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74–163 PDF 2012

S. HRG. 112–387 

PERSPECTIVES ON THE ECONOMIC IMPLICATIONS 

OF THE FEDERAL BUDGET DEFICIT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

ECONOMIC POLICY 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE ECONOMIC IMPLICATIONS OF THE FEDERAL BUDGET 

DEFICIT 

OCTOBER 5, 2011 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

KAY HAGAN, North Carolina 

RICHARD C. SHELBY, Alabama 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

DWIGHT FETTIG, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

DAWN RATLIFF, Chief Clerk 

RIKER VERMILYE, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

SUBCOMMITTEE ON ECONOMIC POLICY

JON TESTER, Montana, Chairman 

DAVID VITTER, Louisiana, Ranking Republican Member 

MARK R. WARNER, Virginia 

KAY HAGAN, North Carolina 

TIM JOHNSON, South Dakota 

ROGER F. WICKER, Mississippi 

MIKE JOHANNS, Nebraska 

ALISON O’DONNELL, Subcommittee Staff Director 

TRAVIS JOHNSON, Republican Subcommittee Staff Director 

(II)

C O N T E N T S 

WEDNESDAY, OCTOBER 5, 2011 

Page 

Opening statement of Chairman Tester ................................................................ 1 

WITNESSES 

Maya MacGuineas, President, Center for a Responsible Federal Budget .......... 3 

Prepared statement .......................................................................................... 33 

Roger C. Altman, Chairman, Evercore Partners .................................................. 6 

Prepared statement .......................................................................................... 62 

Douglas Holtz-Eakin, President, American Action Forum ................................... 7 

Prepared statement .......................................................................................... 66 

William Johnstone, President and Chief Executive Officer, Davidson 

Companies 

Prepared statement .......................................................................................... 72 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Statement submitted by Robert L. Reynolds, President and Chief Executive 

Officer, Putnam Investments, and President of the Putnam Funds ............... 74 

(III)

(1) 

PERSPECTIVES ON THE ECONOMIC IMPLICATIONS OF THE FEDERAL BUDGET DEFICIT 

WEDNESDAY, OCTOBER 5, 2011 

U.S. SENATE, SUBCOMMITTEE ON ECONOMIC POLICY, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Subcommittee met at 10:04 a.m., in room SD–538, Dirksen 

Senate Office Building, Hon. Jon Tester, Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF CHAIRMAN JON TESTER 

Chairman TESTER. I want to call this hearing on the Economic 

Policy Subcommittee titled ‘‘Perspectives on the Economic Implications of the Federal Budget Deficit’’ to order. 

We have got an esteemed panel of witnesses this morning, and 

I look forward to hearing their perspectives on the short- and longterm impacts of our Federal budget deficit. I am eager to hear 

about the impacts that our deficit has on economic growth, activities in capital markets, and investments. 

One of the most important issues facing the Congress and facing 

our economy is the size and the scope of our deficit. It is a huge 

challenge and one that cannot be addressed by tinkering around 

the edges. 

It is a tough challenge given how important it is to get our economy back on track right now. There is an urgency to addressing 

both the debt and the economy, and that is a difficult needle to 

thread. 

I strongly supported the recommendations of the President’s 

Commission on Fiscal Responsibility and Reform, and I appreciate 

all the good work and leadership that Senator Simpson and Erskine Bowles and many of my colleagues have shown in working 

with that Commission. Their work generated thoughtful bipartisan 

conversations in the Senate about how to address our deficit. 

The bipartisan Gang of Six used this work to develop a framework to cut our deficit and cut spending. But, unfortunately, what 

most Americans saw this summer were not careful deliberations or 

solutions about how to address our deficit in a balanced and longterm way. What most folks saw was Washington at its worst: too 

much politics and very little in the way of responsible decision 

making; too many lines in the sand, not enough solutions. 

Now, that is too bad because I do not think that accurately reflects the willingness of many Members of the Senate on both sides 

of the aisle and Members of this Committee to roll up their sleeves 

2 

and make some difficult decisions necessary to address the deficit. 

A balanced, long-term approach to deficit reduction that keeps everything on the table is the only way that we are going to be able 

to address the deficit. That includes spending cuts, including defense, and tax and entitlement reform. And only those plans that 

are balanced and broad in size and scope have generated bipartisan 

support. 

I am optimistic about the prospects for the Joint Select Com- mittee and their ability to go beyond the $1.2 trillion minimum in 

deficit reduction required by the Budget Control Act. But this is 

not nearly enough to make a dent in our long-term debt. We can 

and should overachieve here. Failure to reach our target will lock 

us into mandatory indiscriminate cuts and will limit our options in 

the future, which will ultimately be devastating for this country. 

But we can only overachieve if everything remains on the table. 

I do not think we can get there, at least where we need to get, 

without spending, taxes, and entitlements all being a part of the 

equation. And we need to make some tough decisions now so that 

we can take steps to address the economy so that we can continue 

to make the investment in things like infrastructure and education 

and research and development that are critical to economic growth 

and our ability to compete in this global economy. 

There is a lot of uncertainty out there—corporate cash sitting on 

the sidelines, long-term investments that are not being made, and 

skilled people who are not being hired. And the longer that we kick 

the can down the road, the worse the situation is going to get. If 

we do not cut the debt in the short term, we will not provide any 

certainty for folks to move our economy forward. 

At the same time, if we fail to create jobs quickly, the economy 

will not recover, and the deficit reduction that we need will not materialize. When it comes to growing our economy and cutting the 

debt, we cannot fail. It will not be easy. Every decision is going to 

be difficult, and it is going to be painful. 

Today I hope we can examine the short- and long-term economic 

implications of the Federal deficits as well as the deficit reduction 

plans and their impacts on our economic growth, the appropriate 

dollar level of deficit reduction necessary to ensure long-term sustainability, and how we get a handle on the budget deficit right 

now while still continuing to grow the economy. 

I look forward to hearing from all of our witnesses this morning. 

I want to thank them for being here. Unfortunately, Senator Vitter 

is going to be joining us just a little bit late this morning, so I want 

to turn to Senator Hagan to see if she has any comments she would 

like to make. 

Senator HAGAN. Mr. Chairman, I appreciate you holding this session today, and I am looking forward to the witnesses’ testimony. 

Thank you. 

Chairman TESTER. Thank you, Senator Hagan. 

I want to welcome the witnesses, as I said earlier, a very distinguished panel. I want to thank them for their work that they have 

done in preparation for this Committee and their willingness to 

testify here this morning. 

First we have Maya MacGuineas, who is the president of the 

Center for a Responsible Federal Budget and the director of the fisVerDate Nov 24 2008 15:14 Jun 01, 2012 Jkt 048080 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\10-05 PERSPECTIVES ON THE ECONOMIC IMPLICATIONS OF THE F
3 

cal policy program at the New America Foundation. There she has 

focused on bringing accountability to the budget process. Ms. 

MacGuineas has also served as policy adviser to the Brookings Institution and has also worked on Wall Street. With that, I want to 

welcome Ms. MacGuineas. 

Then we have the Honorable Roger Altman. Mr. Altman is the 

founder and chairman of Evercore Partners, an independent investment banking advisory firm, and has a distinguished career in 

Washington and in investment banking. Mr. Altman has served 

two tours of duty at the Treasury Department, serving most recently as Deputy Secretary of the Treasury during the Clinton administration. 

And last but not least, Dr. Holtz-Eakin serves as president of the 

American Action Forum and has a long career as an academic and 

policy adviser, serving as Director of the Congressional Budget Office and as Chief Economist of the President’s Council of Economic 

Advisers. In addition to his roles in Government, Mr. Holtz-Eakin 

has also served in a variety of roles at Washington-based think 

tanks as an economist and a professor. 

I want to thank you all. 

Unfortunately, our final witness, Mr. Bill Johnstone, is not going 

to be able to join us today. We will put his written testimony into 

the record. 

With that, Ms. MacGuineas, please get us started. Just so you 

know, you have got 5 minutes. Your entire statement will be in the 

record, and if you could be as concise as possible, that will give us 

more time for questions. Thank you. 

STATEMENT OF MAYA MACGUINEAS, PRESIDENT, CENTER 

FOR A RESPONSIBLE FEDERAL BUDGET 

Ms. MACGUINEAS. Thank you. I will. Thank you to the Chairman 

and thank you to Senator Hagan, and it is a privilege to talk on 

this important topic and to speak as well with Roger Altman and 

Douglas Holtz-Eakin. 

The country is now facing two major economic problems: first, 

our debt as a share of the economy is higher than it has ever been 

in the postwar period, and we are on track to continue adding to 

the debt indefinitely. In all likelihood, the debt is already a drag 

on economic growth. At the same time, we face serious economic 

challenges where the recovery has not taken off as well as we 

would have hoped, high levels of unemployment persist, and we 

have a number of structural economic problems from a skills shortage to underinvestment in critical areas and an abysmal Tax Code 

that is anticompetitive, too complicated, misallocates resources, and 

is harmful to economic growth. 

So large deficits and debt have a number of negative economic 

effects. They harm the economy by diverting capital away from productive private investments. They drive up borrowing costs for families and businesses. That rates are currently so low is merely a reflection of the terrible situations around the world, and so as some 

of my colleagues say, being the best-looking horse in the glue factory is not a reason for relief, right? We have to make changes because of the economic problems that we currently face from our 

debt levels. 

4 

From a budgetary perspective, the high levels of debt lead to 

higher interest payments. That squeezes out other more important 

Government spending, and it leads to future tax increases. It also 

leaves us quite vulnerable to increases in interest rates, and CBO 

recently found that a 1-percent increase would lead to an addition 

of $1.3 trillion in interest payments over the decade. 

High levels of debt lead to a loss of fiscal flexibility and the ability to respond to future crises. From an intergenerational perspective, of course, what it is is it is a result of us wanting to spend 

more, and we are unwilling to pay the bills. So we pass them along 

to the future generation, and that inequity is made worse by the 

fact that so much of what we are spending is consumption oriented. 

It is not even on the important investments that would help grow 

the economy and grow the future standard of living. 

The uncertainty that comes for businesses and households from 

the high levels of debt is problematic because we know changes will 

have to be made, but we do not know what they will be. And that 

means that businesses, like you mentioned, are keeping cash on 

their balance sheets. They are not investing and creating jobs in 

a way that would be more beneficial for the economy in the short, 

medium, and long term. 

And, finally, ultimately the unsustainable levels of debt can and 

will lead to a fiscal crisis if we do not make changes. And so something that was once unimaginable in this country is now a real possibility. 

So we know what we need to do. We need to put in place a comprehensive, multiyear plan that would stabilize the debt at manageable levels and put it on a downward path so it is declining as 

a share of GDP. We should aim to bring the debt down to around 

60 or 65 percent of GDP over the decade, still significantly higher 

than the historical averages of below 40 percent, but something 

that would be more manageable. And all areas of the budget have 

to be on the table. 

So looking forward, our fiscal problems are driven by health care 

costs and the aging of the population. But given the commitment 

to phasing in changes gradually so people would have time to adjust, there is just no way to fix this problem without looking at all 

areas of the budget. And so rather than focusing on unrealistic 

promises about what we will not do, we should focus on how to reform the Tax Code in a way that raises revenues and grows the 

economy and focus on reforming entitlements in ways that protect 

those who depend on the programs the most. 

So the debt threat is extremely serious, but I think it is also an 

opportunity to restructure the budget and tax system for the 21st 

century. By shifting our budget away from one that is directed toward consumption toward one that is directed toward investment, 

we can lay a new foundation for growth. And in order to be competitive down the road, we are going to have to focus on many of 

the areas that have not been invested in sufficiently while also reforming the Tax Code, all to be conducive with economic growth. 

So debt reduction is not at odds with the growth strategy. In fact, 

I think it is the center of it. Putting in place a credible multiyear 

plan will have a number of immediate economic benefits. 

5 

First, it does reduce the pressure on interest rates, gives the Fed 

more room to maneuver, and it increases output over the decade. 

And if it is large enough, it eliminates the risk of a fiscal crisis. 

Second, it frees up enough fiscal space up front to allow for more 

stimulus if that is determined to be the right course of action and 

for more space for the recovery to take hold. 

Third, a multiyear plan will provide businesses and households 

more confidence and stability, allowing them to spend and invest 

in ways that will help the recovery and grow the economy. 

Fourth, the added pressures on spending will hopefully lead to 

better oversight and more efficient allocation of resources. 

Finally, a comprehensive plan, if it is large enough, will necessarily include tax reform and entitlement reform. And on the tax 

side, we should look to the Bowles-Simpson type of structure which 

broadens the base by reducing tax expenditures, lowers marginal 

rates, and raises revenues to help close the fiscal gap. 

On the spending side, again, entitlement reform is the center of 

all of this, and it allows us to free up resources to both close the 

fiscal gap and direct more on public investments. 

So, quickly, regarding the Super Committee, as it stands now, the new Joint Select Committee is tasked with saving $1.5 trillion, 

and this would be a tremendous accomplishment. However, unfortunately, it would not be sufficient to stabilize the debt. So, instead, the Super Committee should really consider going big, which 

would put in place a plan that is large enough to stabilize the debt 

and put it on a downward trajectory. And it should also think 

about how to go long, how to address the long-term drivers of the 

debt, and how to do it in ways that are smart so that they are conducive with economic growth—again, focusing on protecting public 

investments, reforming the Tax Code. 

So just today JPMorgan released study talking about 10 reasons 

that markets are going to look at the effects of the Super Committee and its effects on growth, so we brought that study here for 

everybody to look at. Just to touch on a couple of the important key 

points it makes, the markets are looking for a downward debt trajectory, and that means the Super Committee is going to have to 

come up with something that is big enough to get that on track. 

They are worried that it is already harming growth. 

We have been warned over and over again—and markets are 

aware of this—of the political polarization that is currently sort of 

dominating politics. There are concerns that global credit markets 

will turn, and this can happen on a dime, driving up interest rates 

here and harming the economy. And, finally, we could, in fact, lose 

our place as the reserve currency and all the advantages that that 

has with it. The ability to make changes on those terms is so much 

easier than it will be if some kind of crisis forces those changes. 

So what we want to do is put in place a multiyear, credible plan 

that puts us on a glide path to stabilize the debt. To be credible, 

we should put that plan in quickly. It needs to be bipartisan, and 

it needs to come with triggers and caps both on spending and tax 

expenditures to keep the plan on track. And if we do that, I think 

the benefit of a large enough fiscal plan is that it both helps us 

with our debt challenges and our important economic growth challenges that we are currently facing. 

6 

Thanks for the opportunity to come today. 

Chairman TESTER. Well, thank you, Maya. There will be questions as we move forward. 

Next we will go to Roger Altman. Roger. 

STATEMENT OF ROGER C. ALTMAN, CHAIRMAN, EVERCORE 

PARTNERS 

Mr. ALTMAN. Thank you, Senator Tester, and thanks to the 

Members of this Committee for inviting me here today. 

There are really two main points I want to make. One is that 

this is a moment of extraordinary economic and financial fragility. 

I think sometimes folks in Washington underestimate the degree of 

fragility that we are seeing right now. And, therefore, point two, 

the budget decisions which Members of this Committee, the full 

Congress, and the President will make over the short to medium 

term, especially through the Super Committee, will have a big impact on that fragility, either a positive impact in the sense of reassurance or, I fear, a negative impact if there is a failure at a time 

like this. And so my main message today is please keep in mind 

how fragile this environment is and how important those decisions 

are going to be from the point of view of that fragility. Now, let me 

just flesh that out a little bit. 

