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38–357—PDF 2006

S. HRG. 109–985

AMERICA’S PUBLIC DEBT:

HOW DO WE KEEP IT FROM RISING?

HEARING

BEFORE THE

SUBCOMMITTEE ON LONG-TERM GROWTH

AND DEBT REDUCTION

OF THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

SEPTEMBER 28, 2006

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

SUBCOMMITTEE ON LONG-TERM GROWTH AND DEBT REDUCTION

GORDON SMITH, Oregon, Chairman

CHARLES E. GRASSLEY, Iowa JOHN F. KERRY, Massachusetts

(II)

C O N T E N T S

OPENING STATEMENTS

Page

Smith, Hon. Gordon, a U.S. Senator from Oregon, chairman, Subcommittee

on Long-Term Growth and Debt Reduction, Committee on Finance ............... 1

WITNESSES

Bixby, Robert L., executive director, The Concord Coalition, Arlington, VA ...... 2

Orszag, Dr. Peter R., Joseph A. Pechman senior fellow and deputy director

of economic studies, The Brookings Institution, Washington, DC ................... 5

Edwards, Chris, director of tax policy studies, Cato Institute, Washington,

DC .......................................................................................................................... 9

Stenholm, Hon. Charles W., former Member of Congress, Washington, DC ...... 12

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Bixby, Robert L.:

Testimony .......................................................................................................... 2

Prepared statement with attachment ............................................................. 25

Edwards, Chris:

Testimony .......................................................................................................... 9

Prepared statement .......................................................................................... 48

Kerry, Hon. John:

Prepared statement .......................................................................................... 55

Orszag, Dr. Peter R.:

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 57

Smith, Hon. Gordon:

Opening statement ........................................................................................... 1

Stenholm, Hon. Charles W.:

Testimony .......................................................................................................... 12

Prepared statement .......................................................................................... 78

(III)

(1)

AMERICA’S PUBLIC DEBT:

HOW DO WE KEEP IT FROM RISING?

THURSDAY, SEPTEMBER 28, 2006

U.S. SENATE,

SUBCOMMITTEE ON LONG-TERM

GROWTH AND DEBT REDUCTION,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 3:35 p.m., in

room SD–215, Dirksen Senate Office Building, Hon. Gordon Smith

(chairman of the subcommittee) presiding.

Present: Senator Bingaman.

OPENING STATEMENT OF HON. GORDON SMITH, A U.S. SENATOR FROM OREGON, CHAIRMAN, SUBCOMMITTEE ON

LONG-TERM GROWTH AND DEBT REDUCTION, COMMITTEE

ON FINANCE

Senator SMITH. Welcome, ladies and gentlemen. We appreciate

your presence here today. We call to order the U.S. Senate Subcommittee on Long-Term Growth and Debt Reduction. This is the

Committee on Finance.

Our topic is ‘‘America’s Public Debt: How Do We Keep It From

Rising?’’ I have found these hearings, over the last little while, always instructive, and they have helped me to produce some good

legislation and good ideas that hopefully will add to our answering

this question.

We are here today to discuss a topic of growing concern in America, how to solve our budget deficit problem in light of our government’s long-term fiscal challenges. We have a balanced panel of experts with us today with differing views and backgrounds, and I

look forward to this constructive dialogue on how best to address

this looming fiscal crisis.

We recently received good news about this year’s budget deficit. CBO now expects the 2006 deficit to total $260 billion. This is a

$58 billion decline from last year’s deficit, and $112 billion lower

than CBO’s March estimates.

The primary reason for this decline is increased tax revenues.

Receipts from individual income and payroll taxes are projected to

increase this year by $172 billion.

Furthermore, receipts from corporate income taxes are expected

to grow strongly for the third consecutive year. These numbers

once again demonstrate the success, I believe, of the President’s tax

cuts.

2

But by the end of 2006, we will have put back $1.2 trillion in

Americans’ pockets. This has resulted in a strengthened economy

and increased tax revenues. The economy has created more than

1.7 million jobs over the last 12 months and more than 5.7 million

jobs since August of 2003. In addition, over the first half of this

year our economy grew at a 4.2 percent annual rate. This is faster

than any other major industrialized nation.

However, despite recent improvements, our Nation faces a longterm fiscal—I would describe it as a structural challenge. We are

about to experience a dramatic demographic shift as the baby boom

generation begins to retire.

The aging of our population, combined with rapidly rising health

care costs, is likely to create an ever-growing demand for resources

to finance Federal spending for mandatory programs such as Social

Security, Medicare, and Medicaid.

These programs, however, I think we all recognize, have had an

enormously positive effect on so many Americans’ lives. But we

need to face the reality that they simply cannot be sustained in

their current form for the long term.

Reforming our entitlement programs will become increasingly

critical and must be done in a thoughtful manner so as not to hurt

those Americans who rely most upon these benefits.

These reforms may require some politically difficult decisions,

but I think most of my Senate colleagues realize that we must act

soon to ensure that these vital retirement income and health care

programs are around to serve the next generation as well.

I would like to thank our witnesses for joining us, and I look forward to your testimony. I have an opening statement from Senator

Kerry that we will include in the record.

[The prepared statement of Senator Kerry appears in the appendix.]

Senator SMITH. We welcome Senator Bingaman. Senator, your

opening comments?

Senator BINGAMAN. Mr. Chairman, I will spare everybody any

opening comments, and welcome the witnesses. Thank you for having the hearing.

Senator SMITH. Thank you very much.

Our witnesses today have a wealth of experience on Federal

budget issues. We will hear, first, from Mr. Bob Bixby, who is the

executive director of The Concord Coalition, a nonpartisan grassroots organization dedicated to educating the public about Federal

budget issues and their consequence for the future. We will then

hear from Peter Orszag, who is a Joseph A. Pechman senior fellow

and deputy director of economic studies at The Brookings Institution. Then Chris Edwards is the director of tax policy studies at the

Cato Institute. The Honorable Charles W. Stenholm is a former

member of Congress who represented the 17th District of Texas in

the U.S. House of Representatives. We welcome you, one and all.

Mr. Bixby, we will start with you.

STATEMENT OF ROBERT L. BIXBY, EXECUTIVE DIRECTOR,

THE CONCORD COALITION, ARLINGTON, VA

Mr. BIXBY. Thank you very much, Senator Smith and Senator

Bingaman. Thank you for inviting me.

3

My name is Bob Bixby. I am the executive director of The Concord Coalition. I am pleased to address the question of ‘‘America’s

Public Debt: How Do We Keep It From Rising?’’

The short answer is, to keep the public debt from rising, we will

need to reassert budget balance as our fiscal policy goal and make

the necessary trade-offs to achieve that goal.

Budget rules can help in this regard, but they are not a substitute for political will. Moreover, no strategy for keeping the debt

from rising will succeed over the long term unless we can find a

way to reduce projected costs, particularly for health care.

A realistic strategy will likely require some mix of spending reductions and revenue increases, negotiated in a bipartisan process,

aimed at preventing total spending, taxes, or debt from reaching

levels that could reduce economic growth or harm future standards

of living.

I will touch on the budget outlook, but I would also like to talk

about some strategies for public engagement that I have been involved in this year, including something we call the Fiscal WakeUp Tour, and some of the trade-offs of the broad options going forward.

In the short term, there is a budget problem. The CBO baseline

has about $1.7 trillion in deficits over the next 10 years. The Concord Coalition looks at some different assumptions about war costs

and extension of tax cuts and growth of discretionary spending.

Under what we think are a bit more realistic assumptions, you

come out to a 10-year deficit of somewhere around $5 trillion. I

have seen higher and lower estimates of that, but the basic scenario we see over the next 10 years is deficits about the size that

we have now as a percentage of the economy, but drifting upward

maybe to around 4 percent of GDP by the end of the 10-year period.

