in 

North Dakota at our mine-mouth coal plants. We are now the 

fourth largest oil producer in the United States. I don’t think many 

people would think of North Dakota as a major oil producer, but 

we are. We have the greatest wind energy potential of any State 

in the nation. 

And these highways that are in the energy corridor with the 

major finds in the Bakken formation and now a new formation underneath the Bakken that also has tremendous reserves, we have 

got a two-lane road that is servicing that major energy corridor. I 

was just on that road a couple of months ago. It is unbelievable. 

It is like being on the beltway at four o’clock, big truck after big 

truck after big truck—hill, truck, curve. As my Grandfather used 

to say when we went through Wisconsin, hill, truck, curve. 

[Laughter.] 

Chairman CONRAD. That is what is happening in North Dakota 

in this major energy corridor, Highway 85. There is going to have 

to be serious money spent there so that the energy needs of the 

country can be met efficiently. 

Let me go to one other matter before we go, and I know votes 

are ready to start momentarily on the Senate floor, and that goes 

back to the question of Tiger grants. You had $60 billion, as I understand, more than $60 billion of requests, is that correct? 

Secretary LAHOOD. That is correct. 

Chairman CONRAD. And you had $1.5 billion to meet the requests. 

Secretary LAHOOD. That is correct. 

Chairman CONRAD. Your analysis of that $60 billion was that 

most of those were projects of merit, is that correct? 

Secretary LAHOOD. That is correct. 

Chairman CONRAD. I am sure there were some that were not. 

Secretary LAHOOD. That is correct. 

Chairman CONRAD [continuing]. And that is the way the world 

works. 

Secretary LAHOOD. The majority were meritorious. 

Chairman CONRAD. The majority were meritorious. 

Secretary LAHOOD. Yes. 

Chairman CONRAD. That is a big—is that included in your $80 

to $100 billion of backlog? 

Secretary LAHOOD. I would have to check, but probably a few. 

Some of them were road and bridge projects that I am sure were 

in the $80 to $100 billion. 

Chairman CONRAD. It would be very helpful for the Committee 

if you could look at those and look at the $80 to $100 billion of 

471 

backlog and get us a number that takes out any duplication so that 

we have as good a sense as we can of what the total is. 

Secretary LAHOOD. We will do it. 

Chairman CONRAD. All right. 

Secretary LAHOOD. Yes, sir. 

Chairman CONRAD. I thank you very much for your testimony. 

Secretary LAHOOD. Thank you. 

Chairman CONRAD. I thank you for your service. 

Secretary LAHOOD. Thank you. 

Chairman CONRAD. I know these jobs are demanding, and you 

will note I didn’t even ask you why North Dakota didn’t get any 

Tiger grant money. 

Secretary LAHOOD. Thank you. 

[Laughter.] 

Secretary LAHOOD. I will be happy to come up and brief you, 

though, Senator. I know—— 

Chairman CONRAD. Look, I—— 

Secretary LAHOOD. Look, you have been a strong supporter of infrastructure and transportation and I know you get it. Why don’t 

we just make arrangements to come and brief you on—because 

there is $600 million available in the next round and we ought to 

look at that. 

Chairman CONRAD. Well, we would like to talk, and look, we respect the circumstance that you face. You have got $1.5 billion and 

you have got $60 billion of requests, so—— 

Secretary LAHOOD. We will come up and brief you on it. 

Chairman CONRAD. Let me also indicate that for the knowledge 

of colleagues, the staffs who are here, colleagues who might be listening, leadership has asked us to be ready in about the third week 

of March for a budget resolution. Now, we don’t know if that timing 

will hold as we go forward, but that puts us on a very fast track 

because the Senate schedule this year is a little different than it 

has been in the past in terms of when the break comes. So that 

really puts all of us on alert, if you will, that for us to get our work 

done in a timely way, or at least be ready to go when leadership 

may ask us to go to the floor, we have got to get ready. 

And so I am asking colleagues, if there are things that they want 

to make certain are in the resolution, if there are things that are 

of special concern to them, please get that in. I have asked on our 

side to get all of those things to the Committee by the end of the 

work day on Friday. I would say to my colleagues on the Republican side, if there are matters of significant concern to your members, if you would get that to us by the end of the work day on Friday, we will then be in as good a position as we can to go forward 

on the time that has been given to us. 

Again, Mr. Secretary, thank you so much for your testimony here 

today, and again, thank you for your service. 

Secretary LAHOOD. Thank you. 

Chairman CONRAD. The committee will adjourn. 

[Whereupon, at 9:56 a.m., the Committee was adjourned.] 

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QUESTIONS FOR THE RECORD 


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DEPARTMENT OF DEFENSE FISCAL YEAR 2011 

BUDGET REQUEST 

THURSDAY, MARCH 4, 2010 

U.S. SENATE, COMMITTEE ON THE BUDGET, Washington, DC. 

The committee met, pursuant to notice, at 2 p.m., in room SD– 

608, Dirksen Senate Office Building, Hon. Kent Conrad, chairman 

of the committee, presiding. 

Present: Senators Conrad, Wyden, Nelson, Warner, and Grassley. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. 

Let me just say that we have just been alerted by leadership that 

there will be five votes commencing at 2:30. That poses very difficult circumstances for this hearing to be conducted in the usual 

form. So what I am proposing is that we waive opening statements 

on our side, that we go immediately to the opening statements of 

our witnesses and ask them to be as succinct as they can, and then 

we go directly to questions. If that is acceptable on both sides, that 

will be the way we proceed. 

I want to welcome our witnesses today. I deeply appreciate the 

Deputy Secretary of Defense, William Lynn, and the Under Secretary and Comptroller of the Department of Defense, Robert Hale. 

As Deputy Secretary, Bill Lynn serves as the Chief Operating Officer of the Department, and as Under Secretary and Comptroller, 

Bob Hale serves as the Chief Financial Officer of the Department. 

