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S. Hrg. 115–22 

THE EFFECT OF BORROWING ON 

FEDERAL SPENDING 

HEARING 

BEFORE THE

SUBCOMMITTEE ON FEDERAL SPENDING 

OVERSIGHT AND EMERGENCY MANAGEMENT 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

MARCH 29, 2017 

Available via http://www.fdsys.gov 

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs 

( 
(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

RON JOHNSON, Wisconsin, Chairman 

JOHN MCCAIN, Arizona 

ROB PORTMAN, Ohio 

RAND PAUL, Kentucky 

JAMES LANKFORD, Oklahoma 

MICHAEL B. ENZI, Wyoming 

JOHN HOEVEN, North Dakota 

STEVE DAINES, Montana 

CLAIRE MCCASKILL, Missouri 

THOMAS R. CARPER, Delaware 

JON TESTER, Montana 

HEIDI HEITKAMP, North Dakota 

GARY C. PETERS, Michigan 

MAGGIE HASSAN, New Hampshire 

KAMALA D. HARRIS, California 

CHRISTOPHER R. HIXON, Staff Director 

MARGARET E. DAUM, Minority Staff Director 

LAURA W. KILBRIDE, Chief Clerk 

BONNI DINERSTEIN, Hearing Clerk 

SUBCOMMITTEE ON FEDERAL SPENDING OVERSIGHT AND EMERGENCY 

MANAGEMENT 

RAND PAUL, Kentucky, Chairman 

JAMES LANKFORD, Oklahoma 

MICHAEL B. ENZI, Wyoming 

JOHN HOEVEN, Montana 

GARY C. PETERS, Michigan 

MAGGIE HASSAN, New Hampshire 

KAMALA D. HARRIS, California 

BRANDON BOOKER, Staff Director 

ZACHARY SCHRAM, Minority Staff Director 

KATE KIELCESKI, Chief Clerk 
(III) 

C O N T E N T S 

Opening statement: Page 

Senator Paul ..................................................................................................... 1 

Senator Peters .................................................................................................. 3 

Senator Hassan ................................................................................................. 18 

Senator Lankford .............................................................................................. 21 

Prepared statement: 

Senator Paul ..................................................................................................... 29 

Senator Peters .................................................................................................. 33 

Senator Daines ................................................................................................. 37 

WITNESSES 

WEDNESDAY, MARCH 29, 2017 

Hon. David M. Walker, Former Comptroller General of the United States, 

U.S. Accountability Office .................................................................................... 5 

Veronique de Rugy, Ph.D., Senior Research Fellow, The Mercatus Center, 

George Mason University .................................................................................... 7 

Mark M. Zandi, Ph.D., Chief Economist, Moody’s Analytics ............................... 9 

ALPHABETICAL LIST OF WITNESSES

de Rugy, Veronique Ph.D.: 

Testimony .......................................................................................................... 7 

Prepared statement .......................................................................................... 47 

Walker, Hon. David M. Ph.D.: 

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

Prepared statement with attachments ........................................................... 38 

Zandi, Mark M. Ph.D.: 

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

Prepared statement .......................................................................................... 56 

APPENDIX 

Chart submitted by Senator Paul .......................................................................... 68 

(1) 

1The prepared statement of Senator Paul appears in the Appendix on page 31. 

THE EFFECT OF BORROWING ON FEDERAL 

SPENDING 

WEDNESDAY, MARCH 29, 2017 

U.S. SENATE, SUBCOMMITTEE ON FEDERAL SPENDING, OVERSIGHT AND EMERGENCY MANAGEMENT, OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:33 p.m., in room 

342, Dirksen Senate Office Building, Hon. Rand Paul, Chairman of 

the Subcommittee, presiding. 

Present: Senators Paul, Lankford, Peters, and Hassan. 

OPENING STATEMENT OF SENATOR PAUL1

Senator PAUL. I call this hearing of the Federal Spending Oversight Subcommittee to order. 

Two weeks ago today, the Federal Government reached its credit 

limit. As a Nation, we owe almost $20 trillion, about $60,000 for 

each American alive now, including children. Yet we are told that 

$20 trillion is not that much, and that it may well grow, and that 

sometime soon we are going to have to ask again to raise the debt 

ceiling. 

This is what we want to explore here today: what is our debt situation, how does it impact our budget, and how should we respond? 

Some argue that raising the debt should just be automatic; we 

really should not debate about it; that any debate or amendments 

would suggest the possibility of default, and that that would be 

dangerous. 

I do not want to default, but I also think it is wrong for Congress 

to approve more borrowing without necessary reforms and without 

making it a point to try to find a chance to fix some of the situation 

we have. 

I think it is a mistake also, though, to scare the markets and to 

talk of default and say default will occur if we do not have this vote 

immediately. 

If you look at our monthly average cash-flow, the Federal Government is able to actually pay its interest on the debt, salaries for 

our troops, Social Security, and really much more, even if we did 

not raise the debt ceiling. In fact, on an annualized basis, we can 

fund 86 percent of government without net borrowing. So default 
2 

1The chart referenced by Senator Paul appears in the Appendix on page 70. 

is not necessarily an unavoidable occurrence if the debt limit is not 

raised. 

Now, some scholars would argue that we should not worry; we 

do not really need to ever pay back our debt. Keynes said not to 

worry about the long run because in the long run, we will all be 

dead. 

Others have argued, the debt can be stabilized or simply inflated 

away. I do not share these views, but even for those who do, the 

one thing we cannot outlive or inflate away is the interest on our 

debt. This year alone, we will pay $295 billion in interest. This is 

more than we spend this year on seven Cabinet Departments, the 

White House, Congress, and the courts combined. More concerning 

is how ongoing deficits mean interest will consume more and more 

of the budget. 

I want to draw attention to this chart1 we have over here on the 

screen. It shows our share of Federal spending that goes to interest 

on the debt, discretionary spending and mandatory spending over 

the last 30 years. 

What we see is shocking. Today, the American worker sees 

roughly seven cents of their tax dollar going to interest and 30 

cents to discretionary spending. But by the time a recent graduate 

today is near retirement, interest and discretionary spending will 

be taking an equal share of the tax dollar, roughly 19 cents. So 

under the current course, interest will progressively squeeze out 

discretionary spending. So what do we get for interest? Really 

nothing, not one hour of work and not one sticky note. 

Now, we always hear that spending today is an investment and 

that cutting anything would be too devastating. We hear this really 

from both sides, both the right and the left. This is not a Republican/Democrat problem. This is a both-parties problem. 

We hear right and left. We are always told, ‘‘You know what? We 

will be fiscally responsible tomorrow,’’ but tomorrow never comes. 

We simply cannot continue to rack up the debt at the rate we are. 

So just two months ago, I proposed a budget that would balance 

in five years, without touching Social Security and without an actual spending cut. Simply by freezing spending over five years, we 

would balance the budget. Yet only 14 Senators had the courage to 

vote for such a budget. 

So this brings me to my last point. Doing the right thing is hard 

and often not politically expedient. Congress rarely makes simple, 

unpleasant choices, which means we end up facing difficult and unavoidable catastrophic problems. We only act when circumstances 

force us to. 

This is why the debt limit is important. It is our internal credit 

limit, not that of our creditors. It is an opportunity to reassess our 

spending and ask, ‘‘How did we get here, and how do we get out 

of this mess?’’ Answering those questions as part of past debt limit 

debates has spawned most, if not all, major Federal process reforms. The most notable example is the 1974 Budget Act, but 

Gramm-Rudman-Hollings, pay as you go, all of the sequester, all 

came out of the debt limit debates. So when people say, ‘‘Oh, no, 

no. We should just hurry up, hurry up and raise the debt limit 
3 

1The prepared statement of Senator Peters appears in the Appendix on page 35. 

without any reforms,’’ it is exactly wrong. It is historically wrong, 

and every time we have ever gotten any process reform to try to 

fix it, it has been with a debt limit debate. So I think we should 

not shy away from having a real debate when we raise the debt 

limit. 

The Budget Act of 1974 was supposed to be an improvement and 

fix problems, but big spenders have over 40 years to figure it out, 

and they largely have evaded it now. 

My hope is that, once again, as we debate raising the debt ceiling, though, that we can reform spending and have significant reforms that will put us on the right course. 

With that, I would like recognize Ranking Member Peters for his 

opening statement, but before I do that, I would just want to note 

that this is Senator Peter’s first hearing as Ranking Member of 

this Subcommittee. I would like to welcome him and I look forward 

to working with you. Senator Peters. 

OPENING STATEMENT OF SENATOR PETERS1

Senator PETERS. Well, I thank you, Chairman Paul. Thank you 

for the welcome, and it is a pleasure to serve with you, and I look 

forward to having many productive hearings in the months and 

years ahead and for bringing us here today to discuss, certainly, 

this very critical topic of the national debt and the pressing matter 

of the debt ceiling. 

I would also like to give a sincere thank-you to our distinguished 

panel of guests. Your perspectives on both the national debt and 

the debt ceiling is absolutely critical to us as policymakers. 

And today, we will consider what I think are two significant, distinct, and most importantly, solvable problems. 

Perhaps I am an optimist, but I am finding sustainable solutions 

for our Nation’s debt as well as finding a path forward on the debt 

ceiling are both problems that can and should be solved in a responsible, bipartisan manner. 

To me, working in a bipartisan manner on these issues is the 

only path forward. It is what I believe we were sent here to do: to 

find the solutions that put America on a path toward a sustainable 

fiscal future. 

As 2017 progresses, we are going to hear many School House 

Rock explanations of the debt limit, the statutory and arbitrary 

constraint on the amount of money the U.S. Treasury can borrow. 

Much of the conversation will be focused on questions like: When 

is the right time to talk about solutions for the long-term debt and 

deficits? We should be constantly working toward fiscal responsibility. This is not, and should not be, a seasonal debate, and I am 

sure the Chairman certainly shares that sentiment. 

But just as we should be constantly engaged in discussions about 

how to solve our long-term issues, it is wholly irresponsible to turn 

this debate into one that threatens the full faith and credit of the 

United States. 

The global economy relies on the fact that at the end of the day, 

no matter the chaos in the rest of the world, the U.S. Government 

will fulfill its obligations and pay its bills. 
4 

On March 16, 2017, under the Bipartisan Budget Act of 2015, 

the previously suspended debt ceiling was reinstated at just over 

$18 trillion. Immediately on March 16, Treasury Secretary 

Mnuchin wrote to Congress to inform us that the United States 

Treasury was taking extraordinary measures to avoid a breach in 

the debt ceiling. 

According to analysis of the debt limit conducted by both the 

Congressional Budget Office (CBO) and the Bipartisan Policy Center, the Treasury Department’s extraordinary measures may be 

able to extend the date to which the U.S. Government can fulfill 

its financial obligations into the fall of 2017, perhaps October or 

November. 

However, Congress can and should immediately begin discussions to address our obligations. After having been through numerous debates on the debt limit since 2011, it would be the height of 

irresponsibility to let this debate slip into the midnight hour. 

I remind my colleagues, while a breach of the debt ceiling would 

have unprecedented and potentially catastrophic, impact on the 

global economy, brinksmanship alone has the potential to hurt everyday working families. 

In 2011, as Congress struggled to reach an agreement at the last 

minute, the U.S. debt was downgraded, consumer confidence fell 

sharply, and the stock market and credit markets took months to 

fully stabilize. 

To some, though, the debate in Washington may seem abstract, 

but if we yet again engage in brinksmanship, we are jeopardizing 

the chance for a working-class family to purchase their first home 

or take out a loan to buy a much needed automobile. We are risking thousands of Americans’ retirement savings that they have 

built up over a lifetime of hard work. This is simply not acceptable. 

If there is to be renegotiation on the debt ceiling, I ask my colleagues, let it happen now. We cannot afford to let our differences 

risk the financial future of everyday Americans. Failure to act is 

also not an option when it comes to long-term debt and deficit reduction. 

Solving this challenge will take bipartisan cooperation, and it 

will require a comprehensive approach that addresses all three fundamental factors of deficit reduction: cutting spending, reforming 

taxes, and investing in economic growth. 

Budget plans that shift the burden onto one group at the expense 

of another or that ignore any of these three basic factors will not 

solve the problem. We need to support economic growth. We need 

to find real solutions to curbing long-term health care costs. We 

need to reform our Tax Code into one that promotes job creation 

and investment here at home in America. We need to make government more efficient, and we need to find responsible ways to cut 

spending. 

I hope today serves as an open forum on these issues, both our 

long-term debt as well as the debt limit, and I know that each of 

our witnesses are very well informed and highly respected on these 

topics. 

So I hope you use this forum to give us a very honest assessment 

of these challenges. We may not agree on some of the proposals 

that we hear, but it is only by engaging in bipartisan, collaborative 
5 

1The prepared statement of Mr. Walker appears in the Appendix on page 40. 

fashion that we are going to find the solutions that America deserves and the American people are expecting us to come up with. 

Thank you. 

Senator PAUL. Thank you, Senator Peters. 

With that, I will begin by introducing our first witness, the Honorable David M. Walker. Mr. Walker is the former Comptroller 

General of the United States and head of the U.S. Government Accountability Office (GAO). He also served as president and Chief 

Executive Officer (CEO) of the Peter G. Peterson Foundation and 

founded the Comeback America initiative. Mr. Walker has written 

three books and is also the subject of the documentary ‘‘I.O.U.S.A.,’’ 

about government debt, the topic of today’s hearing. 

So we are happy to have you here, and we would love to hear 

your thoughts on the issue. Mr. Walker. 

TESTIMONY OF THE HONORABLE DAVID M. WALKER,1

FORMER COMPTROLLER GENERAL OF THE UNITED STATES, 

UNITED STATES GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. WALKER. Thank you. Chairman Paul, Ranking Member Peters, Senator Hassan, thank you very much for the opportunity to 

testify today. 

The title for this hearing is ‘‘The Effect of Borrowing on Federal 

Spending.’’ The shorter answer is there are several implications of 

our current Federal spending and borrowing practices. They include, first, additional debt results and higher interest costs that 

can serve to crowd out other Federal spending, especially discretionary spending, and/or increase pressure for tax increases. 

The CBO has projected that interest cost will be the fastest growing expense in the Federal budget on a percentage basis over the 

next 10 years, and what do we get for interest? As the Chairman 

said, nothing. 

Excessive levels of debt as a percentage of the economy can serve 

to reduce economic growth and job opportunities. It can also cause 

a crisis of confidence in the U.S. dollar and much higher interest 

rates if the market ever decides that the Federal Government has 

lost control of its finances and is not willing to regain control of 

them. 

Additional debt serves to mortgage the future of our children, 

grandchildren, and future generations at a time when they will 

face increasing competition in a much more interconnected and 

competitive global marketplace. 

From a broader perspective, the United States has strayed from 

many of the key principles and values that it was founded on and 

which made us great. Since 1913, the Federal Government has 

grown from two percent of the Nation’s economy to about 21 percent and increasing. 

In addition, in 1913, the Congress controlled 97 percent of all 

Federal spending annually. The only thing they did not control was 

interest. Today, in fiscal 2016, 69 percent of Federal spending, including interest, was deemed to be mandatory spending. 

Shockingly, the 31 percent of Federal spending that was controlled 

included all of the express and enumerated responsibilities outlined 
6 

for the Federal Government under the Constitution and all investments in our future. 

Discretionary spending is coming under increasing pressure since 

mandatory spending is increasing at rates faster than the economy 

due to known demographic trends and rising health care costs. The 

bottom line is that Congress has lost control of the budget. Our 

debt burdens have now escalated to imprudent levels, and our collective future is now at risk. 

The Federal Government is still adding debt faster than the 

growth rate of the economy, and interest rates have started to rise. 

The CBO now estimates that interest expense will be the fastest 

growing category of spending, as I mentioned before, all the more 

reason why the Treasury Department should consider issuing 50- 

plus-year bonds as the GAO and I recommended over 10 years ago. 

Since the beginning of our Republic, there have only been two 

times in our history that Federal public debt as a percentage of the 

economy has exceeded 40 percent—at the end of World War II and 

the immediate aftermath and today. According to the GAO, the 

percentage of debt held by the public is on a path to rise to levels 

far in excess of the Nation’s high, absent a major correction in 

course. 

Defusing our Nation’s debt bomb will require an unprecedented 

public education and engagement effort as a prelude to major budget, tax, Social Security, Medicare/Medicare, health care, defense, 

government organization operations, and yes, even political reforms. 

The primary mechanism that Congress has used to control the 

level of debt in the past is the debt ceiling limit. However, it has 

not proved to be effective in limiting the growth of Federal debt, 

forcing a reconsideration of the proper role of the Federal Government, including the need to reform mandatory spending programs 

and tax expenditures. 

In addition, the Federal debt, subject to the debt ceiling, will 

soon pass $20 trillion, which his 105 percent of gross domestic 

product (GDP) and 3.5 times higher than it was in the year 2000. 

In my view, given the recent history, the debt ceiling limit needs 

to be replaced ultimately with a stronger statutory set of budget 

controls and a constitutional amendment that would limit public 

debt to GDP with specific targets and automatic enforcement mechanisms if the targets are not met. 

As you Senators may be aware, there is currently an effort to 

achieve a State-led convention under Article V for a fiscal responsibility provision. My view is debt to GDP is vastly preferable to a 

balanced budget for a variety of reasons. Twenty-nine States have 

now ratified that out of the 34 that are required. 

Speaking of the States, ultimately when the Federal Government 

restructures, bad news flows downhill. A typical State relies upon 

the Federal Government for about a third of its finances, as Senator Hassan knows having been a Governor, and we have also 

started to look at the financial condition and relative competitive 

posture of the States. 

I provide in Exhibit C, the Members of this Subcommittee, their 

States’ rank from a high of number two in relative financial posi-
7 

1The prepared statement of Ms. de Rugy appears in the Appendix on page 49. 

tion to a low of number 49. It is important that the States get their 

act together too. 

In summary, we live in a great nation, but we have strayed from 

the principles and values that made us great. We are currently on 

an imprudent and unsustainable fiscal path. We need to be honest 

with ourselves and with the American people. Tough choices are required on the spending and revenue side of the budget in order to 

restore fiscal responsibility, enhance growth, and create a better future. The sooner we start making those choices the better, so the 

miracle of compounding can start working for us rather than 

against us as it is now. 