Then, of course, the real problems begin. As the Chairman mentioned, we have, over the long term, an unsustainable outlook. I

think you can make all sorts of arguments and twists and turns

over the short term, but most of us who look at the long-term budget think that we do have an unsustainable problem.

There are no easy ways to get around this. Basically we have a

structural imbalance between what we are promising future generations and what we seem to be willing to pay for.

Generally speaking, taxes have been around 18 percent of GDP.

If you look at spending over the long term, it is projected to drift

up into the 20s, maybe even as high as 30 percent of GDP over the

long term.

So we can have a debate about whether we should try to tax and

spend at about 18 percent of GDP to keep the public debt from rising or whether we should tax and spend at about 25 percent of

GDP to keep the public debt from rising. But we cannot tax at 18

percent of GDP and spend at 25 percent of GDP, and that is really

the situation that you look at when you look over the long term.

So what we need to do is find some strategies that would reduce

these spending promises, which are primarily for programs that

are excellent social insurance programs for the elderly that have

done so much over the years.

4

But when you look at the coming demographic bulge and then

add on to that the fact that health care costs have been rising so

much faster than the economy, and this has been a historic thing,

you put these two factors together and it means that we are going

to have to take some very politically difficult steps, I think, to

change course.

Now, that is where the public comes in. Because these things are

so difficult, because we are either going to have to reduce promised

benefits, which would be politically very difficult, or raise taxes to

pay for them, which would also be politically difficult, it is very important to bring the public into this discussion from day one.

So what we have been doing this year at The Concord Coalition

is partnering with some people at The Brookings Institution, some

people at The Heritage Foundation, the Committee for Economic

Development (CED), and the Controller General, David Walker,

people with diverse points of view, and going around the country

doing what we call the Fiscal Wake-Up Tour. In fact, some of my

colleagues are in Austin today at a Fiscal Wake-Up Tour event.

Briefly, what we try to do is explain that people from diverse perspectives understand the problem, agree on the dimension of the

problem, think there are no easy options here, and we try to get

the public to understand what the necessary trade-offs are. So it

would help members of this committee, and others here in Congress, to make those hard choices with public understanding.

What we have found so far—and I will end with this because it

is a bit of good news. I am used to spreading bad news, I am afraid,

or at least warnings. The public can engage on this issue.

If you set aside the campaign-style rhetoric and just sort of look

at some of these programs and understand their benefits, and then

talk about how high taxes would have to go up for future generations, people are willing to look at those sort of trade-offs, but they

are very distrustful, and getting over that is going to be one of the

highest hurdles.

When I say ‘‘distrustful,’’ I mean basically distrustful of government. So one of the questions that we all have to ask is, how can

we win the trust of the American people so that they will make

these hard choices?

But they are realistic, and I think they are grown up. The more

public engagement we can do, the better. So, thank you for allowing me to testify. I look forward to your questions.

Senator SMITH. I am curious. Did they have a preferred solution?

Means testing benefits, or raising taxes more?

Mr. BIXBY. They generally compromise, because that is what we

try to get them to do. I mean, I have been surprised at the willingness of people, for example, to raise the eligibility age on Social Security.

They almost always want to raise the cap on the payroll tax.

That is the sort of trade-off—I am just talking about Social Security here—I think they looked at as a little of one side, a little of

the other side.

Now, if you just say to them, do you want the payroll tax to go

up or do you want the eligibility age to go up, the immediate answer is going to be ‘‘no.’’ But by the end of the day, they may reach

a different point of view.

5

Senator SMITH. Thank you.

[The prepared statement of Mr. Bixby appears in the appendix.]

Senator SMITH. Dr. Orszag?

STATEMENT OF DR. PETER R. ORSZAG, JOSEPH A. PECHMAN

SENIOR FELLOW AND DEPUTY DIRECTOR OF ECONOMIC

STUDIES, THE BROOKINGS INSTITUTION, WASHINGTON, DC

Dr. ORSZAG. Thank you very much, Mr. Chairman and Senator

Bingaman. Thank you for having me.

The Nation faces, in my view, two main problems. We are neither paying our way, nor investing adequately in our workers.

National saving is too low. In 2005, net national saving was

about 1 percent of national income. It is now slightly higher, but

there is no good outcome that comes from the world’s leading economic power saving 1 percent of its income.

It means that we either are investing only that much in productive equipment, which robs workers in the future of the capital that

they will need to be productive and earn higher wages, or it means

that we borrow—and that is increasingly what we are doing—from

foreigners to finance our investments at home. That, however, is

not a free lunch. We are mortgaging our future income by borrowing such massive amounts from abroad.

We are already in a situation where almost half of the public

debt of the United States is owned abroad. On current trends, that

share will increase. It is not free money. We are increasingly indebted to the rest of the world.

The second problem that we face is that middle-class families

have basically stagnant real incomes and increased income risk.

The probability of a 50-percent decline in income over a 2-year period has more than doubled since the early 1970s.

The tax cuts, in my view, have made both of these problems

worse. On the one hand, they have increased the budget deficit and

they, over the long term, through 2015, will raise the public debt

by $5 trillion, or 25 percent of GDP, thus contributing to the first

problem.

The second thing is, once you take into account the fact that you

need to finance the tax cuts, that is, ultimately they will have to

be offset by either other revenue increases or spending reductions,

they reduce income for more than 75 percent of households once

that financing is taken into account, and they also reduce the effectiveness of the tax code in attenuating after-tax income fluctuations, so they actually also make that volatility or risk point worse

also.

Senator SMITH. Could I ask you a question, Doctor?

Dr. ORSZAG. Sure.

Senator SMITH. And, please, I would like this to be a little bit informal so we can learn the most.

Dr. ORSZAG. That is great.

Senator SMITH. How have the tax cuts made it worse if it is increasing the revenues?

Dr. ORSZAG. I’m sorry?

Senator SMITH. How have the tax cuts made the deficit worse if

we have increased revenues?

6

Dr. ORSZAG. Even this morning, Mr. Lazier and others from the

Council of Economic Advisers indicated there is no credible evidence whatsoever that the tax cuts pay for themselves. So even

under the most optimistic scenario, there is a net revenue cost to

the tax cuts. They reduce revenue.

Senator SMITH. That assumes growth would be what it is without

the tax cuts.

Dr. ORSZAG. Even if you take into account the most optimistic estimates of what the growth effect from the tax cuts are, they still

significantly reduce revenue. The administration, for example, has

said over the long run, at best, the tax cuts would raise the longterm size of the economy by 0.7 percent of GDP. The tax cuts cost

a lot more than the revenue created by that extra growth. It reduces the net cost of the tax cut, even under their own numbers,

by about 10 percent.

I would say most estimates suggest that over the long term, the

net impact on long-term growth from the tax cuts, because they are

deficit financed and that imposes a drag on the economy, will if

anything be negative. So in other words, over the long term their

costs might even be larger than not taking into account the impact

on economic growth.

Senator SMITH. I see. All right.

Dr. ORSZAG. So if the tax cuts are not the way forward—and they

are not, in my opinion—what is? There is an alternative way forward in which the goal is growth, broad-based participation in

growth, and increased economic security.

That is the basis for a new project at Brookings that I direct

called The Hamilton Project, where we are putting out a whole variety of ideas that are intended to promote investments in education, in economic security, and in national saving.

What, specifically, should we do? On national saving, there are

two key steps. The first is, we need to increase private saving. I

think the best approach there is to make saving more automatic.