From an economic point of view, I think it is pretty clear that 

the U.S. economy is on the edge of renewed recession. We might 

skate by with a little tiny bit of growth, or we might fall back into 

negative growth. And we are right on the edge of that. If you just 

look at the first half growth rate this year, it was eight-tenths of 

1 percent. If you look at the forecasts for the rest of this year, and 

especially for next year—I have a lot of respect for the Goldman 

Sachs Economic Department. They just lowered their growth rate 

next to 0.5 percent. All these forecasts are coming down. We now 

see forecasts over the last 48 hours that Europe is likely to definitely fall into recession. And so we are in a real danger zone. 

Then in terms of financial markets, it would be hard to put them 

or see them on more of a razor’s edge. If you look at the yields, 

they are sending a profoundly negative signal. So the yield on 10- 

year Treasurys is roughly 1.8 percent. That is the lowest yield recorded since the Federal Reserve began publishing market data in 

1953. 

Now, yes, there are safe haven factors and, yes, of course, the 

Federal Reserve has got monetary policy on maximum ease. But 

that does not primarily explain it. That signal essentially says that 

the market is anticipating negligible demand for capital and negligible inflation. And those are hallmarks of recession. And then 

from an equity market point of view, we have seen the equity markets in this country decline 17 percent over the past 5 weeks. And 

it would just be difficult, as I said, to see a more delicate risky situation, and many of the elements of fear that we all saw in late 

2008 and early 2009 unfortunately have reappeared. I do not want 

to say that we are back exactly to that point. We are not. But the 

fear factor, which was not around a couple of months ago, has crept 

back in, and this is a really worrisome and, as I say, fragile moment. 

7 

Now, turning to the deficit issues themselves, there is going to 

be tremendous attention, of course, on the Super Committee, and 

there are three possible outcomes there. 

The first outcome, of course, is that the Committee fails to agree, 

does not submit recommendations to Congress, the trigger is 

pulled. Yes, there would be $1.2 trillion of 10-year deficit reduction 

that would result through the sequester, but the signal of failure 

at a moment of this fragility I think would be a very negative signal and really unhelpful from the point of view of just plain the 

economy and obviously the very difficult jobs picture that we are 

seeing and the possibility that the next move on unemployment 

rate up is up and not down. And most people think that is more 

likely than not that the rate goes higher than 9.1 rather than back 

down, and I do not know what it will be in the next couple of days 

but in general. 

The second possible outcome, of course, is that the Committee 

does agree, sends its recommendations to Congress, which indeed 

passes them into law. That would be a very good thing. 

And the third and best outcome is the one that Maya talked 

about, which is that actually the Committee decides to solve this 

problem once and for all. We need about $3 trillion of additional 

deficit reduction beyond the $1.2 to $1.5 that the Super Committee 

will look at or is looking at. It would be a good idea if that was 

done on a balanced basis, but it would be a really good idea if the 

Committee actually did go big and did go long, as Maya said. And, 

by the way, that would send a very positive signal to consumers, 

to businesses, and to financial markets. 

I also want to say that it makes sense that there be a growth 

and jobs initiative over the short term just for the reasons of the 

fragility and the economic weakness that I talked about. The President, of course, has put forth a $447 billion program. I think myself 

it is a sound program. We all know the core of it is the payroll tax 

cut on an extended and deeper basis for employees and a payroll 

tax cut for small businesses at the employer level. But there are 

many variations on the theme of growth and jobs agenda. I think 

the important thing is that we actually take a step in that direction, obviously a temporary step, one that by its nature ends within 

a year, but trying to provide an insurance policy of sorts to this 

economy would be a sensible thing to do. 

So please keep in mind how fragile and difficult this environment 

is and how relevant the budget decisions that you will be making 

over the short term are to either keeping us afloat or, unfortunately, putting us below water. 

Thank you. 

Chairman TESTER. Thank you, Roger. I appreciate your testimony. 

Dr. Holtz-Eakin. 

STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, 

AMERICAN ACTION FORUM 

Mr. HOLTZ-EAKIN. Thank you, Chairman Tester and Senators 

Hagan and Bennet, for the opportunity to be here today. Obviously 

the outlook for the Federal debt is dangerous, and I have laid out 

some scenarios in my written testimony, and I think Maya and 

8 

Roger have been very clear about this so I will not belabor that 

point. It is imperative that we address this problem. 

It is also imperative that we address the growth problem, and to 

the extent that there is a playbook that is available from looking 

at other countries’ experience with the dual problems of slow 

growth and large debt, we have some lessons, and those lessons are 

that: you should cut spending, but not all spending is created 

equal; you should focus on cutting Government employment—not a 

big deal in the United States, we do not have massive amounts of 

people on Government payrolls—and transfer programs; and you 

should preserve spending on the core functions of Government: national defense, infrastructure, basic research, education. And so 

cutting spending and doing it right is element number one; number 

two, keep taxes low and reform them to be pro-growth, and what 

is heartening about that is that is my reading of essentially what 

the Bowles-Simpson Commission said. They said this is a national 

moment of truth, we have to do something. Our problem is spending, and it is all spending, so each side of the aisle needs to understand that some of the things they love dearly are subject to some 

cuts. And if you are going to look at revenues, you have to do tax 

reform, and I thought that was a tremendous message to come out 

of the Committee. 

Going forward, it is clear that we have to address first and foremost the entitlement programs. These are the core of our social 

safety net, and they are actually badly broken. Social Security is 

running red ink right now. That red ink will increase in the years 

to come. And absent changes, every retiree will face a 23-percent 

across-the-board cut in 2037 or so. It is not a good service to have 

a core part of the retirement system falling apart before our eyes 

and not fixing it. Medicare right now has a gap between payroll 

taxes in and premiums paid and spending going out of $280 billion 

a year. It is an enormous fiscal cancer, and going forward it will 

only get worse. 

Medicaid is essentially all deficit financed at the moment, and it 

is not an outstanding program. Medicaid beneficiaries regularly 

have difficulty finding primary care physicians. They are more likely to get ordinary care in emergency room settings. 

I think as a matter of good social policy, these programs deserve 

to be reformed. As a matter of budget policy, it is imperative that 

they be reformed. As a matter of avoiding what has been called by 

Erskine Bowles ‘‘the most predictable crisis in history,’’ we should 

do it and do it quickly. And so that should be the focus of attention. 

I know there are concerns about cutting spending. I want to say 

a couple things about them. 

Number one, everyone should think of reforms that cut spending 

as reductions in future taxes. If you spend the money, you are 

going to have to pay for it one way or another. And so every time 

we take a dramatic step to control those outlays, we are actually 

controlling the future tax burden. That will improve the business 

climate immediately, and it will be something that I think will 

serve this country well over the long term. 

The second is I am concerned that fears about cutting spending 

harming the economic recovery are being used as an excuse to stall 

efforts to fix our budget problems. You know, I would just say this 

9 

lovingly. I have watched Congress a long time as the CBO Director. 

I have never seen the Congress cut enough to endanger any recovery. And that is a problem I want to have, and I will be happy to 

weigh in when I see it happening. 

Much has been said about the budget ceiling debate and the efforts that came out of that, but if you would think about it, that 

is a promise, honest, really, that a future Congress in 2018 will 

spend a lot less than it might otherwise have. But we have not actually cut anything yet, and so I would like to be surprised at the 

aggressiveness of the cutting to come out of this Congress because 

we need to get this done. 

The next thing I would say is that it is not just cutting. Especially in light of the Joint Select Committee, ‘‘cutting’’ is the wrong 

word. If we simply starve money out of Medicare or starve money 

out of Social Security without reforming those programs, we will 

not have solved the basic architectural problems that led us to 

where we are. And so think about this as an opportunity for reform. That means lower future taxes, and I think we can do it 

without impeding the recovery. Indeed, I believe it will help. 

And move fast. I think, you know, the evidence is in that we are 

in the danger zone already. The probability of crisis is high. Maya 

stole my line about being the best-looking horse in the glue factory, 

but I will find another one. 

And remember that we also have the other characteristics of 

countries to get in trouble. We have an enormous reliance on shortterm borrowing. We have a lot of not well understood and not easy 

to value liabilities that pop up in State and local pensions and still 

out of the housing sector, and those are exactly the kinds of characteristics of countries that think, ‘‘We are fine,’’ but then end up 

having a quick reversal in financial markets. So I do not think we 

should do that. 

And the last thing is there is a lesson about the fragility and the 

fear that came out of the debt ceiling debate. My view is the debt 

ceiling debate had a lot of politics as usual, for better or for worse. 

I mean, these are difficult things to do. Raising the debt ceiling is 

not a happy moment for any Congress. The difference this time 

was that something actually had to get done. Underneath the debt 

ceiling debate was a real debt problem, and the sooner we fix the 

debt problem, the sooner we undertake the steps necessary, the 

less the kind of political bickering that comes over raising the debt 

ceiling will actually scare financial markets, because we will have 

solved the problem and moved it back to just dealing with the Nation’s mechanics of finance. 

I thank you for the opportunity to be here and look forward to 

your questions. 

Chairman TESTER. I thank you all for your testimony, and we 

will start out. We have been joined by Senator Johanns and Senator Bennet before that. I will start, and I think 7-minute rounds 

if that is OK with the Members of the Committee. 

I just want to go back briefly and this is a question of all of you 

about the balanced approach to addressing our deficit. We have two 

realities out there. We have got the political reality and we have 

got economic realities, and sometimes they seem to clash. They 

should not but sometimes they do. 

10 

So, given these realities, what is the appropriate dollar amount 

or range that we should be looking for? I know some of you talked 

about big ones but I mean a bigger one which by the way I agree 

with. But if we are going to change the trajectory of our deficit, 

what would you say is the number that we need to be looking at 

to come out of the Super Committee at a minimum? 

Ms. MACGUINEAS. Well, of course, whenever you are talking 

about saving numbers there is always plenty of room for gimmickry 

because of baselines, because the question is always saving compared to what. 

But so, I think the most useful number basically to look at where 

you are going to have your debt by the end of the decade and 

whether it is going to be moving up or down as a share of the economy. 

So, you basically want to have the debt in the range of 60 to 65 

percent of GDP after a 10-year period and moving down. Compared 

to a realistic baseline which assumes things like ongoing patches 

of the AMT, SGR, extension of part but not all of the tax cuts that 

were in place or revenue levels at that level that you compare to, 

I think the best thing to shoot for is about $4 trillion in savings. 

$3 to 5 trillion might be an appropriate range. We have already put 

1 trillion of savings in place because of the caps we have already 

accomplished. 

Now, we have recently held a forum where a number of voices 

from all sides of the political aisle and all different backgrounds 

came forth and sort of made a call for go big, and there were some 

people who said we should be thinking about two to three times as 

much as that so 10 trillion. 

That to me would be great in terms of how much debt we are 

going to be adding over the next decade but it is unachievable. And 

I think it is really important that we put down a marker that is 

achievable but pushes us to get enough done that we can reassure 

credit markets, rating agencies, businesses. 

And so my best estimate will be if you can do 3 trillion on top 

of what we have already done that would really get us in the range 

where we bought ourselves some time. 

Chairman TESTER. Roger. 

Mr. ALTMAN. I agree with the numbers Maya just used and they 

are in my own testimony. But to complement what she just said 

and echoing what I tried to say myself earlier, I think it is really 

important that the Congress and the President show that they can 

make steady progress on this problem and that, to some degree, 

the fact of progress and that it is on a sufficient trajectory so that 

we are meaningfully eating into this deficit overhang and debt 

overhang is more important than the precise amount, particularly 

in the context of the fragility that I talked about. 

So, as Maya said, there was a trillion or 917 billion agreed in the 

context of the debt limit process. There is another at least 1.2 trillion as we all know in terms of the sequester amount or the trigger 

that would occur underneath the Super Committee. So, you have 

2 trillion, assuming that the Congress ultimately sticks with it in 

future years. 

And that is a good start. It is not enough because then there 

would be at least another 2 trillion needed. But the fact of 

11 

progress, in my judgment, is more important than the precise 

amount because the need now is to reassure consumers, households, let alone businesses and the financial markets, that our 

country can actually, seriously address this. 

And I think at the moment I think most of the Members of this 

Committee would agree, there is great doubt about that coming out 

of the difficult process to put it charitably that we saw on the debt 

limit. 

Chairman TESTER. Dr. Holtz-Eakin. 

Mr. HOLTZ-EAKIN. I will not agree with the numbers but I really 

want to echo Roger’s point about extending the confidence of markets and the United State’s ability to handle its affairs. 

So, I think quality over numerical targets is an imperative. The 

best example of that is Social Security reform. If we were to do any 

of the bipartisan Social Security reforms that have been proposed 

over the past couple of years, we would solve what I think is a very 

important part or social safety net. 

We would send the signal to world capital markets that we can 

touch what has traditionally been the third rail of U.S. politics in 

a sensible way. 

We would do very little actually over the next 10 years in terms 

of deficit reduction. It is a relatively modest impact because we do 

not hit any current retirees and those near retirement in most of 

those reforms. 

I still think that would be an enormously beneficial step. It 

would also allay a lot of the fears that some people have about cutting spending as we struggle through this recovery because all of 

those impacts are in the future. 

So, that I view as a very high quality reform, and the more we 

do of things like that I think the more confidence we will instill in 

capital markets and we will actually address our long-term debt 

problems and that is the kind of progress I think we would benefit 

the most from. 

Chairman TESTER. OK. Just kind of a follow-up, and we will 

start with you, Roger, because this is for all of you. 

Is it possible to hit the kind of targets that you guys are talking 

about the 3 to 5 trillion which is pretty much what I heard without 

including everything that is out there, without including the entitlements that Dr. Eakin talked about, without including reductions 

in defense spending, without including tax reform, you know, all of 

them? 

Mr. ALTMAN. Mr. Chairman, the short answer is no. It is theoretically possible, of course, to try to solve this problem, for example, entirely on the spending side. But for example, the impact on 

national security and defense spending particularly probably would 

be unacceptable. 

It is possible, of course, to imagine gigantic revenue increases but 

those would likely have a negative economic effect and worsen 

some of the problems we have discussed here before. 

So, the most sensible approach and really the only one in practice that would work is a balanced one, balanced in the sense that 

entitlements, of course, are center stage, revenues play a role, and 

the like. 

12 

So, I think the answer to your question, sir, is no, it is not possible to do it except with all in. 

Chairman TESTER. Doctor. 

Mr. HOLTZ-EAKIN. The short answer is I concur, I mean, that you 

really have to look at everything, and we have big problems everywhere you look. 

Chairman TESTER. Maya. 

Ms. MACGUINEAS. Sure, you can do it all on the spending side 

but there is not a single person who would actually be willing to 

when you went through the exercise of what it would take. 

And one of the reasons is a very sensible one, that the core of 

any reform plan is going to have to be reforming entitlements but 

those are things that we are going to do gradually and we are not 

going to suddenly raise the retirement age starting tomorrow. We 

are going to phase it in at a very slow pace so that people have 

time to plan and adjust. The same with the scaling back of benefits 

which I presume would be targeted more at people who do not need 

them in order to protect them for people who do. 

So, when you are talking about changes that you phase-in gradually that makes it basically impossible to do this without looking 

at all areas of the budget. 

I also think from a political perspective everybody needs to be in 

on feeling like this is shared in a way that is fair, and one of the 

things that Erskine Bowles and Al Simpson found when they did 

their commission was that the bigger they went the more people 

bought in and the more support they got because everybody felt 

like they were part of the overall package and it became big 

enough to actually create a win. 