I would be happy to answer questions after my colleagues have 

an opportunity to testify. Thank you again. 

Senator PAUL. Thank you. 

Our next witness is Veronique de Rugy, who is a Senior Research 

Fellow at Mercatus Center at George Mason University and a nationally syndicated columnist. In 2015, she was named the Politico 

Magazine’s Guide to the Top 50 thinkers, doers, and visionaries 

transforming American politics. That is just one of her many accomplishments. 

Dr. de Rugy has written extensively on the issues before this 

Committee today, including the dangers of our debt and the drivers 

of it. She has also put forward some ideas on how to get our budget 

in order, one of which is dear to me, the rooting out and eliminating waste. 

Dr. de Rugy, thank you for being here, and we look forward to 

your testimony. 

TESTIMONY OF VERONIQUE DE RUGY, PH.D.,1 SENIOR RESEARCH FELLOW, THE MERCATUS CENTER, GEORGE MASON 

UNIVERSITY 

Ms. DE RUGY. Thank you, Senator. Chairman Paul, Ranking 

Member Peters, and Members of the Subcommittee, thank you for 

the opportunity to testify before you today. 

I would like to make three points. First, since the debt ceiling 

showdowns of 2011 and 2013, we have actually come a long way 

in understanding what options are available to us when a debt ceiling crisis occurs. 

Second, we still need to recognize that the fights over the debt 

ceiling are only a symptom of a more problematic disease—government overspending. The Federal Government spends too much 

money, which drives the need to increase its borrowing authority 

so much and so regularly. 

Third, the State of affairs is unsustainable. We must address the 

explosion and mandatory spending and, in particular, in entitlement spending. Thankfully, there are a number of institutional reforms and entitlement reforms that can be implemented to check 

the spending that drives the growth in our debt, and a debt ceiling 

debate is a good time to demand these changes. 

So let me start. First, during the 2011 debt ceiling debate, my 

colleague Jason Fichtner and I wrote a paper that explained that 

when the government reaches the debt ceiling and the Treasury 
8 

can no longer issue Federal debt, it would still have a way to stage 

off a regrettable default while giving time to Congress to reach an 

agreement about implementing some reforms that would get us on 

a more sustainable fiscal path. At the time, we explained that the 

Treasury Department had several financial management options to 

continue paying the government’s obligation, including prioritizing 

the debt, liquidating some assets to pay government bills, and 

using the Social Security trust fund to continue paying Social Security benefits. 

The previous administration, however, initially rejected these options, but now there are actually recognized acceptable procedures 

by Treasury, the Congressional Budget Office, and even the Federal Reserve of New York. 

Now, I would like to note that we never advocated for any particular measures, and we often lamented that this path had to be 

pursued because they have a cost. However, we also noted that it 

was much more responsible than defaulting on our debt or raising 

the debt ceiling without making any changes to the State of our finances. 

While there are several instances where Congress has used the 

debt ceiling as an opportunity, as you have said, Senator, to implement other reforms, for the most part, the debt ceiling was raised 

without any attempt to control spending, and the result has been 

a Federal debt that has ballooned from less than $5 trillion in 1993 

to almost $20 trillion today and growing. 

Deficits are also going up. Over the coming decades, the deficit 

will double to almost five percent of GDP, and CBO predicts that 

cumulative deficits in the next 10 years will be a total of $10 trillion. 

Academic and international organizations have warned us 

against the negative consequences of not getting our long-term debt 

under control. Indeed, the consequences would be low economic 

growth, higher taxes, lower standard of living which would hurt 

the neediest of Americans, and the real threat of a debt crisis. 

Real institutional reforms as opposed to a one-time cut would 

change the trajectory of fiscal policy and put the United States on 

a more sustainable path. I believe we should adopt a constitutional 

amendment to limit spending, but there are reforms that could be 

implemented immediately such as adopting a strict cut-as-you-go 

system or creating a Base Realignment and Closure (BRAC)-like 

commission for discretionary spending. However, Congress must 

implement reforms to take control of mandatory spending. Without 

reform, the rate of spending under Medicare, Medicaid, and Social 

Security will have devastating effects on these programs, but also 

other government programs in our national economy. 

Again, without reforms today, vast tax increases will be needed 

to pay for the $75 trillion unfunded promises we have made to a 

steadily growing cohort of seniors. 

Fortunately, many workable solutions are available to lawmakers, like turning Medicaid into a true safety net or modernizing 

Medicare to address fiscal and structure challenges. 

Also, rather than focus just on insurance as the only solution to 

our country’s health care challenges, we can pursue changes in regulatory policy that can generate the type of health care innovation 
9 

1The prepared statement of Mr. Zandi appears in the Appendix on page 58. 

and provider competition that can break the health care cost curve 

to bits rather than simply bend it temporarily. 

Thank you for the opportunity to testify before you today, and I 

am looking forward to your questions. 

Senator PAUL. Thank you. 

Finally, I would like to introduce Mark Zandi. Dr. Zandi is the 

Chief Economist of Moody’s Analytics, a well-known provider of 

economic research. He should be familiar to just about anyone who 

has followed fiscal and economic issues for any amount of time. He 

has testified numerous times before Congress on fiscal matters and 

is a regular on the financial networks. 

Thank you, Dr. Zandi, for coming. 

TESTIMONY OF MARK M. ZANDI, PH.D.,1 CHIEF ECONOMIST 

MOODY’S ANALYTICS 

Mr. ZANDI. Thank you, Chairman Paul, Senator Peters, Senator 

Hassan. It is very kind of you to give me the opportunity to participate today. 

I should mention for sake of disclosure, I am not employed by the 

rating agency, Moody’s Corporation is made of two entities Moody’s 

Analytics and Moody’s Investor Service. I am not part of Moody’s 

Investor Service, the rating agency. 

I am also on the board of directors of the Mortgage Guaranty Insurance Company (MGIC), a large mortgage insurer, and vice chair 

of the board of a nonprofit community development financial institution that makes investments across the country in underserved 

communities. 

I would like to make three points as well. I think we have all 

learned that that is about as many as we can make and people can 

digest. 

Point No. 1, you have a lot of work to do, a lot of budget issues 

dead ahead, one coming up in a few weeks. You will have to extent 

authority, spending authority for the government by the end of 

April. 

But I think the biggest budget issue this year is the Treasury 

debt limit. It is very important that that is resolved in a timely 

way. By my calculation, this has to be done by October 5, give or 

take, but I do not think any longer than October 5. 

Not addressing the debt limit in a timely way will be very costly. 

Not for a while, because I think markets have become conditioned 

to believe that when push comes to shove, you are going to act and 

solve this problem. So it is not going to be an issue today, it is not 

going to be an issue a month from now, but as we get closer, at 

some point, this is going to become a very significant issue. And it 

will be very costly, even if we do not breach the debt limit. 

We did a study looking at the last time we went through this, 

back in late 2013. Interest rates did rise, as we came up to the 

limit. If you do a bit of work and calculation, we found that it cost 

taxpayers about a half a billion dollars, just that brinkmanship 

around the limit and the effect that it had on interest rates. 

Of course, the limit was increased. If we solve that problem, the 

issue is resolved, and we move forward, and everything was OK. 
10 

But if we actually do not solve this issue and we have reached the 

debt limit, I do not agree. I do not think there is any way to 

prioritize here. Maybe you can do it in a technical sense, but effectively, I think financial markets will crater, and it will have very 

serious implications for economic growth, jobs, and the cost to taxpayers will be enormous, a very bad idea. 

Point No. 2, I would recommend that you do away with the statutory debt ceiling. It is a bad idea. It is anachronistic and can be 

very disruptive. I do not think it helps in terms of making good policy decisions. 

If that is a step too far, I would recommend perhaps adopting 

ability-to-pay rules. The idea would be that every time you have a 

bill for spending, taxes, annual appropriation bill, you have to 

make sure that you have sufficient tax, future tax revenue, and 

borrowing authority to be able to meet the deficit requirements as 

calculated by the Congressional Budget Office. 

I think this would impose some discipline. You would have a debate around this issue every time you voted for a spending bill or 

a tax bill that added to the future budget deficit, so still very important, but it does not lead to the situation where we have coming 

up now and we have this drop-dead date and a lot of havoc can be 

created by breaching it. So I would recommend eliminating the 

debt ceiling, but if barring that, ability to pay. 

Finally, a third point, we have very serious long-term fiscal 

issues. I think both of the other folks here testified and did a very 

nice job of explaining that, so we have to make some changes. 

And I do think that will require some entitlement reform, particularly around the growth in health care cost. That is the key to 

Medicare/Medicaid and really the budget going forward. 

But I do think the best thing we can do in the most immediate 

future is focus on things that can improve economic growth. Just 

to give you some numbers, for every .1 percentage point increase 

in GDP growth, that will reduce budget deficits over a 10-year period by $300 billion. So if we can enact policies, for example, that 

raises expected growth over the next 10 years from 2 percent per 

annum GDP to, let’s say, 2.5 percent, that will save $1.5 trillion 

off the 10-year budget, $150 billion a year. 

So the work you are doing now with regard to corporate tax reform, immigration reform will be very important, infrastructure. 

Those are the kinds of things, I think, we need to really focus on, 

get that done, get growth up, and that will help to address our 

long-term fiscal issues. They will not solve them, but that, I think, 

is the best approach at the current time, to focus on those things. 

Thank you very much for the opportunity. 

Senator PAUL. Thank you. Thank you all for your testimony. 

I do not think anybody, Republican or Democrat, wants to approach default or approach the deadline, and I agree with Senator 

Peters. If we began working on this with advanced notice, which, 

we should—we are big boys and girls—we ought to be able to get 

it done in time. 

But if you get rid of deadlines, do you get rid of sort of the impetus to do anything? And there have been reforms that have come 

from having the debt ceiling debate, and, actually, the reforms, I 

think, most of the time have been good reforms. The problem has 
11 

been the people. The people do not obey their own rules, meaning 

Congress does not obey their own rules. 

We have had five or six significant budgetary reforms—Budget 

Act of 1974, Gramm-Rudman-Hollings, pay as you go. I remember 

when I first ran, pay as you go, I think they said they broke it 700 

times in the first three years. It is sort of lack of resolve on our 

part, both parties, and both parties have their sacred cows they 

want to spend money on, so the blame, there is plenty of blame to 

go around. 

But I think if you had no limits, if you had no debt ceiling, we 

would have no impetus to sort of force the issue to say we have to 

do something about it? 

Everybody knows we have this exploding entitlement problem, 

and nobody is doing anything about it. The only thing that ever 

forces us to do anything about it is the debt ceiling deadline. 

In 2011, we had a big fight. The conservatives, we proposed cut 

cap and balance. We actually had a balanced budget that had a 

percentage of spending of GDP. We did not win the day, but actually, I think we forced the issue enough that we got the sequester, 

which I did not think was enough at the time, but turned out to 

probably be the best thing we did in the last 10 years. And now 

it has been defeated by right and left, with both sides at fault. Military wants more money, the left wants more domestic spending, 

and lo and behold, the sequester has been evaded every time. 

I think Mr. Walker had the most important point that I heard. 

It is that at one time, Congress controlled 90 percent of the spending, and now nearly 70 percent of it is not under our control. The 

point is we have to do something about entitlements. My side is as 

guilty of this as the others, and some of these are simply mechanistic things. 

It is demographics. It is nobody’s fault. We have more older folks 

now and fewer younger folks. We have to figure out how to do it. 

We are having fewer children. We have to do something about raising the age of eligibility, and Republicans and Democrats did it together in the 1980s. 

But I guess what I would like to hear from each of you is your 

comments on how we fix the situation, how we address the entitlement problem, or your comments on whether a process type of reform, like a Budget Control Act of 1974 or something like that, will 

work. 

We will start with Mr. Walker, and we will work our way down. 

Mr. WALKER. Well, first, I think that we have to be honest how 

we keep score. We have this number up here, $19.854 trillion. The 

real number is about $80 trillion, because when you end up looking 

at unfunded Social Security, Medicare, unfunded civilian/military 

pensions, retiree health care, environmental cleanup costs, et 

cetera, most of which are in the financial statements, but they are 

not on the balance sheet—and those numbers are bigger, and 

frankly, they are growing faster than this number. So we have to 

be honest about what the nature and scope and magnitude of the 

problem is. 

Second, I think we also have to work with our terminology. I 

think sometimes we cause our own problems because we call 

things, for example, ‘‘entitlements.’’ There is only two things guar-
12 

anteed under the Constitution of the United States, only two: first, 

debt issued by the United States, which I would argue is both debt 

issued to the public and debt issued to the so-called trust funds; 

and second, Union Civil War pensions. And I think we have paid 

all of those. I am from Alabama. They did not guarantee our pensions. I think I know why, but those are the only things that are 

guaranteed. 

Now, what do we do? In 2012, I went on a 10,000-mile, 27-State 

national fiscal responsibility bus tour, and in two States in particular—Ohio, which was a swing State in the North, and Virginia, 

a swing State in the South—Alice Rivlin and I addressed a demographically representative group of voters in those two States with 

the facts, the truth, and the tough choices, and after doing that 

asked them to give us electronic confidential feedback on reforms 

in the following areas—budget process and controls, Social Security, Medicare/Medicaid, health care, defense, taxes, government 

organization operations, and political reforms, specific illustrative 

reforms designed to get debt to GDP down to 60 percent by then, 

at that time, 2030, now 2035, and to be able to do it with everything on the table. 

Senator PAUL. And so you asked these groups like a focus group? 

What did they say? 

Mr. WALKER. They were demographically representative. 

Senator PAUL. What did they say about raising the age of eligibility for Social Security? 

Mr. WALKER. Correct. And we got 77 percent to 90-plus percent 

support for packages of reforms in all the areas that I just talked 

to you about. OK? 

Senator PAUL. Including even allowing the age of eligibility to 

rise? 

Mr. WALKER. Correct. And we were able to do it because we got 

them to agree first on three things. Are we on an improved and 

unsustainable path? Ninety-seven percent said yes after they had 

the full story. 

Second, should our goal be to stabilize debt to GDP at a reasonable and sustainable level? That way, it is pro-growth but with fiscal responsibility. I think about 90 percent agreed on that. 

And then six principles and values to guide reform: pro-growth, 

socially equitable, culturally acceptable, mathematical integrity, politically feasible, and meaningful bipartisan support. Now, there is 

details I can go into, if you want. 

But after doing that, after agreeing there is a problem, here is 

the goal, here is the principles and values, then we showed them 

a range of solutions designed to achieve that. And we got 77 to 90- 

plus percent support. That is not how things were done in this 

town. OK? 

Senator PAUL. It does not seem to be working here. Dr. de Rugy. 

Ms. DE RUGY. I agree. It is a difficult act to follow, and I agree 

entirely with what you were saying. It is interesting because it 

echoed a lot of polling that I have seen also that shows that when 

you actually present people with the tradeoffs, when you say, for 

instance, ‘‘Do you want this government service?’’ people will say, 

‘‘Oh, yes.’’ ‘‘Do you want more of it?’’ ‘‘Oh, yes.’’ But when you say, 

‘‘At which price?’’ then people are more willing to start actually 
13 

talking about the kind of tradeoffs they would be willing, what they 

would be willing to sacrifice, whether they actually would want to 

see that program cut. 

So it is kind of interesting, and I think, unfortunately, in this 

town, there is not a lot of interest to talk about real tradeoffs. 

The other thing that is pretty clear is we know how to reduce 

debt-to-GDP ratio. First, we know there is an impact on growth, 

and I agree that we need to grow the economy, but we are not 

going to get our way. I agree that it is a priority, and it is a priority for everyone, but we cannot overstate how important it is for 

low-income Americans to see the economy grow. 

But if you want to reduce debt to GDP—we are not going to grow 

ourself out of this debt. We are going to have to address our spending, and we know how to reduce our debt-to-GDP ratio. If you do 

a review of the literature on fiscal adjustments, what you find is 

that the countries that have actually implemented fiscal adjustment packages, that are made mostly of spending cuts and particularly and not surprisingly of the social transfers, the so-called entitlement spending, which you are totally right—I mean, we know 

we are not entitled to them; that has been proven by the Supreme 

Court, and Congress can just change the law at any time—those 

countries actually manage to reduce their debt-to-GDP ratio. 

On the other hand, countries that try to do kind of a halfway 

thing of raising taxes and cutting spending did not succeed, and 

one of the reasons is because they would raise taxes and not really 

follow through on the spending. And they would not actually do the 

spending cuts where they needed to be, meaning do fundamental 

structural changes. 

And the thing that is important is that—so we know what to do. 

There is multiple ways to do it, multiple solutions, and what is important is also going back to economic growth. There is always a 

lot of people saying, ‘‘Well, if you implement these type of packages’’—right?—‘‘it is going to have a depressive effect on the economy.’’ Well, actually, economists agree. There is a consensus that 

in the long term, it is actually beneficial for the economy. And 

there is still a debate on the consequences in the short term. 

But the question is like—while I will agree also with Mr. Zandi 

that, yes, reaching the debt ceiling or even have some of these 

conversations or getting that close has a cost. In a sense, we are 

getting a taste of what is going to happen to the American people 

if we do nothing, and it is just like simply pushing back and kicking the can down the road—and the name that it has a cost 

today—is irresponsible, and we absolutely need to do something. 

And if I can say one more thing, reducing the cost of health care 

is important, and unfortunately, a lot of the conversation in this 

time is actually—places focus in the wrong place. Constantly talking about how we can reform the way we provide health insurance 

is the wrong thing to talk about. I am not saying it is not important, but it kind of ignores the fact that third-party payer, whether 

it is the government or insurance, actually contributes to the problem. 

One of the things that would be better to do is, sure, the government provides for the neediest in terms of health coverage, but also 

bring as much innovation and free the supply side of health care 
14 

in order to bring the kind of emulation that we have seen in other 

sectors like technology and many other sectors, which raises quality and reduces prices. And that is, unfortunately, a conversation 

we are not having enough. 

Senator PAUL. Dr. Zandi. 