I commend both you, Mr. Bingaman, and your colleagues for the

legislation you introduced yesterday that would include an automatic IRA component. The evidence is overwhelming that this is by

far the best thing we could do.

Inertia is a very powerful force in savings decisions, and making

it easier for households to navigate the pension system is an overwhelmingly good thing. You should not need a Ph.D. in financial

economics to navigate the pension system, and your legislation

would go a long way towards eliminating that requirement.

Senator SMITH. We just have to get it passed now.

Dr. ORSZAG. It does need to get passed. That is the next step.

Senator SMITH. We will do that.

Dr. ORSZAG. That is your job, right?

Senator BINGAMAN. We are going to add it to the fence bill.

[Laughter.]

Dr. ORSZAG. I am in favor of that.

The second thing we need to do is get our fiscal imbalance in

order. There, I would make three points. The most important longterm thing that we could do is to tackle health care. Health care

costs are the leading explanation for our long-term fiscal imbalance.

7

The second thing we need to do is shore up our revenue base.

The third thing is Social Security, in that order. Health care is by

far the most important, revenue second, Social Security third.

On health care, there is both a challenge and an opportunity.

The challenge is that it is important to think about restraining cost

growth not just for the Federal Government’s programs by themselves. They are too integrated with the rest of the health care system.

Cost per beneficiary in the public programs and in the private

sector have been growing at about the same rate, and it is impossible to think that you are going to solve one in isolation. So that

is the challenge.

The opportunity is that the evidence suggests that there is a lot

of health care spending that is not cost-effective. On average,

health care spending is extraordinarily beneficial and leads to significant improvements in health. But there is a lot of health care

spending that does not do that. If you think of a curve of health

care spending and health care improvements, we are sort of at the

flat part of that curve.

So there are significant opportunities for restraining cost growth

in ways that either do not harm people or actually make them better off in terms of health outcomes. That is a very significant difference from Social Security reform.

In my view, it makes sense to try to tackle health care reform,

both because it is a much bigger problem and because there is this

opportunity for trying to restrain cost growth without directly

harming households. That is impossible to do in Social Security, because basically it is a cash assistance/cash transfer program.

Senator SMITH. Can I explore that a little more with you?

Dr. ORSZAG. Sure.

Senator SMITH. I am from a State where we are very used to

prioritizing what health care gives you the most health for the

buck.

Dr. ORSZAG. Right.

Senator SMITH. I assume what you are meaning when you come

to this flattening out of the benefit to health, it is usually at the

end of life. Is that correct? Are you suggesting that we should assign certain numbers of kinds of health care or types of procedures

that are available on Medicare and Medicaid and not get into the

more expensive stuff at the end?

Dr. ORSZAG. I think the first step, before we get to that, although

that may ultimately be required, is several-fold. I think we can significantly affect doctor norms and doctor practice norms in terms

of what kind of tests they undertake, what kind of procedures they

recommend.

There is overwhelming evidence, for example, that cost per beneficiary in Medicare and in Medicaid varies a lot across States, for

reasons that have absolutely nothing to do with health outcomes.

The extra spending does not get you anything. The leading explanation is that the norm in one part of the country is just different

from the norm in another part of the country for no underlying reason.

It is just, doctors talk to each other and they get into a certain

practice style. Ways of trying to tackle that through practice guideVerDate 11-MAY-2000 16:39 Nov 07, 2007 Jkt 095484 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 38357.000 SFIN1 PsN: SFIN1
8

lines, through the Institute of Medicine providing recommendations, would be a very good first step.

The other thing that I think we need to do, frankly, is ask more

personal responsibility: you take care of yourself, and then we will

take care of you. It does not make any sense to be providing very

fancy health treatments to people who then go and do not take care

of themselves at home after the treatment.

So I think those two main steps would be a significant step forward. It may not do everything that we need, and more rigorous

intervention may be required.

Senator SMITH. And these ideas would be available from the Institute of Medicine and are generally accepted in the medical community and obviously would not be controversial because everybody

agrees?

Dr. ORSZAG. There is significant movement towards evidencebased practices and recommendations, and the Institute of Medicine is just one body that can provide it. But I think we need easier

access to professional guidelines for doctors so that they know: here

is the evidence on what works and what does not.

When you are ordering Test A, Test B, and Test C that do not

seem to actually yield any benefit for this kind of condition, you

should be asking yourself why you are doing that.

Senator SMITH. It sounds like a really good idea. I am just trying

to figure out how we would put it in legislation in ways that apply

to Medicare and Medicaid that would result in the cost savings.

Those are the very kinds of ideas that have a real potential to

save money and to preserve health. But obviously if you are the

person who is in pain and wants something, and you do not want

to be told what it costs, you want to be told how to feel better—

I am anxious to learn more.

Dr. ORSZAG. If I could go on, Medicare, especially under Dr.

McClellan’s leadership, is starting to lean in this direction, and

those are good first steps. But I think there is widespread agreement that much more could be done.

A key question is, who is reaching the decisions about what kind

of information to be providing to doctors, and that is why the choice

of that professional body would be very important.

The other thing I would note is that, as States move towards different types of health care reforms—for example, in Massachusetts,

the Connector—that State government body that will be the backstop to the program is very likely to play this kind of role also.

It is going to be the basis for providing information about what

works and what does not, and may help to set norms, at least in

that State. As that model spreads to other States, that is another

possibility.

While I am on the topic of health care, just briefly, I would say

one other thing. This is a broader theme that I think that the Finance Committee, in particular, needs to reexamine.

We are currently spending $500 billion a year subsidizing—

through the tax code, through tax incentives in the tax code—

health care, retirement, home ownership, and a variety of other social goals that we want to promote.

We do it almost all in the form of deductions or exclusions—

health care is in the form of exclusion, retirement is in the form

9

of a deduction or exclusion—which link the size of the tax break

to one’s marginal tax bracket.

In my view that is not only unfair, it does not make any economic sense. Unless you think that high-income households are

more responsive or generate larger social benefits when they do respond than middle-income households or low-income households, it

does not make any sense to provide a larger per-dollar break to one

set of households than another.

So in a recent paper that was co-authored with Fred Goldberg,

who was the IRS Commissioner under the first Bush administration, we argue that basically all of that should be reconsidered and

redone in the form of a credit rather than a deduction or exclusion.

One could apply that to the roughly $200 billion incentive for employer-based health care, significantly raise the incentive to get

health care for middle- and low-income households, while somewhat restraining it for high-income households that would probably

purchase the health care anyway, and it could be done on a revenue-neutral basis.

Senator SMITH. That is it. That is good stuff.

[The prepared statement of Dr. Orszag appears in the appendix.]

Senator SMITH. Mr. Edwards?

STATEMENT OF CHRIS EDWARDS, DIRECTOR OF TAX POLICY

STUDIES, CATO INSTITUTE, WASHINGTON, DC

Mr. EDWARDS. Thank you very much, Mr. Chairman, for inviting

me to testify today, and to Senator Bingaman.

The Federal debt continues to rise, and spending growth keeps

running ahead of fast-growing tax revenues in recent years.

Public debt today is about 37 percent of GDP. While the OMB

and CBO baselines show a falling trend in public debt as a share

of GDP, if you adjust for the Bush tax cuts, making the Bush tax

cuts permanent and AMT relief permanent, which I support, public

debt rises over the next 10 years to about 45 percent of GDP.

The debate over rising Federal debt usually splits between those

who blame recent tax cuts and those who blame rising spending.

I blame rising spending. However, those opposed to recent tax cuts

argue that tax cuts that are financed by deficits do not do much

for the economy. They are partly right. Recent tax cuts would have

benefitted the economy even more if they had been matched by

spending cuts.

But here is a crucial point: not all tax cuts are created equal.