So, when we talk about whether the Super Committee should go 

big or small, one of the benefits other than being economically beneficial in solving the problem is that politically the rewarded is you 

solve the problem rather than the headlines the next day after you 

have gone through all this hard work of saving a trillion and a half 

being, well, there is still so much more to do. So, there is political 

upside in putting everything on the table and building a big 

enough package. 

Chairman TESTER. Absolutely, 

Ranking Member Vitter. 

Senator VITTER. Thank you, Mr. Chairman, and thanks to all of 

our witnesses. I would like to ask each of you what would you rate 

as the chances of further formal downgrades of U.S. credit if, A, the 

Super Committee is not successful and the sequestration happens 

or, B, it is successful only to its minimum dollar figure mandate 

level? 

Mr. HOLTZ-EAKIN. In, A, I think the probability of downgrade is 

one. If we continue to fail, we will convince capital markets that 

we are not going to address 

Senator VITTER. It would be 100 percent. 

Mr. HOLTZ-EAKIN. Yes, 100 percent. 

The second one is harder because how it hits the spending limit 

matters. And as I said before, if we were, for example, to do a Social Security reform which would be budgetarily modest but have 

enormous confidence effects I think, you know, we can avoid things 

like that. 

13 

Mr. ALTMAN. Senator, I have a slightly different view. I do not 

think the chances of a downgrade in the event that the Super Committee fails to agree or that the Congress does not pass its recommendation is 100 percent because after all there will be at least 

1.2 trillion of deficit reduction then triggered over 10 years, again 

provided the Congress ultimately sticks with that. 

So, I think the chances of downgrade under that scenario from 

another agency, remember there are several agencies and only one 

of them so far, Standard and Poor’s, has acted on the negative side, 

are probably 50–50 because even if the Super Committee fails, we 

will have set in motion over the past few months 2 trillion of deficit 

reduction against a problem that is $3 to 5 trillion in size, probably 

closer to the high end. 

But I think the psychology again of the Super Committee failing 

is the problem. In other words, the signal that just like the debt 

limit process showed us not in the most favorable light a failure 

of the Super Committee would send a negative psychological signal. 

And what often happens, and I will stop on this note, what happens is rating agencies follow markets not so much as lead them, 

and if the market sentiment in general is very negative and the 

sense in the markets, and this time you might see it expressed 

more in the equity markets than the bond markets, the sense is the 

reaction to the failure of the Super Committee is very negative at 

a time when, as I said before, everything is so fragile. 

That would be then pressure in effect on one of those agencies 

or more than one to take a negative step. So, I think it is only 50– 

50 but I think the problem is the psychology rather than the substance. 

Ms. MACGUINEAS. I would say that the hard truth is that S&P 

was probably correct for downgrading us when they did in that we 

had not set ourselves on a course to do what we all know needs 

to be done and I think now there is another kind of moment of 

truth which is what will come out of the Super Committee. 

If they fail completely, I think it is likely that we will have a 

downgrade pretty quickly. If they come up with what their mandate charges, the 1.2, I think Doug has made the really important 

point that it kind of depends what the make up of that is. 

So, keep in mind the economy is going to be worse than most of 

the projections have been assuming. We have already seen that 

just a 1-percentage increase in interest rates would add 1.3 trillion 

to the deficits from increased interest payments alone over the next 

decade. 

So, saving 1.2 in and of itself is not going to be much of a debt 

in the challenges that we have. The only way that I think that 

would be reassuring is if what makes that up are the critical problems driving the debt. 

So, if that 1.2 trillion, if the Super Committee accomplished just 

the minimum it is supposed to focused on health care or accomplished making Social Security solvent for the long run or made 

real progress on tax reform and improving tax expenditures, that 

could be reassuring. 

But if it focuses just on the low hanging fruit, and we need to 

reform agriculture subsidies and public pensions and all those 

14 

things but that is not a package that would reassure credit markets or rating agencies on its own. 

So, if we go big, I think we will not be downgrade because we 

will have put the debt on a stabilized path. If we go medium, I 

think it depends on what is in that package. 

Senator VITTER. If I could react to some of your answers. I agree 

with your answers. However, I believe if the Super Committee hits 

the minimum target only, they are going to be doing that by going 

after the low hanging fruit, not going after any bigger issues. 

If they are going after bigger issues, they can easily go well 

above that number. I do not think that scenario is likely. 

And, Mr. Altman, I just say in terms of sequestration, I think the 

day after the Super Committee fails, there is going to be plenty of 

evidence that that will not hold for any significant period of time, 

to sort of follow up on your comment there. 

Second and final question. Give us a ballpark figure in your opinion of what fundamental tax reform, broadening the base, lowering 

rates, what revenue it could raise if it is done on a revenue neutral 

basis, in a static model what revenue could it produce on a dynamics score? 

Ms. MACGUINEAS. I would estimate depending on the parameters 

of the tax reform that you would probably be in the neighborhood 

of raising $848 billion from something that is revenue neutral on 

a static basis if you look at the dynamic effects, and of course, the 

form of the corporate reforms would be critically important in that 

as well. 

Mr. ALTMAN. I generally agree with that. I think the formula 

that was used by Bowles-Simpson which is essentially a three to 

one formula in terms of spending versus revenues with one of the 

three being the interest savings is a very good framework. 

And obviously under Bowles-Simpson they envisioned about a 

billion dollars of revenue impact. 

So, the figure Maya used or a slightly higher figure would be my 

answer, Senator. 

Senator VITTER. Just to be clear, that model is a little different 

than what I set out. What I set out is revenue neutral and a static 

model. Theirs was not. So, if you are talking about something revenue neutral and a static model, would you agree with 800 billion? 

Mr. ALTMAN. Yes, sir. 

Mr. HOLTZ-EAKIN. So, I would put it in the range of 700 to a trillion over 10 years. The wildcard being how you do the international 

tax reforms. If we were successful in getting the corporate rate 

down to an internationally competitive level and moving to a territorial tax system, moving away from worldwide taxation, there are 

many ways to do that. 

But if we do it the way I would prefer and make the U.S. an advantageous place to locate future investments, you can get much 

bigger near-term impacts out of international capital flows and FDI 

in the U.S. than you would otherwise. So, you can hit all sides of 

that range depending on how you structure the revenue neutral 

piece of the reform. 

Senator VITTER. Thank you. 

15 

Ms. MACGUINEAS. I have one quick point which is when we are 

thinking about that and obviously at least the number I put out 

was not precise. It is sort of my best guess. 

But there is also revenue advantages that will come from having 

an overall debt consolidation package. So, you are going to have 

revenue increases from pro-growth tax reform but you are also 

going to have revenue increases from the medium- and long-term 

effects of a debt consolidation package which you might want to 

think about looking at as well. 

Chairman TESTER. Senator Bennet. 

Senator BENNET. Thank you, Mr. Chairman, and I want to thank 

you for holding a hearing on this vital topic, and we have not spent 

enough time on this and talking about it, and I appreciate your letting me sit in on the Subcommittee. 

Mr. Altman, I share your concern about the fragility of this economy. I think it is in much tougher shape than we seem to imagine 

here in Washington. I see it every single day when I am home in 

Colorado. The effects of two decades of declining family median income has hit the people in my State very, very hard. 

I was struck the other day by a Wall Street Journal piece on the 

front page about Procter and Gamble, the most iconic middle class 

brand I can imagine and how they are adapting their business 

strategy to reflect the decline of the middle class by selling to the 

richest Americans and the poorest Americans because that is 

where the growth is. 

That is what this is really about I think. I mean we talk about 

deficit and debt and all of the rest. The fact is our economy is in 

very, very tough shape and our families are in tough shape as result. 

There is $2.3 trillion of cash sitting on the balance sheets of 

America’s corporations. It is not being invested in the economy to 

grow jobs. I think a huge part of that is, Mr. Chairman, that people 

do not know what interest rate environment they are going to be 

in because we do not know what we were going to do. 

In that spirit, I wanted to ask you about what you think the effect of the debt ceiling conversation was on economic confidence in 

the markets in this country, because we went through an entire 

summer of what was in many ways I think a disgraceful conversation. 

My sense was that the economy was beginning to move forward 

but, to show you my bias, that conversation or the lack of a real 

conversation has contributed mightily to the lack of confidence people have in the economy. 

Can you talk a little more about that? 

Mr. ALTMAN. I think the answer is profoundly negative because 

the signal that was sent to consumers, households, businesses was 

dysfunction. And anytime you are looking at economic outlooks, unemployment outlooks, confidence plays an important role and we 

are all seeing surveys which show that consumer confidence at 20, 

30, 40 year lows. 

Just from my other life, I can tell you that business confidence 

is quite weak, and the debt limit process or lack of process played 

an important role in that. 

16 

I would also like to digress and say in spirit of your opening comments, I do not think enough attention is played to what the real 

conditions are in the labor market. 

So, everybody pays attention to the unemployment rate but, as 

Doug points out in his testimony and I point out in mine, the labor 

conditions are actually worse than that. The underemployment rate 

which is probably better measure because it captures people who 

have given up looking for work and it captures people who are 

working part time who would rather work full time at 16.2 percent 

and the labor participation rate which is the most basic of all, just 

the percentage of working age adults who have a job is at a 27- 

year low of 64 percent. 

And then we all saw the poverty data although it seemed to come 

and go with no attention at all but it was pretty devastating, 45.3 

million Americans in poverty, 15.3 percent of the population, the 

worst figures in about 20 years, obviously affected by the economic 

conditions. 

So, again, this is a moment of great risk. We are really close to 

slipping back into negative territory. 

Senator BENNET. In that spirit, I mean, a fifth of the children in 

this country are living in poverty, a 43 percent increase in the poverty rate in the last decade, and an economy where the productivity index continues to rise and rise and rise. 

We have a very productive economy but we do not have an economy that is creating jobs for people in the country. 

In that spirit, I want to ask you, Mr. Holtz-Eakin or any of the 

panelists, that $4 trillion number sounds large over a 10-year period. But I wonder if you could give us a perspective on our run 

rate about how big that really is, because as somebody who has 

spent time in business and in local government and who has had 

to make tough budget decisions over time, on a percentage basis in 

the face of all the things that we are talking about, it is really not 

that huge a number, is it? 

Mr. HOLTZ-EAKIN. In a $15 trillion economy. So if you did 4 trillion this year, you would be under 33 percent. If you do it over 10 

years, 3 to 4 percent. That is where we are. 

The magnitudes, however, can be staggering. If you do the arithmetic, we are borrowing $58,000 every second, more than the median family income in the United States every second we are burning it up. So, there is a real need to change this trajectory and do 

it in a significant way. 

Senator BENNET. My hope, Mr. Chairman, is that we can get 

past what is a political problem in Washington, DC, and create a 

path out of the situation that we are in that is not remotely as 

hard as what people in our States are having to deal with every 

single day. 

So, I thank the panelists for their testimony. I thank you for the 

hearing. 

Chairman TESTER. Thank you for your kind words and thanks 

for your questions. 

Senator Johanns. 

Senator JOHANNS. Thank you, Mr. Chairman, and to all the witnesses, thanks for being here. 

17 

All of us over the past years have participated in hearings like 

this. We have sat in each other’s offices talking about this problem 

remarkably defining the problems pretty straightforward. 

The difficulty is how to go from definition of the problem to 

something that starts putting solutions in place. 

All of you have more Washington experience than I do. But it 

seems like we can all go to the floor no matter which side of the 

aisle we are on, give a great speech about how significant the problem is. 

Give us some advice on how best to solve this, and here is what 

I have in mind when I ask that question just to give you a fair notion of what I am thinking about. 

You have this deficit group. They came up with a recommendation. You have the gang of six, a remarkably similar recommendation came out of that effort. 

I think these are two very workable approaches. I am not saying 

I embrace them 100 percent. But they seem to be workable and yet 

they do not seem to be going anywhere at the moment. 

My worry is that we are going to do a trillion two. Everybody is 

going to breathe a sigh of relief. We are going to turn the calendar 

over into a Presidential election cycle. It will be much easier not 

to deal with this than to deal with it, and now another year slips 

by and the problem only gets worse. 

So, you are not going to offend anybody on this panel. Tell us 

what we are doing wrong and how do we overcome that and start 

solving this Nation’s problems? 

Roger, can I start with you? 

Mr. ALTMAN. Well, I want to echo in response to that very good 

question, Senator, what Maya said. I think the process which the 

Simpson-Bowles group went through provides a bit of a roadmap 

toward the right outcome here or actually a solution. 

Because it was, because they sought a total solution, because it 

was a very well run and deliberative and careful process, and because the ultimate recommendations at least from the cochairs 

were widely seen as fair and relatively conservative apropos of this 

3 to 1 ratio I mentioned before, they achieved at least a modestly 

bipartisan result. 

We all know the Members of the Committee from both sides who 

voted for the cochairs’ recommendations. 

So, I think that is the best guide to how to solve this. As Maya 

said, the greater degree to which you work on a one-step, full solution, a full solution, so that we are dealing with another 3 to 4 trillion beyond the 917 originally set in motion under the debt limit 

process, I think the better chances of success, the higher the 

chances of success. 

I just cannot think of a better blueprint than the one that the 

Bowles-Simpson group laid out. Is it perfect? No, of course, it is not 

perfect. 

But it had wide appeal and, for example, I happened—my private 

life involves working with the business community and there is 

enormous support for the business community in that framework. 

And no one has any problem, I do not mean no human being, but 

by and large, no one has any problem with the ratios they used, 

the size that they wanted to go for, and if you put that to a vote 

18 

at the Business Roundtable or the Business Council or any such 

group it would pass overwhelmingly. 

That does not mean it is the right thing, but just as an example. 

Senator JOHANNS. Maya. 

Ms. MACGUINEAS. So, I have to say that I know it is pretty easy 

to sit here on the sidelines and say we need to do it. We all know 

what the answer is. You just have to do it. 

And I think looking at what the members of Bowles-Simpson did 

and the gang of six did, it is truly inspiring because we have had 

a decade of nobody confronting the really tough choices involved in 

fixing the fiscal problems. 

And in the past year that has changed. The dynamic has 

changed and people have come out and started talking about realistically what is going to be involved, and I think we are moving 

in the right direction. 

I do not think time is on our side but I think we are moving in 

the right direction. And a lot of people sitting in this room right 

now are critical in that, and it really is terrific. 

So, it is frustrating because we know what it is going to take and 

we also know that nobody is going to get their first choice. 

The past couple of years were for people putting ideas out there, 

and there are a number of ideas now. We, in fact, have kind of this 

comparison table that shows all the different policy plans that have 

been recommended, and all the overlap. There is tremendous overlap. 

And it is now the point to say nobody is going to get their first 

choice and it is time to start compromising. 

So, I think the thing you do is you agree on the fiscal goal. Let 

us say that is to save 4 trillion totally, and stabilize the debt. 

You run through a couple of scenarios. Let us just look at what 

it takes to do that on the spending side. OK. It turns out that realistically that is just not politically acceptable for anybody no matter 

what party. 

Let us look at what it takes to do that primarily on the revenue 

side or even 50–50, and it actually is so harmful for growth and 

is not really practical. 

We know the ratios of Bowles-Simpson are the right place to 

start, and we know that that is terrific. My specific recommendations would be take Bowles-Simpson and put in a little bit more on 

health care reform. 

I think if there is one place we need to go is to do more on health 

care. I think that would have helped buy a few more people into 

the entire process of being structurally sustainable, and I think you 

have a great working document to start with right there. 