This is the first appearance for both before the Senate Budget 

Committee and we want to welcome them and look forward to your 

testimony. 

Please proceed. 

STATEMENT OF WILLIAM J. LYNN, III, DEPUTY SECRETARY OF 

DEFENSE, U.S. DEPARTMENT OF DEFENSE; ACCOMPANIED 

BY ROBERT F. HALE, UNDER SECRETARY OF DEFENSE 

(COMPTROLLER) AND CHIEF FINANCIAL OFFICER, U.S. DEPARTMENT OF DEFENSE 

Mr. LYNN. Thank you very much, Mr. Chairman. You have a 

written statement, I think, in front of you. I would ask you to put 

that in the record. I will summarize briefly the main points of that 

and then we will go, as you suggested, to your questions. 

The top-line request from the Department for fiscal year 2007 is 

$708 billion. That consists of $549 billion to fund the base Defense 

program and then another $159 billion to support overseas continVerDate Aug 31 2005 10:16 Feb 04, 2011 Jkt 000000 PO 00000 Frm 00493 Fmt 6601 Sfmt 6601 C:\DOCS\58153 SBUD1 PsN: TISH
488 

gency operations. There is also a $33 billion request for a fiscal 

year 2010 supplemental to pay for the additional 30,000 troops deployed to Afghanistan. 

The base budget represents about a 3.4 percent increase in nominal terms and a 1.8 percent increase after adjusting for inflation. 

Measured in terms of share of the economy or Gross Domestic 

Product, the Defense budget would be steady at about 4.7 percent 

this year. 

The priorities reflected in the Defense budget reflect those of the 

Quadrennial Defense Review, which was just completed. There are 

three major priorities that I would summarize for you. Rebalancing 

Secretary Gates is trying to rebalance America’s defense posture, 

emphasizing the capabilities needed to prevail in the current conflicts while still taking appropriate steps to modernize against future threats. 

The second priority is reform. The reform agenda that Secretary 

Gates laid out in last year’s budget, the fiscal year 2010 budget 

that we are now executing, laid out a reform agenda. An important 

part of that was to cancel or curtail programs that were either 

underperforming, were in niche areas with exotic technologies, or 

we had sufficient quantities of. Those included last year, importantly, the F–22. 

This year, we have continued that approach of appropriate fiscal 

discipline and program discipline and we are proposing seven 

major systems be curtailed. The list of those are in my statement. 

I would highlight two, the C–17 and the Joint Strike Fighter. The 

C–17 is a fine airplane, but we already have 40 more than the Defense Department originally requested and we are above the number that has been laid out in the recently submitted Mobility Requirement Study, so we would curtail that program. And the Joint 

Strike Fighter Alternative Engine, we do not think the up-front 

costs, which are substantial, are justified by the prospective savings, so we would propose not to go forward with that program. 

The third priority is resourcing. The President has made, I think, 

an important strategic decision, which is to give national security 

agencies, including the Department of Defense, real growth in this 

budget while holding domestic agencies flat. I think that represents 

a balancing of the important national security needs against fiscal 

austerity and he has tried to draw that balance appropriately. 

Modest real growth in the defense budget itself is necessary for 

several reasons. Some of our costs, such as benefits, especially 

health care, are growing faster than inflation, and ultimately, the 

overall cost of sustaining the force grows faster than inflation. So 

in order to maintain the force levels we have, we need at least 

some level of moderate real growth given that making force cuts 

when we are in two major operations is really not an option, at 

least in the near term. 

Mr. Chairman, in closing, we believe that the fiscal year 2011 

budget represents the minimum funding needed to provide for the 

defense of the United States and its people. It gives us the tools 

to prevail in the wars we are in while making investments for the 

future. We would strongly urge Congress to support the full Defense request in its upcoming budget resolution and its subsequent 

funding allocations. 

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With that, Mr. Chairman, I would turn it to your questions. 

[The prepared statement of Mr. Lynn follows:] 


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Chairman CONRAD. Thank you. Thank you for being so succinct. 

Of course, we have had a chance on this committee to already 

have a hearing on Defense and we have had a tremendous amount 

of material from your Department as well as our own independent 

analysis available to members of the committee. So I want people 

who are listening to understand there has been an enormous 

amount of work done trying to scrub these budgets to determine 

whether or not the taxpayers’ money is being used wisely or not. 

Let me get right to it, if I can. First of all, we thank you for your 

service. We very much appreciate people of your quality and character being willing to serve in public life, and I say that to both 

you, Mr. Lynn, and to you, Mr. Hale. You both come before us with 

stellar reputations and we certainly want to recognize that. 

With that said, we have an extraordinarily serious problem facing the country. We understand our first obligation is to provide 

the resources to defend this nation, and we take that obligation seriously. This committee will provide the resources necessary to defend this country. So let there be no doubt about that. 

But we also have an obligation to try to determine whether or 

not taxpayer dollars are being spent as efficiently and effectively 

as they can be. One of the great concerns that we have on this committee is whether or not procurement dollars are being well spent, 

whether or not O&M dollars are being well spent, and this committee, as we have expressed repeatedly, wants to see funding in 

Defense, whether it is for ongoing Defense operations or war operations, be transparent and be budgeted for. 

So the first question I have goes to the request for $33 billion of 

supplemental 2010 funding. Every time we see a supplemental 


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coming our way that wasn’t previously budgeted for, that raises red 

flags, especially with a committee that has the jurisdiction that we 

do. I hope you understand and can respect that. So could you tell 

us, why is there a need for $33 billion of a supplemental over and 

beyond what was previously budgeted for for 2010? 

Mr. LYNN. Yes, Mr. Chairman. We share your policy preference 

to have all the operating costs for the conflicts budgeted up front. 