Mr. ZANDI. I will give you four suggestions. This first suggestion 

is I do not think I would use the debt limit as a way to effectuate 

change. It is a matter of benefit and cost, and I think the costs are 

very significant, particularly if you breach the debt limit. We have 

obviously not gotten there yet, but the costs there are obviously uncertain, unknown. But a prudent planner would want to go down 

that path, and therefore, it is not really credible to think that is 

going to have a significant effect on the behavior in terms of solving these long-term fiscal issues. It is a judgment, but I think the 

costs there could be quite substantive and should not be discounted, particularly given the uncertainty around those costs. 

The second thing I would say is, at this point in time, I think, 

just to reiterate the point in my oral remarks, I would focus on 

growth. You are thinking about policies that could help promote 

growth. Corporate tax reform is a very good idea. I think immigration reform is the most obvious way. More highly skilled immigrants into the country is the most obvious way to lift growth and 

address our long-term fiscal issues, as you brought to your point 

about demographics. And infrastructure spending is also key. 

Third, if I were King for the Day and you are focusing on Social 

Security and how you would solve that and you are proposing raising the age of retirement, the path I would take would be different. 

I would say let’s raise the payroll cap. It has eroded over time. 

When Social Security was put on the plan in the 1930s, it was 90 

percent-plus of eligible earnings. Now we are down to 80. Let’s just 

put it back to 90. 

And the second thing I would do is I would adopt a chain-weighted Consumer Price Index (CPI). That would affect Social Security 

benefits. It would also affect the Tax Code and some of the parameters in the Tax Code. 

So if I were going to solve Social Security, if that is what you are 

focused on, those are the kinds of things I would do before raising 

the retirement age. 

Finally, the real solution in my view to solving our long-term fiscal issues is really the growth in the cost of health care. That is 

the key thing, but that is not going to be something you are going 

to solve today, next year, or the year after, just given the situation 

that we are in and the politics of all this. 

So my advice would be let’s do these other things. They are doable. They will have significant benefits. And let’s come back to 

this when we are a few years down the road and take another 

crack at it because these long-term fiscal problems, they are not 

going away. They are here for 20, 30, 40 years. Let’s do what we 

can do, not beat our heads against some of these other smaller 

things that are not going to really make a difference. It is really 

about the growth in health care cost. 

Senator PAUL. Senator Peters. 

Senator PETERS. Thank you, Mr. Chairman, and again, thank 

you to the panelists, your testimony, and the conversation that we 
15 

are having here, it is refreshing to have a hearing like this where 

we can really just have a conversation back and forth, not as formal as these usually are. I appreciate the frankness of all of you. 

First off, Mr. Walker, I listened with great interest in the panels 

that you held around the country with a variety of groups. I listened to that with interest because I have done that myself in my 

district, not for a few years, but a few years ago, we had a number 

of sessions where we had cross-sections of folks. A lot of this was 

a few years ago when I was in the House, the Tea Party movement 

was in full bloom, and the folks who were there were heavily represented. Tea Party folks were heavily represented, but it was all 

sorts of groups of people who came together. 

I will tell you my results were different than your results at each 

of those meetings, where there was not that sort of consensus that 

came out of it, as folks were saying we added the tax element, you 

talked about a little bit, Mr. Walker. But folks were all for tax cuts. 

They thought those were pretty good until they realized it was not 

solving their issue with the deficit, and they could not do that. 

Then when it talked about cuts, most of them were all in favor of 

cutting foreign aid. That was the top of their list, but they realized 

that did not have much impact whatsoever on the budget. 

They were not really excited about cutting Social Security or 

Medicare, and so in the end of it, we did not get that kind of consensus. I would love to talk with you more at some point in the future as to how we bring folks together because that is kind of the 

crux of the problem. How do we bring America together to have 

this kind of comprehensive adult conversation that we need to have 

and understand in order to deal with this? I always explain that 

this is a three-legged stool. We cannot talk about dealing with the 

deficit unless we are dealing with all three legs, which are tax policy, spending, and growth. None of those by themselves will work. 

You cannot raise taxes enough to deal with it. You cannot cut 

enough to deal with it, and you cannot grow yourself out of it. You 

have to do all three, and that is where you then run into the politics of people just wanting tax cuts. They do not want to have anything that is revenue-neutral or raises more revenue or they think 

we can grow our way out. I think that has been pretty clear by our 

panelists that this is a complex issue that we have to handle, particularly when you are dealing with entitlements. 

I have heard a couple of you say that we know that these are 

not entitlements. I will tell you, ask any person of my constituents—and I agree with them. These are entitlements. These are 

things that people have paid in their entire life, and if you tell 

them that they have paid into a system for their entire life, that 

they should get something back, like their pension plan. If they 

have been contributing to their pension plan and to say, ‘‘Well, we 

have changed the rules. We know you have paid into this for the 

last 30 years, and we know you are counting on a dignified retirement, but, hey, we changed the rules,’’ that is not something that 

is going to be palatable to nearly everybody. And I agree if you pay 

into the system, those are the rules, and you played by the rules, 

you should expect that it will actually be there for you. 
16 

So these are things that we grapple with and why it is difficult 

to bring all of our colleagues together, but let me ask a more specific question on the debt limit to Dr. Zandi. 

You have talked about the costs associated with debt limit—because we have to figure out how to force this. I agree with all three 

of you. We have to force these kinds of decisions. I would agree 

with the Chairman. We have to force this, but the question is, is 

this tool the appropriate one? Because I am afraid we are heading 

toward another crisis, and the pattern has not been very good, that 

we have actually had these kinds of frank discussions. 

I agree. I do not think we are likely to eliminate the debt limit. 

That is probably not going to happen, but I think we should understand the costs associated with it. 

You talked about the impact of the markets and the cost of the 

last crisis—although I know in your testimony, you also talked 

about the fact that markets are now starting to realize Congress 

should just do this. This is all games that they play, and they go 

back and forth, and it is just another example of the dysfunction 

that exists in the U.S. Congress that we get to those crises, but 

they are going to just pass it as soon as it comes to that crisis 

point. 

So my question is, if that is the case, is this even losing its viability as a tool, and the fact that in the past, the markets would 

react negatively? My colleagues would say, ‘‘Oh, my gosh, we better 

do something here because the markets are performing badly. This 

is having an impact on the economy.’’ 

Mr. ZANDI. Yes. 

Senator PETERS. ‘‘We better get our act together.’’ But now it is 

not like we are even getting that pressure until the very end, and 

then it is too late. And then it could be catastrophic, potentially. 

Is that a fair assessment of where we are and why this is kind of 

a dangerous thing to be thinking about right now? 

Mr. ZANDI. Yes. That is an excellent point. I mean, if you think 

back to the 2011 experience, December 2011—you mentioned that 

in your opening remarks about the downgrading of the debt by 

Standard & Poor’s (S&P)—as soon as the letter was written 

by—I believe it was Treasury Secretary Geithner—I cannot remember to whom Congresswoman Pelosi—the markets had already 

started to react. You could actually see it in the markets, and the 

tension in markets started to build pretty quickly. 

And that you would think started to put pressure on policymakers, ‘‘Oh, we have to do something here, or otherwise markets 

are going to cave.’’ 

But now they have been conditioned. We have gone down this 

path a number of times, again in 2013, and the letter was sent. 

Secretary Mnuchin sent a letter to House Speaker Ryan, and no 

one is even talking about it. It is like, literally, no one is talking 

about it. This would have been news in 2013 and big news in 2011. 

So I think the markets are being conditioned here to expect that 

you finally solve this, and there is no pressure. The markets do not 

react. The stock prices are not going down. The credit spreads are 

not gapping out. The credit default swaps spread are not widening. 

Where is the pressure? 
17 

But at some point—and there will be a point—everyone is going 

to wake up and say, ‘‘Oh, my gosh, what is going on?’’ Boom. And 

at that point, it is going to be very costly to taxpayers because we 

are all going to pay—we are talking about interest on the debt. 

Well, interest rates are going to spike, and it is going to cost us. 

All that short-term money that the Treasury issues is going to be 

issued at a much higher interest rate, and that is going to cost taxpayers. And to what end? We are going to do something with 

the Treasury debt limit, and everyone knows it. So I am not sure— 

again, it is a matter of judgment, but my sense is this is not the 

way to achieve the kinds of things you want to achieve here, and 

it could be very costly. 

Senator PETERS. Just before I get to Mr. Walker, if I may, the 

complacency works, I think, two ways. One is that policymakers 

think, ‘‘Well, we do not have the pressure because the markets are 

not reacting this way to do it,’’ and then there is the complacency 

not to do anything. Then there is also the feeling, ‘‘Well, then 

maybe it is OK if we breach the debt limit because the markets do 

not seem to be reacting to any of this.’’ 

Mr. ZANDI. Right. 

Senator PETERS. If we are not seeing any pressure and then it 

adds to the danger level as well—and we heard a lot of conversations, ‘‘Well, the markets really are not reacting. Maybe we can 

find other ways to get through this and prioritize,’’ which I think 

is potentially very problematic. Mr. Walker. 

Mr. ZANDI. Can I make one other point? We actually did default 

on debt briefly because of a technical mistake, it was back in early 

1970s, where the Treasury, because of a computer glitch, did not 

actually pay on time. And there has been academic research that 

shows that, in fact, that raised interest rates for a very long period 

of time, just that technical error. 

So if you actually get to a point where we do not pay, that would 

be very costly to us, and at the end of the day, the triple-A credit 

of the United States is the bedrock of the global financial system. 

We just should not mess around with that. That is a given, and 

messing around with that could be very significantly costly. 

Senator PETERS. My time expired, but we want to hear from you. 

Mr. WALKER. A couple things quickly. First, I used to be a trustee of Social Security and Medicare, one of the prior hats that I had. 

While Social Security, you are paying a payroll tax during your 

working life and while Part A under Medicare, you are paying a 

payroll tax during your working life and so is the employer, you are 

not for B and D. Part B and Part D under Medicare are the ones 

that are the most underfunded, and people do not pay for that until 

they are actually eligible for the program to begin with. And most 

of the costs of those programs are funded out of general revenues. 

Second, I think the big difference between the results that you 

got in your session and I got is that you did not have a representative group of voters. You basically had adverse selection, people 

who wanted to come, including the extremes tend to come disproportionately. And so having a representative group was important to try to get better results because, unfortunately, the extremes from both sides tend to be disproportionately represented in 

our political process. 
18 

The last thing is the process matters, and I will give you one example. In 1998, President Clinton wanted to reform Social Security, and that was right before I was appointed as Comptroller 

General of the United States. And I had been a trustee of Social 

Security and Medicare. The American Association of Retired Persons (AARP) and the Concord Coalition came together, worked with 

the White House to try to do several forums, where experts like 

myself stated the facts, spoke the truth, talked about the options, 

engaged people with electronic confidential balloting, and the elected officials observed. They did not talk; they observed. That resulted in some dramatic evidence that people were willing to accept 

some tradeoffs, and I believe that we would have had Social Security reform before the beginning of this millennium had there not 

been a personal problem of the President, which caused him to lose 

political capital. 

Quite frankly, the kind of reforms that we would have done back 

then, because I was part of that, pretty much can be the same kind 

of reforms that ultimately we do. The question is, When are we 

going to do it? 

Senator PETERS. Thank you. 

Mr. WALKER. The process matters. 

Senator PETERS. Right. Thank you, Mr. Walker. Thank you. 

Senator PAUL. Senator Hassan. 

OPENING STATEMENT OF SENATOR HASSAN 

Senator HASSAN. Well, thank you, Chairman Paul and Ranking 

Member Peters. I am really glad to be here for my first Federal 

Spending Oversight and Emergency Management Subcommittee 

hearing. It is a privilege to join this Subcommittee, and thank you 

to the panelists. It is nice to see you again, Mr. Walker. 

I do have a couple of questions. First, starting with Dr. Zandi, 

I would like to talk about the cost of government defaults and shutdowns and how that impacts our national debt. In your testimony, 

you warn that if the Treasury were to default on its obligations, 

the economic impact would be devastating, potentially more severe 

than the Great Recession. 

In addition to the incredible damage that would cause to our 

families and businesses in New Hampshire and all around the 

country, it seems to me that the damage to our economy—you estimated a possible five percent decline in GDP—would also reduce 

tax revenues and then, therefore, increase the national debt considerably. Is that an assessment you agree with? 

Mr. ZANDI. Yes. That is exactly right, and that was a scenario 

where we breached the limit. So October 5 is the limit. 

Senator HASSAN. Right. 

Mr. ZANDI. We breach it, and we go on for another month without resolving it, and we do not make Social Security payments. And 

that is the scenario that you are describing. 

And you are right. Just to give you a context, the 5 percent decline in GDP that you cited for the scenario is equal to roughly the 

decline during the Great Recession. In the Great Recession, the 

debt-to-GDP ratio of the United States rose by 35 to 40 percentage 

points, so that gives you a sense of the magnitude of that kind of 

a recession and what kind of impact it would have on the budget. 
19 

Senator HASSAN. OK. So that description is one of the reasons I 

am hopeful that both parties can come together to deal with the 

debt ceiling well before the deadline, without manufacturing a crisis by bringing in unrelated political issues that really force impossible choices. I think people in both parties would agree that they 

get put in a situation when political issues get added on. 

I am also concerned that government shutdowns can have much 

of the same effect. I lived through the shutdown in 2013 as the 

Governor of New Hampshire, watching the White Mountains National Forest shut on Columbus Day weekend, which is one of our 

prime tourist periods in the State. 

To that point, Dr. Zandi, you previously said that the 2013 government shutdown resulted in a $20 billion hit to our Nation’s 

GDP, as default shutdowns have a real impact on families and 

businesses and also reduced tax revenues, once again, increasing 

our national debt. 

So, Dr. Zandi, do you agree that costly shutdowns increase the 

Federal debt, and that if Congress is serious about cutting the deficit and reducing our debt, as I am, that we should be avoiding 

those kind of costly defaults and shutdowns that hurt our bottom 

line? 

Mr. ZANDI. Yes, absolutely. Just to give you a rule of thumb, for 

every week that the government shuts down, it costs 20 basis 

points of annualized GDP growth. So you can do the arithmetic. 

And here is another really good rule of thumb. For every lost dollar of GDP, the deficit will increase by 40 to 50 cents. So the arithmetic here is pretty daunting. 

Senator HASSAN. Well, thank you. I am truly hopeful that the 

threat of these kinds of consequences will help ensure that Senators from both sides of the aisle can come together and work out 

a clean budget deal without any poison pills. 

This is a question to the full panel, as it is a related point. Dr. 

Zandi notes in his testimony that political uncertainty in Washington is already very high and has been since the shutdown in 

2013. As this uncertainty grows, businesses are more reluctant to 

invest or hire workers. Families become more cautious in their 

spending, and GDP growth slows. 

So if each of you could address how uncertainty can impact economic growth and long-term investment, and can you discuss how 

Congress creates uncertainty when it passes short-term continuing 

resolutions (CR) rather than annual appropriations or when it 

threatens defaults or shutdowns for political purposes? 

And, Mr. Walker, I would start with you. 

Mr. WALKER. Believe it or not, I am 65 years old. Congress has 

passed timely budget and appropriation bills four times in 65 

years. That is an F minus. OK? 

Business relies upon some reasonable ability to predict what the 

future might be, and the absence of that reasonable ability to predict, there is a cost. There is clearly an economic cost. There is 

clearly an opportunity cost, et cetera, and so clearly, we need budget reforms. 

Frankly, the only thing under the Constitution of the United 

States that is express and enumerated for both houses of the Con-
20 

gress to do every year there is only one and that is appropriations. 

Yet it does not do it. 

At the same point in time, rules like pay-as-you-go rules are not 

adequate because that assumes that we are in a sustainable position, and all we need to do is pay for new stuff when, in fact, we 

cannot afford what we already have. 

So I think, yes, we need more certainty, but we also need to start 

treating the disease—— 

Senator HASSAN. Yes. 

Mr. WALKER [continuing]. Rather than the symptoms, and that 

is part of what this hearing is all about. 

Senator HASSAN. Thank you. Doctor. 

Ms. DE RUGY. I mean, I agree. Uncertainty is a problem. Markets 

do not like uncertainty. It creates paralysis, but I will also say 

that, It is not the only way by adopting continuing resolution, time 

and time again, that Congress creates uncertainty. 

The Tax Code is replete with temporary tax provisions, which require to be extended or not. I mean, the drama every so often over 

the tax extenders—it was supposed to be a one-time thing in 1988, 

and it has been happening all the time ever since, creates uncertainty. Writing massive regulations that will take years to write all 

the regs create massive amount of uncertainty. So the government 

has this tendency of, yes, creating massive uncertainty, and it is 

not a good thing. 

That being said, I will say again there is no doubt, so default 

shutdowns are not—they are not desirable things at all. The waiting is not an option. The government is not going to meet its promises under any circumstances right now, and it is certainly not 

going to meet its promises with this level of debt. 

Take Social Security, for instance. When the trust funds are 

empty, we know what is going to happen. By law, benefits are 

going to be cut by 25 percent. We know this, and people, the lowest-income Americans, those who really truly depend on Social Security are going to be hurting. And the idea that we can push that 

can down the road because Congress is going to change the law, 

once again, I think is foolish because by then, the debt-to-GDP 

ratio will be 150 percent. It is going to be already $30 trillion gross 

debt in 2017, 140 percent. I do not think you guys will have the 

luxury of actually changing the law to say we keep everything. 

So I just think that I would rather for my children and future 

generations that we assume—I mean, that we are responsible 

today and start passing the reforms, and if we need to do it by 

using the debt ceiling, again, there are ways to not default. The 

idea of threatening of default all the time as if, and which is, by 

the way, the conversation in 2011 was one where there was no way 

to actually use extraordinary measures. There was no way to do 

prior writing—I mean, it is not that these are desirable things, but 

it is not true. We know it is not true, and if it allows us to not continue pushing this can down the road—in the name of my children, 

I would rather take that risk and rock the boat a little bit today. 

Senator PAUL. Thank you. Senator Lankford. 
21 

OPENING STATEMENT OF SENATOR LANKFORD 

Senator LANKFORD. Thank you. 

Can we set some context real quick? When we are talking about 

interest and debt issues, what do you anticipate the interest payments will be 10 years from now for the United States? 

Ms. DE RUGY. Can I tell you? 

Senator LANKFORD. Go ahead. 