About 45 percent of recent tax cuts in 2001 and 2003 were what

you can call social policy tax cuts, such as the expansion of the

Child Tax Credit.

Such tax cuts do not reduce economic distortions, they do not do

anything for economic growth, and all they really do is push tax

burdens onto future generations if spending is unchanged.

But about 55 percent of recent tax cuts have been what you can

call supply side tax cuts, including the individual rate cuts and the

dividend and capital gains tax cuts.

These tax cuts do reduce distortions in the tax code. They increase the Nation’s GDP. As you touched on earlier, Senator, they

do not lose the Federal Government as much money as the basic

static revenue estimates suggest.

10

So Congress should continue to pursue supply side tax reforms,

in my view, targeting reforms at the worst parts of the tax code,

but they should avoid further social policy tax cuts, particularly

now because we have large and rising deficits.

Senator SMITH. Like child credits, and things like that.

Mr. EDWARDS. Right.

Senator SMITH. What are the other ones?

Mr. EDWARDS. Well, the other big one was the new bottom 10

percent tax bracket, which also does not generally affect the marginal incentives to work, or save, or other good things.

All it really did was, it gave a big break to a lot of folks who do

not already pay taxes. It almost caused as much of a revenue loss

as lowering the other rates, the 28 to 40 percent rates.

Senator SMITH. All right.

Mr. EDWARDS. Spending increases have been the real culprit, it

seems to me, in rising deficits and debt. A couple of figures show

how. Federal outlays have risen $800 billion in 5 years, 2001 to

2006. That is about four times greater than the revenues lost, even

on a static basis, from the Bush 2001 and 2003 tax cuts of about

$200 billion this year.

Also, if you compare the revenues lost in the 2001 and 2003 tax

cuts, they actually just about equal the tax increases of 1990 and

1993 under Bush one and Clinton, so in a lot of ways we have just

gone back to where we were in the late 1980s after the 1986 Tax

Reform Act.

So regardless of whether or not you support recent tax cuts,

though, it is clear, and everyone recognizes, that the government

has a gigantic long-term spending problem.

The basic business as usual scenario by the GAO shows Federal

outlays rising from 20 percent of GDP this year to about 45 percent

by 2040. That European-sized government, it seems to me, would

bring us low economic growth, lack of job opportunities, and all the

other sort of pathologies we see in continental Europe.

Unfortunately, that is a bit of an optimistic scenario in a certain

sense. That is because the GAO’s estimates themselves are static.

If Congress did try to raise taxes to match the rising entitlement

spending, it would create sort of an economic death spiral where

tax avoidance would increase, economic growth would fall, and

Congress may try to respond and even raise tax rates higher.

So when you see some of those long-term, scary scenarios from

the GAO or CBO, those are static scenarios. If we actually tried to

raise taxes that much to match rising spending, we would be in big

trouble.

Senator SMITH. Is that not what we see all over Europe right

now?

Mr. EDWARDS. Yes. Absolutely. I mean, certainly over the last

decade we have seen continental Europe grow much slower than

the United States. The fast-growing countries in Asia and Eastern

Europe now generally have smaller governments than in continental Europe.

Senator SMITH. And do the western European economies have a

lot more tax avoidance, for example, than we do?

Mr. EDWARDS. Some, especially the southern countries in Europe,

are infamous for tax avoidance, like Italy. There is no doubt that

11

there is a relationship between the marginal rates and tax avoidance.

Actually, to put another interesting number on that, if you look

at the static sort of estimates from the Social Security Administration of the Federal payroll tax that funds Social Security and Medicare Part A, which currently is about 14 percent of taxable wages,

that is expected to rise to 25 percent of taxable wages by 2040.

But estimates by Martin Feldstein at Harvard show that if you

actually tried to raise the tax rate up to 25 percent, tax avoidance

would increase and the government would actually have to raise

the payroll tax up to 30 percent, not 25 percent, to get the revenue

that it thinks it might get at 25 percent.

So, clearly, these numbers show a bleak fiscal future for young

Americans. I do think we need new budgeting rules, among other

changes, in Congress. I think we can look to the 50 States for guidance on changes in budget rules.

About half the States have some form of overall budget growth

limitation or budget cap, which is what I proposed for the Federal

budget. Colorado’s constitution limits growth in the State budget to

inflation plus population growth each year.

Similarly, I think Congress should put a statutory cap on the

growth in total Federal outlays, discretionary and entitlement. I

think the government should live within constraints that the rest

of us do, and not consume any increasing share of the Nation’s

economy over time.

A real simple restraint, it seems to me—and it is so simple I

think people have overlooked it, to an extent—is that you could put

a cap on the overall Federal budget so that growth would not rise

more than some fixed percentage, like 4 or 5 percent, and you could

write that into law.

Senator SMITH. Is that not the Colorado model?

Mr. EDWARDS. Colorado varies by inflation and population, which

may vary from year to year. What I am saying is, if you just said,

look at the last 20 years. If inflation or personal income or some

indicator rose by an average of, say, 5 percent a year, just say the

total cannot rise more than 5 percent a year.

It would be a great planning tool for Congress. They would know

exactly what they have to hit in future years. It would also be

great for citizens, because it would be clear when Congress was

cheating on the budget.

Some of the problem with prior budget rules, like GrammRudman and some of those, is they are very complex. Average citizens do not understand them. So I think a real simple and clear

cap would be a real step forward for budget transparency.

I would envision that Congress would have their annual budget

resolution, the OMB and CBO could tell them where they are compared to the cap, they would include reconciliation bills to get

spending under the cap, if needed. They would cap discretionary,

if needed. If the session ends and we are still over the cap, the

President would sequester, as has occurred under Gramm-Rudman

and the Budget Enforcement Act of 1990.

Senator SMITH. Is it not true, though, that Colorado has had difficulty, even with their more flexible model?

12

Mr. EDWARDS. Right. The problem there was, they set their State

cap on tax revenues, and tax revenues fell sharply with the recent

recession. I am saying, put a cap on total Federal spending where

you would not have that problem.

The problem with caps on both revenues and deficits, as under

Gramm-Rudman, is they fluctuate widely and Congress has no real

control over them. They depend, really, on how well the economy

is doing. But Congress does directly control spending, so I think if

you set a cap at 4 or 5 percent, Congress could clearly plan ahead.

So to wrap up, we obviously have huge problems here. I think

we clearly need new budget rules, because the budget rules we

have had recently have not worked. We have had deficits most

years.

Spending is rising very rapidly. I think that Congress ought to

experiment with new budget constraints. There may be new problems with new rules that they enact, but we can try again, just like

we have tried with new rules in the past. So, I think we ought to

experiment going forward to get the fiscal situation under control.

Thanks a lot.

[The prepared statement of Mr. Edwards appears in the appendix.]

Senator SMITH. I would agree with you that not all tax cuts are

created equal. The ones you identify, though, as not being equal,

the child credits, the reduction of the tax credits for the bottom 10

percent, those obviously were designed to win votes, and all the

things that you were talking about were only possible because we

had to do some of those things. I am sure you recognize that.

Mr. EDWARDS. Absolutely.

Senator SMITH. But your budget rules idea and everything you

said, I can agree with conceptually. But I have been around here

for 10 years and I know how hard it is to do politically.

Would you not agree with that, Senator?

Senator BINGAMAN. I never found any difficulty. [Laughter.]

Senator SMITH. All right.

Well, thank you very much. Very informative.

Congressman Stenholm, you did not have any problems like this

in the House, did you?

Representative STENHOLM. Never.

Senator SMITH. All right.