Frankly, we attempted to do that when we submitted the fiscal 

year 2010 budget. The reason for the $33 billion supplemental is 

that the policy changed over the course of the year, and in particular, the President, after a detailed review of the policy in Afghanistan, decided to supplement the number of troops and add 

over 30,000 troops to the fight in Afghanistan. That required the 

additional funding. The funding that we had laid out did not anticipate that level—that increase in the troops as well as the forward 

operating bases, the logistics costs, the transportation costs, the 

training costs of bringing those troops in. And so there was a requirement for the supplemental. 

Frankly, we are submitting the fiscal year 2011 operating budget 

in advance this year for the conflicts. We are hoping that that 

budget will not require a supplemental. 

Chairman CONRAD. OK. Let me get right to it, if I can, because 

we are on 5-minute rounds and then we will go to Senator Grassley, and if we need additional rounds, we will certainly do that because we are going to have until about 2:45. 

Senator Grassley, do you think we should go a little longer than 

5-minute rounds? Should we go seven? 

Senator GRASSLEY. I will be able to ask my questions, so I don’t 

care whether it is seven or five. 

Chairman CONRAD. OK. All right. We will start with five, and 

then if you need more time, we will do it. 

Thirty-three billion—is it the testimony before this committee 

that that entire $33 billion is because of the 30,000 ramp-up of 

troops for Afghanistan? 

Mr. LYNN. No. I think the bulk of it is, and that was, I think, 

the reason we went to a supplemental. But there are, I think, fuel 

costs, some of which would apply to Afghanistan, some of which 

would be broader, and I think there is some Iraqi training money, 

and I turn to Bob—— 

Mr. HALE. Iraq security forces money for $1 billion is not related 

to it. All the others are at least partially related. Mr. Lynn mentioned the funding for Iraq security forces. We also have some 

money in there for Army mobilization costs to mobilize the troops. 

So I would say $30 billion is related directly. Another couple are 

partially related. And the $1 billion of Iraq security forces is not 

related directly to Afghanistan. 

Chairman CONRAD. All right. Let me say this to you, or ask you 

this. How confident are you that the $159 billion, as I heard your 

testimony, that is for the wars, that is separate and apart from the 

$549 billion for ongoing operations, how confident are you that the 

$159 billion that you are budgeting for 2011 will be adequate and 

sufficient and will preclude the necessity of a supplemental at this 

time next year? 

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Mr. LYNN. I would say we are moderately confident. I think we 

have budgeted relatively conservatively and we think we have a 

pretty good understanding of the situations in both Iraq and Afghanistan. So if that holds, if those situations hold as we had projected, we think that the numbers will be accurate. If the situation 

on the ground changes in either Iraq or Afghanistan, that will 

probably make a liar of me. 

Chairman CONRAD. All right. Let me first say that you have done 

a much better job than we have seen being done in the past with 

respect to budgeting on the front end. It does concern us to have 

a supplemental floating through here for over $30 billion, and we 

hear your explanation. 

Let me go to several other areas of cost increase that are of special interest to the committee. Operation and maintenance costs 

are up, are up as I read this request by more than 8.5 percent. 

That gives us concern in terms of what that means in future years. 

Can you give us any insight into that O&M increase of 8.5 percent 

and what it means for future budgets? 

Mr. LYNN. I would say two things and then ask the Comptroller 

for a bit more detail. The first is we have tried to do more accurate 

budgeting in two ways. We have tried to include more of the operating costs in the base budget versus the budgets for the conflict. 

That shift has caused—this was money that in prior years would 

have been in the supplementals. We have now, because we think 

it is going to continue with or without the conflict, so we have tried 

to put it in the base budget so that the OCO or what you were calling the supplementals isn’t subsidizing the base budget the way I 

think it was in the past. 

The other, and this goes more to the out years, less to your first 

years, we have tried to account for the fact that there is—historically, over the last 50 years, almost without fail, there has been 

two to 3 percent real growth in the operating budgets. This is due 

to information technology costs, health care costs, a whole variety 

of cost increases. And so if you project lower than that, you tend 

to have to come back in the budget year and fix it, and that tends 

to come out of the investment account and disrupts your planning. 

So we have tried to project as accurately as we could the out-year 

operating costs and that has yet led to some increases. 

Bob, I don’t know whether you want to add anything. 

Mr. HALE. Let me focus on three categories for why the increase 

between 2010 and 2011. It is about 8 percent. It is about $16 billion. It is substantial. 

One is what Mr. Lynn mentioned, about $1.4 billion in there for, 

we call it, OCO to base in wartime into the enduring budget. 

Chairman CONRAD. Let me say, I personally applaud you for 

doing that. I think Senator Gregg has been very clear about our 

concerns about this not being done in the past. 

Mr. HALE. And you will see that in subsequent budgets as we are 

planning to move more. 

The second piece is essentially fiscal year 2010 is understated for 

a couple of reasons. One is the fuel costs. We thought fuel would 

be considerably lower than it is turning out to be. So about $2 billion there that we are asking for in fiscal year 2010. That lowers 

the base in 2010 and we have fixed it in 2011. 

497 

And Congress cut about $1 billion out of the O&M budget in fiscal year 2010. We feel we need that back. 

The third part, and it is about half of the growth, is a wide variety of operational changes. We have higher training costs associated, for example, with training more helicopter pilots so we can 

make full use of our forces. We have higher military intelligence 

costs associated with building the capability that we need in wartime and otherwise. There is some higher maintenance, depot 

maintenance costs, particularly in the Navy as they have encountered higher costs to repair ships. 

O&M is the most diverse account in the budget, Mr. Chairman, 

and so there are dozens of reasons, and I don’t known them all and 

I won’t try to give them all, but if you would like more detail, we 

can get it to your staff or in the record. 

Chairman CONRAD. I think that would be useful to the committee. 

I will recognize Senator Grassley now for 7 minutes. 