Ms. DE RUGY. Right now, projected by CBO, it is going to be close to $800 billion. That assuming that the interest rates stay what it 

is projected to be modest. 

Senator LANKFORD. Right, modest growth. Modest growth in interest rates. 

Ms. DE RUGY. So almost $800 billion. 

Senator LANKFORD. Mr. Walker, anything you want to mention? 

Mr. WALKER. That sounds right. Right. That is modest growth in 

interest rates, not returning to the levels of the 1990s, by the way, 

but below that. Interest rate risk is arguably one of our highest 

risks. It is the fastest-growing expense on a percentage basis, and 

we get nothing for it. 

Senator LANKFORD. Right. It has been one of the areas that I try 

to push a lot of people that I talk to, to say it is the creeping element in the budget that no one can pay attention to because you 

assume it is never going to get that high, but it is coming. It actually squeezes out all discretionary spending just for interest, which 

we will do. 

So let me ask a question: How are other nations handling issues 

like debt limits? 

Mr. WALKER. I do not know of any other nation that has a debt 

limit. There are nations that have what I advocated, which is a 

debt-to-GDP limit, with automatic targets and triggers and enforcement mechanisms if you violate it. Things have to happen. Right 

now, things do not happen, and so, as a result, we have gone from 

$5.7 trillion in total debt, subject to the debt ceiling limit, to almost 

$20 trillion since 2000. And we still have not done anything to deal 

with the structural driver of the fiscal imbalance. 

Mr. ZANDI. Yes. Relative to other developed economies, we have 

a very anachronistic, unusual approach to this. There is no other 

country that has anything that comes close to a debt limit or even 

shuts the government down over these issues. 

Senator LANKFORD. Right. So I asked the same question to several other international leaders last year and I was aware there is 

no debt limit out there anywhere else in the world, that we do it 

very different. But I asked a question of another international leader and said, ‘‘What happens if you get to the end, and then you tip 

over, and you have a government shutdown?’’ He laughed. He said, 

‘‘We have a new election the next week, because all of us are out. 

Parliament dissolves, and everybody is out and done. This did not 

work, and we are all gone. That is how we handle it, to be able 

to make sure that we actually take advantage of our responsibility.’’ 

Mr. ZANDI. And, of course, they do not. So if you look at the debt 

to GDP of almost every developed economy in the world, it is higher than the United States at this point in time. 

Senator LANKFORD. Right. 
22 

Ms. DE RUGY. I was going to say, I mean, it is hard to think of 

a country we should use as a model, so I think a debt ceiling or 

not is really—— 

Senator LANKFORD. So the question is the combination of several 

things here. I have proposed several areas to be able to get on top 

of this. Several Members of this Committee have as well. One is 

we have to avoid the constant fear of a government shutdown. That 

does not help us. That does hurt our economy every single time. 

We have to have a way to be able to solve that, but we also have 

to be able to bring fiscal responsibility. 

I have a bill called the Government Shutdown Prevention Act, 

which puts the consequences on Congress and the executive 

branch, holds harmless every other agency, but puts the pressure 

where the pressure should be for us to get to appropriations, and 

so we can finally get to doing appropriations bills and to be able 

to move on. 

I have noticed in the short time that I have been here that Congress only acts when it has a deadline. If there is no deadline, we 

never seem to get to action items; hence, things like immigration 

reform and so many things we discuss year after year. But with no 

deadline, there is no time to do it. That is why a debt ceiling suddenly creates this false deadline. That is why you have all these 

other entities when you deal with budget times, that it creates a 

deadline. So it is important, I think, that we actually accomplish 

something with that to be able to move, to not have a shutdown, 

to be able to keep maintaining where we are, but to be able to solve 

some of the issues. 

I want to ask about the issue about a debt ceiling. I believe Congress will always expand the debt ceiling. We will find a way every 

time to do it for fear of default and what that means internationally to the international economies. The question is, Is it useful to 

us to be able to actually accomplish something with it and to be 

able to find a way to be able to say, how do we get hold of our interests and our debt payments at some point? 

So, Mr. Walker, you have mentioned several times debt to GDP 

or other mechanisms. Is there a way that we can deal with a debtceiling vote that also has a marker on it saying the debt ceiling increases if our deficit numbers decrease by a certain percentage? So 

let’s say Congress were to say, at this point, two years from now, 

our deficit decreases 10 percent. Then the debt ceiling increases, 

and it sets specific targets for Congress to be able to work toward. 

When trying to work toward this, not just we have debt-ceiling 

votes, because I think we are always going to have debt-ceiling 

votes, and there will be a way that Congress finds to pass it every 

time, but to have a meaningful process that is a marker to say, 

‘‘We are failing to get on top of this. How do we get us back to balance and to start bringing this down?’’ 

Mr. WALKER. If you are going to have metrics—and I am for 

metrics and mechanism—targets, triggers, and enforcement mechanisms—I really think you ought to change, rather than deficits and 

rather than total debt, to go to debt to GDP. And why do I say 

that? That is what really matters. That way, you could pursue progrowth policies, and we have talked about a number, but you have 

to have fiscal constraint. And that fiscal constraint requires every-
23 

thing to be on the table. It requires discretionary spending to be 

on the table. It requires mandatory spending to be on the table, 

and it requires tax expenditures to be on the table, which is $1.2 

trillion a year and largely not looked at, at all. So I think you need 

to move toward that approach. 

The other thing, there is a group that I am the national co-founder of. It is called No Labels, and one of the things that it advocated 

with regard to the budget and appropriations process is no budget, 

no pay. That if the Congress does not pass a budget and the appropriations bills by a certain date, that Congress does not get paid 

until it does. 

Now, there are States that have done that. I think California is 

one of them, and they have not had a problem since then. They 

have other problems. 

Senator LANKFORD. Lots. 

Mr. WALKER. But they do not have that problem. 

Senator LANKFORD. I would not exactly pull California as a 

model on efficiency in spending. 

Mr. WALKER. No, no, no. No, they are not, but they are ranked 

number 40 out of—— 

Senator LANKFORD. But they have found way—and not to go pick 

on California because their folks are not here to be able to defend 

themselves. But what their legislators had done as a result of that 

is find a way to be able to hide their debt in other places and to 

be able to bury it in other ways. 

Mr. WALKER. And we do that too. 

Senator LANKFORD. I agree. That has been the challenge that I 

have faced, and when you do a debt to GDP, every time you do debt 

to GDP, there is some way to be able to fudge the numbers and 

to be able to fudge exactly which GDP number that is and how you 

figure it and what you do. I am trying to find a way that you cannot fudge the numbers. 

So when I look at specific targets—I understand economic growth 

has got to be a major priority, but if you look at percentage, reduction of the deficit, that assumes you are going to find a way to have 

economic activity and growth. You are going to have to control 

spending. You are going to have to find a way to be able to do that. 

Whether it is revenue or whether that is cutting, you have to find 

a way to be able to do that, but that is a clean number. That if 

you set a date, you cannot fudge it. 

And in this town, everyone fudges the numbers. I am trying to 

find a clean way to say let’s do a number no one can hide. 

Mr. WALKER. It may have to be a transition. Yes. You may have 

to do something like that. 

Ms. DE RUGY. Can I add something about fudging? 

Senator LANKFORD. Sure. 

Ms. DE RUGY. You are so right. I mean, like debt-to-GDP limit 

has not worked for Europe very well. 

Mr. WALKER. It is because they do not enforce it. 

Ms. DE RUGY. Yes, they do not enforce it. But it ultimately boils 

down to this: implementation. And how do you tie the hands of 

Congress? That is a real—that is a $20 trillion, going on $40 trillion question, is how do you tie the hands of Congress? That is 

really hard. 
24 

I just wanted to say something about tax expenditure. I do not 

entirely disagree with you, but we have to be very careful. Now 

those $1.2 trillion should be on the table because some of those tax 

expenditures are meant to mitigate the double taxation that exists 

in the Tax Code. So I think we have to be careful and not looking 

at them all as a potential source of revenue, unless we fundamentally reform our Tax Code and adopt a flat tax and get rid of double 

taxation of saving and—— 

Senator LANKFORD. I am over time, but let me make one quick 

comment. Where we are right now in budgeting, I am not sure it 

is how do you tie the hands of Congress. It is how do you untie the 

hands of Congress because most everything is on autopilot around 

here, and if you get to the end of a budget year, you do a continuing resolution. Even discretionary spending ends up being on 

autopilot. So this is a matter of giving Congress a deadline when 

they have to act and do something and cannot just sit back and say 

status quo will work and status quo is driving us over the cliff. 

Mr. ZANDI. I have a suggestion for it if you want to hear it. 

So the ability-to-pay rules in every piece of legislation, that adds 

to projected budget deficit. So ability to pay is equal to projected 

tax revenues plus borrowing authority must cover the deficits the 

CBO expects over the 10-year budget horizon, and that would be 

for every piece of legislation. That would add to future budget deficits. So every time you vote for a piece of legislation that will add 

to deficits, you have to also vote for the borrowing authority to 

achieve that. 

Senator LANKFORD. How is that different than the PAYGO rules 

that already exist that are waived by Congress routinely? 

Mr. ZANDI. If you waive them, you waive them, but that would 

be a rule that instead of having a Treasury debt limit, where it is 

cataclysmic if you go over it and, therefore, it is not credible that 

you will go over it, then you have this is something that would impose discipline every single time you voted for something. 

Senator PAUL. Thank you. I think that illustrates a lot of the 

problem, is it is not that we have not tried, not that we do not have 

processes in place. It is a people problem. 

Senator LANKFORD. Right. 

Senator PAUL. We do not obey our own rules. 

But I think Mr. Walker made a good point earlier when he said 

that basically 70 percent of the budget is not controlled by us. We 

need to untie our hands. We need to have our hands in all of it, 

but we just let the mandatory spending go on and on and on. 

I actually think there are some things we could do. I mean, 

Democrats and Republicans did raise the age of eligibility back in 

1983, and they raised taxes. Really, to my mind, as far as Social 

Security, we had a bill that I put forward six years ago. Two-thirds 

of the problem was fixed by raising the age over like a 20-or 30- 

year period. That fixed two-thirds of the shortfall. The remaining 

third, we did by means testing. You could argue whether you 

should raise the taxes or means-test it. They are still taking the 

bite from the wealthy more. The only reason I prefer means testing 

over taxes is means testing is on the tail end when you are not 

really creating jobs. You have all your wealth, and you just take 

a little bit less Social Security. Taxes on the early side, I think, can 
25 

have a disruptive effect on the market if we tax everybody on the 

full extent of their wealth. 

I would rather have rich people get a lot less Social Security to 

pay for it, but you can fix it. I do not think those are emotional 

things, but we just keep putting it off. 

But how come we do not fix it? Senator Peters, tell us how to fix 

it and why we do not fix it. 

Senator PETERS. So now that I am a member of the panel. 

[Laughter.] 

Senator PAUL. It is a friendly question. 

Senator PETERS. It is a friendly question. 

Well, I think when you talked about some of the things related 

to Social Security reform, one of the increasing the age limit, the 

problem with that is that not everybody can work longer. It is a 

situation for those of us who are blessed to be able to sit at a desk 

in an air-conditioned environment and engage in our profession. I 

think many of us will probably work beyond 70 years old for obvious reasons. 

A lot of the folks I represent lift heavy objects for a living, and 

their body does not necessarily last until 70 years. They are outside 

in the cold and the extremes, and so it does have a disproportionate impact based on what people’s jobs are. So I find there is 

generally more acceptance for raising the retirement age for folks 

who are in office jobs and who are usually very well paid versus 

everyday folks who are struggling and are concerned about that. 

The problem is the underlying premise, and Dr. Zandi mentioned 

this fact. When Ronald Reagan and that group figured they would 

solve Social Security for the future, they came together bipartisan. 

It was a great compromise. They came together. But as you mentioned, roughly 90 percent of all income was captured by that Social Security tax that paid in. It was based on the premise that everybody pays in, everybody gets it back. It captures most of the 

revenue. 

But what has happened since those Reagan years, as we all 

know, is that there has been an acceleration of income inequality 

at an accelerating rate. So it is the fact that the folks at the very 

top have now—I do not have the numbers in front of me here, but 

a very large percentage of total income goes to the folks at the very 

top. If you really want to solve—the ideal way to solve Social Security in my mind is you raise everybody’s income up—we get back 

to the 90 percent so we do not have this great gulf of not only income inequality but of wealth inequality, which is even greater 

than the income inequality, which causes the problem. 

So to have a means test would generate revenue, but you would 

need to generate an awful lot from that means test. It would not 

be just not getting your Social Security. That would not be enough, 

in my mind. I would have to run the numbers. You probably have 

run the numbers. It is not going to make up the difference, given 

the fact that you have had such a drop in the amount of income 

that is covered because of growing inequality. So that is why it has 

to be more comprehensive. 

Let me ask a question of the panel, after I have answered the 

question from the Chair. Mr. Walker, you wanted to make a comment. Do that as well, please. But as I mentioned in my opening 
26 

question, this is a three-legged stool. We have not talked a lot 

about taxes, and yet that is actually what is pending before us here 

or likely to be pending before us in Congress very shortly as we 

look at tax reform. There are folks who would like to see if there 

is tax reform, and there are certainly ways that we should make 

this Tax Code a lot more efficient. We should get rid of this thick 

document and simplify it—I am all about that. We should bring 

more certainty and deal with some of the uncertainties associated 

with that. 

I do not know how we deal with this if we are not dealing with 

at least deficit-neutral. We probably need to do more than deficitneutral as long as we are also cutting spending and growing the 

economy, but we will probably need to raise some revenue, ideally. 

But at a minimum, we should be deficit-neutral, and we will only 

make this problem worse. 

If you look at President Trump’s proposal, it was in the trillions 

of dollars, at least during the campaign, which does not seem like 

it fixed the problem. Folks around here love to give tax cuts. That 

is a fun thing to go back home, but it is increasing the deficit dramatically, and that is more abstract. But we know it is very real. 

It is not abstract in terms of the everyday world that we live in. 

So to kind of get your sense on this tax proposal, are you concerned if it is something other than at least deficit-neutral? 

Dr. Zandi, you are shaking your head, but I would like all of you 

to respond to it. Dr. Zandi. 

Mr. ZANDI. Sure. I would be supportive of revenue-neutral corporate tax reform. I think the House Republican plan, the proposal 

that has been put forward by Congressman Brady, is a pretty good 

plan. There are things to be worried about, particularly with regard to the border adjustment tax and some of the issues around 

transition and whether it violates WTO rules. But broadly speaking, on a reasonably dynamically scored basis, that would be a reasonable proposal. It is revenue-neutral, roughly. 

Other than that, I would not be supportive of cuts in personal 

income taxes at that point, unless you could do revenue-neutral 

kind of taxation to lower marginal rates and broaden the base. But 

I think that should be the key criteria that this—when it is all said 

and done, currently Federal revenue to GDP is 19 percent. That is 

where it should be. I think we should work toward that and try to 

make the Tax Code more efficient, work for us in a better way, promote growth, but I do not think we should reduce it. That has been 

the average amount of revenue raised, and as a percent of GDP for 

35 or 40 years, I do not think that should at this point in time. 

Ms. DE RUGY. I agree with you that tax cuts should be deficitneutral, not revenue-neutral, and there is just a lot of things we 

could cut, especially if we are talking about 10 years. The House 

Republican bill is a good bill, especially the growth, the part that 

grows the economy, but the border adjustment tax is actually a terrible idea. It is something that is completely untested, with extremely large amount of risks. And I could go on and on and on 

about this. 

But I think the goal—and outside the border adjustment, there 

is other ways in the bill, other provisions to raise revenue. I think 

a proper tax reform will do a little bit. If you cut some rates, you 
27 

expand the base, so you do some revenue increase too. But I think 

deficit neutrality should be the goal, not revenue neutrality. 

Senator PETERS. If I may just briefly. 

Ms. DE RUGY. Yes. 

Senator PETERS. Your opposition to the border tax, if that is 

taken out, the math does not work real well for the tax plan. Do 

you agree or—— 

Ms. DE RUGY. Yes. It does not work. It does not work really. That 

is true. 

Senator PETERS. At all, in fact. 

Ms. DE RUGY. But you could do a smaller package too. This discussion right now is as if this is the only—we need that—I mean, 

yes, the part outside of the border adjustment tax is great. If we 

cannot pass this, we go to something smaller. We will get a lot of 

growth from it, especially on the corporation tax. I mean, I would 

love to see reforms on the individuals’ side and reduction of rates, 

but this is not a priority. The corporation tax side—I mean, our 

system is absolutely awful. It is anti-competition. We have the 

highest rate of all the Organisation for Economic Co-operation and 

Development (OECD) countries. We have a worldwide tax system. 

This needs to happen, and a lot of growth will come from this. But, 

yes, the math does not work. 

On this, you also bring some spending cuts to the table, which 

the plan does not address at all. 

Senator PETERS. Thank you. Mr. Walker. 

Mr. WALKER. It should be deficit-neutral, and one of the real 

questions would be is whether and to what extent you consider economic growth in calculating that as to whether or not it is deficitneutral. 

With regard to Social Security, coming back to that real quick, 

keep in mind two things about 1983. They had no choice but to 

reach an agreement in 1983 because the trust fund was going to 

zero within a matter of months. If it went to zero, tens of millions 

of people would have their checks cut. That was not politically feasible or acceptable. They had no choice. 

But second, when they made the reforms in 1983, they did not 

consider known demographic trends. They only achieved actuarial 

balance over 75 years. They forgot that we have gone from 16 to 

1 people working to retired to three to one, going to two to one by 

2035. Next time you reform Social Security, you have to recognize 

demographic realities, demographics or destiny. 

And last, what we tested for Social Security reform—again, not 

advocating that this is necessarily the right answer, but what got 

77 percent support for Social Security reform of a demographically 

representative group of voters was the following: Raise but not 

eliminate the cap, considering 90 percent of taxable wages, which 

is what Reagan did back in the 80s. 

Mr. ZANDI. Seventy percent, did you say? 

Mr. WALKER. Ninety percent of taxable—— 

Mr. ZANDI. No, but the support was 70 percent? 