STATEMENT OF HON. CHARLES W. STENHOLM, FORMER

MEMBER OF CONGRESS, WASHINGTON, DC

Representative STENHOLM. Mr. Chairman, Mr. Bingaman, it is

an honor to be before you today. I am going to share with you a

few ideas we gleaned over our 26 years in the House of Representatives.

In complete candor, many of the views you will hear from me

contributed to me being here as a former member today rather

than continuing to represent the 17th District.

I would summarize my testimony in three ways. The first thing

we have to do is acknowledge we have a problem. As long as you

have folks saying deficits do not really matter, which we have had

now for several years, you are not going to solve the problem, beVerDate 11-MAY-2000 16:39 Nov 07, 2007 Jkt 095484 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 38357.000 SFIN1 PsN: SFIN1
13

cause you cannot get there from here unless you agree that you

have a problem.

Second, you have to stop digging the hole deeper. If you are going

to start fixing the problem, the first thing you have to do is quit

making it worse, which we have not been doing a good job of as

of late.

Third, if you are going to get a solution, it has to be bipartisan.

The only way to start that is to agree to put everything on the

table and have everything be discussed, and then have some votes

taken from time to time and settle it out, and go back to some of

the previous suggestions you have already heard from my fellow

panelists today.

The first part, as to whether we have a deficit problem or not,

I was here when we went through the $1 trillion debt. I was here

when we went through the $8 trillion debt. I will not be here, but

you will, when we go through the $10 trillion debt. Back in the

early 1980s, our debt was 25-percent owned by foreign interests.

Today our debt is 50-percent owned by foreign interests. By 2010

or 2011, foreign interests will be 60 percent of our banker. I am

a farmer in real life, and I understand my banker has something

to say about what we do or we do not do. That is why I think deficits do matter and why I would encourage you to begin dealing

with the deficit, and dealing with it in a meaningful way.

The second recommendation is, quit digging. Here you go, a simple rule: pay-go. It worked very well in a bipartisan way in 1990,

1993, and 1997. Just agreeing that if you are going to increase

spending for any worthwhile thing, you have to cut spending somewhere else or provide the revenue to pay for that which you are

asking to be done.

It is very simple. If you are going to cut taxes, you have to cut

spending or raise some additional revenues somewhere else. I totally agree, and most economists agree, that you do not increase

revenue by cutting taxes. It just does not happen, when you take

all of it.

At least, I am not smart enough to say that, but the economists

that I believe in do say that. So, pay-go, and applying it to both

spending and revenue, will work. It is a simple little gimmick, but

it helps.

Put everything on the table. One of my clients is an organization

called For Our Grandchildren, and we have been trying to work

with you, in a bipartisan way, to fix Social Security for our grandchildren. We cannot get there because folks keep wanting to take

everything off the table.

I remember the last debate I had in my last race, in which my

opponent said at that time, ‘‘Contrary to Congressman Stenholm,

I will never raise taxes on Social Security, as he did,’’ which was

right—in 1983—‘‘or cut benefits,’’ which I did.

You are not going to fix Social Security easily, in any way. There

are only four things you can do: (1) raise revenue; (2) cut benefits;

(3) borrow the money; and (4) grow the accounts. I happen to have

come to a conclusion that you have to do all four. It is controversial. But again, it is seeing a way to get there. You have to put everything on the table.

14

My final point that I would like to leave, is a little idea for you.

We increase the debt limit from time to time. I remember going

through the $1 trillion limit, and it is always painful. But you have

to do it.

Once you have spent the money, you have to increase the debt

limit. But I have always objected to increasing the debt limit without doing anything to fix the problem that caused us to have to increase the debt limit. Little things like pay-go. Anything that you

can do to help provoke a little bit of a discussion. I have always

been in favor of doing a temporary debt ceiling.

Do it for a month or two, have a discussion in the interim, and

then raise the debt limit. But at least you have had an honest debate, hopefully, of why it has to go up and why we think we have

done something now in the interim that is going to keep it from

going up as fast.

Then beginning to address the long-term problems, we have already had that. That is in my written testimony. But the entitlement problem, the challenge, is real. The baby boom generation is

out there.

I remember first starting talking about the problems of Social Security and talking about 2008 when the baby boomers begin to turn

62. It was so far away, 26 years ago. But 2008? We are already

talking about the next election in 2008.

Unless we find a way to begin dealing with the entitlement challenge—and it is a challenge, and commissions are a dime a dozen—

but I strongly recommend that the 109th Congress, in the last few

days, either get a commission, or the 110th Congress, that would

begin to honestly put everything on the table.

It has to be truly bipartisan and it has to represent a broad

range of ideas. The commission must be given a broad mandate to

examine all aspects of fiscal policy, including entitlements and tax

policy, and the commission should educate the public about the

long-term fiscal challenges and engage the public—as Mr. Bixby

has done, and is doing now, with David Walker, and others—in discussion of the potential problems to make those of you who still depend upon votes a little bit more comfortable with some of the suggestions that come out.

All policy options must be on the table. There should be no preconditions. Because if you have noticed the commissions that work,

there are no pre-conditions. The ones that do not work are those

that put on a pre-condition in saying you can talk about everything

except X. That will never work.

The commission’s recommendations should be given a broad up

or down vote. The Base Closings Commission has worked very well

because there is a vote on this. I would strongly recommend that

you take a look at it, not as a silver bullet, but as you have already

stated, Mr. Chairman, these are difficult questions.

Unless you are going to acknowledge up front that you have a

problem and try to bring the public in, it is going to be very difficult to get to where you need to go.

Thank you, Mr. Chairman.

[The prepared statement of Representative Stenholm appears in

the appendix.]

15

Senator SMITH. Charlie, I guess obviously I would defer to your

many years here, but it seems to me, in my reading of history and

my 10 years here, it seems like Congress only takes on these terribly difficult, politically hot issues when it has no other choice. Obviously I think we all recognize, we are not going to have a choice

much longer. I was just wondering, in your calculation, when will

we no longer have a choice? 2008? 2015?

Representative STENHOLM. I wish I was smart enough to tell you

that, Senator.

Senator SMITH. Well, I really agree with you. Some commissions

are better than others, but eventually we are going to have to have

some structure to deal with these, obviously with the Congress reserving a vote, with some real smart group of people to figure out

how to give us some light when we have no other choice.

Representative STENHOLM. Mr. Chairman, I would make this observation. I was known, and I guess proudly so, as a pretty bipartisan person through my 26 years, and that got me in trouble with

my own party and ultimately started getting me in trouble with

the other side.

But I find that all of the colleagues that I have served with,

when you discuss it privately, admit we have a problem, but it is

our political system that is causing more of the non-opportunity to

solve the problem.

When we have the attacks every 2 years that we have had on

the personal character of the members, it is difficult to sit down

and then to start working on the difficult problems. I do not know

what we are going to do about that.

But I do think that right after this year’s election there is going

to be an opportunity—and it is a small window of opportunity—

that we will have. I know that I can speak for some on my side,

and I can speak for some on your side of the aisle, that there are

a lot of folks who are willing to do it, but we have to find the dynamics to put it together.

That is where there are some great ideas. Senator Voinovich and

Congressman Frank Wolfe have a proposal. Senator Ben Nelson

and Congressman John Tanner have been proposing some things.

So there are some bipartisan suggestions of how to get there in

the over-simplified way that I have suggested today, but it just

takes the dedication of members. Unless you have a Democrat and

a Republican standing up together, you are not going to get there.

Senator SMITH. Exactly right.

Do you have some questions?

Senator BINGAMAN. Let me ask Peter Orszag to comment on any

of the other testimony that he has been hearing here, but particularly, I guess, on this pay-go issue. As I understand Mr. Bixby’s

testimony, you favor pay-go and you think we ought to reinstate

the pay-go rules that used to be in place. Certainly, Charlie Stenholm believes that.