And my final point would be Prospect Theory says that you 

should give bad news all of once. Get it over with. So, if you are 

going to come up with a fiscal package, let us just fix the problem. 

If you are giving good news, do it in lots of little bits. 

But this is tough stuff. So, we do not want to have to keep coming back and making these hard choices. So, we should go as big 

as we can and use something Bowles-Simpson to get us started. 

Mr. HOLTZ-EAKIN. I want to echo the proviso that I am a little 

uncomfortable giving cheap advice from the easy side of the table. 

I have been in the position of doing that for a number of years. 

19 

What you are asking is actually quite hard. But, you know, I think 

both Roger and Maya are right about Bowles-Simpson. That is the 

politically tested architecture that was much more successful than 

anyone really dreamed it would be, and it gives you the components on spending and tax reform that are going to be elements of 

success. So on the politics, I think that is right. 

On the second piece, which is the substance, how to really be 

successful, I would urge everyone to really change real programs, 

which dominates, in my view, tremendously what we have done so 

far, as it processes, promises on caps in the future, sequesters that 

are more reneged upon than honored in the history of budget by 

the Congress. And so we have really got to change the program so 

that it is far more convincing. And in doing that, you know, these 

tough issues of taxes and spending, I think we have to somehow 

overcome what has been a recent—I do not know what the very 

word is—a recent viewpoint where principle compromise is not possible, it is always viewed as surrender. 

It is important to recognize that—you may not think it is fair to 

have your program cut, I might not think it is fair to have my 

taxes increased. But both of those are dwarfed by how unfair it will 

be to leave this problem unfixed and ask the next generation to do 

both those things in the presence of a broken economy because we 

did not do our job. You know, that is where we are, and somehow 

we have to rediscover that spirit and understand that that is what 

is at stake. 

Senator JOHANNS. Thank you, Mr. Chairman. 

Chairman TESTER. Thank you for your answer to the question. 

Before we go to Senator Hagan, I would just say, sitting on this 

side of the table, I will tell you that I think there is a realization 

by everybody up here and a whole lot of folks in the Senate that 

tough decisions are going to have to be made, or as every one of 

you pointed out, things are going to get a hell of a lot worse. 

Senator Hagan. 

Senator HAGAN. Thank you, Mr. Chairman, and once again, 

thank you so much for holding this session, and for our witnesses, 

your testimony is certainly stark, realistic opinions and facts, and 

I am hoping that everybody can listen to what you are saying and 

realize that we do have to take action. And I have always said that 

I have been a strong supporter of the Bowles-Simpson report and 

a strong supporter of the Gang of Six, and I am certainly am hoping that the Super Committee goes big, goes long, and goes smart. 

Dr. Holtz-Eakin, I have been looking at a number of measures 

that might be used to get the economy growing again, and one 

measure that I know that has bipartisan support is to allow companies with earnings trapped abroad to bring that money back to the 

United States at a temporarily reduced tax rate. I know you have 

done a lot of work on this issue. Can you talk about some of the 

economic benefits of what this measure might mean? 

Mr. HOLTZ-EAKIN. Well, as you know, I have done some work on 

this, and I think that Roger is right about how fragile the economy 

is. I think we need to do things that boost the near-term growth 

rate for sure. I also think we ought to do things that are consistent 

with the long-term path we want to end up on. And in my view, 

we should end up with a territorial tax system with zero taxes on 

20 

repatriations and a much lower rate overall. This moves in that direction. 

I think that if you do a fair reading of the research literature— 

and the most important thing about a fair reading is you focus not 

just on the companies that in the past have repatriated profits, because the mistake that literature makes is if a company brings 

some money back and repurchases shares, they then pretend that 

money is going into a black hole. It did not. It went into the economy, and a correct reading is what is the overall impact of bringing 

those dollars back on the economy, not on those companies. I think 

it would have very beneficial impacts. It is the same kind of economic impacts as the President’s stimulus bill was modeled on. If 

you use those kinds of estimates, you get, you know, $360 billion 

in additional GDP from a sort of stylized repatriation policy. 

So I certainly think it cannot hurt to bring the money here instead of leaving it overseas, and it is the kind of thing we ought 

to do and do quickly. 

Senator HAGAN. Thank you. 

Mr. ALTMAN. Senator, could I comment for a second on that? 

Senator HAGAN. Yes, please. 

Mr. ALTMAN. I would just add two provisos. One is there is a 

pretty good argument for there being some quid pro quo associated 

with repatriation, because we all can look at the amounts of cash— 

Senator Tester referred to that—that corporations have already 

here in this country on their balance sheets and extrapolate that 

the likely result of that repatriation would not necessarily be any 

positive impact on, for example, hiring or investment, at least over 

the short term, which is when we need it. So there are various 

ways to think of quid pro quos, but if it were left up to me, I would 

want a repatriation plan which was tied to some positive economic 

impact rather than just a blanket one. 

And the second proviso is I am a little concerned that we may 

need repatriation to facilitate tax reform, and we al know that tax 

reform is going to be necessary in the context of deficit reduction 

and, more broadly necessary for competitiveness. So I wonder if 

that should not be an element in broad-based tax reform rather 

than a separate step all unto itself. 

Senator HAGAN. Well, I think we do need broad-based tax reform, 

but I also think we need to look at what is happening right now 

and what we can do to make an impact. But I do appreciate the 

comments, too, on how we can structure something to be sure that 

it does have more of an economic impact on jobs. 

The debt-to-GDP ratio is often cited as a sign of fiscal health. I 

would welcome your comments on what ratio of debt to GDP you 

think would trigger increases in the interest we pay on our debt. 

Anybody on the panel. 

Mr. HOLTZ-EAKIN. I think that it is just not possible to draw a 

statistical line and say on this side credit markets will trust you, 

on that side they will not. It is really about their perception of the 

U.S. future and will we be able to get what is clearly an 

unsustainable trajectory back on track. And when the confidence 

that we can do that goes away, the interest rates rise inevitably. 

That is when you see a rush for the exits and real financial market 

turbulence. 

21 

So we do not know the number, but we do know that if you use 

history as a guide, we are in the danger zone. We already debt-toGDP ratios which historically have been associated with slower 

growth, high probability of sovereign debt crisis, and we should not 

pretend that we have any luxury of additional increases. We should 

go the other direction fast. 

Ms. MACGUINEAS. So just to jump in on that, I think there are 

two sort of economic effects you want to be aware of. One is when 

your debt level is harming your economic growth, and the second 

is when it is triggering capital markets losing faith in you. So by 

all accounts, the best studies that are out there—and there is a 

new one just presented at Jackson Hole this summer—we are already in the danger zone where our total debt is already a drag on 

economic growth, which is one of the reasons that a debt consolidation plan would actually be pro-growth. Sometimes it has an immediate negative effect in the very short term, but in the medium and 

the long term, that would help us increase growth. 

In terms of what level we need to be to avoid a fiscal crisis or 

capital markets losing faith in us, exactly what Doug said, nobody 

knows. It is really a psychological exercise. We—and Doug was on 

this as well—ran a commission, the Peterson-Pew Commission on 

Budget Reform, for the past 2 years, and the recommendation we 

came out with is stabilize the debt at 60 percent of GDP, at the 

time we said 2018. That now looks out of the range of possibilities, 

unfortunately. None of the plans in place would accomplish that. 

But we could credibly get to 65 percent of GDP by the end of the 

decade, and I think what you want to do is push yourself as far 

as you can get without taking a goal that is so high—I mean, we 

cannot get back to historical averages this year, this decade. We 

cannot balance the budget this decade in all likelihood. We would 

like to, but we are too far away. 

So it seems to me that the range of 65 percent of GDP by the 

end of the decade is the right thing to be shooting for and that 

markets as well have kind of glommed onto that number and focused on that. 

Senator HAGAN. Thank you, Mr. Chairman. 

Chairman TESTER. Senator Wicker. 

Senator WICKER. Well, Mr. Chairman, I want to thank you for 

putting together a balanced panel, and I think both the testimony 

today and the questions have been very helpful. So thank you. 

Dr. Holtz-Eakin, let me begin with you. What is your understanding of the President’s proposal with regard to tax increases on 

wealthier Americans? He has famously been referring to Warren 

Buffett and talking about the fact that Mr. Buffett’s secretary pays 

a higher percentage in taxes than Mr. Buffett does. What is your 

understanding of exactly what the President is proposing and what 

effect that would have on the economy? 

Mr. HOLTZ-EAKIN. I do not know exactly what he is proposing. 

It sounds—— 

Senator WICKER. You have been watching him pretty closely, 

haven’t you? 

Mr. HOLTZ-EAKIN. I do pay some attention, sir. I do not know the 

specific proposal. It sounds like something we already have, which 

is the alternative minimum tax, to make sure that those with high 

22 

incomes pay a minimal rate. In that case, we should fix the alternative minimum tax instead of adding another layer of tax. 

It also to my mind sounds like Mr. Buffett, although a famously 

successful financier, is not a very good tax policy analyst. The layers of taxes on many of those pieces of income start at the corporate level, and they are not reflected in that calculation. 

And the last point I would make about this is all of the discussion today has focused on in particular Bowles-Simpson, but in 

general the need for tax reform being the route to higher revenues. 

Proposals that raise marginal tax rates go the wrong direction from 

a tax reform proposal. And what we need are a broader base, lower 

rates, better growth policy in our Tax Code, and none of these proposals are consistent with them. 

Senator WICKER. Ms. MacGuineas, do you agree with that final 

statement about proposals that raise marginal rates being harmful 

to job creation and economic growth? 

Ms. MACGUINEAS. I do. I do not think we are at a point where 

the marginal rates are so high that they are incredibly negative on 

the economy, but I think if we tried to solve this problem by raising 

marginal rates, that would be the complete wrong approach because we have a tremendous opportunity to reform the Tax Code 

in a way that actually lowers marginal rates. That is what happens 

when you have over $1 trillion a year in tax expenditures that 

probably misallocate capital more often than not and greatly complicate the Tax Code. So we have a remarkable opportunity to raise 

any revenues that we want to raise as part of a fiscal package 

while simultaneously lowering rates. 

The thing that I do understand is I remember back in graduate 

school studying these tensions, and one of the biggest tensions is 

between economic growth and equity. And I understand the frustration that growing income inequality is at profoundly disturbing 

levels right now, and you want to think about ways, while we are 

dealing with fiscal problems, to try to get at that. But even if you 

want to make the Tax Code more progressive than it currently is, 

you can do that as part of fundamental tax reform while lowering 

rates overall as well. You can do distributional changes that are 

pro-growth as part of tax reform, and I would say that, if we want 

to change any of the distributional effect, should be how we do it. 

Increasing marginal rates just politically it is not the right way to 

start right now, but more importantly, economically it would be 

much less beneficial than the Bowles-Simpson type of approach to 

reforms. 

Senator WICKER. Mr. Altman, do you want to respond to that? 

Mr. ALTMAN. In effect, I want to add a footnote. I agree entirely 

with the points Maya just made, that the Bowles-Simpson approach—focusing on tax expenditures, broadening the base, lowering rates—is the best approach, and hopefully we will undertake 

serious broad-based tax reform soon. But just for the record, if the 

Bush high-earner tax cuts were to expire and we were to return to 

the Clinton rates, 39.6 on the top marginal rate, 20 percent on the 

capital gains rate and so forth, I think we have a lot of evidence 

during the 1990s that that was not damaging to economic growth, 

damaging to investment, damaging to financial markets. And I do 

not believe it would be again damaging. 

23 

Is it the optimal way to go? No. But would it have dreadful, terrible, catastrophic effects? I believe the answer to that is no. 

Senator WICKER. OK. Back to you, Dr. Holtz-Eakin. Would you 

challenge that last statement of Mr. Altman? 

Mr. HOLTZ-EAKIN. I am sure Roger is doing better empirical 

work than many who defend what went on in the late 1990s, but 

my concern is that you often hear this, ‘‘Well, we raised taxes and 

the economy grew like mad and everything was great.’’ People forget we also had a tech bubble which, when it burst, provided the 

same level of losses as did the housing bubble bursting and caused 

a recession. That very same tech bubble was the source of the revenue surge that ultimately led to budget balance and surplus in the 

United States, and it was also fueled by the peace dividend with 

the decline of the Soviet Union. 

I do not think anyone wants to go back to a world that relies on 

being safer in the globe—we are not—and having a bubble fuel 

both the Federal budget and private economic growth. 

So I think the tax policy did not make that happen. I think other 

factors made it happen, and to raise taxes back to those levels in 

this environment would be a bad idea. 

Senator WICKER. OK. Dr. Holtz-Eakin, let me begin with you on 

a second thread. This Congress passed and President Obama 

signed a stimulus package of approximately $820 billion early in 

2009, and let me make my question bipartisan. In early 2008, there 

was a modest $152 billion stimulus bill passed by this Democratic 

Congress and signed by President Bush. 

Did those two economic stimulus packages work? Were any part 

of them a success? Were they helpful in any respect? 

Mr. HOLTZ-EAKIN. I would give—— 

Senator WICKER. And let me just do this because I do not want 

to interrupt you. If you had $821 billion to spend in early 2009, 

how could we have better spent it? 

Mr. HOLTZ-EAKIN. So I am not a big fan of the 2008 episode. I 

think the evidence is pretty clear that that temporary stimulus, 

and many others designed that way, are largely ineffectual, and 

that one—there is nothing in the data to suggest it worked. 

The 2009 I think you have to evaluate by a different standard. 

There is no President or Congress who would not have acted in 

those circumstances. You had to. And my reading of what we did 

with that is, you know, we threw nearly a $1 trillion at the economy. That has to have an impact. Assertions that there was zero 

impact from the stimulus just cannot be right. The work we have 

done suggests that—since we will never know what would have 

happened in the absence of it, it is always guess work. But the 

work we have done suggests that stopped the fall by about $1 trillion, and that was good. But there were not these grand multiplier 

effects that you hear so much about, that basically for every dollar 

we spent, we got $1 of GDP, maybe a little more. And that I think 

reflects the design flaws in that bill. The bill had numerous deficiencies. We have heard a lot about the shovel-ready things that 

really were going to take a long time. That was predictable. It also 

contained many things which were not about short-term stimulus 

but which were downpayments on a domestic policy agenda by the 

Administration. They should have actually focused on things which 

24 

were genuinely short-term stimulus. And it was unrealistic, I 

think, to scale up some things and expect them to work. The best 

example is we used to have two $20 million rural broadband programs in the Federal budget, one in USDA and one in the Department of Commerce. That bill had $4 billion for rural broadband. 

There is not any organization in the public or private sector that 

can scale itself that much overnight and use the money effectively. 

It just cannot. And it was destined to fail. Worse, once attention 

got focused on things like that, everyone running such programs 

was afraid they were going to end up on ‘‘60 Minutes’’ as the poster 

child for waste, and so they started writing grant agreements that 

were ironclad so that they would be safe, and the money never 

went out. 

And so it really was a flawed effort, and we could have done 

much better with the $800 billion. 

Senator WICKER. Mr. Chairman, it is only you and I left on the 

panel. I have a number of other questions. Perhaps you would like 

to take another round or just tell me how you would like to proceed, but I have at least another round. 

Chairman TESTER. No, no. We will do another round. I have just 

a couple left, and that would be good. 

You folks have all described the fragility of this economy. I am 

going to start with you, Mr. Altman, given your background and 

your work. If the Super Committee was to come out with $3 to $5 

trillion in reductions, how do you think the capital markets would 

respond? And just as importantly, how quickly would they respond? 