Mr. WALKER. Seventy-seven percent for a package. Now, you 

have to keep in mind—and that is how you have to do it. If you 

do individual things, forget it. You are not going to get people to 

come together. You have to vote on packages. All right? 
28 

Raise the cap. Gradually raise the retirement age two years over 

20 to 30 years, but provide an exception for certain occupations 

where they are not white collar occupations. You have to do that. 

You have to recognize that reality. Make the benefits more progressive. So give a higher replacement rate to people near the poverty 

level, a somewhat lower replacement rate for people that are higher income, but do not fully means-test it to make it a welfare program, and then consider going to an alternative form of CPI. Those 

got 77 percent support, which is even good enough in the Senate, 

I think. 

Mr. ZANDI. Can I make one point about corporate tax reform that 

is going to be relevant to the debate, I think? I think it would be 

a mistake to try to get around the budget rules by sunsetting any 

tax proposal after a 10-year budget window, that particularly with 

regard to growth, if we go to corporate tax reform and the idea here 

is to promote growth, if in fact you sunset it after 10 years just to 

make it work from a reconciliation perspective, that will—because 

back to the policy uncertainty—significantly reduce the economic 

value of that kind of proposal. You are not accomplishing what you 

need to approach. In my view, that would be an error to go down 

that path. If you are going to do it, you have to do it in an honest 

way. 

Senator PAUL. Well, I want to thank the panel for coming. I 

think we have had a good discussion, and I hope this is a beginning. I wish we had sort of a standing committee that was actually 

looking at entitlements. If I were in charge, there would be a committee looking at Social Security and Medicare and saying, ‘‘How 

do we come together?’’ And it would be a permanent committee, 

and it would be the most important committee around here. And 

we would devote time and resources day in and day out. And I 

think we could. I think we eventually could come to some arrangement. The idea that it is harder for people to do physical work, that 

there may be some accommodation, sure. I am sure we could find 

an agreement there. Does the age have to go up, though? The age 

has to go up. It is an enormous part of how you fix cost. 

Two-thirds of the Social Security shortfall can be wiped out by 

raising the age. Can you have some exceptions for people who are 

not able to work as long? You could. But there are all kinds of 

things. 

Which is worse? Raising taxes on everybody or means testing, or 

are they kind of the same thing? They are kind of the same thing. 

We could figure out how to do this, but we are not having the discussion. 

So I was pleased with the discussion today. This is a beginning. 

I appreciate you taking your time to come in, and thank you, Senator Peters, for being part of it. 

[Whereupon, at 3:59 p.m., the Subcommittee was adjourned.] 
(29) 

A P P E N D I X 
30 

I don't share these view, but even for those who do, the one thing we cannot outlive or 

inflate away is interest on the debt. This year alone, we will make $295 billion in interest 

payments. That is more than we will spend this year on seven cabinet departments, The White 

House, Congress, and the Courts, - COMBINED. 

More concerning is how ongoing deficits mean interest will consume more and more of 

our budget in the years to 

come. I want to draw your 

attention to this chart; it 

shows the share of federal 

spending that goes to 

interest on the debt, 

discretionary spending, and 

mandatory spending over the 

next 30 years. That spans 

roughly a typical worker's 

career. 

What we see is shocking. Today the American worker sees roughly 7 cents of their tax 

dollar go to interest and 30 cents to discretionary spending. But by the time a recent graduate 

today is near retirement, interest and discretionary spending will be taking an equal share of 

their tax dollar, roughly 19 cents each. 

Of course these are ratios, we'll be spending more overall in 30 years; but the point is 

still clear, under the current course, interest will progressively squeeze out discretionary 

spending. 
31 

So, what do we get for interest, what are we trading defense and education spending 

for? Nothing, not one hour of work, not one sticky note. 

We always hear spending today is an investment, or that cutting anything is too 

devastating. We hear that from both the right and the left, and we're always told we'll be fiscally 

responsible tomorrow. 

What kind of investment is that? The reality is, tomorrow we won't have a choice, there 

will be cuts. When Congress spends money it does not have today, it means in the near future, 

we will be less safe and less educated. Not for children and grandchildren, but for people -

adults - in the workforce today. 

We simply cannot continue to keep racking up debt. Yet, just two months ago I 

proposed a budget that balanced in 5 years without touching Social Security and without an 

actual spending cut. Yet only 14 senators had the courage to vote for that budget. 

So that brings me to my last point. Doing the right thing is hard and often not politically 

expedient. 

Congress rarely makes simple but unpleasant choices, which means we end up facing 

difficult and unavoidable, catastrophic problems. We only act when circumstances force us to. 

That is why the debt limit is important. It is our internal credit limit, not that of our 

creditors. It is an opportunity to reassess our spending, and ask, "how did we get here, and 

what do we do?" 

Answering those questions as part of past debt limit debates have spawned most, if not 

all major federal fiscal process reforms. The most notable example is 1g74 Budget Act, which 

came to be as the result of the 1972 debt limit debate. That act created procedures, road 

blocks, intended to prevent fiscal peril. 
32 

The '74 Act has its flaws; big spenders have had over 40 years to figure out how to beat 

it. The Budget Act was born during a debt ceiling debate. My hope, as we once again debate 

raising the debt ceiling, is that we reform spending at the same time. 

With that, I'll recognize Ranking Member Peters for his opening statement. But, before I 

do, I just want to note this is Senator Peter's first hearing as Ranking Member of this 

subcommittee, so I'd like to welcome him and look forward to working with you. Senator Peters. 
33 

I want to first thank the Chairman, Senator Paul, for bringing us 

here to discuss the critical topic of the national debt, and the 

pressing matter of the debt ceiling. 

I'd like to also give a sincere "thank you" to our distinguished 

panel of guests. Your perspectives of both the national debt and 

the debt ceiling are critical for us as policy makers. 

Today we will consider what I see as two very significant, 

distinct, and most importantly, SOLVEABLE problems. 

Perhaps I am an optimist, but finding sustainable solutions for 

our nation's debt, as well as finding a path forward on the debt 

ceiling, are both problems that can and should be solved in a 

responsible, bipartisan manner. 

To me, working in a bipartisan manner on these issues is the 

only path forward- it is what I believe we were sent here to do 

-to find the solutions that put America on a path towards a 

sustainable fiscal future. 

As 2017 progresses, we are going to hear many "School House 

Rocks" explanations of the debt limit, the statutory- and 

arbitrary - constraint on the amount of money the US Treasury 

can borrow. 

Much of the conversation will be focused on questions likewhen is the right time to talk about solutions for the long term 

debt and deficits? 
34 

We should be constantly working toward fiscal responsibility. 

This is not and should not be a seasonal debate. I'm sure the 

Chairman shares this sentiment. 

2 

But just as we should be constantly engaged in discussions about 

how to solve our long term issues, it is wholly irresponsible to 

turn this debate into one that threatens the full faith and credit of 

the United States. 

The global economy relies on the fact that at the end of the day, 

no matter the chaos in the rest of the world, the United States 

Government will fulfill its obligations and pay its bills. 

On March 16, 2017, under the Bipmiisan Budget Act of2015, 

the previously suspended debt ceiling was reinstated at just over 

$18 trillion. 

Immediately on March 16, Treasury Secretary Mnuchin wrote to 

Congress to inform us that the United States Treasury was 

taking "extraordinary measures" to avoid a breach in the debt 

ceiling. 

According to analysis of the debt limit conducted by both the 

Congressional Budget Office and the Bipartisan Policy Center, 

the Treasury Department's extraordinary measures may be able 

to extend the date to which the U.S. Government can fulfill its 

financial obligations into fall2017, perhaps October or 

November. 
35 

However, Congress can, and should, immediately begin 

discussions to address our obligations. After having been 

through numerous debates on the debt limit since 2011, it would 

be the height of irresponsibility to let this debate slip into the 

midnight hour. 

I remind my colleagues- while a breach of the debt ceiling 

would have unprecedented and potentially catastrophic impact 

on the global economy- brinksmanship alone has the potential 

to hurt everyday working families. 

In 2011, as Congress struggled to reach an agreement at the last 

minute, the US debt was downgraded, consumer confidence fell 

sharply, and the stock market and credit markets took months to 

fully stabilize. 

3 

To some, the debate in Washington may seem abstract, but ifwe 

yet again engage in brinksmanship, we are jeopardizing the 

chance for a working-class family to purchase their first home, 

or to take out a loan to buy a much-needed car. And we are 

risking thousands of Americans' retirement savings that they 

have built up over a lifetime of hard work. This is not 

acceptable. 

If there is to be a negotiation on the debt ceiling, I ask my 

colleagues, let it happen now. We cannot afford to let our 

differences risk the financial futures of American families. 

Failure to act is also not an option when it comes to long term 

debt and deficit reduction. 
36 

Solving this challenge will take bipartisan cooperation- and it 

will require a comprehensive approach that addresses all three 

fundamental factors of deficit reduction: cutting spending, 

reforming taxes, and investing in economic growth. 

4 

Budget plans that shift the burden onto one group at the expense 

of another, or that ignore any of these basic factors, will not 

solve the problem. 

We need to support economic growth, we need to find REAL 

solutions to curbing long term health care costs, we need to 

reform our tax code into one that promotes job creation and 

investment here at home in America, we need to make 

government more efficient, and we need to find RESPONSIBLE 

ways to cut spending. 

I hope today serves as an open forum on these issues, both our 

long term debt as well as the debt limit. I know that each of our 

witnesses is well informed and highly respected on these topics. 

Please use this forum to give us your honest assessment of these 

challenges. We may not agree on the proposals that we hear 

today, but it is only by engaging in a bipartisan, collaborative 

fashion that we are going to find the solutions that America 

deserves. 

Thank you. 
37 

I applaud Subcommittee Chairman Paul for hosting this hearing to examine the 

effects of debt on federal spending. I would like to highlight the importance of 

transparency and honesty in the federal budget process. Accurate accounting for 

budgetary estimates is foundational to the integrity of the budget process. 

However, budgetary scoring conventions used by both the Congressional Budget 

Office (CBO) and the Joint Committee on Taxation (JCT), the organizations 

tasked with providing official budgetary and revenue scores, do not always reflect 

the economic reality. The treatment of interest costs represents one such 

departure from accurate budgetary scoring because financing costs are not 

considered when calculating the total cost of legislative proposals. As a result, 

CBO and JCT revenue scores often underestimate costs, causing inflated actual 

spending outlays after costly legislative measures are passed. 

Interest costs are not a small part of the federal budget. In fact, net interest 

payments on the nation's debt alone are expected to be $768 billion by 2027, 

significantly above defense spending. Additionally, the Federal Reserve is highly 

anticipated to continue to raise interest rates by 0.25 percent increments, most 

recently increasing on March 15, 2017 only increasing the impact of interest 

costs. With CBO's projected FY17 deficit of $559B, this quarter percent increase 

alone amounts to about $1.4B in unaccounted for deficit spending in legislative 

proposal revenue estimates. 

But there is a solution. Today, I introduced the Budgetary Accuracy in Scoring 

Interest Costs (BASIC) Act to require both CBO and JCT to include projected 

interest expense associated with legislative proposals in order to accurately 

account for budgetary costs. Such a change will reduce variances between 

budget costs and actual costs, creating clarity in the fiscal budgeting process to 

both legislators and the public. 
38 

United States Senate 

Committee on Homeland Security and Governmental Affairs 

Federal Spending Oversight and Emergency Management Sub-Committee 

Hearing on "The Effect of Borrovving on Federal Spending" 

March 29, 2017 

Washington, DC 

By: Hon. David M. Walker 

Chairman Paul, Ranking Member Peters, and other members of the SubCommittee, thank you for the opportunity to testify today on this important 

topic. I am currently a Senior Strategic Advisor ·with PwC Public Sector. I 

am also a member of a number of Governing Boards and Advisory 

Committees. However, today I am testifying as a private citizen and the 

immediate former Comptroller General of the United States. 

The title of this hearing is: The effect of Borrmving on Federal Spending. 

The short answer is there are several implications of our current federal 

spending and borrowing practices. They include: 

o. Additional debt results in higher interest costs that can serve to 

crowd out other federal spending, especially discretionary spending, 

and/or increase pressure for tax increases. 

o. The Congressional Budget Office (CBO) has projected that interest 

costs will be the fastest growing expense in the federal budget on a 

percentage basis over the next 10-years. And what do we get for 

interest? Nothing! 

o. Excessive levels of debt as a percentage ofthe economy (GDP) can 

serve to reduce economic growth and job opportunities. It can also 

cause a "crisis of confidence' in the U.S. dollar and much higher 

interest rates if the market ever decides that the federal government 

has lost control of its finances and is not vvilling or able to regain 

control over them. 
39 

o. Additional debt serves to mortgage the future of our children, 

grandchildren and future generations at a time when they will face 

increasing competition in a much more interconnected and 

competitive global marketplace. 

From a broader perspective, the United States has strayed from many of the 

key principles and values that it was founded on and which made us great. 

The federal government has also grown too big, promised too much, and 

needs to enact a variety of reforms in order to help create a better future for 

our country and its citizens. The balance of my statement will provide some 

background and ideas regarding these matters. 

The United States was founded based on certain basic principles and 

values. These include, but are not limited to: individual liberty and 

opportunity, personal responsibility and accountability, limited but 

effective government, rule of law and equal justice under the law, fiscal 

responsibility, intergenerational equity and stewardship. Stewardship 

requires that leaders not just deliver positive results today, not just leave 

things better off when they leave than when they came, but also leave things 

better positioned for the future. This is consistent with the long-standing 

American value of doing everything possible to provide each generation 

with more opportunity and a better standing of living than the past. This 

important tradition is now at significant risk. 

For many generations the United States was disciplined about federal 

spending and focused on the express roles allocated to the federal 

government under the U.S. Constitution. However, in 1913 three things 

happened that served to significantly increase the size and scope of the 

federal government and undercut state's rights. Specifically: adoption of a 

federal income tax; creation of the Federal Reserve, and; direct election of 

the U.S. Senators rather than have them appointed by State legislatures. 

Since 1913 the federal government has grown from 2% of the nation's 

economy to about 21% today and increasing. Stated differently, the federal 

government is over 10 times larger today on a relative basis than in 1913 

and it's still growing. In addition, in 1913 the Congress controlled 97% of 

all federal spending annually. The only thing that Congress did not control 

was interest expense. Today, in Fiscal2016, 69% offederal spending was 

deemed to be "mandatory spending" (See Exhibit A). Shockingly, the 31% 
40 

of federal spending that was controlled included all of the express and 

enumerated responsibilities outlined for the federal government under the 

Constitution, and all investments in our future. 

Discretionary spending is coming under increasing pressure since 

mandatory spending is increasing at rates faster than the economy due to 

known demographic trends and rising health care costs. The bottom line is, 

Congress has lost control of the budget, our debt burdens are escalating to 

imprudent levels, and our collective future is now "at risk". 

The federal government is still adding debt faster than the growth rate of 

the economy and interest rates have started to rise. The Congressional 

Budget Office (CBO) now estimates that interest expense ~ill be the fastest 

growing category of spending growth as a percentage of the budget over the 

next 10-years. A recent independent analysis by Brian Riedl of the 

Manhattan Institute showed that if interest rates were to return the average 

rates in the 1990s that, the 2027 projected budget deficit would increase 

from $1.4 trillion to $2.2 trillion. 

Speaking of interest rates, the Federal Reserve has only recently begun to 

increase its discount rate. The Fed still has trillions of U.S. Government 

debt that it needs to dispose of. Social Security is now in a negative versus 

positive cash flow position since interest credits are a non cash item. In 

addition, the appetite for foreign government investment in U.S. 

Government debt is declining for a variety of reasons. All of these factors 

v\ill serve to put upward pressure on interest rates over time, especially if 

the economy starts to grow at a more brisk rate. 

Since the beginning of our republic, there have only been two times in our 

nation's history that federal public debt as a percentage of the economy 

(GDP) exceeded 40%. Those two times during the later part and in the 

immediate aftermath of World War II and in the 21st Century, including 

today. After World War II, the U.S. was over so% of global GDP, there 

were over 16 persons working for every person drm\ing Social Security 

benefits and the dollar was a good as gold. U.S. brought back fiscal 

responsibility and took a range of steps to grow the economy much faster 

than the nation's public debt. The result was a dramatic reduction in 

federal public debt/GDP from over 100% of GDP to less than 40% by 1980. 

Today, federal debt held by the public is approaching So% of GDP and, 
41 

based on estimates by the Government Accountability Office (GAO), the 

percentage of debt held by the public/GDP is on a path to rise to levels far 

in excess of the nation's historical high absent a major course correction 

(See Exhibit B). 

Today the U.S. represents about 24% of global GDP, there are about 3.1 

persons working for every person on Social Security and the dollar is not 

backed by gold. Current trends are not positive in any of these areas. 

Defusing our nation's ticking debt bomb will require an unprecedented 

public education and engagement effort as a prelude to major budget, tax, 

Social Security, Medicare/Medicare, health care, defense, government 

organization/operations, and political reforms. I led a 27 state effort in the 

fall of 2012 to test how such an effort could be conducted and whether it 

would serve as an effective means to bring Americans together to achieve a 

common goal (i.e., reducing public debt/GDP to a stated level by a specified 

date) and in a manner that was consistent with stated principles and values 

that could achieve a super-majority support and served to bring people 

together than rather than divide people apart. 

The result of the above effort proved that achieving the needed 

comprehensive reforms is possible. For example, 77% to over 90% of 

representative groups of voters in Ohio and Virginia, both so-called "swing 

states, agreed on a range of reforms in all of the above referenced areas that 

would result in public debt/GDP being reduced to 6o% by 2030 in 

installments and in a manner that would be sustainable over time. I would 

be happy to answer any questions about this effort should you so desire. 

The primary mechanism that Congress has used to control the level of 

federal debt in the past is the debt ceiling limit. While this mechanism in 

only direct debt speed brake the Congress has, it has not proven to be 

effective in limiting the growth of federal debt, forcing a reconsideration of 

proper role of the federal government, including the need to reform 

mandatory spending programs and tax expenditures. In fact, total federal 

debt subject to the debt ceiling limit will soon pass $2o,ooo,ooo,ooo,ooo. 

This is about 105% of GDP and about 3·5 times what the same number was 

in 2000! Clearly, the federal government has lost control of its finances. 