Senator GRASSLEY. Thank you very much, Mr. Chairman. 

Secretary Lynn, in preparation for the debate over your nomination to be Deputy Secretary, we exchanged a number of letters on 

Department of Defense financial management issues. This correspondence pertained to what I consider misguided financial management policies that were pursued during your tenure as DOD 

Chief Financial Officer from November 1997 to January 2001. 

Many of my questions pertain to two payment policies known as 

pay-and-chase and straight pay. Neither of these policies complied 

with the law. They also addressed an arbitrary allocation scheme 

used by the Defense Financing and Accounting Service at Columbus Center for making progress payments on big contacts. This 

scheme is also called bucket billing. It has been declared illegal by 

both the Inspector General and by the Government Accountability 

Office. 

In responding to my questions, you made a personal commitment 

to me to address and correct these problems. As I understand it, 

all three of these problems persist today. Pay-and-chase and 

straight pay have been morphed into the Direct Bill program and 

Power Track, which allowed huge sums of money to be paid out 

with essentially no supporting documentation other than pay 

vouchers. Many of the large Department of Defense contractors are 

approved for direct billing. These programs put the Department of 

Defense check-writing machine on autopilot. 

The Department of Defense IG audits clearly indicate that these 

payment programs are what they call high-risk zones, ripe for 

fraud. I also understand that the bucket billing operation at Columbus is still operating at full steam. Your predecessor, Mr. John 

Hamre, assured me that he would fix that problem after he was 

confirmed as Deputy Secretary, but he didn’t keep his word. 

So, two questions. What are you doing to prevent fraud in the 

Direct Bill and Power Track programs, and second, what have you 

done to close down the bucket billing operation? 

Mr. LYNN. Senator Grassley, I mean, I think the policies that you 

are referring to, the pay-and-chase and straight pay, I think we can 

both—those are policies that are no longer being pursued by the 

498 

Department. They are actually stopped either during or before my 

tenure before. 

Where I think the overall policy that you are referring to, the 

overall rubric goes under the phrase ‘‘pre- validation.’’ In other 

words, what you would like to see, and I think should see, is that 

we pre-validate that there is an obligation before we pay an invoice. I think that is the direction that you want the system to go. 

We have been making steady progress on that. It is not at 100 

percent at this point. It is at 99.5 percent. We do need to bring it 

to 100 percent. We are taking steps to do that. Maybe the most important overall step that we are taking is in the enterprise planning area, where we have set up a—you set up a system that is 

completely integrated. So the invoice, the receipt, and the obligation are all in a single integrated information, management information system so that the checking, the ability to check, is done 

inside one loop. That addresses that. 

I am in the process through the DBMC, the Defense Business 

Management Steering Committee, to implement that and we are 

working on that as a long-term solution to the issues that you have 

suggested. 

Senator GRASSLEY. Well, I would hope that at least not because 

Chuck Grassley says so, but because the IG at DOD says so, that 

these are very still high-risk areas, that you keep that in the back 

of your mind, because I think my judgment is you have a ways to 

go. I am not going to challenge you that you are making progress, 

but I don’t think you are there yet, and I guess you said you 

weren’t there yet. But this is something that needs continual ongoing attention on your part because this is where we waste so much 

of the taxpayers’ money. 

Question No. 2: In your letter of February 3, 2009, you gave me 

this assurance. Quote, ‘‘If confirmed as Secretary of Defense‘‘—I 

should say, ‘‘Deputy Secretary of Defense, I will do my utmost to 

strengthen the Department’s financial management and internal 

controls designed to prevent fraud.’’ Just about every DOD IG 

audit—and when I say that, I have a staff person that goes over 

these audits, so I hope you know I give this attention—but just 

about every DOD IG audit finds that internal controls are weak or 

nonexistent and that it is, quote-unquote, ‘‘impossible’’ to audit contracts because supporting documentation is missing and there are 

no audit trails to follow. 

These are red flags. They are indicators of fraud. You assured me 

that you would strengthen internal controls, but they remain weak 

or nonexistent, and that leaves DOD resources vulnerable to theft 

and fraud. Since becoming Deputy Secretary of Defense, what exactly have you done to strengthen internal controls? 

Mr. LYNN. Senator, I have been working with Mr. Hale here to 

my left on the Financial Management Improvement Plan. 

Strengthening internal controls is part of that. Bringing the DOD 

audit standards up to snuff is part of that. The focus is that we 

have tried to focus our resources initially on the thing that is most 

important to the Department, which is keeping track of the resources that Congress provides the Department. So that means our 

initial focus is on the statement of budgetary resources, and so we 

have targeted our improvement plan in that direction. 

499 

I don’t know, Bob, if you want to add. 

Mr. HALE. I think the enterprise resource planning systems that 

Mr. Lynn mentioned before, which are being deployed right now in 

the Navy, the Army is beginning to deploy them, the Air Force is 

a little behind, and our two small agencies and we are moving 

ahead to the Defense agencies, will strengthen internal controls. 

These are systems that impose the controls. You can’t make obligations without going through all of the steps required by the financial regulations. So as we get them in place, they will strengthen 

our internal controls. 

I would put this in context, Senator Grassley. I think we have 

got 50,000 men and women around the world in Defense financial 

management who are making Defense financial management work 

in support of the national security mission. We do have the ability, 

and I think the IG would agree with this, and their review is several years old, to track the money that you appropriate and ensure 

that it is distributed to the accounts that Congress says should receive them in law, so-called funds distribution—appropriations received is the term that auditors use—and we are in the process as 

part of this Financial Improvement and Audit Readiness Plan of 

verifying that again, because I think it is particularly important, 

or should be, to the Congress to know that we are distributing 

these funds. If you put $100 billion in weapons to track combat vehicles, it will be in that account and it will be distributed, and with 

any restrictions you impose, and that is auditable or at least can 

be validated. 