Mr. ALTMAN. Overnight, and at least on the equity side and globally, very positively. It would be a big surprise. If we were getting 

to the verge of that, presumably we would all see that we were getting to the verge of it. But, in general, it would be a big surprise. 

It would be a huge positive surprise, and it would have a tonic-like 

effect. All markets would respond very positively. As I said a 

minute ago, interest rates in most sectors of the credit markets are 

already so low that I do not think they could go lower because they 

are so low for some of the wrong reasons. But the overall effect 

would be big and it would be overnight and it would be positive. 

Chairman TESTER. And the potential for those interest rates to 

blow up would be minimized, do you think? 

Mr. ALTMAN. Yes, although I do not think we are going to see 

any blowup soon, because as I say in my testimony, right now, as 

is the case so often with financial markets which have, by definition, a rather short term point of view, the focus is on the European sovereign debt crisis and the risks of recession in both Europe 

and the United States. That focus will return to our deficit and 

debt problem. It is just a matter of when. There is no doubt that 

it will return. And if we have not done much to solve it, that will 

be a bad time. But right now that is not what is preoccupying markets because the other two issues are so front burner. But I do not 

think there is a risk of blowup over the very short term. But as 

I said earlier, a failure on the part of the Super Committee, cannot 

agree, defaults to the sequester, is going to be taken quite poorly. 

Chairman TESTER. Maya, as far as capital markets, do you 

agree? 

25 

Ms. MACGUINEAS. I agree completely. I think the question is 

what will happen if they come out with something in the medium 

size and whether that will be reassuring or not. But I think we 

know that there would be an immensely positive upside if they 

came out and exceeded expectations; and if they gridlock and they 

cannot get anything done, this is just going to be another sort of 

failure that keeps markets low and uncertainty high and is very 

damaging. 

Chairman TESTER. Well, let me touch on that again, and we will 

get to you, Doctor, and you can address any of them you want. But 

if they come out with a medium size, what do you think is going 

to happen to the capital markets? 

Mr. ALTMAN. Maya said earlier it depends on the composition of 

it, and it depends on the precise size. But so that I am not wishywashy, I think if there is a successful outcome in the sense that 

the Super Committee actually reaches agreement and the package 

is bigger than the minimum, the reaction is going to be positive, 

not negative. 

Chairman TESTER. Yes, go ahead, Maya. 

Ms. MACGUINEAS. Just one quick point, which is I do think that 

if they were to come out with the minimum, the 1.2, but set in 

place the next stage so that we can sort of encompass all of go big 

in some stages but it is all one comprehensive piece, that would be 

reassuring. We cannot just say 1.2 and we are done, we will until 

after the election, because that is not going to do the trick. But if 

we keep this momentum building, I think that can be positive. 

Chairman TESTER. I agree. Doctor. 

Mr. HOLTZ-EAKIN. Just on the mechanics of it, I think a numerical success big enough to move the next debt ceiling increase past 

the election would be a very big win for the financial markets. And 

then in terms of looking at the markets to monitor the reaction, I 

just want to say what I think Roger said, which is look at the equity markets. I think that is going to be the key. We actually want 

interest rates to go up. We do not want them to spike and reflect 

a crisis, but higher interest rates, you know, throw me in that briar 

patch. That would mean we are actually growing. That would mean 

we are actually are looking more normal as an economy. 

Chairman TESTER. OK. Taking it down to a small Main Street 

business, working-family perspective, how would they be impacted, 

either by the capital markets or by some sort of big agreement 

overall? What would be the positive impacts? What would be the 

negative impacts? Whoever wants to start can. 

Mr. ALTMAN. Oh, maybe I will start. There should be a positive 

impact on credit availability. Right now a lot of lenders see this 

weakening economic condition, which leads, of course, to weaker 

credits for everybody, and lenders are very, very hesitant. We see 

that everywhere. So I think it would have a positive impact on the 

ability of a small business to borrow, at least at the margin. 

I also think it should improve confidence levels at the business 

level and the consumer level. You should see—and this will not 

happen in a tidal wave sense, but you should see some improvements in consumer spending, and you should see some improvements in business investment and hiring. I do not want to imply 

26 

they will be dramatic overnight, but some of those spigots should 

begin to turn a bit. 

So I think there are benefits and that they will be meaningful 

over the medium term. 

Chairman TESTER. OK. Maya or Dr. Holtz-Eakin? 

Ms. MACGUINEAS. I think certainly there would be more stability 

than there currently is, and I think that would have the deepest 

effect on the business environment where some of the uncertainty 

is really causing businesses—you know, they have two problems 

right now. There is not sufficient demand, and there is certainly 

not enough stability and security for them to invest as we need to. 

I think if we were to see a political compromise, we should not 

underestimate the huge increase in confidence that you would see 

in this country to see a functioning political system because people, 

as you all know from going back home, are so frustrated with—you 

know, the solution is in sight, and yet we cannot find the political 

way to get ourselves there. 

Chairman TESTER. That is right. 

Ms. MACGUINEAS. And I think the real advantage—and it is 

similar to your question about stimulus, but in some ways it is the 

counterfactual. What would happen if we do not do it? And the real 

advantage would be some things that families may never understand, which is how much better making some of these tough 

choices now, whether it is raising the retirement age gradually in 

the future or scaling back on some benefits or slightly higher taxes 

at some point, is so much better than waiting until markets force 

us to make these changes, where all of those tough choices will be 

there—we will have to do them all, and we will have to do them 

in a much greater scale, and we will not be able to protect people 

from dangerous tax hikes that would choke off the economy. And 

we will not be able to protect people from making more changes to 

the safety net than we otherwise would have to. 

So it is doing it now in a thoughtful and gradual way that allows 

us all to protect the most important interests as opposed to waiting 

until we are hit with a crisis, which would be the worst across the 

board. 

Chairman TESTER. OK. Dr. Holtz-Eakin. 

Mr. HOLTZ-EAKIN. I think three things. 

First, a crisis averted. It might not be visible, but it is the biggest benefit, and emphasis should be placed on that. 

Second is I believe there will be beneficial business climate improvements, and that will mean jobs and growth. And that is the 

number one priority. It is going to be especially important among 

young people who have been disproportionately hurt by this recession, both in terms of the numbers and duration of their unemployment, the wage losses, and I think with people dropping out of the 

labor force, we are running the real risk of a cohort having marginal attachment to the labor force, and that leads to bad social 

problems. Main Street is not going to like that, so that would be 

a benefit. 

The last thing is just that the mechanics of a household level, 

there is no real confidence in Social Security. Medicare has to be 

a scary proposition. There is an incentive then to save against a 

future that is really quite uncertain in their mind. Settling some 

27 

of that would mean that they can concentrate on fixing household 

balance sheets, which is important, but not more. And they would 

then live better in the moment than they would otherwise, and 

that I think they would see right away. 

Chairman TESTER. Good. Senator Wicker. 

Senator WICKER. Thank you. 

Ms. MacGuineas, could you briefly describe the additional health 

care reforms that you would have added to the Bowles-Simpson report? And would they have attacked the real problem with health 

care costs, namely, that they are rising at 3 to 4 times the inflation 

rate? 

Ms. MACGUINEAS. Right. So as I mentioned before, I think probably the part that needs to be strengthened the most in BowlesSimpson is to do more on health care. And a stark reality on all 

this is none of us know how to fix health care. This will be—you 

know, we can fix Social Security. We can do it. With health care 

we are going to have to go back a number of times. And so the answer, when it comes to health care, is we have to do everything we 

can possibly do, and I look at that as kind of three categories. One, 

there are the things that will save money, and they are not structural, but they will save some money. So if that comes from providers or wherever we can find that, that is a savings. It does not 

bend the curve. 

The most important area—— 

Senator WICKER. We have hit the providers pretty hard. 

Ms. MACGUINEAS. We have hit the providers very hard, and 

there is only so much—if there is even anything that you can 

squeeze out of there. 

Senator WICKER. OK. 

Ms. MACGUINEAS. That is short term, how you save money. What 

is really important is how you slow the growth. I think what came 

out of the Obama and Boehner discussions was critically important. 

Let us talk about raising the retirement age because that is one 

thing that we now have the ability to do in Medicare that would 

save money in ways that created better incentives. I think reforming the tax expenditures for the health care exclusion, which is 

part of Bowles-Simpson, but looking at that as aggressively as possible, would make a big difference. 

I think greater levels of cost sharing is very, very important, and 

I think we have to look at that as aggressively as we can while protecting people who cannot afford to pay more. And I think malpractice—— 

Senator WICKER. You would do that at the higher-income level? 

Ms. MACGUINEAS. I would do that at the higher end, and where 

you had to, at the medium levels. I mean, we have to—we cannot 

perpetuate this notion that health care is something that somebody 

else pays for for you. So bringing people closer to the effects and 

the prices helps us make better choices, just like it does in other 

markets, even though health care is not a normal market. 

Then when it comes to the deepest structural reforms, I believe 

health care does need to have a budget that limits its growth. 

Senator WICKER. I interrupted you, and you were about to 

say—— 

28 

Ms. MACGUINEAS. I was about to say with medical malpractice 

and tort reform, I think that should be a piece of it. And depending 

on how you do it, it can save more or less money. But I think that 

is something we should look at. Basically every idea that is out 

there—I look at what Coburn and Lieberman did, I look at what 

all other outside groups have recommended, and I would do as 

much as we possibly can. 

And then on structural reforms, I do think thinking about a 

version of premium support, which is the one that Domenici and 

Rivlin recommended, where you look at premium support, but it 

grows at more manageable, I think, levels than the proposal that 

has come out of the House on that, so the growth rate would be 

a little bit higher, and it stays in place—it keeps in place traditional Medicare as a parallel program, and you control costs of both 

of those, is a way to get at some of these deeper structural reforms 

we need to make. But we cannot have health care be open-ended 

indefinitely. We are going to need to put real budgets on that. 

There are different approaches to that. IPAB is another way to 

help control costs, and those all need to be considered to stay within a health care budget. 

Senator WICKER. Let me begin with Mr. Altman, and then the other two can respond. Of the target of $1.2 trillion, realistically 

how much of that can be achieved through reductions in discretionary spending in the 10-year window? 

Mr. ALTMAN. I think all of it can be achieved through discretionary spending, if it has to be. But if I interpret your question 

a little more broadly, that does not send a very encouraging signal 

because you are dealing with such a small portion of the total 

budget, and you are saying we cannot deal with entitlements, we 

cannot deal with revenues, and so we are going to do it entirely 

this way. Would $1.2 trillion divided equally between defense and nondefense over 10 years be undoable? No, it would not be undoable, 

although I am sure there is a big, huge debate in the national security community as to whether that magnitude of defense cuts could 

be managed or not. My very amateurish judgment—but I do talk 

to a few people that know something, unlike me, about that—is 

that it could be. But it is not the ideal approach. 

Senator WICKER. Dr. Holtz-Eakin, in answering the question, if 

you could discuss how severely we would have to get into those 

three core functions that you mentioned in your presentation of infrastructure, basic research, and national defense. 

Mr. HOLTZ-EAKIN. I do not want to say none, but that would be 

my best advice, that, in fact, going with exclusively discretionary 

cuts comes with two very serious handicaps. One is that discretionary spending is where we locate those core functions—national 

defense, basic infrastructure, research—and those are things that 

we need to both do and do better in the United States. And I think 

it would be a mistake to focus the cuts there. 

The second is that you cannot cut discretionary spending 10 

years from now. Discretionary spending is done annually, and it is 

utterly unconvincing, given the budgetary history of the United 

States, to promise to cut discretionary spending 10 years from now. 

So I think markets are going to look at that and say, ‘‘Yeah, right.’’ 

29 

Real changes to mandatory spending programs start now and stick 

and are far more compelling and the place that I think the Committee should be focused. 

Senator WICKER. OK. Let me ask all three of you, and I will 

begin with you, Dr. Holtz-Eakin, and then we will just go down the 

panel, and this will probably end it up, Mr. Chairman, and I thank 

you for your indulgence. 

If we go big and long, is it not true that we can have a very positive effect even if we do not reach much over the $1.5 to $2 trillion 

amount because we have done long-term structural things? And I 

am asking specifically about the really tough political things where 

the Chairman and I and the President would all have to agree to 

hold hands and jump off the high dive together. If we follow the 

suggestion of gradually raising the Medicare age for people who are 

under the age of 55 presently to eventually match the—bring the 

Social Security and Medicare ages together, if we redo the CPI to 

make it more accurately reflect the real world for retirees, if we do 

the means testing beginning at the top end for some of these entitlement benefits, if we do those sorts of things, we do not get as 

much punch in the 10-year window that we are talking about. But 

is it not a fact that we have really done better by future generations than doing some of the low-hanging fruit that Ms. 

MacGuineas talked about in her testimony? 

Mr. HOLTZ-EAKIN. I completely agree. If the gentlemen you mentioned could hold hands and address Social Security, Medicare, 

Medicaid, and the Affordable Care Act, make fundamental changes 

to their trajectory over the long term, and hit only $1.2 trillion in 

the first decade, I think that would be an enormously beneficial 

step, and I think everyone would recognize it as such. 

Senator WICKER. Mr. Altman. 

Mr. ALTMAN. Well, of course, you cannot jump off the Washington Monument now because it is closed, but I agree with Doug. 

If the Super Committee, A, did more than the minimum and, B, 

took on the issue as you are talking about, the reaction and some 

of the benefits I said to Senator Tester in response to his question 

really would be very considerable, very positive result. 

Senator WICKER. Ms. MacGuineas. 

Ms. MACGUINEAS. Absolutely. It is a really important question— 

because if we could focus on something that would say raise the retirement age gradually, means-tested entitlements in the way that 

protected people who depend on them but asked for people who do 

less to give more, and I would also add into that at least some reform of tax expenditures—because do not forget, some of the tax 

expenditures are growing as quickly. They are just like entitlements, and some of the problematic ones. Boy, would that be a tremendous package. And the CPI as well, of course, which is a technical fix. There is absolutely no reason we should not be correcting 

a CPI which overstates inflation. 

But all of those things have the benefit of having the savings 

compound over time so they would not show as huge savings in 

that 10-year window, but the effect they have is so important because what it does is it brings that debt level down. 

30 

Now, I do think that you want to have some savings in the 10 

years because our debt levels need to be brought lower, but more 

important than that is that they are on that downward trajectory. 

The only thing I would recommend is that just as Doug said 

about caps, things can be undone, you want to make sure that all 

those changes are credible and that there is a real political commitment to stick to them so that they are reassuring enough that 

those savings which would material more in the long run would 

come along as promised. And I think there are budget process maneuvers that could help tie up a deal like that. And anything along 

the lines of what you just put out would be immensely reassuring 

and helpful to the economy. 

Senator WICKER. Well, thank you. I want to thank the panelists. 

Let me just observe in closing, Mr. Chairman, almost every Senator who came and attended today spoke out in favor of going big 

and going long, and I would add what Senator Hagan said, going 

smart. I immediately embraced the concept of the Group of Six. It 

was an idea that was so trashed at once from both the right and 

the left that it was dead on arrival by sundown of that very day. 

I think there is a willingness on this panel and in this Senate 

and both ends of the Capitol to do something tough at this moment 

of divided Government. I serve in a Democratically controlled Senate. The House of Representatives is Republican. The executive 

branch is Democratic. And, frankly, the agencies and the regulatory bodies are largely Democratic. But this is an ideal time—it 

is actually the perfect time to do big things where we all have our 

fingerprints on them, and we cannot make them an election issue 

afterwards. 