Arguably, 2003 was the year that the federal government lost its way. In 

that year alone, the federal government passed a second round of debt 
42 

financed tax cuts, invaded a sovereign nation without declaring war and 

charging the cost to the nation's credit card, and expanded Medicare to add 

prescription drugs. The latter action added over $9 trillion in new 

unfunded obligations when Medicare was already underfunded by over $19 

trillion! And this occurred just three short years after the then Chairman of 

the Federal Reserve testified that he was concerned that the federal 

government might pay off all the federal debt. A concern that I did not 

share and testified accordingly at the time. One thing is clear, we don't 

have to worry about that anymore. 

In my view, given recent history, the debt ceiling limit needs to be replaced 

vvith stronger statutory budget controls and a Constitutional amendment 

that would limit public debt/GDP with specific targets and automatic 

enforcement mechanisms if the targets are not met. In my view, a 

debt/GDP fiscal responsibility approach is vastly superior to a "balanced 

budget" approach. I am happy to discuss why and a related illustrative 

amendment, should you so desire. 

As you may be aware, there is currently an effort underway to achieve a 

state led Convention under Article V of the Constitution to restore fiscal 

responsibility at the federal level. Twenty eight of the required 34 states 

have already passed related resolutions and several groups are working to 

make this concept a reality. One of these groups is called the Balanced 

Budget Amendment Task Force. Michigan is one ofthe 28 states that has 

passed a related fiscal responsibility resolution but Kentucky has yet to do 

so. Hopefully the Kentucky legislature vvill do so either this year or next. 

Speaking of states, I lead an annual effort to rank the so states based on 

their relative financial position, competitive posture and migration 

patterns. This report reveals a v.ide disparity among the states. It also 

serves to demonstrate that cash-based "balanced budget" amendments 

have not proven to be effective mechanisms to ensure fiscal prudence and 

sustainability at the state level. As an example, both Kentucky and 

Michigan are required to have "balanced budgets". However, both states 

face fiscal sustainability challenges of differing degrees of magnitude due, 

in large part, to underfunded retirement plans. Kentucky is ranked number 

49 and Michigan number 41 out of the so states in relative financial 

position, v.ith number so (i.e., New Jersey) being the worst state (Sec 

Exhibit C). 
43 

States need to take steps to improve their competitive posture and put their 

finances in order. After all, eventually the federal government will take 

steps to restructure its finances, and when it does, the dmvndraft v.rill have 

an adverse impact on troubled states. In addition, while the federal 

government can create money and manipulate interest rates, state 

governments can't. And while municipalities can file for bankruptcy, states 

can't. Furthermore, most Americans do not want to leave the United States; 

however, most do not have a problem leaving a state, especially when they 

retire. 

In summary, we live in a great nation but we have strayed from the 

principles and values that made us great. We arc currently on an 

imprudent and unsustainable fiscal path. We need to be honest with 

ourselves and the American people. Tough choices are required on the 

spending and revenue side of the budget in order to restore fiscal 

responsibility, enhance economic growth, and create a better future. The 

sooner we start making those choices the better so the miracle of 

compounding can start working for us rather than against us as it is now. 

Thank you again for the opportunity to testify. I would be happy to answer 

any questions that members of the sub-committee may have. 
44 
45 

- 11 -o-n m "" 

of5- Percentage of GOP (%) ro ~ ~ X \;: :;; :;; 25 0... " 0 N .. g; co 0 25 :::r 0 0 0 0 0 0 0 0 

" ro 0. 1797 (/) -· ~ 1801 a- l 1805 OJ "'!1 

:;· 1809 M " 

" (/) 1813 

0 @ 

Y> 0 

t: 1817 OJ ., c:; 1821 

" 

- ro '" 0. 1825 )> G) 

:z: rr 0 1829 < ., " 1833 M '< 3 "'!1 3 1837 0 

:! " a :r: 1841 ., )> a (') 1845 

ro (') 

0 1849 t: -- " 1853 

0... iil' 

g: 1857 

~ l , 1861 ro ~ Q. 0 1865 ro rr 3l :r: (') ~· 

1869 Ql 

-" Q 

- N ~ 1873 0 

::1 M ro 0 1877 g- "' ro 

:::r g: 1881 :I iii 1885 ro 0: a: ro ~ 1889 a- if 1893 < -o 

" 1897 .... c :r c o- 1901 ro ~ -o a- Gl 1905 c: !<l 1909 2:: 

1913 r;· 

"' (') I 1917 "' 1921 "' l Vl OJ " 

~· 1925 :r 

1929 "' (./) 

[ (il 1933 0 OJ ~ 1937 G'l - :r: 1941 0 l/) :!l: 1945 -o o- 1949 -;:::;: < :::r ~ "-J ro 1953 I.D OJ " "-J c 1957 o- ,:., l 

~ 1961 0 

ro -!:> 

!<l 1965 .s 1969 

1973 0 1977 -h 1981 

G) 1985 

1989 

1993 0 1997 -o 2001 

2005 

2009 

2013 

2017 

2021 

2025 

2029 

2033 

2037 

N 
Relative Financial Position and Competitiveness bv State I - ------- ----. 

(Exhibit C) 

PwC 

1. Alaska (5) 700% 18 Missouri (3) 5.9% 35. Pennsylvania (4) 

2. North Dakota (2) 49.5% 18 Oklahoma (3) 5.9% 36 Vermont (5) 

3. Wyoming (3) 43.3% 20 Colorado (1) 60% 37 Mississippi (5) 

4. Utah (1) 7.2% 21. Arizona (2) 6.1% 38 Alabama* (4) 

5. South Dakota (2) 6.0% 22. Nevada (3) 7.1% 39. West Vtramia 15\ 

6. Nebraska (2) 5.8% 22. New Hampshire (4) 7.1% 40 California (4) 

7. New Mexico (4) 5.3% 24. Georgia (1) 7.7% 

8.1daho (2) 4.6% 25. Wisconsin (2) 8.3% 

9. Tennessee (1) 44% 26. Ohio (2) 94% 

10.1owa (1) 1.8% 27. Kansas (3) 11.8% 

11 Oregon (3) 0.7% 28. Texas (1) 13.6% 

12. Florida (1) 

29. North Caroltna (1) 15.2% 23% 

13. Virginia (1) 

30. Washington (2) 15.5% 2.4% 

14. Minnesota (2) 

31. Matne (5) 16.5% 

2.6% 32. Maryland (4) 20.1% 

41 Michiqan (3) 

42. Delaware (3) 

43 NewYork 14\ 

44 Louisiana (5) 

45 Hawaii (5) 

46. Massachusetts (3) 

47. Connecticut (5) 

48 Illinois 14\ 

15. Montana (3) 2.9% 33. South Carolina (2) 21.8% 49. Kentucky ( 4) 

16.Arkansas (4) 3.3% 34 Rhode Island (5) 25.5% 50 New Jersey (5) 

17.1ndiana (1) 4.6% 

Completed: January 2017 

Rankings are based on Fiscal2015 CAFR financial data and the latest migration and competitiveness data for 2016 

*Alabama Fiscal Year 2015 CAFR had not yet been released. Fiscal Year 2014 CAFR data is used here instead. 

25.7% 

28.9% 

29.5% 

301% 

32.5% 

32.8% 

33.6% 

34.1% 

34.7% 

37 9% 

442% 

44 7% 

67.2% 

75.3% 

79.5% 

86.9% 

-State names in black denote posttive state migration, state names in red denote negative state migration for the period 7/1/15-6/30/16 

- Percentages 1n red denote an accumulated burden per taxpayer as a percentage of median household income, percentages in black denote 

an accumulated surplus per taxpayer as a percentage of household income 

- Relative Competitive Posture 1n 2016 By Quintile- (1 ), (2), (3), (4) and (5) 

- Sources. Truth in Accounting's State Data Lab, U.S. Census Bureau, Forbes. CEO Magazine, and CNBC 

-The initial and full PwC State Financial Position Index (SFPI) and Competitiveness Report that used 2014 CAFR and 2015 competitiveness 