So I think we are getting the mission done. We need to do better, 

and there are two broad pieces, as Mr. Lynn has said, the Financial Improvement Audit Readiness effort and these enterprise resource planning systems. 

Senator GRASSLEY. I hope I am here next year to continue this 

discussion. Thank you. 

Chairman CONRAD. And can I just rivet the point, because Senator Grassley, who has been a long-time consistent voice on these 

issues is right. I think all of us know the financial systems and internal controls at DOD need improvement. You have acknowledged 

that. You have indicated you have begun a process to make improvements. We will be looking at what the IGs report in the future with respect to those improvements, and it is critically important. 

I mean, we can’t have a circumstance in which dollars, precious 

dollars that are being allocated for the nation’s defense are wasted. 

And the only way we can determine whether or not that occurs is 

if we have auditable records, if we have a financial system that will 

allow us to check and ascertain whether or not the dollars have 

been used for the purposes intended and whether those dollars 

have been expended in a way that is efficient. 

With that, I will recognize Senator Warner for— 

Senator WARNER. Thank you, Mr. Chairman. And, Secretary 

Lynn and Under Secretary Hale, thank you very, very much for 

your service and for being here. 

Let me say at the outset that I am going to raise an issue where 

my friend and colleague Senator Nelson and I have a difference, I 

think a legitimate difference, in opinion, but it is one that I want 

500 

to try to bring my background in business and as a Governor where 

we actually had to balance our budgets on a regular basis and 

make ends meet. I have raises a series of questions for you gentlemen, perhaps Secretary Lynn first off, where I need a much fuller 

understanding to get to the point of accepting the decision that the 

QDR made. 

The issue I am raising, of course, is the porting of our carrier 

fleet on the east cost, currently homeported at Norfolk, Virginia, 

and the question that has been raised by the QDR that has said 

the need to create a new homeporting facility in Mayport, Florida. 

And I understand Senator Nelson has pointed out repeatedly and 

accurately the long history that Mayport has played serving the 

non-nuclear components of our carrier fleet, and it is a wonderful 

community and wonderful facility. 

The QDR said there was a need, and I believe the quote was, ‘‘to 

mitigate risk of terrorist attack, accident, or natural disaster’’ to 

create this requirement to have some back-up or secondary facility. 

There was no analysis done that I have seen in any of the documents on whether the locations were given equal balance since 

clearly, in terms of natural disasters, in terms of hurricanes, there 

is a grave, actually higher incidence of possibility in Florida than 

in Virginia, and there were enormous amounts of recent expenditures made to upgrade the security facilities in Norfolk. 

So for my first question, I want to go through all of these, I 

would like to get an analysis done of was there an estimate—was 

one of those priorities higher than the other? Natural disaster? 

Terrorist attack? Accident? What was the ranking of those risks in 

terms of prioritization in of making this assessment, No. 1. 

No. 2, Under Secretary Flournoy, when she met with the members of the Virginia delegation, said that the Department went 

through this analysis and thought about the kind of back-up that 

was needed to protect the security needs of our country. And let me 

make clear that I absolutely believe that the security needs of our 

country trump every other item, and I say that at the outset. But 

Under Secretary Flournoy said that the Department reached the 

conclusion in effect, two choices. And what was key in at least her 

description was that they were two valid choices, each that met the 

defense needs of our country. One choice was homeporting a carrier 

at Mayport permanently. The second choice was to continue the 

dredging efforts that I know Senator Nelson has supported and upgrading the pier and having that facility simply as a back-up in the 

event of disaster, attack, or accident in Norfolk. 

So the term was that this was, in effect, an insurance policy by 

making the substantially greater investments in Mayport. We have 

got a variety of numbers, but I believe the most recent number we 

have received from the Department is that insurance policy is at 

a cost of $671 million. 

My second question is: When we have got two valid choices both 

meeting by the Department’s acknowledgment the security needs of 

our country—so this is not a question any longer of security; it is 

a question of how much additional insurance we may need or additional back-up to have, but not a security question, at a $671 million cost, where will that fall in terms of a prioritization when you 

have already got a $36 billion backlog in shore infrastructure needs 

501 

that the Navy has documented? Will that trump that $36 billion 

in infrastructure backlog needs? Does it go at the front of the line, 

the back of the line, or the middle of the line? And I think this is 

really important for us as we weigh this financial decision that we 

are going to be asked to make. That is, I think, my third question. 

My fourth question is the one where I hope that I and others will 

continue to try to make the strong case. We think you have grossly 

underestimated the costs of this so-called insurance policy. I think 

we will show in coming weeks and months that these costs will be 

well in excess of $1 billion, especially when you build in the infrastructure needs for the basing of the crew and their support staff, 

look at the needs for creating the appropriate—when you have got 

a nuclear carrier there homeported—evacuation needs for the road 

structure, do the additional buildup that the Navy has committed 

and already successfully implemented in Norfolk to buildup against 

the possibility of terrorist attacks. 

And my last question, and the one that ultimately is the most 

important question that I personally need to get an answer for is: 

Even if you could ever get to the argument that this is a worthy 

investment, you are going to convince me that you are going to 

bump these other criteria, bump this other $36 billion backlog to 

move it somewhere on that list, at what price does this insurance 

become—since we have agreed there are two valid choices that 

meet security needs, homeporting or simply upgrading the facilities 

in Mayport as a back-up facility, if this ends being a $1 billion— 

if we can legitimately show this is a $900 million price tag, a $1 

billion price tag, $1.2 billion price tag, is there any dollar amount 

that this insurance policy does not become a valid choice and an 

appropriate choice for the Defense Department to make if we start 

again with the premise that the Department has already acknowledged that either option, homeporting or simply upgrading the facility as a back-up facility, both meet the security needs of the 

country? 