I would just suggest to my Democratic friends and to anyone 

within the sound of my voice that if the President of the United 

States would step forward and give a clear signal to the Super 

Committee that he is willing to be engaged in this, he is willing 

to endorse this, he is willing to say early on that he would sign legislation that goes big and goes long, I think we could get it done 

a la Tip O’Neill and Ronald Reagan, and we would actually have 

something that we can tell our grandchildren that we did for their 

future. 

Chairman TESTER. Thank you, Senator Wicker, and I do not 

think there is a soul, on this panel at least, that does not agree this 

is the preeminent issue we have got to deal with. So we are going 

to have to get on the same page. 

Instead of talking about the good things that can happen with 

the good, long-term big package, I want to talk about the other side 

of the equation. Let us say that the Super Committee cannot come 

to any sort of real recommendations. Let us say that the sequestration is evident that it is going to start and with that will be bills 

brought up to the Senate, at least, and probably the House to 

eliminate programs that will be sequestered, for example—well, 

one of them, military spending has already been brought up. We 

are not going to do that. 

Give me some sort of idea—and I think I know what your answer 

is going to be, but give me some sort of answer on what that would 

do, that not only do we not come to some sort of $1.2 trillion discussion, or much bigger than that, but also the sequestration that has 

31 

been mandated by the agreement that was done on the debt ceiling, there are inroads into that so that that does not even happen. 

Give me some sort of idea. Doug, you can start. 

Mr. HOLTZ-EAKIN. Well, I think, you know, obviously you would 

have severe disappointment in markets. I am firmly convinced that 

you would see more agencies downgrade U.S. credit ratings. I think 

you would see markets steadily reevaluating the relative position 

of the U.S. versus other places to park their money. Because it is 

always relative, we can, you know, be the best-looking horse in the 

glue factory or the world’s tallest pygmy or a lot of things that we 

are right now, but markets at some point are going to decide someone else is just a little bit better, and that would trigger the more 

dramatic reaction. 

You do not want to find out when that happens. We do not need 

that experiment, and we should avoid it. 

Chairman TESTER. Thanks. Roger. 

Mr. ALTMAN. Well, Senator, I agree with what Doug said. Let me 

just add one element. Right now there is a widespread expectation 

that the Super Committee is going to fail to agree, and that expectation, among other things, is being underscored by Members of 

Congress themselves who often privately rather than publicly are 

themselves saying that. 

So the expectations are awfully low right now, and apart from 

agreeing with everything Doug said, one of the advantages of actually achieving an agreement, especially if it were above the minimum, it would be such a surprise. You know, it would be doubly 

beneficial because it would be confounding the conventional wisdom. 

Chairman TESTER. Maya. 

Ms. MACGUINEAS. It is terribly discouraging because I think the 

trigger is a real problem. Peterson-Pew came out with a number 

of recommendations about how to build a trigger, and basically 

there are two ways you want to do it. You want to create a trigger 

that either is something that if it went into place would be a good 

thing. Like a good trigger would be, well, if you do not come up 

with an option, Bowles-Simpson goes into place. Right? You pick a 

default that is good or that is strong enough that it causes people 

to act but they will not bypass it. 

This trigger, so much of it is security. You can already see people 

lining up to be concerned about it. So many things are exempt. We 

recommended that you have broad-based triggered both on revenues and on spending so both parties would hate them and you not 

exempt any program so that all people would say we do not want 

this to hit. 

So I am concerned that the design of the trigger is not as effective, and the main thing that is going to cause action is not just 

the threat of the sequester, but that it is the right thing to do, that 

there is this huge outcry to do the right thing. And you can just 

see from the comments we have heard today on this, the Senators 

who have been here have just asked all the right questions and 

showed the momentum to do the right thing. That is what is going 

to push it more than the sequester, I believe. 

Chairman TESTER. I would agree. I want to thank you all very 

much for your testimony. As I said when I met you earlier today, 

32 

I appreciate the work you have done in preparation for this Committee, and I appreciate your insights about this whole process and 

how it can work very, very well or how it might turn into a train 

wreck. 

I can tell you from a personal standpoint, one of the reasons I 

wanted to have this hearing, as Senator Bennet said, this is a very 

important issue. But we also need to give the Super Committee the 

knowledge to know that there are a lot of people out there that 

want to see this thing work and work well for our country and for 

our kids. And now is the time to act. We cannot continue, we just 

cannot continue to kick the can down the road. 

I remain optimistic. My fellow Senator from Montana, Max Baucus, is on that Committee. I hope that he as well as the other five 

Senators can provide solid leadership to bring forth comprehensive 

deficit reduction. I think it is the Senate’s—I think it would serve 

the Senate well, and I think there are—I mean, as I counted it up 

here, I think almost everyone one of us, if not every one of us, are 

part of the Gang of 35, if that is a gang or group or whatever you 

want to call them, pretty much evenly split, Democrats and Republicans, that want to see a big reduction plan. 

As was pointed out, as we look to the future, this is 3 percent. 

My God, we ought to be able to do that with our hands tied behind 

our back. 

So just as a formality, this record will remain open for 7 days 

for any additional comments and questions that might be submitted for the record. I once again want to thank you all. You may 

come from different political persuasions, but I think I heard a hell 

of a lot more agreement than I did disagreement today. I very 

much appreciate that because I agree with what you said. 

Thank you all. We are adjourned. 

[Whereupon, at 11:46 a.m., the hearing was adjourned.] 

[Prepared statements and additional material supplied for the 

record follow:] 

33 

* The CRFB Realistic Baseline assumes the 2001/2003/2010 tax cuts are fully extended, the 

AMT continues to be patched, war costs slowly decline, and scheduled reductions to Medicare 

payments to physicians continue to be waived for remainder of the decade. It does not assume 

the $1.2 trillion in savings the Joint Select Committee on Deficit Reduction has been charged 

with. 

PREPARED STATEMENT OF MAYA MACGUINEAS 

PRESIDENT, CENTER FOR A RESPONSIBLE FEDERAL BUDGET

OCTOBER 5, 2011 

Chairman Tester, Senator Vitter, Members of the Subcommittee, thank you for 

inviting me here today to discuss the economic problems presented by our budget 

deficit. 

I am Maya MacGuineas, president of the bipartisan Committee for a Responsible 

Federal Budget and the director of the Fiscal Policy Program at the New America 

Foundation. I am also a member of the Peterson-Pew Commission on Budget Reform, which recently released two reports—Red Ink Rising and Getting Back in the 

Black, which focus on the need to adopt multiyear debt targets and automatic triggers to help improve the budget process. 

Our debt as a share of the economy is now higher than it has ever been in the 

postwar period, and we are on track to continue adding to it indefinitely. In all likelihood, the debt is already a drag on economic growth, and without changes, it will 

at some point result in a fiscal crisis. 

At the same time, we face serious economic challenges: a slowing economic recovery, unemployment at unacceptably high rates, and a number of persistent problems 

from a skills shortage, underinvestment in a number of critical areas, and an abysmal, inefficient, and anticompetitive tax code, all of which stand in the way of 

longer-term growth. So we have our work cut out for us. 

The debt owed to the public grew from $9.0 trillion, or 62 percent of GDP, at the 

end of fiscal year 2010 to $10.1 trillion, or 67 percent of GDP, at the end of fiscal 

year 2011. Under the Congressional Budget Office’s current law baseline, debt is 

projected to grow to $14.5 trillion by 2021. Interest payments alone would be over 

$660 billion in 2021. 

Yet, these assumptions are likely wildly optimistic. The Committee for a Responsible Federal Budget recently updated its ‘‘Realistic Baseline’’, which includes more 

realistic assumptions about future tax and spending policies than the current law 

assumptions CBO is directed to follow.* Our baseline shows deficits at nearly $1.1 

trillion, or 4.5 percent of GDP, by the end of the 10-year window; public debt growing to $19.4 trillion, or 81 percent of GDP; and interest payments reaching $815 billion in 2021. 

34 

1See, Stephen G. Cecchetti’s September 2011 paper: ‘‘The Real Effects of Debt’’. http:// 

www.kc.frb.org/publicat/sympos/2011/2011.Cecchetti.paper.pdf, and Carmen Reinhart and 

Kenneth Rogoff, ‘‘Growth in a Time of Debt’’. http://www.ycsg.yale.edu/center/forms/growthdebt.pdf 2See, the Congressional Budget Office’s January 2011 ‘‘Budget and Economic Outlook’’. 

http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26lFY2011Outlook.pdf 

Under realistic assumptions, debt will continue to grow over the coming 10 years, 

and then continue to rise to over 100 percent of the economy in the late 2020s, to 

over 200 percent in the 2050s, and eventually to nearly 400 percent by 2080. Obviously, we would experience a fiscal crisis well before it would ever get to these 

points. 

Large deficits and debt have a number of negative effects. 

• They harm the economy by diverting capital from productive investments to finance Government borrowing, which will inevitably push up interest rates and 

the cost of capital for families and businesses. A number of academic studies 

find that high debt levels are already likely negatively impacting the U.S economy. 1

• From a budgetary perspective, high debt levels lead to higher interest payments 

which squeeze out other Government spending and lead to higher taxes. Higher 

interest burdens also leave the Government more vulnerable to increases in interest rates. The Congressional Budget Office recently found that if interest 

rates were one percentage higher each year than currently projected, it would 

lead to $1.3 trillion in additional interest costs over the next decade. 2

• High debt levels lead to loss of fiscal flexibility. Though the past recession was 

quite severe, we escaped a far worse outcome due to our ability to borrow to 

smooth out some of the economic shocks. With our current higher debt levels, 

we no longer have as much fiscal space to respond to emergencies, and doing 

so will be much more difficult and costly in the future if the debt trend is not 

reversed. 

• From an intergenerational perspective, excessively high deficits and debt reflect 

the basic policy of our spending, yet refusing to pay for it, and passing the bills 

along to future generations, along with a lower standard of living than they 

would otherwise enjoy. This inequity is exacerbated by the fact that the bulk 

of our Government spending goes to consumption—much of it for the elderly— 

rather than investments, which would at least have the potential to boost 

longer-term growth. 

• The uncertainty that comes from businesses and households knowing the 

changes will have to be made, but not knowing what they are, makes planning 

and investing significantly more difficult than if policy changes were already 

clearly put in place. The lack of certainty is one of the major factors causing 

businesses to keep their cash on their balance sheets rather than making productive investments that would help create jobs and grow the economy. 

• Finally, ultimately, unsustainable levels of debt will lead to some type of a fiscal 

crisis. Once unimaginable in the United States, we should no longer see ourselves as immune from such a crisis. 

The solution to all of the risks of higher debt is a multiyear, comprehensive fiscal 

plan that would stabilize the debt at a manageable level and set it on a course to 

decline as a share of GDP. The sooner we enact such a plan, the better. 

We should aim to bring the debt down to around 60 or 65 percent of GDP over 

a decade—still significantly higher than the historic average of below 40 percent, 

but more manageable—and continue to bring it down to precrisis levels over the following decade. All areas of the budget should be on the table. 

The debt threat is extremely serious, but it is also an opportunity to restructure 

our budget and tax system for the 21st century. By shifting our budget from one 

directed towards consumption to investment, we can lay a new foundation for 

growth. In order to be competitive down the road, we must strengthen critical investments in human capital, infrastructure, and high value research and development. And our tax system needs to be fundamentally reformed to both help grow 

the economy and raise more revenues to help close the fiscal gap. 

Debt Reduction as an Engine for Economic Growth 

It is important to recognize that debt reduction is not at odds with economic 

growth strategy, but rather, a central part of one. Putting in place a credible 

multiyear debt stabilization plan immediately has a number of economic advantages. 

35 

3See, the Congressional Budget Office’s July 16, 2010, report: ‘‘The Macroeconomic and Budgetary Effects of an Illustrative Policy for Reducing the Federal Budget Deficit’’. http:// 

www.cbo.gov/ftpdocs/123xx/doc12310/07-14-DeficitReductionlforweb.pdf 4See, the October 2010 International Monetary Fund, World Economic Outlook, ‘‘Chapter 3: 

Will It Hurt? Macroeconomic Effects of Fiscal Consolidation’’. http://www.imf.org/external/ 

pubs/ft/weo/2010/02/pdf/c3.pdf 

First, a credible debt reduction package reduces the negative consequences of excessively high debt levels, including pressure on interest rates and payments. The 

Congressional Budget Office has analyzed the potential impacts of a multitrillion 

debt reduction plan over the course of a decade and has found that while it can 

dampen economic growth in the short-term, the overall size of the economy later in 

the decade and over the long-term can be notably larger. CBO estimates that by 

2021, real GNP could increase by 0.6 to 1.4 percentage points from a $2.4 trillion 

debt reduction plan, compared to what otherwise would have occurred, 3 The International Monetary Fund has also found that fiscal consolidation in high-debt countries will be beneficial and likely increase output over the long-run. 4 There is also 

evidence that the announcement itself of a credible, long-term debt reduction can 

have positive economic effects in the short-term effects by improving confidence and 

pushing down long-term interest rates. Finally, debt reduction would reduce or 

eliminate the risk of a fiscal crisis. 

Second, a credible, multiyear debt reduction plan can help free up enough fiscal 

space upfront to allow the economic recovery to continue to take hold. Rather than 

implementing immediate spending cuts and tax hikes, budgetary changes could be 

phased in more gradually, putting the debt on a glide path to stable and then declining levels. Gradual changes would also allow beneficiaries of our entitlement 

programs and taxpayers more time to adjust. But, a plan does need to be credible 

to be effective. Three keys to a credible plan are: 

• It must be put in statute, not just promised. 

• It must be bipartisan so that there isn’t an immediate push by either political 

party to undo it. 

• It must include a well-designed fiscal rule to ensure that savings are realized 

as promised and that the plan stays on track. Such rules could include spending 

caps at the levels of an agreed-upon plan, and broad-based automatic triggers 

that provide savings if policies fall short. The more difficult to override, the better. The Peterson-Pew Commission reports and the Gang of Six plan include a 

number of budget process reforms that should be integrated into any debt reduction plan to help ensure that stays on track. 

Third, a multiyear plan will provide businesses and households more confidence 

and stability, allowing them to spend, invest and plan in ways that will help the 

economy. 

Fourth, the added pressures on spending will likely lead to better oversight of 

Government programs and reforms or elimination of outdated, ineffective, and redundant spending programs. This is also an important opportunity to transition the 

U.S. budget from a consumption-oriented budget to an investment-oriented one, 

which will be critical to long-term economic growth. In so doing, consumption oriented programs would be cut, while spending on many key areas of productive public investments would be increased. Our current incremental approach to deficit reduction is doing just the opposite of thoughtfully reassessing our priorities and their 

effects on economic growth, and we are instead chipping away at the absolute wrong 

parts of the budget. 

Finally, a comprehensive plan to stabilize the debt, if large enough, will by necessity include reforms to entitlement and the tax system, which if done prudently, will 

help grow the economy. Examples of such pro-growth structural reforms would include: 

• Fundamental tax reform like what the Bowles-Simpson Fiscal Commission proposed, which dramatically reduces tax expenditures, lowers rates—including 

corporate tax rates, and uses a share of the revenues for deficit reduction. 

• Entitlement reform—particularly health and pensions, not only because this is 

primarily where our fiscal challenges lie, but because fundamental reforms 

would allow us to more efficiently use our country’s resources, and provide better incentives for consumptions, savings, and work. 