and migration data can be found at hl!J2j/pwc.to/1 06S85f. This report contains explanations of key terms and computations. 
47 

~~~- MERCATUS CENTER 

-~-George Mason University 

Change the Trajectory of Debt 

Veronique de Rugy 

Senior Research Fellow, Mercatus Center at George l'.fason University 

March 29th, 2017 

Senate Committee on Homeland Security and Governmental Affairs, Subcommittee on 

Federal Spending Oversight and Emergency Management 

Hearing: The Effect of Borrowing on Federal Spending 

Chairman Paul, Ranking Member Peters, and members of the subcommittee: 

Thank you for the opportunity to testify today. 

After briefly looking at how we arrived where we presently are, I would like to make the 

following points: 

l) High and increasing debt has adverse consequences for our economy. 

2) At the minimum, Congress should look for institutional reforms (such as credible 

budget caps and a BRAC commission for discretionary spending) that would be a 

first step to addressing our long-term debt problem as a condition to raising the debt 

ceiling. 

3) Optimally, Congress would reform the drivers of our future debt as it raises the debt 

ceiling, ending a cycle of pushing the unsustainability of the federal government, 

punishing taxes, and slower growth onto future generations. 

4) There are a few measures the Department of the Treasury can take, and there are 

sufficient assets available to prevent a default for several months, which should give 

Congress and the administration some time to reach an agreement that reflects the 

commitment to implement reform. 

THE INCREASING FEDERAL DEBT 

The origins of the federal government's statutory debt limit can be traced back to 1917, when 

the country was borrowing money to finance the First World War.' Limitations on federal 

borrowing were intended to control congressional spending by limiting the amount of debt 

that the federal government could accumulate. Policymakers have routinely pushed the 

debt limit ever higher with the passage of time. Indeed, the limit has been increased almost 

1 D. Andrew Austin, 1

'The Dcht Limit: History and Hecent Increases," Congressional Research Service, October 

I, 2015,5. 

3434 Washington Blvd. 4th Floor, Arlmgton. VA 22201 Phone: (703) 993-4930 Fax: (703) 993-4935 www.rnercatus.org 
48 

21 times between 1993 and 2015, 2 including the Bipartisan Budget Act of 2015 passed in 

October 2015 that suspended the debt limit until March 15, 2017.3 During that time, the 

federal debt ballooned from less than $5 trillion in 1993 to $19.9 trillion as of February 20174 

As of March 16 of this year, a new debt limit has been established to reflect the additional 

borrowing that took place during the suspension and through March 15, 2017. From this 

point on, "Treasury will, from that date forward, have no room to borrow under standard 

operating procedures. Therefore, to avoid breaching the ceiling, the Treasury would begin 

taking the extraordinary measures that would allow it to continue to borrow for a limited 

time," according to the Congressional Budget Office (CB0).5 

It is worth noting that the 2015 suspension of the debt limit was part of a deal to increase 

spending (for the second time) above what was intended by caps implemented by the 

Budget Control Act of 2011. Despite the popular perception of Republicans and Democrats 

caught in gridlock, the truth is that after the political dust settles, the end result is always 

the same: a bipartisan agreement on more spending and more debt. 

This needs to change. According to the most recent ten-year fiscal forecast from the 

Congressional Budget Office, federal outlays remain near 21 percent of GDP for the next few 

years-higher than their average of20.2 percent over the past 50 years. Also, if current laws 

generally remained the same, growth in outlays would outstrip growth in the economy, and 

outlays would rise to 23.4 percent of GDP by 2027. 

CBO projections also show that federal debt held by the public will reach 77.5 percent by the 

end of 2017. It is expected to grow from $14.8 trillion this year to $24.8 trillion by 2027. 

Gross debt will reach $20.3 trillion at the end of this year and total $27.5 trillion at the end 

of 2027. 

That's probably an underestimate, since it is a projection based on the assumption that 

promises to cut spending and raise taxes will be kept. Based on Congress's termination of 

the sequester years ahead of schedule and its historical propensity to spend more and more 

each year, this is unlikely. The projections also assume that the economy will grow at 

current projected rates and without any recessions. This too is unlikely, because the 

economy, historically, has cycled into recession every five to six years. 

Deficits are projected to balloon from $559 billion in 2017 to $1.4 trillion in 2027. Over the 

coming decade, the size of the federal deficit will double to reach an almost annual gap of 5 

percent of GDP in 2027. CBO predicts that cumulative deficits will total $10 trillion between 

this year and 2027. 

1 D. Andrew Austin, "The Debt Limit Since 2011," Congressional Research Service, March 14,2017, 5. 3 Veronique de Rugy, '

1

Rudget Deal Is Business-as-Usual in Washington," lVIercatus Center at George Mason 

University, November 18, 2015. 

·~Department of the Treasury, "Monthly Statement of the Public Debt of the United States, February 28, 2017,'' 

table I-Summary of Treasury Securities Outstanding. 5 Congressional Budget Office, "Federal Debt and the Statutory Limit, March 2017," March 7, 2017. 
49 

The projected explosion of spending from programs such as Social Security, Medicare, and 

Medicaid will trigger even higher levels of debt in the years outside the 10-year budget 

window. 

The growth in spending on mandatory programs-such as Medicare, Medicaid, Affordable 

Care Act subsidies, and Social Security-is the driving force behind this spending growth 

and our exploding debt. In 2017, spending on those programs will reach $2.1 trillion, or 54 

percent of total spending. 

Unfortunately, as the debt grows, so too will the interest payments on that debt. Debt 

payments, which were $270 billion in 2017, are currently projected to increase to $768 

billion in 2027. If the United States doesn't change course, debt will end up as one of the 

federal government's biggest budget items. Our unfunded liabilities keep going up, too. The 

net present value of the promises made to the American people that the United States does 

not have the money to pay is roughly $75.5 trillion, according to the Treasury Department. 

Even leaving aside the fact that the federal budget isn't sustainable on its current trajectory, 

high debt levels are problematic. As CBO explained a few years ago: 

Such high and rising debt later in the coming decade would have serious negative 

consequences: When interest rates return to higher (more typical) levels, federal 

spending on interest payments would increase substantially. Moreover, because 

federal borrowing reduces national saving, over time the capital stock would be 

smaller and total wages would be lower than they would be if the debt was reduced. 

In addition, lawmakers would have less flexibility than they would have if debt levels 

were lower to use tax and spending policy to respond to unexpected challenges. 

Finally, a large debt increases the risk of a fiscal crisis, during which investors would 

lose so much confidence in the government's ability to manage its budget that the 

government would be unable to borrow at affordable rates. 6 

These numbers should be at the forefront in any discussion about the need to raise the debt 

ceiling again. 

WHAT'S AT STAKE 

The debt ceiling will need to be raised in the near future. As such, we can expect 

Washington to have the same debate it has had for the last few years about whether or not 

to raise the debt ceiling and under what circumstances. On one side, you will find those who 

want to raise the limit with no conditions. On the other side, you will find those who will 

demand reforms in exchange for yet another increase in the debt ceiling. 

Default should not be an option on the table. However, raising the debt ceiling without a 

commitment to improve our long-term debt problem has adverse consequences. In 2011, the 

6 Congressional Budget Office, "Updated Budget Projections: Fiscal Years 2013 to 2023," l\r1ay 2013. 
50 

rating agency Fitch Ratings warned the US government that while it wanted the debt ceiling 

to be raised, it also wanted the government to come up with a credible medium-term deficitreduction plan. 7 Other rating agencies at the time also warned the United States of the 

negative consequences of not dealing with the country's long-term debt. 

The federal budget is unsustainable. According to economist Paul Winfree, this 

unsustainability is driven by 2 percent of nearly 1,800 spending accounts funding all 

government activities-mainly public heal the are programs administered by the Department 

of Health and Human Services and benefits paid by the Social Security's Old-Age and 

Survivors Insurance Trust Fund.8 The spending on those accounts is about 60 percent of 

gross spending over 10 years. It is currently projected to keep increasing faster than GDP, 

but this cannot sustainably continue indefinitely. 

This makes it incredibly important to address our country's long term debt problem. A delay 

in dealing with this underlying unsustainability will severely restrict our future fiscal 

choices and make it very hard to respond to emergencies. 

With that in mind, the need to raise the debt ceiling offers a great opportunity to demand 

that Congress take some steps toward a more fiscally responsible future. Optimally, the 

White House, Congress, and Treasury will raise the debt limit while Congress passes and 

the president signs a credible plan to reduce near-and long-term spending at the same time. 

It takes some time to come up with such a plan. Fortunately, this administration 

acknowledges that the United States need not risk defaulting on its debt while it figures out 

what reforms can be adopted as part of a debt ceiling deal. The Treasury Department has 

the legal authority to use extraordinary measures to prioritize interest payments on the debt 

above all else, thus avoiding a default. 

As was the case in 2011, the United States will have enough expected cash flow (tax 

revenue) and assets on hand to avoid either of these unattractive options. Managing 

payments in this manner is by no means optimal, and Treasury officials have indicated that 

this will be difficult owing to payment automation. That said, it is important to recognize 

the options that are available to prevent a default. v\'hile Washington has difficult choices to 

make, defaulting on its debt obligations is not one of them, such a step should not be a 

consideration in the current or foreseeable discussion about how to handle the debt limit or 

reduce long-term government spending. 

Vetomquc de Rugy, "Po hey Imphcations of the S&P Warnings," The Corner, Natwnal RevWH' Onlzne, July 22, 

2011. Also sec Jeannette Neumann, "Fitch Unveils Two Possible Routes to D(nvngrading US Deht Rating," 

Wall Street .Tournai, January 15, 2013. 3 Paul Winfree, "Causes of the Federal Government's Unsustainable Spending" (Backgrounder No. 3133, 

Heritage Foundation, Washington, DC, July 7, 2016). 
51 

REAL INSTITUTIONAL REFORM 

We can predict that in the coming months the heated rhetoric about whether Congress 

should raise the debt ceiling will obscure the federal government's real problem: an 

unprecedented increase in government spending and the future explosion of entitlement 

spending has created a fiscal imbalance today and for the years to come. No matter what 

Congress decides to do about the debt ceiling, the United States must implement 

institutional reforms that constrain government spending and return it to a sustainable 

fiscal position. 

Real institutional reforms, as opposed to one-time cuts, would change the trajectory of fiscal 

policy and put the United States on a more sustainable path. Such reforms could include: 

l. A constitutional amendment to limit spending. The inability of lawmakers to constrain 

their own spending makes spending limits enforced through the US Constitution 

preferable.9 

2. Meaningful budget reforms that limit lawmakers' tendency to spend. In the absence 

of constitutional rules, budget rules should have broad scope, few and high-hurdle escape 

clauses, and minimal accounting discretion. 10 

3. The end of budget gimmicks. Creative bookkeeping is at the center of many countries' 

financial troubles. Congress should end abuse of the emergency spending rule, reliance on 

overly rosy scenarios, and all other gimmicks and institute a transparent budget process." 

4. A strict cut-as-you-go system. This system should apply to the entire federal budget, 

not just to a small portion of it. There should be no new spending without offsetting cuts. 12 

5. A BRAC-Jike commission for discretionary spending. Commissions composed of 

independent experts often tackle intractable political problems successfully.13 

REAL ENTITLEMENT REFORMS 

Some members of Congress believe that we can stabilize our debt problems by raising taxes, 

preferably on the wealthiest Americans. However, the math doesn't add up. Other members 

believe that we can make the budget more sustainable by simply reducing nondefense 

discretionary spending, engaging in regulatory reforms, and cutting taxes. \Vhile there is 

'David M. Primo, "Constitution is Only Way to Cut US Deficit," Bloomberg, February 24, 20!1. 10 David l\1, Primo) "Making Budget Rules Bite" (Mercatus on Policy, Mercatus Center at George Mason 

University. Arlington, VA, March 20!0). 

': Vcronique de Rugy, "Budget Gimmicks or the Destructive Art of Creative Accounting" (l\.-1ercatus \A.Torking 

Paper, l\.fercatus Center at George ::\lason University, Arlington, VA, 2010). 12 Veronique de Rugy and David Bieler, ''Is PAY GO a No-Go?" (Mercatus on Policy, l\1ercatus Center at George 

1Vlason University, Arlint,rton, VA, April2010). 3 Jerry Brito, "The BRAC Model for Spending Reform" (Mercatus on Policy, Mercatus Center at George 

I\t1nson Unin:-rsity, Arlington, VA, February 2010). 
52 

some merit to doing all these things, it won't be enough to address the unsustainability of 

our fiscal outlook. 

As I mentioned earlier, the drivers of our future debt are spending on Medicare, Medicaid, 

and Social Security. Without reforms today, vast tax increases will be needed later to pay for 

the unfunded promises made to a steadily growing cohort of seniors. For instance, looking 

only at the excess spending growth in Medicare and Medicaid, Katherine Baicker and 

Jonathan Skinner find that "if spending growth is completely funded through tax increases, 

by 2060 GDP would be reduced by between 5 percent and 11 percent, depending on the 

future tax changes." 14 

While there is some disagreement among economists when it comes to fiscal policy 

prescriptions, a consensus has emerged recently that spending-based fiscal adjustments are 

not only more likely to reduce the debt-to-GDP ratio than tax-based ones, but they are also 

less likely to trigger a rcccssion. 15 In fact, if accompanied by the right type of policies 

(especially changes to public employees' pay and public pension reforms), spending-based 

adjustments can actually be associated with economic growth. 

Fortunately, numerous workable solutions are available to lawmakers, including adding a 

system of personal savings accounts to Social Security, liberalizing medical savings 

accounts, and making the latter permanent to reduce healthcare costs by increasing 

competition between providers and making consumers more responsive to tradeoffs. 16 

These options would encourage families to save more and use their money more 

responsibly, in a manner more consistent with their long-term needs. And because 

taxpayers remain in control of their wealth, they can bequeath any surplus to their heirsgiving the next generation a head start when it comes to building assets. 

Better yet, we should free the healthcare supply from the many constraints imposed by 

federal and state governments and the special interests they serve. 17 

The stakes are high: Bringing revolutionary innovation to this industry could mean not just 

bending the healthcare cost curve but breaking it to bits-making the need for health 

insurance much less important if not moot in many cases. 

14 VVinfrcc, "Causes of the Federal Government's l.Insustainable Spending," 17. 15 Vcronique de Rugy, "The Effect ofT ax Increases and Spending Cuts on Economic Grm.vth" (Testimony 

before the Senate Budget Committee, Mercatus Center at George Mason University, Arlington, VA, May 22, 

2013). 

10 Chris Edwards and Tad DeHaven, "War between the Generations: Federal Spending on the Elderly Set to 

Explode" (Policy Analysis 1\'o. 488, Cato Institute, Washington. DC, September 16, 2003). 

~~Robert Graboyes, Fortress and Frontier in American Health Care (Arlington, VA: l\1ercatus Center at George 

iVIason University, 2014). 
53 

REVENUE AND ASSETS AVAILABLE TO FUND OUR COMMITMENT UNTIL AN 

AGREEMENT IS REACHED 

When the government reaches the debt ceiling and the Treasury is no longer able to issue 

federal debt, the federal government could reduce spending, increase federal revenues by a 

corresponding amount to cover the gap, or find other funding mechanisms. This would 

allow time for Congress and the president to reach an agreement to make some important 

policy changes to change the debt trajectory we are on. 

At that time, the Department of the Treasury will have several financial management 

options to continue paying the government's obligations. These include (l) prioritizing 

payments; 18 (2) taking financial steps, including permitting the suspension of investments 

in, and the redemption of securities held by, certain government trust funds or postponing 

the sale of nonmarketable debt;t9 (3) liquidating some assets to pay government bills;20 and 

( 4) using the Social Security Trust Fund to continue paying Social Security benefits. 21 

PRIORITIZING PAYMENTS 

The secretary of the treasury has long-standing authority to prioritize payments and does 

not have to pay bills in the order in which they are received. The Government 

Accountability Office found that 

the Secretary of the Treasury has the authority to determine the order in which 

obligations are to be paid should the Congress fail to raise the statutory debt ceiling 

and revenues are inadequate to cover all required payments. There is no statute or 

other basis for concluding that the Treasury must pay outstanding obligations in the 

order they are presented for payment. Treasury is free to liquidate obligations in any 

order it determines will best serve the interests of the United States.22 

According to a report by the Department of the Treasury's Inspector General (IG), during 

the 2011 debt ceiling crisis, the Treasury "considered a range of options with respect to how 

Treasury would operate if the debt ceiling was not raised." Further, the report notes that 

Treasury officials told the IG that "organizationally they viewed the option of delaying 

payments as the least harmful among the options under review" and that "the decision of 

:t! Jason J. Fichtner and Vcronique de Rugy, "The Debt Ceiling: What Is at Stake'?" (Mercatus Research, 

Mereatus Center at George Mason University, Arlington, VA, 20lt). 19 Jason J. Fichtner and Vcronique de Rugy, "The Debt Limit Debate'' CVIcrcatus on Policy, l\:1crcatus Center at 

George lVIason University, Arlington, VA, l\1ay 2011). 20 Fichtner and de Rugy, "The Debt Ceiling: What is at Stake?" 

Zi The Social Security Trust Funds can only be used to pay Social Security benefits. See Glenn Kessler, "Can 

President Obama Keep Paying Social Security Benefits Even If the Debt Ceiling Is Reached?," Washington 

July 13, 2011; Contract with America Advancement Act of 1996, Pub. L. No. 104-121, !tO Stat. 847 (1996). 

Government Accounto.bility Office, letter to Senator Bob Pacbvood, October 9, 1985. 
54 

how Treasury would have operated if the U.S. had exhausted its borrowing authority would 

have been made by the President in consultation with the Secretary of the Treasury." 23 

TEMPORARY MEASURES 

During the last debt ceiling debate in 2011, my colleague Jason Fichtner and I listed all the 

assets that Treasury could tap into to avoid a default until the president and Congress 

reached an agreement. 24 For instance, we found that Treasury was expected to collect $2.6 

trillion in revenue. As we explained: 

That alone would be enough to cover interest on the debt ($218 billion), thereby 

avoiding any technical default of the US government on its debt obligations to Social 

Security ($809 billion), Medicare ($581 billion), and Medicaid ($267 billion), and it 

would leave approximately $725 billion for other priorities. 

In addition, we noted that the Department of the Treasury had financial measures at its 

disposal to fund government operations temporarily without having to issue new debt. To 

be clear, our list was only meant to present the range of possible options available to 

Congress. And as we noted then, they may well be neither good nor desirable options. 

These assets totaled $1.9 trillion and included $50.2 billion in nonrestricted cash on hand, 25 

$121.1 billion in restricted cash and other monetary assets (gold, international monetary 

assets, and foreign currency),26 or the redemption of existing investments in other trust 

funds. 27 

We also noted that the government could rely on the determination of a "debt issuance 

suspension period." This determination would permit the redemption of existing, and the 

suspension of new, investments of the Civil Service Retirement and Disability Fund 

(CSRDF). 28 The latest data show $858.7 billion in intergovernmental holdings in the 

CSRDF. 29 

2

:< Department of the Treasury, Office of Inspector General, Jetter to Senator Orrin G. Hatch, OIG-CA-12-006, 

Aug1tSt 24, 2012. 

Jason J. Fichtner and Veronique de Rugy, "The Debt Ceiling: Assets Avai1able to Prevent Default" (Mercatus 

Research, IVlercatus Center at George Mason University, Arlington, VA, 2013). 

Department of the Treasury, "Daily Treasury Statement," January 14,2013. 

Department of the Treasury, "2012 Financial Report of the US Government," 2013, 65. Note: At the time, the 

Treasury owned approximately 261.4 million ounces of gold and marked the value of its gold holdings at $42 

per ounce, giving a reported value of $!1.1 billion. At a spot market price of $1,500 per ounce, Treasury's gold 

holdings could be valued near $400 billion. 27 Department of the Treasury, "Monthly Statement of the Public Debt of the United States, December 31, 

2015." 

"In September 1985, the Treasury took the step of disinvesting the Civil Service Retirement and Disability 

Trust Fund, the Social Security Trust Funds, and several smaller trust funds. 

Office of Personnel Management. "Civil Service Retirement and Disability Fund Annua1 Report: Fiscal Year 

Ended September 30, 20!5," January 2016. 
55 

Today, the numbers arc different, but the same assets may be used to avoid a default, as 

confirmed by CB0. 30 Relying on any of these sources of funds or increasing the debt ceiling 

without reducing existing budget commitments illustrates the irresponsibility of the path 

the country is on and the urgent need for institutional spending reform. Nonetheless, these 

assets could be used as a temporary measure to allow Congress and the administration to 

negotiate spending reductions and institutional reforms to the budget process to ensure the 

nation is put back on a sound fiscal path. 

Thank you. I am happy to take your questions. 

"'Congressional Budget Office, "Federal Debt and the Statutory Limit, March 2017." 
56 

Written Testimony of Mark Zandi 

Chief Economist, Moody's Analyiics 

Before the F~:dcral Spending Oversight and Emergency Management Subcommittee 

of the Committee on Homeland Security and Governmental Affairs 

"The Effect of' Borrowing on Federal Spending" 

March 29, 2017 

Federal policymakers face a daunting number of significant pressing fiscal 

challenges. Most immediately, Congress has an April 28 deadline to renew expiring 

government spending authority through the end of the current fiscal year. Failure to do so 

could result in a government shutdown. 

Then there is the budget for fiscal 2018. which is sure to be a matter of significant 

debate given President Trump's recent call for big increases in spending on the military 

and veterans' benefits. and commensurate cuts to nondefense discretionary programs. 

The Treasury debt limit was also reinstated on March 16, although the Treasury 

probably has until at least August and perhaps as long as early October before it runs out 

of cash to pay bills coming due. 

Policymakcrs appear likely to take up comprehensive tax reform this year. This will 

involve lowering marginal tax rates for businesses and individuals. and scaling back or 

eliminating preferences in the tax code to help pay for the lower rates. To pay tor 

significant tax cuts, policymakers will need to find other sources of revenue or additional 

cuts in government spending, both of which will be extraordinarily difficult to do. 

And then there is the nation's longer-run fiscal problems. The federal budget deficit is 

currently running at nearly $600 billion annually, equal to just over 3% of GDP. Publicly 

traded federal debt is equal to more than 75% ofGDP, more than double what it was a 

decade ago, prior to the Great Recession. But more disconcerting, without significant 

changes to federal tax and spending policies. the federal government's deficits and debt 

load will steadily increase. The Congressional Budget Office estimates that by 2020. if no 

changes are made to current law. 92 cents of every federal tax dollar will go toward 

mandatory spending and interest. A decade hom now this will rise to more than one 

dollar. This is not sustainable. 

This written testimony will focus on the potential economic impact of political 

brinkmanship over increasing the Treasury debt limit. Such brinkmanship would be very 

costly to taxpayers, and under some scenarios catastrophic for the economy. This 

Page I 
57 

testimony will also provide a few suggestions policymakers may want to consider to 

address the nation's looming problem with deficits and debt. 

Treasury debt limit countdown 

In a letter to House Speaker Paul Ryan, Treasury Secretary Steve Mnuchin confirmed 

that the Treasury debt limit, which was suspended by the Bipartisan Budget Act of2015, 

would be reinstated on March 16 and that he would start undertaking extraordinary 

measures to preserve the Treasury's cash to avoid defaulting on its obligations. 

The Treasury looks to run out of room under the $19.9 trillion debt ceiling as soon as 

August, but no later than early October. Under the most likely scenario, the Treasury will 

be able to manage until the September 15 corporate tax deadline, when an inflow of tax 

receipts will provide another couple of weeks' worth of headroom under the limit. 

However, Congress will need to raise the limit by October 5 (see Chart 1 ). 1 

Chart 1: Oct. 5 Is Debt Ceiling Point of No Return 

Estimated borrowing capacity under reinstated debt limit. S bil 

450 

150 

0 

·150 

-300 

Apr.Q4 May.Q4 Jun·05 Jul.()5 Aug.Q4 Sep.()S Oct·OS Nov·06 

Any thought that Treasury would be able to pay holders of U.S. government 

securities first, and thus avoid defaulting on its obligation, is misplaced. Treasury has the 

technical ability to pay bond investors before others, as those payments are handled by a 

different computer system than other government obligations, but the Treasury believes it 