Mr. Edwards’s position is that we should not, we should have

caps on spending, as I understand it.

Mr. EDWARDS. I do not support pay-go with including tax cuts because we are in a different position. In the 1990s, it was fine, but

now we have tax cuts expiring in 2010 and this would tilt the playing field against extension of those tax cuts, which I do not think

16

is a reasonable position, because I think a lot of those tax cuts are

doing very good things for the economy.

Senator BINGAMAN. Let me ask Dr. Orszag to give us his view

on this discussion of pay-go.

Dr. ORSZAG. I think we should apply pay-go to both sides of the

budget. There are lots of things on the spending side that do wonderful things for the economy, including investments in early education and a variety of other things.

I would say, though, that that is the least that we should do, because, of course, pay-go just basically sort of locks in the current

imbalance and avoids making the hole deeper. So, unfortunately,

that is just the first step. We also then need to actually start filling

in the rest of the holes so we get back above ground. But I very

firmly support pay-as-you-go rules on both sides of the budget.

I would say two other things with regard to some of the other

questions that have already come up. First, Senator, with regard

to when the crisis will hit, one can do a whole variety of projections

about spending increases and deficit increases and when a critical

point would be reached.

My concern is that that is a somewhat academic exercise in the

following sense. We are currently in a quite dysfunctional relationship with the rest of the world. We are borrowing 7 percent of our

income. I cannot guarantee you that it will fall apart, but we are

running a fairly significant risk that it will fall apart.

It is a dysfunctional relationship. The thing about dysfunctional

relationships is, they can go on longer than you think and then end

faster than you think—-not that I have ever been in a dysfunctional relationship.

Senator SMITH. And how would it end?

Dr. ORSZAG. The way it would end, most likely, is by our foreign

creditors deciding to reallocate their portfolios away from dollarbased assets. That could cause a very, very significant foreign exchange reaction, upward pressure on domestic interest rates, and

basically you would then be forced to be making decisions about all

these complicated questions in an environment that is fast-moving

and not particularly amenable to sound choices.

I am not saying it will definitely happen, but insurance against

that happening, I think, is a very strong motivation for acting sooner rather than later.

Senator SMITH. Can I ask you, because I am really trying to

learn here, and I respect and value your opinion, in particular, and

all of you as well; but when Charlie Stenholm began his Congressional career, the size of the American economy was roughly $4.6

trillion. In the time he served, our economy is now over $12 trillion.

I do not know where they are going to go with their money if it

is not here, because Europe is not going anywhere. Japan is stuck

in neutral.

I guess I am really asking, how does it come to an end? We are

the only game, it seems, in town at this point, with the rule of law,

political stability, with an educated populace, with sort of a total

mix of things. That is why I asked the question, when do we have

no other choice? Because that seems to me when the stars align to

do the kind of stuff Charlie is talking about.

17

Dr. ORSZAG. When the argument is that we might not be the

ideal thing, but there is no better alternative, that is where I think

we are really starting to run risk, because better alternatives

spring up all the time. This actually brings me back to another

question you had raised about continental Europe.

I think we need to really differentiate—and this is a direct question to where the investment portfolios can be diversified—and just

in terms of economic performance, the Scandinavian countries, the

northern European countries, are performing exceptionally well

with a much different model.

Peter Lindert, who is an economic historian at U.C. Davis, has

a new book out in which he basically shows that the reason that

continental Europe has not done well is not their social insurance

programs or their revenue systems, which by the way put higher

emphasis on relatively efficient revenue sources like a value added

tax, but rather that they have direct market interventions, hiring

and firing restrictions, product market restrictions, and that is

what is to be avoided.

In countries like Denmark, they have very flexible labor markets,

a much different sort of attitude towards both government spending and revenue, and very strong economic performance. So I think

we need to start differentiating the lessons that we learn from Europe. That was the other point I wanted to make about the earlier

testimony.

With regard to a direct answer to your question, I think the most

likely outcome, the most likely scenario in which this reallocation

occurs, is most of those decisions are now being made by official

bodies that are not motivated by relative rates of return in the sort

of story that you were depicting, but rather, basically, central

banks deciding where to hold their assets. They can make decisions

for a whole variety of reasons that are not necessarily all marketbased.

Senator SMITH. I am sorry to interrupt you.

Senator BINGAMAN. No. Let me just try to understand also. My

impression is that there are attractive alternatives out there for a

lot of capital, for people to put capital in.

This year is the first year, I believe, in history where China is

the recipient of more direct foreign investment than the United

States. I think there is a lot of money going elsewhere in the world,

and there is no reason that that will not continue and accelerate

in the future. I do not know if that is accurate or not.

Dr. ORSZAG. I think there are other alternatives that develop

also, but the big story recently over the past 5 years is basically

official entities, foreign governments and foreign central banks purchasing U.S. Government securities. That dynamic is much different. So your point just reinforces the concern, but that dynamic

is a much different thing.

There is a very interesting analysis of the Suez Canal crisis from

the 1950s in which, because we were a creditor to the rest of the

world, we were able to put pressure on other of our allies—in particular, the UK government—in a way that we would not be able

to have done if we were not basically lending them money. We are

putting our Nation in the same position with regard to a whole vaVerDate 11-MAY-2000 16:39 Nov 07, 2007 Jkt 095484 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 38357.000 SFIN1 PsN: SFIN1
18

riety of forces that are not just relative attractiveness of our domestic markets.

Senator Bingaman, I would just say there are other markets that

are attractive also, and especially if we do not tackle our fiscal imbalance and start investing in our workers, even the potential advantages that we do have in terms of private investors may be attenuated.

We saw yesterday a report from the World Economic Forum suggesting that our Nation was becoming much less, they used the

word ‘‘competitive,’’ mostly because of our fiscal imbalance.

Representative STENHOLM. Mr. Bingaman, on the question you

asked, I want to make one point in a little disagreement with Mr.

Edwards regarding the opposition to pay-go for revenue.

I have argued with my Republican friends who have taken that

position in the last 5 or 6 years now, and others who have taken

this position, that if you really believe in that concept, it should be

very easy. You get a tax cut when you cut spending. That has been

the argument about this.

It seems to be that if you really believe it and you really believe

that the tax cuts had to be offset by spending cuts, get the spending cuts and have the tough vote on that. But we know the politics

of that which has made that rather difficult, so we have just ignored that, and in so doing the deficits have increased alarmingly.

I know the Cato Institute has been very good at pointing out how

the spending has gone up considerably in this, but it works. All I

say is, when I find something that works, then I like to try it

again. It is not working when you have pay-go only for spending.

Senator BINGAMAN. Let me just throw this idea out and see if

this is right. It seems to me we have made it more difficult, as a

practical matter, to adopt pay-go rules again because we have built

into the law, both on the spending side and on the tax side, these

multi-year assumptions and requirements, which we know are as

phony as a 3-dollar bill.

One example is on the spending side. If you look at the projected

expenditures in Medicare, the assumption built into the budget is

that there is going to be a 5-percent cut, or 4.9-percent cut, or

something in physician payments on the 1st of January.

I do not think that is going to happen. I do not think anybody

in Congress thinks it is going to happen over the next 10 years or

the next 5 years. I think we have built in something like a 40-percent cut in Medicare reimbursement as part of the baseline assumption. Now, that is a phony assumption. But if you reinstate

pay-go, you would have to compensate in order to change that.

The same thing on the tax side. I mean, we write all these tax

bills and they are all ready to expire because we do them a year

at a time, because we know that it is irresponsible to do them longterm. So we do them a year at a time.