While smaller budget deals are less likely to include fundamental overhauls of 

major entitlement programs and the tax code, a larger deal would encompass all 

36 

areas the budget and could reform them in a way to create better growth incentives 

and reduce the deficit simultaneously. 

Our tax code is simply a massive mess. It is littered with over 250 special credits, 

deductions, exemptions, and exclusions that cost us nearly $1.1 trillion a year. 

These ‘‘tax expenditures’’ are truly just spending by another name. By reducing, if 

not eliminating, many of them, we can reduce tax rates to more effectively encourage work and investment, while also helping to reduce deficits. Fundamental tax reform is critical in turning our fiscal situation around and strengthening our economic well-being. 

To be large enough in the medium and long-term, and to reassure markets that 

a plan is serious, entitlement reform and tax reform must be at the center of any 

fiscal turnaround plan. 

While the policy choices involved in tackling our out of control debt are not easy, 

they are far easier than what we will face if we continue to delay. One thing should 

be clear: it is preferable to make these difficult budget choices on our own terms 

then if and when they are forced upon us by credit markets. 

As it stands now, the new Joint Select Committee, or Super Committee, is tasked 

with recommending savings of $1.5 trillion over 10 years. This, however, is unlikely 

to be sufficient to stabilize the debt. Instead, we would urge the Super Committee 

to ‘‘Go Big’’ by implementing a larger plan that would be sufficient to stabilize the 

debt at a manageable level and, in so doing, to tackle the most problematic areas 

of the budget, including health and retirement entitlements and taxes. Specifically, 

we urge the Super Committee to: 

1. Go Big. From a realistic baseline in which current policies are extended, $1.5 

trillion is not nearly enough to stabilize the debt. The Super Committee should 

look at all areas of the budget in order to achieve more savings, with a goal 

of stabilizing the debt as a share of the economy and then putting it on a 

downward path. 

2. Go Long. Any serious fiscal plan must address the long-term drivers of our 

growing debt. The Super Committee should enact serious reforms to Social Security—which seems to be all but forgotten in this discussion—as well as Medicare, Medicaid, and other Federal health spending. 

3. Go Smart. Without economic growth, it will be difficult if not impossible to get 

our fiscal situation under control. The Super Committee should pursue progrowth tax reform which broadens the base and lowers rates, and should 

reprioritize spending to better encourage short- and long-term growth. 

4. Stay Honest. The Super Committee must not rely on budget gimmicks to make 

it appear that they identified savings to meet their target or that the problem 

was solved, while failing to fix the problem in reality. 

5. Make It Stick. Once savings have been identified, the Super Committee should 

put in place an enforcement regime to ensure savings materialize as promised. 

Thank you to the Committee for all your work on this and the opportunity to appear here today, and I look forward to your questions. 

37 

APPENDIX 1 

38 

39 

40 

41 

42 

43 

44 

45 

46 

47 

48 

APPENDIX 2 

49 

50 

51 

52 

53 

54 

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56 

57 

ADDENDUM 

58 

59 

60 

61 

62 

PREPARED STATEMENT OF ROGER C. ALTMAN 

CHAIRMAN, EVERCORE PARTNERS

OCTOBER 5, 2011 

Mr. Chairman and Members of the Subcommittee, thank you for inviting me to 

testify before you today on American fiscal policy. 

You are holding this hearing at a time of serious economic and financial fragility 

for the United States. More than 2 years after the trough of the Great Recession 

(June 2009), our recovery has stalled and there is a serious threat of slipping back 

into negative growth. The sovereign debt crisis in Europe continues to rage, and 

that is undermining consumer, business and investor confidence. As a result of 

these two factors, severe and alarming strains have reemerged in our own financial 

system and in the global system. 

In other words, this is a dangerous moment from an economic and financial perspective. And, the decisions which the President and Congress make on fiscal policy 

over the short and medium term will play an important role in diminishing, or in 

worsening, those financial strains and our economic stability itself. 

Economic and Financial Conditions Today 

I want to spend a moment walking through this point on fragility. 

First, the U.S. economy is threatened with renewed recession. It decelerated to 

an 0.8 percent growth rate during the first half of this year. That was down from 

3.9 percent for the first half of 2010, as you can see in Table 1. Just a few negative 

developments, in financial markets, employment trends, or in overall confidence levels, could push this low growth rate into negative territory. 

In addition, the present growth rate trend is far too slow to improve our struggling labor markets, given population growth. This is why net monthly job growth 

for the past three months has averaged only 35,000 new jobs, with zero jobs added 

in August. 

The medium term outlook is also not encouraging. The latest IMF forecast for the 

U.S. economy over the second half of this year is a similarly meager 1.5 percent. 

And, the well regarded Goldman Sachs economic forecast is just slightly above that. 

As for next year, Goldman Sachs’ 2012 growth number is now down to 0.5 percent. And, in the face of such weakness, the U.S. unemployment rate will likely rise. 

That same forecast envisions an average 2012 unemployment rate of 9.4 percent. 

That is discouraging. 

Further, the unemployment rate, while high, probably understates the real weakness in labor market conditions. The so-called underemployment rate (U-6) reflects 

those who have given up looking for work and those who work part time but would 

like a full time job. It presently stands at 16.2 percent, the highest since 1994. 

63 

Moreover, the labor participation rate, which just measures the percentage of working age adults with a job, is 64 percent currently. That is a 27 year low. 

The latest Census Department data on poverty is also important, and it received 

too little attention. 15.3 percent of the American population, or 45 million people, 

now lives below the poverty line. The latter is defined as income of $22,000 or less 

for a family of four, excluding in-kind benefits like food stamps. This is the highest 

percentage of Americans in poverty in 28 years. 

My point is that this is a poor overall economic picture. There are two main explanations. The aftermath of the credit market collapse of 2008, the second worst financial crisis in 100 years, is still restraining consumers. And likely will do so for another few years. Household balance sheets, which were severely overleveraged when 

the bottom fell out (debt at 140 percent of household income) have only returned 

halfway to historically average levels of debt. 

More household deleveraging will occur, driven by the continuing weakness in 

home prices, weak incomes and overall economic insecurity. This is why the personal savings rate, at 4.5 percent, is so far above the negligible level of 3 years ago. 

Which, in turn, explains why consumer spending, which constitutes approximately 

70 percent of U.S. GDP, is relatively stagnant. 

The other major factor contributing to economic weakness is credit availability 

and lending volume. Total bank loans to commercial and industrial businesses are 

well below 2008 highs. Present outstandings are $1.29 trillion, as compared to the 

$1.61 trillion high. This reflects the bad combination of tighter lending standards 

and weak loan demand. The problem is that such low levels of borrowing are not 

consistent with a durable economic recovery. 

These factors explain why, according to CBO, the country is ‘‘only halfway 

through the cumulative shortfall in output relative to its potential level’’ which will 

have resulted from the Great Recession. The total of that cumulative shortfall is estimated at $5 trillion. 

Let me also comment on financial market conditions, starting with credit markets. 

Again, two main points. One is that the level of yields on U.S. Treasury securities 

is so low as to be nearly incomprehensible. Or the Treasury 10 year, for example, 

the yield is hovering around 1.80 percent. That is the lowest recorded level since 

the Federal Reserve System began publishing market data in 1953. And, it is a profoundly negative development. For, it signals negligible demand for capital and negligible inflation. These are hallmarks of recession. 

Second, the sovereign debt crisis in Europe, and the concomitant risk of a banking 

crisis there, has infected financial markets all around the world. Borrowing in public credit markets has recently become much more difficult. Stock prices have fallen 

nearly 20 percent since April, and equity financing levels have dropped accordingly. 

The window for initial public offerings, for example, has nearly closed. The fear factor which we saw so vividly in late 2008 and early 2009, has crept back into these 

markets. They are on a razor’s edge. 

Role of the Federal Deficit 

The Members of this Committee, and all of your Congressional colleagues, should 

recognize that they will be making crucial decisions on deficit reduction in the midst 

of this economic and financial fragility. The right decisions can help to alleviate it. 

But, poor ones can worsen it, even to the point of serious crisis. 

We all know that the U.S. is on the wrong track when it comes to deficits and 

debt. CBO recently projected that the amount of Federal debt held by the public will 

equate to 67 percent of U.S. GDP. That will be the highest ratio since 1951. Worse, 

CBO forecasts that, based on current policies, this proportion will be 82 percent by 

2020. That would be the highest level incurred since record keeping began in 1792, 

excepting the period during and immediately after WWII. All of this is depicted in 

Table 2. 

64 

The Federal debt grows, of course, in proportion to the size of the budget deficit. 

And, you well know that, in absolute terms, deficits hit all-time record highs in 2009 

and 2010 and were still stratospheric at $1.3 trillion for the Federal fiscal year 

which ended a few days ago. 

These deficits reflect a historically wide gap between spending and revenue levels. 

Federal spending has been hovering around 23 percent of GDP and revenue around 

a modern historic low of 16 percent. This seven point difference appears to be the 

largest in our modern history. 

It is obvious that this mismatch, and the scary rate at which it is increasing our 

debt/GDP relationship, is not sustainable. Everyone agrees that, unchecked, it will 

reduce productivity, incomes and our standards of living. There is also reasonable 

agreement on the magnitude of deficit reduction which America needs to cure this 

disparity. The Bowles/Simpson Commission set a goal of stabilizing the debt/GDP 

ratio by 2015 and beginning to turn it downwards from there. The amount of 10 

year deficit reduction necessary to achieve this approximates ($5 trillion). 

Fortunately, the tide of public opinion has moved, and moved sharply on deficits 

and debt. It would seem that the basic wisdom of the American people has asserted 

itself. For, polls indicate that the public is deeply unhappy over continued, record 

deficits and the explosion in Federal debt, realizes the inherent dangers, and wants 

this path altered. 

While this past summer’s dispute over extending the Federal debt limit was difficult, it did provide a modest breakthrough. A 10-year package of specific deficit 

reduction actions totaling $917 billion was agreed then. And, the twelve member socalled Congressional Super Committee was established. It is charged, as we all 

know, with devising an additional $1.5 trillion program of deficit reduction actions 

and submitting them to the full Congress by November 23. If the Super Committee 

cannot agree on a package, or the Congress votes down its recommendations, then 

$1.2 trillion of reductions in domestic discretionary spending over 10 years will be 

automatically triggered. Essentially, these would take effect in 2013 and cuts would 

be divided equally between the defense and nondefense portions of the budget. 

All of this means that a minimum of $2 trillion in 10-year deficit reduction actions 

will be set motion by the end of this year. That is a good start but not enough. Further, difficult decisions by the Super Committee, the full Congress and the President 

would be necessary to properly adjust U.S. fiscal policy. 

A Growth and Jobs Initiative 

The economic slowdown and recession risk which I initially discussed represents 

a huge short term risk. Slipping back into negative growth, and seeing the unemployment rate rise again, would deliver a psychological blow to consumers, businesses and financial markets. They could retrench further and a downward economic and financial spiral could result. And, that could occur when the fiscal and 

monetary authorities are largely out of ammunition. 

65 

Therefore, it makes sense to undertake a short term, entirely temporary growth 

and jobs agenda. This would represent a form of insurance policy. 

President Obama has proposed a $447 billion program of tax cuts, infrastructure 

spending and extended unemployment insurance benefits. The core element is a 

deeper 1-year extension of the 2010 payroll tax cut for employees and a similar 1- 

year payroll tax cut for small businesses. 

In my view, the President’s proposal is a sound one. And, it is clear to me that 

such actions, like the 2009/2010 stimulus program, would have a beneficial economic 

impact. But, there also are numerous, possible variations on the President’s package. The point is that a short term growth and jobs package of this approximately 

magnitude should be undertaken now. Economic conditions demand it, and financial 

markets would welcome it. 

Long Term Deficit Reduction 

At this very moment, financial markets are pre-occupied with the European Sovereign debt crisis and the risks of renewed recession in the U.S. and Europe. That 

is why yields on U.S. Treasury securities, and German and British government 

bonds, are at all-time lows. Concerns over the long term deficit outlook, poor as it 

is, are secondary. 

But, such views can change in an instant. It is just a matter of time before financial markets again are preoccupied with the threatening U.S. fiscal outlook. 

At that point, the trajectory of interest rates will reverse itself. After all, the 10- 

year average yield on 10-year U.S. Treasuries is nearly three times the present 

yield. Then, if our deficits actually follow the CBO path, exceeding 80 percent of 

GDP, family incomes would be lower, productivity would be lower and our standards 

of living would be lower. That is not an acceptable outcome, which is why a major, 

long term deficit reduction package is necessary. 

There are three possible outcomes for the Super Committee process. The first is, 

unfortunately, the most widely expected result. Namely, that the Committee cannot 

find a majority to support the necessary $1.5 trillion package of reductions and does 

not submit a recommendation to the full Congress. On that basis, the so-called trigger would be pulled, and $1.2 trillion of discretionary spending reductions would be 

initiated. 

This outcome would be disappointing across the board. It would vividly underscore an inability to address such a fundamental and important problem. And, if financial markets were as unstable then as they are now, this outcome also could further destabilize them. I would urge the Members of the Committee to work with 

other Senators to avoid this disappointment. 

The second outcome would involve the Super Committee finding a majority on a 

credible $1.5 trillion deficit reduction package, submitting the related recommendations to the full Congress and having those pass and become law. This would send 

a reassuring signal to the public, and to the business and financial communities. 

At a time of such economic and financial weakness, this would be particularly helpful. 

The third outcome, albeit unlikely, would be the optimal one. This is the ‘‘Go Big’’ 

scenario under which the Super Committee reaches agreement, on a much larger, 

and balanced package of deficit reduction actions. In effect, it solves the debt/GDP 

problem in one fell swoop with a $3–4 trillion 10-year agreement along the lines of 

Bowles/Simpson. And, one which wins the support of President Obama and a majority of the full Congress. 

Provided that this did not take effect too quickly in such a weak economic environment, this is just the type of solution which could shore up consumer and business confidence, reassure financial markets and begin to restore public faith in Government itself. 

66 

* The opinions expressed herein are mine alone and do not represent the position of the American Action Forum. I thank Cameron Smith for her assistance. 1 Congressional Budget Office. 2011. ‘‘The Long-Term Budget Outlook’’. Pub. No. 4277. http:// 

www.cbo.gov/ftpdocs/122xx/doc12212/06-21-Long-TermlBudgetlOutlook.pdf 2 Congressional Budget Office. 2011. ‘‘An Analysis of the President’s Budgetary Proposals for 

Fiscal Year 2012’’. Pub. No. 4258. http://www.cbo.gov/ftpdocs/121xx/doc12130/04-15- 

AnalysisPresidentsBudget.pdf 

PREPARED STATEMENT OF DOUGLAS HOLTZ-EAKIN 

PRESIDENT, AMERICAN ACTION FORUM

OCTOBER 5, 2011 

Introduction 

Chairman Tester, Ranking Member Vitter, and Members of the Subcommittee 

thank you for the privilege of appearing today. In this short statement,* I wish to 

make the following points: 

• The outlook for deficits and debt threatens the Nation’s prosperity and freedom. 

Changing the fiscal course should be our top national priority. 

• Controlling the growth of future Federal spending should be the central objective of policy makers in pursing this goal. Effectively controlling spending, reducing deficits, and eliminating future debt accumulation can aid near-term economic growth. 

• Businesses, entrepreneurs, and investors perceive the future deficits as an implicit promise of higher taxes and higher interest rates. 