is not legally viable to do so, and politically it would be very difficult to pay bond 

investors before, say, Social Security recipients. 

Even if the Treasury did pay bond investors first, this would not stop investors from 

demanding a much higher interest rate for the legal uncertainty and the real possibility 

that they may not get paid on time in the future. Bond investors, especially those 

overseas, would reasonably ask whether Congress would actually allow them to be paid 

ahead of American seniors. 

Page 2 
58 

Deciding which other bills receive priority would be all but impossible, as the 

Treasury could not sort through the blizzard of payments due each day. More likely, the 

Treasury would delay all payments until it received enough cash to pay a specitic day's 

bills, as outlined in a 2JJ 2 t:<;,[lt_l_l1 by Treasury's inspector general. 

The Federal Reserve could restart quantitative easing-purchases of Treasury 

bonds-but any benefits would likely be overwhelmed as global investors sold U.S. 

securities. Financial markets would surely be spooked. Sometime in early October, there 

would be a TARP moment, harkening back to that day in autumn 2008 when Congress 

failed to pass the Troubled Asset Relief Program, and the stock market and other 

financial markets cratered. 

There has been no discernible reaction in financial markets to a potential standofT 

over the debt limit so far. Credit default swaps on Treasury securities-the cost of 

insuring against a default by the Treasury-are currently close to a very low 5 basis 

points for one-year Treasuries, and less than 30 basis points for five-year securities. For 

context, in the summer of2011 when brinkmanship around raising the debt limit was at 

its apex, CDS spreads on one-year Treasuries rose to as high as 80 basis points and those 

on live-year Treasuries to 65 basis points. 

Markets are calm likely because it has become typical for Congress to run down the 

clock but in the end to raise the debt ceiling when absolutely necessary. It is thus widely 

expected that Congress will do so again. This is especially true now given that 

Republicans control both the executive and legislative branches of government. Investors 

cannot imagine that the deadline will be as disruptive as some recent experiences. 

However, the House Republicans' inability to coalesce around a healthcare bill last 

week shows that policymaking is still rocky under a unified government. The longer it 

takes for policymakers to raise the debt limit, the more likely it will cost taxpayers money 

and harm the economy. And if policymakers fail to raise the limit before the Treasury 

runs out of cash and causes it to default on its obligations, it vvill be extraordinarily costly 

to taxpayers and do serious, even potentially catastrophic, damage to the economy. 

Economic impact 

The impact of political brinkmanship over the Treasury debt limit will show up first 

in higher interest rates. Just how costly this can be is evident fi·om the reaction of 

Treasury investors during the last round of such brinkmanship in late 2013. A Moody's 

Analyties analysis of the period shows that investors nervous about a U.S. government 

default pushed I 0-year Treasury yields up by 6 to 12 basis points at the height of their 

angst. Short-term interest rates also increased2 

Page 3 
59 

Even though the Treasury ultimately did not default, and interest rates quickly fell 

back, the episode cost taxpayers an estimated nearly half-billion dollars in added interest 

costs. And this does not include the costs to households and businesses that also had to 

pay higher interest rates on the money they needed to borrow. Though these costs were 

relatively modest, they were unnecessarily incurred, and they surely would have been 

many multiple times greater if the Treasury actually had defaulted on its debt. 

Brinkmanship around the debt limit will also quickly affect consumer and business 

sentiment and harm economic growth. Businesses will become more reluctant to invest 

and hire and entrepreneurs less likely to start companies. Financial institutions will be 

more circumspect about extending credit and households more cautious about their 

spending. 

Uncertainty created by Washington is already very high, according to the Moody"s 

Analytics political uncertainty index. The index is based on the CDS-implicd probability 

of default on five-year Treasury bonds. the present value of future expiring tax 

provisions. and the share of businesses that cite legal and regulatory issues as their 

biggest problem in the Moody's Analytics weekly business survey. The index is set to 

equal zero in 2004-2005, ncar the end of the last business cycle. The higher the index, the 

greater the uncertainty. 

The Moody's Analytics index rose significantly during the heated debate over the 

American Recovery and Reinvestment Act-the $830 billion fiscal stimulus-in early 

2009. It surged during the budget debate in early 20 I 0, and the Treasury debt-ceiling 

showdown in the summer of201! (see Chart 2). It hit a record high during the late 2013 

government shutdown and has remained elevated ever since. 

Political uncertainty is a corrosive on business investment, reduces hiring, and slows 

GOP growth. A statistical analysis shows that increased political uncertainty since the 

2008 recession has lowered real GOP by close to $180 billion, reduced employment by 

1.2 million jobs, and increased unemployment by 0.7 percentage point3 If not for the 

logjams in Washington in recent years, and if policy uncertainty had simply remained 

unchanged from its prcrecession level, the economy would have returned to full 

employment nearly a year ago4 

Page 4 
60 

Chart 2: Fiscal Uncertainty Remains Elevated 

Fiscal policy uncertainty. 2004·2005=0 

300 

225 • 

150 ' 

75 • 

-75 

05 06 07 08 09 10 11 12 13 14 15 16 17 

If the debt limit is not increased in time and the Treasury actually were to default, not 

only would interest rates and policy uncertainty soar, but the federal government would 

have to significantly cut back on its spending. Based on the timing of outlays and tax 

receipts, this would probably mean delaying by more than a week about $60 billion in 

payments due November 1 to Social Security recipients, veterans, and active-duty 

military. This would almost surely undermine consumer and business confidence. 

If the impasse over the debt limit lasts through November, the Treasury will have no 

choice but to eliminate a cash deficit of approximately $130 billion by slashing 

government spending. 

In contrast with previous recessions, the Federal Reserve and fiscal policymakers 

would have few tools available to cushion the blow. With Congress and the 

administration still at loggerheads, there would be no fiscal policy response, and with 

already very low short-term interest rates and a bloated Federal Reserve balance sheet, it 

is unclear how much the central bank could do to support the economy. 

This would be a cataclysmic economic scenario. Based on simulations of the 

Moody's Analytics model of the U.S. economy, the downturn would be at least as severe 

as the Great Recession. That means real GDP would decline by as much as 5%, close to 

I 0 million jobs would be lost, and unemployment would rise back close to double digits. 

With this economic backdrop, stock prices would likely be cut in half, wiping out about 

$10 trillion in household wealth. Treasury yields would likely spike, at least until the debt 

limit is increased and debt payments are resumed. 

Page 5 
61 

The path forward 

Policymakers have yet to consider how they should go about increasing the debt limit. 

There are several approaches Republican leaders might take to address the issue, 

including raising the debt limit as part of a necessary spending bill, such as the spending 

legislation that will need to be enacted by September 30, the end of the current fiscal 

year. The debt limit could also be raised as part of the reconciliation process, and 

combining tax reform with a debt limit increase, for example. To do so, instructions to 

increase the debt limit would need to be included in the fiscal 2018 budget resolution 

sometime this summer. 

Finally, Republican leaders could pass a debt limit increase as a standalone piece of 

legislation without any direct link to the budget process. Several recent debt limit 

increases have been passed this way. This option could be attractive if other legislation, 

such as tax reform, is not ready by the time the debt limit needs to be raised. 

Budget reforms 

Congress could also use this opportunity to eliminate the statutory debt ceiling. It is 

an idiosyncratic. anachronistic and, as has been demonstrated, potentially destructive rule 

that is detrimental to sound economic policy. 

Short of a repeal of the debt ceiling, policymakcrs should consider strengthening the 

link between borrowing and tax and spending policy, by requiring "ability to pay" 

language in any legislation that adds to future deficits. Ability to pay is det!ned as 

sutlicient projected tax revenue and borrowing authority to cover the current 

Congressional Budget Office deficit forecast. This requirement would be applied to all 

direct spending. taxation and annual appropriations bills. Any discrepancies that result 

from changes in the CBO forecast could be reconciled in the annual budget process. 

The debt ceiling would still force lawmakers to think about the long-term fiscal 

impact of any legislation. but it would do so in the context of the spending and taxation 

bills that create the need for that debt. This proposal makes use of current CBO budget 

projections and scoring practices. and thus should cause no new compliance costs. 

Another alternative would be to cap the ratio of the structural deficit to potential GDP 

for the coming year; as long as this remains below an agreed-upon threshold. the debt 

limit increase would be automatic. 

Policymakers should also require the CBO and General Accounting Otlice to adopt 

fiscal-gap and generational accounting. 5 This provides a more accurate calculation of the 

nation's long-term fiscal obligations and thus would create the basis for sounder 

budgeting and fiscal decision-making. 

Page 6 
62 

The fiscal gap describes the difference between the present value of projected 

government expenditures, including interest and principal payments on outstanding 

federal debt, and taxes and other receipts, including income accruing from the 

government's ownership of financial assets. Generational accounting measures the burden 

of closing the fiscal gap on today's and tomorrow's children, assuming they must do so on 

their own and that the burden on each generation is proportional to its labor earnings. 

Fiscal-gap accounting and generational accounting are comprehensive and forwardlooking, and determine the sustainability of fiscal policy and the burden of that policy on 

future generations. Fiscal-gap accounting has already been adopted by the Social Security 

Trustees and Medicare Trustees and is becoming more widely used in other countries. 

Taking these steps would restore the fundamental economic relationship between 

budgeting and borrowing, and reduce the risk that political brinkmanship could damage 

the full faith and credit of the U.S. or the stability of world financial markets. 

Pro-growth policies 

It is also important for lawmakers to address the nation's long-term fiscal challenges. 

Although the fiscal situation should be more or less stable during the next several years, 

the long-term outlook remains disconcerting. If Congress does not make significant 

changes to the tax code and entitlement programs, rising healthcare costs and an aging 

population will swamp the budget in coming decades. 

Of course, the best way to address these looming challenges is to implement policies 

that will boost the economy's long-term growth rate. For every one-tenth of I% increase 

in long-run GOP growth, the federal budget deficit over the next decade would be 

reduced by almost $300 billion. Thus policies that increase GOP growth from say 2% per 

annum-the current consensus outlook for real GOP growth over the next decade-to 

2.5% per annum. for example, would reduce annual budget deficits by a sizable $150 

billion. 

To achieve such a boost in the economy's long-run growth and improvement in the 

nation's finances, three key policies should be implemented: revenue-neutral corporate 

tax reform, immigration reform that significantly increases the number of legal 

immigrants permitted into the country, and a significant expansion in infrastructure 

spending. 

Corporate tax reform 

Revenue-neutral corporate tax reform that lowers marginal corporate tax rates and is 

paid for by scaling back or eliminating tax preferences in the code or other sources of 

revenue would support growth by improving the competitiveness of U.S. businesses. As 

Page 7 
63 

part of corporate tax reform, policymakcrs should replace our current worldwide taxation 

system with a territorial system that has a minimum tax on overseas earnings. 

Multinationals should also be encouraged to repatriate their now sizable pile of overseas 

profits with a lower tax rate. 

However, paying for any cuts to marginal rates will be difficult. Every ]-percentage 

point reduction in the corporate tax rate costs the Treasury approximately $120 billion 

over a 1 0-ycar period on a static basis. Thus, reducing the top rate from its current 35% to 

25%, for example, \Vould cost $1 .2 trillion. The lower marginal rates will result in a 

stronger economy, and thus on a dynamic basis the cost will be closer to an estimated 

$900 billion, but this is still a very big number and a heavy lift for policymakcrs. 

A phased-in so-called border adjustment tax would be a reasonable way to raise the 

needed revenue. Simply put. the idea behind the tax is to require all imported goods and 

services to effectively pay the corporate tax, but exempt all exports fi·om the tax. Because 

the U.S. runs a close to $500 billion annual trade deficit, the tax would raise the revenue 

needed to lower the marginal rate to 25%. 

The principal downside to the border adjustment tax is the uncertain incidence of the 

tax. That is. it is unclear who ultimately will pay for it. Much of the tax will be borne by 

foreign companies selling their wares in the U.S., but it could also be partially borne by 

U.S. consumers via higher costs for impoticd goods. U.S. retailers may also feel some ill 

effects. In theory, if phased in, U.S. consumers and retailers should not be harmed, but 

this depends on a range of assumptions including the impact of the tax on the value of the 

U.S. dollar. So in practice, we cannot know for sure what the incidence will be. 

Immigration reform 

Reform of the nation's immigration laws would provide an even more effective way 

of boosting long-term economic grO\vth. The ,,,_,~~'""''·'~"--'-'-'-"'-""-'"·"·""·-c·~~""'-'"J . .o 

,lD.'Lll1ll.lli uraJ.L<.'lJ_0.h~~ml<::<~tiDn_;\~1.JJI. :.'0 I J is a good example of such reform. This 

legislation-also knovm as the Gang of Eight bill for the eight senators, including 

Republicans and Democrats, who crafted the legislation-passed the Senate in a 

bipartisan vote but stalled in the House and never became law. 

This legislation expands existing employment-based immigration, including 

exempting fl·om the cap on green cards foreigners with STEM graduate degrees or 

doctorates in any field. The number of temporary immigration visas for skilled and 

unskilled workers also increases. It would create a points-based immigration track that 

would reward individuals with greater education. English fluency, and other factors. 

Family-based immigration would be expanded by uncapping the annual number of green 

cards that can be issued to spouses and unmarried children of existing legal permanent 

Page 8 
64 

residents. And perhaps most controversially, the reform includes a path to legalization for 

undocumented immigrants living in the country who meet certain criteria. 

The Congressional Budget Office's economic :mah_~i:; of this legislation found that it 

would increase legal immigration to the U.S. by approximately I million per year. Within 

a decade, the U.S. population would be about 3% larger than it would be without the 

change in immigration law. The legislation would result in a substantial increase in the 

number of both high-skilled and low-skilled immigrant workers. 

According to the CBO, this legislation would increase real GDP by a substantial 3.3% 

within a decade compared with what GDP would have been without the change. The 

increase in population also lifts the labor force and employment. There would be close to 

6 million more jobs in 10 years, as the additional population would add to the demand for 

goods and services and, in turn, the demand for labor. Productivity would also receive a 

measurable boost, as the "immigration of highly skilled immigrants would tend to 

generate additional technological advancements, such as new inventions and 

improvements in production processes."6 

Infrastructure investment 

A signil1cant increase in public infrastructure investment would also support stronger 

longer-term growth. The federal government spends approximately $100 billion per year 

on inti·astructure. mostly on transportation and water systems7 Federal financial support 

for inti·astructure should be substantially increased via more direct spending and the 

formation of an infrastructure bank. 

The bank would provide direct loans, loan guarantees, and other forms of credit 

enhancement, which would support hundreds of billions in more infrastructure spending. 

If !l1shioncd ofT the program, 

the bank could fund a significant amount of additional investment For example, if the 

bank received $25 billion in seed capital, it could support as much as $250 billion in 

federal loans over a five-year period. Those loans, in turn, could make up approximately 

one-third of total project costs, so in all the infrastructure bank could support as much as 

$750 billion in total additional infrastructure development. Although to be sure. the 

operation and success of such an infrastructure bank involves significant uncertainties. 

An infi·astructure bank could also help administer a Build America Bonds program, 

which was successful in financing a substantial amount of infrastructure development in 

the wake ofthc financial crisis8 This would be a signil1cant change in thl? l,l'\ 

that the federal government offers to buyers of municipal bonds, which are often issued 

to finance highway construction projects. Tax-exempt bonds are a relatively inefficient 

way to subsidize state and local governments· investment in infrastructure, because the 

Page 9 
65 

revenue cost to the federal government may substantially exceed the interest-cost subsidy 

provided to the state and local governments. 

Possible budget changes 

Even if policymakers are able to implement these pro-growth policies, to fully 

address the nation's long-term fiscal problems, policymakers will still need to implement 

cuts in government spending and increases in tax revenues. What follows are a few 

suggestions. 

Unfortunately, as economist like to say, there is no free lunch; any change in tax and 

spending policy requires hard choices. These suggestions significantly reduce future 

budget deficits. have limited broader economic consequences, and are sensitive to the 

distributional impacts on different groups. Taken together, these suggested changes will 

reduce budget deficits over the next decade by close to $1 trillion. But even more will 

need to be done, particularly with regard to the grovvth in future healthcarc costs, but that 

is a subject for another day. 

Increase the maximum taxable earningsfor the Social Security payroll tax. 

When payroll taxes for Social Security were first collected in 1937, about 92% of 

earnings from jobs covered by the program were below the maximum taxable amount. 

This has slipped substantially over the past more than a decade. Even as the maximum 

increases with the growth in average earnings, earnings for the highest-paid workers have 

grown mueh faster because of the skewing in incomes. In 2016, only 82% of earnings 

from employment covered by Social Security fell below the maximum taxable amount. 

The suggestion would be to increase the taxable share of earnings from jobs covered 

by Social Security to 90%. The maximum taxable amount would increase to $245,000 in 

calendar year 2017. ln later years. the maximum would grow at the same rate as average 

wages. as it does under current law. 

Implementing such a policy change would increase federal revenues by an estimated 

$648 billion over the next decade. according to the Joint Committee on Taxation9 

Us-e the chained consumer price index measure of' inflation to index Social Security 

and other mandatory programs, and some parameters in the tax code. 

Cost-of-living adjustments for Social Security and other federal programs are indexed 

to increases in traditional measures of the consumer price index. The CPI measures 

overall inflation and is calculated by the Bureau of Labor Statistics. In addition to the 

traditional measures of the CP!, that agency computes another measure of int1ation-the 

chained CPI--designed to account for changes in spending patterns and to eliminate 

several types of statistical biases that exist in the traditional CPI measures. 

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The suggestion would replace the traditional CPI beginning in 2018 with the chained 

CPI for indexing cost-of~ living adjustments for Social Security and parameters of other 

programs. This change \Vould also apply to various parameters in the tax code, such as 

income thresholds that divide the tax brackets. The chained CPI has grown by an average 

of about 0.25 percentage point more slowly per year over the past decade than the 

traditional CPI measures have, and the gap is likely to persist. Therefore, the option 

would reduce federal spending and increase revenues, and the benefits to the budget 

would grow each year as the eJTects of the change compounded. 

Implementing such a policy change would lower federal spending by $182 billion 

through 2026, according to the CBO. And according to the Joint Committee on Taxation, 

it would increase federal revenues by $157 billion over the same period. 

Convert the mortgage interest deduction into a 15% tax credit. 

Homeowners can deduct the mortgage interest they pay on up to $1.1 million in 

mortgage debt if they itemize their deductions. Like all itemized deductions, the value is 

reduced as the homeowners' adjusted gross income increases above specified thresholds. 

Homeowners beneiit from this deduction through higher house prices, as the value of the 

deduction is largely capitalized in house prices. And generally wealthier homeowners 

bencfiL as they are the ones likely to itemize on their tax returns. 

The suggestion is to gradually convert the tax deduction for mortgage interest to a 

15% nonrefundable tax credit. This change would be phased in over six years, beginning 

in 2017. By 2022, the deduction would be replaced by a 15% credit; the maximum 

amount of mortgage debt that could be included in the credit calculation would be 

$500,000; and the credit could be applied only to interest on debt incurred on a first 

home. This change would promote homeownership, as lower- and middle-income 

households who are more likely to benefit are also more likely to be renters. 

This suggestion would raise $105 billion in revenues over the next decade, according 

to the Joint Committee on Taxation. The increase in revenue would be substantially 

greater in subsequent decades. 

Conclusions 

Washington's budget battles in recent years have been painful to watch and harmful 

to the economy. Political brinkmanship creates significant uncertainty and much anxiety 

among consumers, businesses and investors, impairing their willingness to spend, hire 

and invest. 

Despite these political headwinds, the economic expansion is nearly 8 years old, 

making it the second longest in the nation's economic history. The economy is at full 

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employment for the first time in a decade, and the benefits of the stronger economy are 

linally beginning to accrue to lower- and middle-income households. Business balance 

sheets are about as strong as they have ever been, the banking system is well capitalized, 

and households have significantly reduced their debt loads. 

This is an opportune time for policymakers to address the nation's long-standing 

fiscal challenges. This includes eliminating the statutory debt limit; adopting fiscal gap 

and generational accounting; implementing pro-growth policies such as revenue-neutral 

corporate tax reform, immigration reform, and infrastructure investment; and making 

some modest adjustments to tax and spending policies. 

Accomplishing this will require some deft policymaking, but it would put the 

American economy and the nation's finances on a solid foundation for decades to come. 

1 These are similar to estj,l>atcs done by the Congressional Budget Oftice. 2 The referenced Moody's Analytics study is available upon request. 1 These results are based on a structural vector autoregressive model of the U.S. economy. The model is 

used to estimate the extent to which surprise changes in political uncertainty produce changes in GOP, 

unemployment, the hiring rate, investment, jobs, and several other economic variables. 

' It is difficult to statistically distinguish between political uncertainty and policy uncertainty. Political 

uncer1ainty is created by political brinkmanship and dysfunction in government. Policy uncertainty is 

created by potential changes in government spending, taxes and regulation. The 2011 showdown over the 

Treasury debt limit was especially hard on the economy, as it created a great deal of political uncertainty 

but also involved large changes to spending and tax policy. The current government funding and debt limit 

debates may have less economic impact, as they appear to involve more political than policy uncertainty. 

Despite current legislative efforts to defund the Affordable Care Act, such defunding seems very unlikely, 

and no other major policy changes arc being debated, at least so far. Also mitigating the economic impact 

of the current debate is that businesspeople, consumers and investors appear to be increasingly desensitized 

to the political vitriol with each budget battle. 5 This proposal is part of the J!~LUK~Li~f[. 

"CBO continues that "total factor productivity (TFP, the average real output per unit of combined labor 

and capital services) would be higher by roughly 0.7% in 2023 than what would occur under cun·ent law. 

The increase in TFP would make workers and capital alike more productive, leading to higher GDP, higher 

wages. and higher interest rates." 7 According to a CBO an additional approximately $300 billion per year is spent on infrastructure 

by state and local governments. 

' Build America Bonds. which supported more than $180 billion in infrastructure spending during the 

financial crisis. are a more efficient way of helping to finance infrastructure spending than traditional taxexempt municipal debt, as tax-exempt municipal debt ends up benefiting not just infrastructure projects but 

also high-income purchasers of the debt. See the i[cJllJ!LC:.IlJ of Frank Sammartino, assistant director for Tax 

Analysis of the Congressional Budget Office, in a hearing of the Senate Finance Committee. 

''These estimates account for the reduction in individual income tax revenues that would result from 

employers' shitiing some labor compensation from a taxable to a nontaxable form. 

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