Like on the estate tax, you could get 95 votes here in the Senate

for the idea of taking the $3.5 million exemption in the estate tax,

which is going to occur, under current law, in 2009, and just keeping it there or increasing it by the cost of revenue, or something.

But to do that, under pay-go, it would cost you a lot of money

because the assumption built into the law is that, in 2010, it is

19

going back to $650,000, or whatever the figure was, which is a totally ridiculous assumption. It is not going back to that.

Congress will not let it go back to that. But we have made it difficult, as a practical matter, for pay-go to work because of these

phony assumptions we built in on the spending side and on the tax

side.

I do not know. Peter, am I off base on that?

Dr. ORSZAG. Well, a couple things. One, of course pay-as-you-go

rules could always be overridden. They just set a norm. So if you

really had 95 votes, it would happen anyway.

But if this were the main objection to pay-as-you-go rules, you

could define the baseline used for the pay-as-you-go rules in a

slightly different way. I am not suggesting that, but if that were

the only objection, one could at least do that so that you avoid making it worse relative to whatever you think the reasonable projection is.

Senator BINGAMAN. Right.

Dr. ORSZAG. That alone would be a significant step forward.

Senator BINGAMAN. Right. That is a good suggestion.

Yes, go ahead.

Mr. EDWARDS. Two quick points. One is the asymmetry. The tax

cuts have only been enacted temporarily. Spending increases, such

as the Medicare Modernization bill of a couple of years ago, of

course, thrust these gigantic unfunded obligations many decades

down the road into permanent law. So that is the asymmetry, it

seems to me, on that.

To go back to the Chairman’s question about how long can we

go down the path we are going, unfortunately or fortunately, however you look at it, I think we can go a long time before there is

any kind of big financial crash. The debt to GDP is 37 percent of

GDP. A number of countries, Italy and Japan, have had debt-toGDP ratios of over 100 percent in the past. That is not healthy, of

course.

The United States is a much bigger economy, but the United

States is becoming, slowly but surely, a relatively smaller and

smaller economy in the world. The whole global pool of equities and

debt is absolutely massive and growing constantly, tens of trillions

of dollars.

The U.S. Government is borrowing out of a massive pool. So the

problem with that is, of course, that Congress can go on being irresponsible as long as they want.

In the 1980s and 1990s, everyone, of course, up here on Capitol

Hill and everywhere else was much more scared of large budget

deficits, and that is why we had Ross Perot running for president,

and folks like Mr. Stenholm proposing new kinds of budget rules,

and the Gramm-Rudman-Hollings, and all those sorts of things.

So the problem now is, people are not scared. Members of Congress are not scared of the deficit any more because it does not

seem to impact today’s economic growth.

The problem with these rising deficits and debt is that it thrusts

costs onto future taxpayers, and that is the cost of running these

deficits now. It pushes costs onto the future, which I think we all

think is unfair and immoral.

20

Senator SMITH. A question I have for all of you, and specifically

to you, Mr. Edwards. In your book, ‘‘Downsizing the Federal Government,’’ you talked about duplicative, wasteful, and fraudulent

programs that ought to be eliminated.

I wonder if, for the record, you could name some of those. I will

tell you if they are possible to cut.

Mr. EDWARDS. The interesting thing about the Federal budget,

the $2.7 trillion in outlays, is a lot of folks think that the main

thing the Federal Government does is sort of aid the poor and the

less fortunate.

But if you look at the distribution of Federal spending, there is

lots of corporate welfare. High-income people get Social Security,

Medicare, and all kinds of other benefits. I think one way to move

in a bipartisan fashion to cut and trim, is to cut benefits for higherincome folks.

I think putting price indexing for Social Security benefits, even

in a progressive fashion, is a good idea. Congress should vote on

that tomorrow. I think it could be a bipartisan agreement.

Cutting future Social Security benefits for middle- and higherincome people, phased in over decades, is very fair, I think. It gives

people time to plan for the future, to save more.

Senator SMITH. Would that be better in terms of economic growth

than raising their taxes now to keep them at the same level of benefit? In other words, they were promised a smaller benefit in the

future but they still have the insurance policy. If they fall on hard

times, they have the full benefit.

Mr. EDWARDS. Right. And if you look at Britain, what they have

done is they have sort of gone to a two-tier system, where the first

tier is the government-guaranteed benefit, but it is a flat benefit,

which I think is fine. But on top of that, people have private accounts where they save.

So I think that sort of two-tier system where you have a flat, progressive, if you want, benefit is fine. But on top of that, give people

the tax vehicle so that they can save for their own retirement and

give them warning down the line. I think that would be very fair.

Senator SMITH. So you would make the benefit structures more

progressive, reverse progressivity.

Mr. EDWARDS. Cut benefits, subsidies, corporate welfare, farm

subsidies, and all the rest.

Senator SMITH. So those are the ones you are speaking of.

Mr. EDWARDS. Yes. I mean, there have been proposals up here,

for example, to trim the amount of subsidies that some of the millionaire farmers can get. That is the type of progressive, populist

spending cut I think that should gain wider support on the Hill.

Senator SMITH. I voted for that, by the way.

Representative STENHOLM. I feel compelled to defend the farmers. [Laughter.]

Senator SMITH. Well, there are not many farmers that get crop

subsidies in Oregon currently. But one of the things that could be

most helpful to me, and I suppose Senator Bingaman, is what do

you see in other countries with similar structural deficit problems

that we have? What is working? You have identified a couple of

Britain’s ideas.

21

Representative STENHOLM. Let me add, just a moment, to that.

I do not disagree at all with Mr. Edwards on that, and, as he mentioned a moment ago, putting spending caps up. In fact, one time

we recommended spending caps on mandatory spending.

Now, you cannot do that just with a simple budget. You have to

do the policy. You have to have some discussion and you have to

set meaningful caps. When you set discretionary spending below

what is doable, then you do not get there, but if you have a good

debate as to what is doable, then you can come out with a consensus that that should be the steps. We did a pretty good job at

staying at that. When you look at discretionary spending in the

budget today, you guys have not done badly.

Senator SMITH. No.

Representative STENHOLM. Now, when you start asking, what do

you start cutting, do not exempt anything. I have always said, and

I have served on the Agriculture Committee, start with agriculture.

But do not do just agriculture. Then have the honest debate.

Which we do. Every 5, 6 years we have a big omnibus farm bill.

We have these discussions. Congress decides whether or not they

are worthwhile expenditures or not, and then we go on. But so

much of government does not have any oversight.

Sunset legislation—there should be no government program—

none—that does not have, at least every 10 years, oversight by the

appropriate committees to determine whether or not it should continue; if it should, should it be changed, or is it doing perfectly.

Mr. BIXBY. I would say on that also, we find support for that in

the events we do around the country, on the Fiscal Wake-Up Tour.

You have all seen David Walker’s presentations, and The Concord

Coalition’s are pretty similar; so are Belle Sawhill’s from Brookings, and Stuart Butler’s from Heritage.

We are trying to get people focused on these big, long-term issues

such as health care costs. What do we do about Social Security?

How do we keep the debt from rising? It always comes back in the

Q&A to waste, fraud, and abuse.

People will say, no, we understand what you are saying. But they

do not trust. One of the problems is, they say, well, I would not

mind paying higher taxes, but I just heard about this bridge to nowhere. Why should my taxes go up?

You can get into the proportions of these things, that a lot of the

waste, fraud, and abuse that makes the headlines, it should not

happen, but it is pretty small when you are talking about the

things that are going to drive fiscal policy over a cliff. But consider

the outrage factor—they like Medicare, they like Social Security,

and they do not want to pay higher taxes.