Mr. LYNN. OK, let me try and tackle those questions. Let me step 

back, though. When we came into office, there was a Navy recommendation to go forward with the homeporting at Mayport, to 

do the full facility. We thought that was a—it was a strategic decision. It is under the rubric ‘‘strategic dispersal of carriers.’’ We 

thought that was an important decision, and we thought it ought 

to be made within the Quadrennial Defense Review. So we essentially stepped back—— 

Senator WARNER. Excuse me a second. I know my time is almost 

expired, and Senator Nelson is going to want equal rebuttal time 

here, but—— 

Mr. LYNN. Well, we will stay as long as you need. 

Senator WARNER. Just one comment. Secretary John Warner, 

who held this position for a long time prior to me, who has got exponentially greater knowledge of the Navy and the DOD than I will 

ever have, former Secretary of the Navy, said that that decision 

that appeared in the waning days of the prior administration without any kind of preliminary work, kind of appeared whole cloth, 

and I appreciate you and Secretary Gates and others saying this 

needed to be in the QDR, but to somehow say that that prior decision point popped up at the end of the last administration, he 

502 

claimed that it smelled of politics. I do not know, but I appreciate 

the fact that it got put into the QDR, and now that we can make 

this analysis on both the defense needs and the very legitimate extensive needs of the Navy’s capital requirements. 

Mr. LYNN. I think we are agreed that is the right context. It was 

not popular at the time to do that, but that is what we did. And 

that goes to your two decisions. We did make a subsidiary decision, 

though, in that, and it was clear—however you came out on building the facility in Mayport or not, it was absolutely clear that we 

needed to dredge the harbor and to make at least an emergency 

port available in Mayport. And we went forward with that in the 

immediate timeframe, and we took a longer term to look at the 

much larger expense, frankly, of doing Mayport. 

So when you are saying there were two choices, I mean, it was 

sort of a stepped-up—there was one clear choice, which was do 

the—and immediate choice, which was to do the dredging and the 

emergency availability of Mayport for a carrier. And then there 

was a second longer-term decision, which was to evaluate should 

we put the funding in to put the nuclear facility. 

After doing—— 

Senator WARNER. Can I again just clarify one point here? Because this is really very, very important—how this plays out. My 

understanding has been that the Department has said that for the 

security needs of the Nation—both of these choices, permanent 

homeporting or an emergency back-up, both of those choices met 

the security needs of the Nation. And then there was a question 

of whether you— 

Mr. LYNN. Well, that is not actually the way I would phrase it. 

I would say that the threshold decision, which was the more modest financial commitment to have the emergency, was a decision we 

could take immediately. The more expensive decision and the 

longer term of whether to put a nuclear facility in was a decision 

that we wanted to put into the Quadrennial Review. It was really 

a strategic decision, a decision of strategic dispersal. On that decision, we came to the conclusion that although it did—I think it will 

cost what you say, the $671 million. That was an increase from a 

prior estimate. We do think it will cost that. But despite that cost, 

we should pay that cost in order to continue the policy that has 

been longstanding of having two carrier ports on each coast. That 

is what we have on the west coast right now. It is what we have 

had on the east coast, but we were able to do it without a nuclear 

facility because it was a conventional carrier. 

So the decision that came up when the conventional carrier, the 

John Kennedy, retired, you had to make a decision, OK, do we invest in a nuclear facility at Mayport to keep the strategic dispersal 

or do we not? After looking at it in the QDR, we came to the conclusion that, yes, that is worth the investment. 

Now, you asked where does this rank kind of in other investments, and we pushed the Navy on that because there are other 

bills in the Navy, and the Navy does not—you know, no service has 

everything they want. That is just the way life is. So we asked 

them: Is this really something that is within—that you are willing 

to displace other requirements for? We sent them back. They came 

back and said yes. And the rationale—you were trying say priority. 

503 

The rationale went a little bit different. You asked for a ranking 

of, you know, I guess, hurricanes versus terrorist assaults. It was 

the accumulation of all of them that caused us to think that there 

is a risk. We did not rank them, but we think there is a risk there. 

And I think the term ‘‘insurance’’ is not a bad one, that we wanted 

to buy some insurance. One way of looking at the premium is the 

investment in the carrier force is well over $100 billion. So this is 

a 1-percent or so insurance premium that you are going to pay. 

You also asked the question kind of what would be too much. Of course, you know, going to the extreme, if it cost us $100 billion, 

we would not do that. Now, you want to where in between $671 

million and $100 billion, and I cannot give you a precise number 

except to say that is the equation. How much insurance do you 

want to use to protect this large investment? We concluded that 

$671 million was a reasonable insurance premium to pay for that 

investment, and that was essentially what we did in the year intervening between when we came in and when we issued the QDR. 

Senator WARNER. My time has expired. 

Mr. LYNN. I am staying as long as you need. 

Chairman CONRAD. Senator Nelson. 

Senator NELSON. If the Senator wouldn’t mind staying, I had deferred to the Senator instead of taking the time first because I was 

not going to bring this up. We have been through this process laboriously now for the 10 years that I have been Senator, and painfully, over the course of the last year of the Secretary’s tenure, he 

has accurately characterized that he made the decision as he did 

with regard to dredging, the long lead items, the dredging and the 

pier at Mayport, and then the issue was deferred to the United 

States Navy, and the Defense Department, of course, signing off, 

and this went all the way to Secretary Gates with regard to the 

homeporting issue. 

Mr. Secretary, is it true that up until the retirement of the John 

F. Kennedy that there were always two homeports of the Atlantic 

fleet carriers on the east coast? 

Mr. LYNN. Yes, sir. 

Senator NELSON. Is it true that up until the late 1980’s, Mayport 

was the homeport for two aircraft carriers? 

Mr. LYNN. I believe so. 

Senator NELSON. Is it true that not two but three homeports are 

located on the Pacific Coast? 

Mr. LYNN. Yes, two in close proximity, but that is correct. 

Senator NELSON. And is it true that the lessons of Pearl Harbor 

and the dismissal of Admiral Kimmel and the stripping of his two 

stars from his four stars and forced retirement as a result of the 

lessons of Pearl Harbor is still a lesson that is taught in the United 

States Navy? 

Mr. LYNN. I am sure the Navy well remembers Pearl Harbor and 

tries to learn its lessons. I would not put that as the principal reason here, though. I think we were looking more prospectively at the 

risks that we thought might face us as we go forward, and as I 

think Senator Warner correctly characterizes, this is an insurance 

premium that we want to pay. And it was more in that framework 

that we looked at it. 

Senator NELSON. Thank you. 

504 

Now, with regard to that insurance premium and your commentary, are you aware when this issue was raised, first by the 

other Florida Senator—and I did not raise it first—in front of the 

Armed Services Committee, responded to by Senator Webb of Virginia, and then furthermore raised by me to the CNO, Admiral 

Roughead, and the Secretary of the Navy just recently in a hearing 

in front of the Senate Armed Services Committee, that Admiral 

Roughead testified to the fact that the cost of making Mayport nuclear capable was approximately $500 million instead of the 

amount that you have stated? 

Mr. LYNN. 500 instead of 671? 

Senator NELSON. Instead of the 671. 

Mr. LYNN. I guess I would have to look into that. I may be counting the costs of the dredging, and I do not know what you are—— 

Senator NELSON. OK. And, specifically, I asked that question 

about the cost of the dredging and the amounts of work being done 

to one of the piers, which is roughly about $70 million, which is already in this current funding bill of which you all, the Navy and 

DOD, had requested. 

So I asked Admiral Roughead, does that mean, then, since $70 

million is being done right now in the dredging down to 55 feet, 

a mile and a half out into the Atlantic, in order to get to the mouth 

of Mayport, is that cost then a cost that is part of the $500 million, 

therefore, the balance that is due is somewhat between $430 million and—— 

Mr. HALE. Senator Nelson, I think the $500 million, which I believe includes the $70 million, is military construction. There are 

some other costs. There would be PCS costs. There would be some 

infrastructure costs. So I believe the $670 million is a better total 

figure. And I will go back and get that for the record. 

Senator NELSON. All right. Well, let us get clarification because 

I am just repeating what Admiral Roughead testified to. 

Mr. HALE. I think he may have been referring only to the milcon costs, but we will double-check. 

Mr. LYNN. We will get the record of that hearing, and we will 

get back to both Senators with our understanding. 

Senator NELSON. OK. 

Senator NELSON. You know, at some point we have to have a decision and move on, and I understand Senator Warner—he is a 

great, distinguished Senator. He is my personal friend. And I do 

not like the fact that we have to keep bringing this up, and I certainly am not going to look forward to a fight in the Budget Committee, the Senate Armed Services Committee, and the Appropriations Committee on a decision that the Navy and Secretary Gates 

have made that is essential to the national defense and national 

security of the country. 

I would just point out this in closing: In February of 2005, the 

CNO, Admiral Vernon Clark, said that the Navy should have two 

carrier-capable ports on each coast, and this is testimony in front 

of the Senate Armed Services Committee. In March of 2006, the 

Deputy Secretary of Defense and the former Secretary of the Navy 

Gordon England stated that a nuclear carrier should be in Florida 

to achieve dispersion. In March of 2006, the Vice Chairman of the 

Joint Chiefs of Staff, Admiral Giambastiani shared that we should 

505 

disperse our carriers on the east coast. And I will never forget his 

riveting testimony that he saw, one holiday, five carriers all tied 

up next to each other of which we have shown pictures of that several times as clearly an indication that that is not in the interest 

of national security. 

In July of 2007, the Chairman of the Joint Chiefs, Admiral 

Mullen, stated, ‘‘I am on the record more than once for this, very 

supportive of strategic dispersal of our carriers.’’ 

In December of 2008, Secretary Gates wrote, ‘‘Having a single 

CVN homeport has not been considered acceptable on the west 

coast and should not be considered acceptable on the east coast.’’ 

And in January of 2009, the Navy issued the record of decision 

to establish a naval station at Mayport as a CVN homeport. 

And then, in the QDR that you have indicated, in 2010, it is complete, and the Defense Department has validated the Navy’s position, stating, ‘‘To mitigate the risk of a terrorist attack, accident, 

or natural disaster, the U.S. Navy will homeport an East Coast 

carrier in Mayport, Florida.’’ 

So, Mr. Chairman, I just want the record—I know our colleague 

from Oregon has come, and we have a vote. I am not going to take 

the additional time that my colleague took. I wanted that read into 

the record. I wish, since the Defense Department has made their 

decision, that we could let it be. But if it needs to keep being 

brought up, I am compelled to bring up the long, lengthy, and detailed record that has been established. 

Thank you. 

Chairman CONRAD. I thank the Senator, and we will go to Senator Wyden for 7 minutes. 

Let me just indicate to colleagues the vote has begun. There is 

about 11–1/2 minutes left on the vote. I will recognize Senator 

Wyden for 7 minutes. 

Senator WYDEN. Thank you very much, Mr. Chairman, and I will 

try to be shorter than that. 

Secretary Lynn, I think you are aware of the problems being encountered by the Shepherds Flat Wind Energy Project in our home 

State. The project would be an enormous boost to eastern Oregon, 

providing thousands of jobs and a huge source of clean energy in 

our State. Unfortunately, the project is threatened by a conflict 

with Defense Department radar systems in the area. 

My concern is—and, obviously, I care greatly about my constituents who are finding this is a very immediate problem. But, generally, I continue to be concerned—I serve on the Energy Committee as well—about the Department’s apparent inability to adequately address its concerns with wind turbine replacement in an 

efficient fashion. 