They do not like hearing about some wasteful project. Urban people do not want to hear about farm subsidies and rural people do

not want to hear about Amtrak subsidies. So you get into this

waste, fraud, and abuse thing.

But I think that in order to deal with some of these really big

issues that we would like to get into and that we know we need

to get into, some very strong signal would help, from Congress and

the White House, about cutting waste, fraud, and abuse.

I say that as one who has sort of never spent a lot of time talking

about waste, fraud, and abuse in the government because to me it

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seems like the big savings are elsewhere and that is not really

what is driving the problem.

But when you look at public attitudes, when people have a bee

in their bonnet, something that is of real concern to them, that at

least has to be addressed in some way before you can get them to

look seriously at some of the other things. So, more than the budgetary savings, the signal it sends is important.

Dr. ORSZAG. Senator, I would strongly agree with what Mr.

Bixby just said. I think, frankly, progressives, or people who believe that government can play an effective role in the economy,

need to be paying more attention to the symbolism of efficiency

within government.

I mean, Cato and other places are always putting out ideas about

how to make the government more efficient. In a sense, actually,

progressives should be the one doing that, because if you believe

government can be effective, you need to demonstrate to people

that it is not waste, fraud, and abuse. I also agree with Mr. Bixby

that the reality is that it does not seem like that is the major contributor to the problem here.

Let me put on the table three things. One, we released a paper

by McKinsey & Company about setting productivity goals or efficiency goals for the Federal Government, drawing on experiences

abroad, including from the United Kingdom, that suggest that

there may well be some benefits there.

A third of Federal civilian employment is in the Postal Service.

Other countries have moved to introduce a lot more competition

into their postal systems than we have, and I think that is an area

we could do even more on.

Then, finally, the Federal Government owns several hundred billion dollars of buildings all across the country, much of which is a

legacy of old missions or outdated agencies and could be reexamined. So there is sort of an asset portfolio management task that

we could do a lot better at.

Senator SMITH. I am with you 100 percent on all that.

Representative STENHOLM. Mr. Chairman?

Senator SMITH. Yes, Charlie?

Representative STENHOLM. One other suggestion. When you start

talking about waste, fraud, and abuse, in the House Agriculture

Committee, from time to time, and I know it is true on the Senate

side, there are certain suggestions that there is waste, fraud, and

abuse in certain areas, and we did a pretty good job with some

oversight, particularly in the area of crop insurance.

Then there is a little technology thing there that is commonly

called data mining. It is amazing what you can do, finding out if

there are any anomalies or if there is anything going wrong, when

you take the data that you have available and mine it and see.

Now the Department of Agriculture uses as their poster child the

data mining project that was done on crop insurance, and we are

hoping now that this will be expanded into some other areas, not

the least of which are Medicare and Medicaid.

Now, when you look at a chart and you see the cost per enrollee

State by State, there is a question that just pops out into my mind

as to why the State of Iowa, for example, gets $3,100 per enrollee

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and the State of Texas gets $6,300, and other States involved in

this.

I am not saying that anything is wrong, but wouldn’t we like to

know, if we are going to put a cap on mandatory spending, what

Iowa was doing right, Texas is doing wrong, or New York, or California? Would you not, as the policy makers, like to know that?

There is a good suggestion running around now that by applying

the principle of data mining to this concept, that you can find out.

We know it has worked in the VA beautifully right now in saving

money and providing better service. So these are some of the tools

that can be used.

A final point you asked. When you say, when is this all going to

end? I am not a pessimist. I am an optimist. But I also spent my

whole life on the farm. That is my life. I can remember, when you

say, yes, the Gross Domestic Product was $4 trillion in 1978 when

I was elected, and it is now $12 trillion, and I can remember some

of my fellow farmers going to a net worth of $100,000 to several

million, and then it collapses.

Why does it collapse? Because things change. The economy

changes, the demand. The most concerning deficit, I think, to most

of us today is the current accounts deficit. That is the one that is

way out of kilter.

You could look at the fiscal deficit as a percent of GDP and make

the argument that that is not a major problem, but then you look

at the current accounts deficit, or as I like to put it, how long can

America keep exporting $700, $800 billion of our jobs every year,

and the money keeps going out, and foreigners keep subsidizing the

interest rates on what we are borrowing back.

Senator SMITH. I do not know either, Charlie. It is an interesting

thing. In my other life, I am a frozen vegetable processor. When

you were serving in Congress and I was picking peas, I did not sell

anything to China. But today, they come in and they buy 10, 20

million pounds of frozen vegetables.

What does that tell me? They tell me they have refrigerators and

their middle class is growing. All of a sudden they are buying

American food and American products. I do not know when it reverses.

I honestly do not know. But I do know that, as India, China, and

the world gets flatter and they grow middle classes, America is an

enormously productive Nation. I also know that half the current accounts deficit is just due to foreign energy, which is pretty pathetic.

So if you take energy out of it, we can produce more, we can conserve more. We are going to be shipping more, too. Not just hightech, but low-tech, like corn. I have just seen it in my lifetime. So

I do not know whether it is the worst deficit we have had, or when

it will reverse course. It has not yet, because everybody keeps enjoying Wal-Mart.

Mr. BIXBY. Can I make a point on the crisis thing, just before you

wrap up? Nobody here can say when a crisis will hit, but we know

we have a terrible vulnerability. I mean, there is a lot of risk there.

You can look ahead 20 or 30 years, to 2030, or something, look at

CBO or GAO, and you see a scenario that cannot happen. I mean,

debt is at 200 percent of GDP and the deficit is about 20 percent

of GDP. It is as big as the entire government is today.

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So you can give at least a range and say, if you plan to be alive

in 2030, or know somebody who will be, we cannot get there on the

course that we are on. That is the vulnerability. It is really an unprecedented challenge. We have never had this combination of demographic factors and entitlement programs, so it is not the usual

deficit challenge.

I mean, I guess I can say, if we wait for a crisis, we are in big

trouble, because at the time the crisis hits it will be too late to do

anything rational about it. That is really the challenge for all of us,

for you particularly as elected officials, and for us who talk about

it, and for the American public. It is something we need to go

through together.

Senator SMITH. Yes.

Senator BINGAMAN. Mr. Chairman, this was a very useful hearing. I think if we had additional time before the end of the Congress and you have an interest, we ought to try to do one on the

current account deficit and try to identify what the problems are

there that are subject to some kind of resolution.

Senator SMITH. At your recommendation, we will get the hearing

organized.

Senator BINGAMAN. That would be great.

Senator SMITH. Well, gentlemen, this has been very helpful to

me. I hope it has been for you. I want to say for the record of the

U.S. Senate, we congratulate Congressman Stenholm for doubling

the size of the American economy during his Congressional tour.

[Laughter.] Good work.

Representative STENHOLM. I am glad you mentioned that, not

the deficit.

Senator SMITH. Yes. [Laughter.] But anyway, there are a lot of

people of good will whom I serve with on both sides of the aisle

who understand this and who frankly struggle with the political realities of how to get from here to there. It is hard. It is really, really hard.

Election seasons, as important as they are, get pretty darned

silly, with the character assassination. Then you have to go cut a

deal with a guy who just took your head off. It is just really, really

difficult.

But the whole point of my asking the question, when do we hit

the wall—because I am a student of history; I cannot read enough

of it—tells me that Congress ultimately acts on hard political

things when it has no other choice. That is too darned bad. I think

there are some people here—I know Senator Bingaman is one of

them—who would like to act sooner rather than later. We will keep

working until we get there.

This is a great country that has produced a pretty great civilization, and each of you has added immeasurably to our understanding, to the Senate record, and we are thankful to you for your

time and your expertise.

With that, we are adjourned.

[Whereupon, at 3:47 p.m., the hearing was concluded.]

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