As we see more of these wind farm projects established, we are 

seeing almost a trend where the services raise objections at the 

11th hour. This costs local companies millions, and obviously, what 

we want is we want a system that promotes sensible renewable energy development and addresses our very obvious national security 

needs. 

So my question, Secretary Lynn, is: What steps has the Department taken to effectively and efficiently address these issues with 

506 

respect to renewable energy projects in a fashion that is consistent 

with national security? Secretary Lynn. 

Mr. LYNN. Senator, I am afraid I am not familiar with the Shepherds Flat issue, so I am going to have to take that for the record 

and come back to you. 

Senator WYDEN. All right. 

Senator WYDEN. Has the Department established an office or 

designated a point person who can deal with this? Because, obviously, my constituents care greatly about this, but we are not going 

to be the only one. We are looking at this being a centerpiece of 

the President’s economic development strategy. It is obviously important to help us break our dependence on foreign oil. Is there 

somebody who has been designated, or an office, to ensure that we 

coordinate this effort in a fashion that is efficient? 

Mr. LYNN. Well, actually, you did, sir. The Congress created a 

confirmed position for operational energy matters. We have submitted a nomination for this position. She is before the Senate, and 

she would be underneath the Under Secretary for Acquisition Technology and Logistics, and the responsibilities of that office would 

be, I think, exactly along the lines that you are talking about. 

Senator WYDEN. And who is doing it until that gets put in place? 

I think that would really be the question. And I think your point 

is a valid one, and I think we want to know who do you go to until 

that is up and running. 

Mr. LYNN. We have starting to stand that office up in anticipation of getting the individual to lead it, but there is also an Office 

of Installations and Environment within the Under Secretary of Acquisition, and they are in a supporting role until we are fully 

staffed in the operational energy—— 

Senator WYDEN. If you could get me, Secretary Lynn, a name 

and a phone number, that is what I think my constituents want 

to know: Who are we going to go to now in order to try to address 

this? Because this is our biggest effort. It is going to cost a lot of 

money, and this is an 11th-hour objection. In other words, everybody has been working very constructively together, and obviously 

you are not aware of it today, so I have got to go back and try to 

address that. We just want to have a name and a phone number 

and somebody who has got some authority until this new position 

is up and running. 

Mr. LYNN. Let me investigate a little bit the issue, and we will 

get you a name and a phone number. 

Senator WYDEN. One last question, if I might. My State does not 

have active-duty bases, but we have a tremendous level of participation in the National Guard and Reserves. We have developed a 

host of programs, yellow- ribbon programs and others, to try to 

help the troops make the transition. But, unfortunately, there still 

really is not the kind of transition structure back to civilian life 

that the Guard and Reserve folks say they need. It seems like it 

is almost you go from carrying your rifle overseas to carrying your 

child here, and if you are a Guard member and you are not from 

an area with a lot of active bases, there is really nowhere to turn. 

Our Reserve forces get 15 days of pay and benefits before they are 

essentially hit with the prospect of reduced income and tension in 

507 

the family and concerns with respect to a transition from serving 

in the military to being home. 

I have introduced a piece of legislation called the Soft Landing 

bill that is intended to relieve the stress on the warriors who have 

come back by giving them active-duty benefits for another 45 days 

in effect so that there could be additional time to make a transition. 

What would be your general reaction to something like this, extending the transition time for Guard and Reserve folks when they 

come back from combat? 

Mr. LYNN. Well, I have two contradictory reactions, Senator. 

First, the issue you identify is a valid one. The transition for Reserve units coming back from the conflicts can often be more difficult because they come back and then disperse, and so they often 

do not have the same support structure and the same resources 

that our active-duty units might be able to draw on. So I think 

there is certainly an issue there. 

What you propose in terms of the 45 days of benefits, I do not 

know what the cost is, but I think it could be relatively substantial. 

I think we have put 500,000 troops through the conflicts from the 

Guard and Reserve to this point. So I do not expect our top line 

to be increased to accommodate that, so the question I would have 

is what other programs would we have to sacrifice to get this program, which I there is a valid need here, but is this the most costeffective way to address it would be the question I have. 

Senator WYDEN. Well, we will want to have that discussion with 

you. I think your point is a fair one as well. I think there have 

been a number of weapons systems that Secretary Gates, for example, has been on something of a crusade to try to say no longer 

meets the rigorous tests of being cost-effective when you have got 

to make tough, tough choices. I just want to know what you think 

of the concept. You have indicated that conceptually we have got 

a valid point. We will continue to have the budget debate with you. 

I have introduced the legislation. Thank you for this discussion. 

Thank you for the time, Mr. Chairman. I know you have other 

items, and getting that phone number and name for the matter involving wind will be very helpful, Mr. Secretary. We will continue 

the discussion with respect to Soft Landing. 

Mr. LYNN. Thank you. 

Senator WYDEN. Thank you. 

Chairman CONRAD. I want to indicate that there are about 4–1/ 

2 minutes left in the vote, so then there are going to be four votes. 

I see no reason to ask you to stay for four votes. That would be 

an hour and a half. You have got a lot of other things to do at a 

time when we have two major conflicts and all the rest that is 

going on in the world. So I want to thank you for your testimony 

here today. I want to thank you for your service to the Nation. The 

Committee appreciates your answers here today, and we may, because of the unusual nature of this truncated hearing, need to submit other questions in writing from colleagues who were not able 

to be here because of votes on the floor, and I hope that you will 

respond to those in a timely way. Can we count on your to do that? 

Mr. LYNN. Absolutely. 

508 

Chairman CONRAD. All right. Thank you very much, and the 

Committee will stand adjourned. 

Mr. LYNN. Thank you, Mr. Chairman. 

[Whereupon, at 2:57 p.m., the Committee was adjourned.] 

509 

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