• There are no fixed statistical indicators that will signal imminent loss of confidence in the U.S. by global capital markets, but Federal debt is already in the 

danger zone. 

Let me discuss each in turn. 

The Threat of Future Debt 

The Fiscal Outlook. The Federal Government faces enormous budgetary difficulties, largely due to long-term pension, health, and other spending promises coupled 

with recent programmatic expansions. The core, long-term issue has been outlined 

in successive versions of the Congressional Budget Office’s (CBO’s) Long-Term 

Budget Outlook. 1 In broad terms, over the next 30 years, the inexorable dynamics 

of current law will raise Federal outlays from an historic norm of about 20 percent 

of Gross Domestic Product (GDP) to anywhere from 30 to 40 percent of GDP. Any 

attempt to keep taxes at their postwar norm of 18 percent of GDP will generate an 

unmanageable Federal debt spiral. 

This depiction of the Federal budgetary future and its diagnosis and prescription 

has all remained unchanged for at least a decade. Despite this, action (in the right 

direction) has yet to be seen. 

Those were the good old days. In the past several years, the outlook has worsened 

significantly. 

Over the next 10 years, according to the Congressional Budget Office’s (CBO’s) 

analysis of the President’s Budgetary Proposals for Fiscal Year 2012, 2 the deficit 

would never fall below $750 billion. Ten years from now, in 2021, the deficit would 

be 4.9 percent of GDP, roughly $1.2 trillion, of which over $900 billion would be devoted to servicing debt on previous borrowing. 

As a result of the spending binge, in 2021 public debt would have more than doubled from its 2008 level to 90 (87.4) percent of GDP and will continue its upward 

trajectory. 

The ‘‘Bad News’’ Future under Massive Debt Accumulation. A United States fiscal 

crisis is now a threatening reality. It wasn’t always so, even though—as noted 

above—the Congressional Budget Office has long published a pessimistic Long-Term 

Budget Outlook. Despite these gloomy forecasts, nobody seemed to care. Bond markets were quiescent. Voters were indifferent. And politicians were positively in denial that the ‘‘spend now, worry later’’ era would ever end. 

Those days have passed. Now Greece, Portugal, Spain, Ireland, and even Britain 

are under the scrutiny of skeptical financial markets. And there are signs that the 

U.S. is next. The Federal Government ran a fiscal 2010 deficit of $1.3 trillion—nearly 9 percent of GDP, as spending reached nearly 24 percent of GDP and receipts 

fell below 15 percent of GDP. 

What happened? First, the U.S. frittered away its lead time. It was widely recognized that the crunch would only arrive when the baby boomers began to retire. 

Guess what? The very first official baby boomer already chose to retire early at age 

67 

62, and the number of retirees will rise as the years progress. Crunch time has arrived and nothing was done in the interim to solve the basic spending problem— 

indeed the passage of the Medicare prescription drug bill in 2003 made it worse. 

Second, the events of the financial crisis and recession used up the Federal Government’s cushion. In 2008, debt outstanding was only 40 percent of GDP. Already 

it is over 60 percent and rising rapidly. 

Third, active steps continue to make the problem worse. The Affordable Care Act 

‘‘reform’’ adds two new entitlement programs for insurance subsidies and long-term 

care insurance without fixing the existing problems in Social Security, Medicare, 

and Medicaid. 

Thus, the U.S. faces squarely a future that potentially includes sufficient Federal 

indebtedness to generate sovereign debt distress. What is at stake for the average 

citizen? 

For Main Street America, the ‘‘bad news’’ version of the fiscal crisis occurs when 

international lenders revolt over the outlook for debt and cut off U.S. access to international credit. In an eerie reprise of the recent financial crisis, the credit freeze 

would drag down business activity and household spending. The resulting deep recession would be exacerbated by the inability of the Federal Government’s automatic stabilizers—unemployment insurance, lower taxes, etc.—to operate freely. 

Worse, the crisis would arrive without the U.S. having fixed the fundamental 

problems. Getting spending under control in a crisis will be much more painful than 

a thoughtful, proactive approach. In a crisis, there will be a greater pressure to resort to damaging tax increases. The upshot will be a threat to the ability of the 

United States to bequeath to future generations a standard of living greater than 

experienced at the present. 

Future generations will find their freedoms diminished as well. The ability of the 

United States to project its values around the globe is fundamentally dependent 

upon its large, robust economy. Its diminished state will have security repercussions, as will the need to negotiate with less-than-friendly international lenders. 

The ‘‘Good News’’ Future under Massive Debt Accumulation. Some will argue that 

it is unrealistic to anticipate a cataclysmic financial market upheaval for the United 

States. Perhaps so. But an alternative future that simply skirts the major crisis 

would likely entail piecemeal revenue increases and spending cuts—just enough to 

keep an explosion from occurring. Under this ‘‘good news’’ version, the debt would 

continue to edge northward—perhaps at times slowed by modest and ineffectual ‘‘reforms’’—and borrowing costs in the United States would remain elevated. 

Profitable innovation and investment will flow elsewhere in the global economy. 

As U.S. productivity growth suffers, wage growth stagnates, and standards of living 

stall. With little economic advancement prior to tax, and a very large tax burden 

from the debt, the next generation will inherit a standard of living inferior to that 

bequeathed to this one. 

Controlling Spending To Reduce Deficits and Debt 

The policy problem facing the United States is that spending rises above any reasonable metric of taxation for the indefinite future. Period. There is a mini-industry 

devoted to producing alternative numerical estimates of this mismatch, but the diagnosis of the basic problem is not complicated. The diagnosis leads as well to the 

prescription for action. Over the long-term, the budget problem is primarily a spending problem and correcting it requires reductions in the growth of large mandatory 

spending programs and the appetite for Federal outlays, in general. 

As an example, using the President’s 2012 Budget, the CBO projects that over the 

next decade the economy will fully recover and revenues in 2021 will be 19.3 percent 

of GDP—over $300 billion more than the historic norm of 18 percent. Instead, the 

problem is spending. Federal outlays in 2021 are expected to be 24.2 percent of 

GDP—about $1 trillion higher than the 20 percent that has been business as usual 

in the postwar era. 

Just as some would mistakenly believe that the Federal Government can easily 

‘‘tax its way out’’ of this budgetary box there is an equally misguided notion in other 

quarters that it can ‘‘grow its way out.’’ The pace of spending growth simply must 

be reduced. 

Most importantly, mandatory spending programs cannot be left to evolve as dictated by current law. It is equally important to quickly undertake entitlement reform. To see the need for urgency, consider first Social Security. 

Social Security contributes to the current deficit. At present, Social Security is 

running a modest cash-flow deficit, increasing the overall shortfall. As the years 

progress, these Social Security deficits will become increasingly larger. They are 

central to the deficit outlook. More importantly, the stream of future outlays is 

heavily driven by demography. In particular, if the future benefits of the baby boom 

68 

3See, http://americanactionforum.org/news/repairing-fiscal-hole-how-and-why-spending-cutstrump-tax-increases. 

generation are exempted from reform, either by design or a failure to move quickly, 

then the outlay ‘‘problem’’ will have been effectively exempted from reform. This 

would be a fundamental policy failure. 

For these reasons, an immediate reform and improvement in the outlook for entitlement spending would send a valuable signal to credit markets and improve the 

economic outlook. 

Naturally, it would be desirable to focus on the larger future growth in outlays 

associated with Medicare, Medicaid, and the Patient Protection and Affordable Care 

Act (ACA). These share the demographic pressures that drive Social Security, but 

include the inexorable increase in health care spending per person in the United 

States. From a policy perspective, it would be desirable to replace the ACA with reforms that raised the efficiency of health care spending and slowed the growth of 

per capita health care outlays. At the centerpiece of such reforms would be reforms 

to the Medicare and Medicaid programs. However, in the absence of a political consensus to revisit the ACA, Medicare and Medicaid reforms will remain paralyzed 

and the most promising area for bipartisan entitlement reform is Social Security. 

The Economics of Spending Control 

The top issue facing Americans is the need for robust job growth. According to 

the National Bureau of Economic Research the recession began in December 2007. 

Their data show that there were 142.0 million jobs in December of 2007—the average of payroll and household survey data. In June 2009, NBER’s date for the end 

of the recession, the same method showed 135.3 million jobs, for a total job loss of 

6.7 million attributed to the recession. These numbers are quite close to those using 

the Bureau of Labor Statistics nonfarm payroll data, which showed a loss of 6.8 million. 

There are glimmers of promise. Since December 2009, 1.8 million payroll employment jobs have been added. However at the same time, there are 14 million unemployed persons in the economy and many more discouraged workers. Since the start 

of the recession the labor force has fallen nearly 535,000. 

For these reasons, the current unemployment rate of 9.1 percent likely understates the real duress. Using the BLS alternative unemployment rate (U-6), one 

finds that unemployed, underutilized and discouraged workers are 16.2 percent of 

the total. As evidence of the difficulties, the number of long-term unemployed (27 

weeks or more) is currently 6 million and accounts for 43 percent of all unemployed 

persons. 

The fiscal future outlined above represents a direct impediment to job creation and 

growth. The United States is courting continued downgrade as a sovereign borrower 

and a commensurate increase in borrowing costs. In a world characterized by financial market volatility stemming from Ireland, Greece, Portugal, and other locations 

this raises the possibility that the United States could find itself facing a financial 

crisis. Any sharp rise in interest rates would have dramatically negative economic 

impacts; even worse an actual liquidity panic would replicate (or worse) the experience of the fall of 2008. 

Alternatively, businesses, entrepreneurs and investors perceive the future deficits 

as an implicit promise of higher taxes, higher interest rates, or both. For any employer contemplating locating in the United States or expansion of existing facilities 

and payrolls, rudimentary business planning reveals this to be an extremely 

unpalatable environment. 

In short, cutting spending is a pro-growth policy move at this juncture. As summarized by recent American Action Forum research, the best strategy to both grow 

and eliminate deficits is to keep taxes low and reduce public employee costs and 

transfer payments. 3

Keynesian Arguments and Reducing Spending. Analyses of H.R. 1, the continuing 

resolution that called for $61 billion in reduced Federal spending, by Goldman Sachs 

and Economy.com have been touted by some as evidence that it is not feasible to 

engage in spending reductions. Similarly, one hears frequently that the Budget Control Act of 2011 runs the risk of choking off the recovery. 

I believe these arguments miss several key points. 

Begin, for illustration, with the debate surrounding the CR. The first thing to note 

is that while Members are aware that a reduction of $61 billion in budget authority 

does not translate into an immediate $61 billion cut in outlays, many analysts appear to not understand these budgetary facts. Indeed, on average, a $1 cut would 

translate into only 52 cents during the current fiscal year. 

69 

4 Congressional Budget Office. 2011. ‘‘CBO’s Projections of Federal Receipts and Expenditures 

in the Framework of the National Income and Product Accounts’’. Pub. No. 4250. 

To generate their estimates, Goldman Sachs assumed outlay reductions of $15 bil- lion in the 2nd quarter and $30 billion in the 3rd quarter of calendar 2011. Naively 

interpreted, this could produce noticeable impacts on quarter-to-quarter GDP 

growth. But this is a misleading and highly overstated estimate of the likely impact 

because: 

• The CBO estimates an outlay reduction of only $9 billion in fiscal 2011, or an 

impact of at most 0.3 percentage points; 

• The calculation assumes full dollar-for-dollar reduction in GDP as spending declines. This is too large, especially because; 

• Not all outlay reductions are actual cuts in the purchases of goods and services 

to contribute to measured GDP. Instead, some are transfers payments to States 

or individuals that will have a more muted impact. Indeed, while FY2010 

showed outlays of $3,456 billion on a budget basis, the National Income and 

Product Accounts 4 showed under 30 percent ($1,030 billion) as consumption 

purchases; 

• Not all of the budget authority cuts are from new spending. Instead, some are 

rescissions of the authority for spending that never occurred and might never 

occur; and 

• Most importantly this is a static calculation that assumes no beneficial offset 

in private sector spending because of the improved budget outlook and prospect 

of lower future taxes and interest rates. Put differently, the criticisms ignore 

the rationale for making these beneficial cuts to begin with: to clear the way 

for private sector jobs and growth. 

A different way to make the last point is to note that these ‘‘Keynesian’’ arguments invoke a sterile, mechanical view of his economic views. In fact, Lord Keynes 

placed considerable importance on the role of expectations and optimism regarding 

the economic environment—so-called animal spirits. Policies that enhance the willingness and desirability of businesses to invest fit neatly in to his view of business 

cycles and economic growth. 

Similar considerations apply to the recently enacted Budget Control Act of 2011. 

Much publicity has accompanied the discretionary caps in the bill, which ‘‘cut’’ over 

$800 billion in budget authority relative to CBO’s adjusted 2011 baseline. In reality, 

no such cuts have yet taken place, as the FY2012 appropriations have not yet been 

completed. Moreover, the future ‘‘cuts’’ imposed by the caps are only as concrete as 

the collective will of future Congresses and Administrations to impose them. 

In this light, it is interesting to examine recent movements in indexes of economic 

confidence ranging from small businesses, to CEOs, to households (see Table). 

70 

5Some defend the high corporate tax rate by arguing that the effective corporate tax rate is 

much lower. This misses an important point. Every country’s effective tax rate is also lower than 

its statutory rate. A recent study by two economists at the University of Calgary (http:// 

www.cato.org/pubs/tbb/tbbl64.pdf) concludes that the marginal tax rate in the U.S on new 

investment is 34.6 percent, higher than any other country in the OECD. 

No definitive explanation of month-to-month movements in measures of confidence will emerge from this hearing. However, one could make the case that markedly as the election and Congressional debate shifted toward control of future spending, deficits, and debt. Unfortunately, with the passage of a Budget Control Act that 

revealed partisan differences and less-than-definitive commitments to reduced 

spending, confidence tailed. Off. 

Two final aspects of the recent, Keynesian-based opposition to controlling spending are perplexing. Often those who make the claim that, for example, a $61 billion 

cut in spending will endanger the recovery are equally willing to argue that tax increases are needed to close the deficit. However, in a Keynesian model tax increases 

and transfer decreases enter in exactly the same manner. If the latter endanger the 

recovery, so must the former! 

More importantly, entitlement reform—the repeal of the Affordable Care Act, 

Medicare reform, Medicaid reform, or Social Security reform—is likely to have no 

immediate impact on Federal outlays. Instead, they are commitments in the present 

to reduced spending in the future. By construction, they can have no negative, 

Keynesian impacts on recovery. Instead, they carry only beneficial impacts on the 

expectations of employers and other market participants. 

The Role of Tax Policy 

While it will not be possible or desirable to rely on pure revenue increases to address the looming debt explosion, there is a role for improved tax policy to support 

economic growth. What is needed now is a tax policy that has incentives for businesses and entrepreneurs to locate in America and spend at a faster rate on innovation, workers, repairs, and new plants and equipment. 

The place to start is the corporate income tax, which harms our international 

competitiveness in two important ways. First, the 35 percent rate is far too high: 

when combined with State-level taxes, American corporations face the highest tax 

rates among our developed competitors. 5 The rate should be reduced to 25 percent 

or lower. 

Second, the United States remains the only developed country to tax corporations 

based on their worldwide earnings. Our competitors follow a territorial approach in 

which, say, a German corporation pays taxes to Germany only on its earnings in 

Germany, to the U.S. only on its earnings here, and so forth. If we were to adopt 

the territorial approach, we would place our firms on a level playing field with their 

competitors. 

Proponents of the worldwide approach argue that because it doesn’t let American 

firms enjoy lower taxes when they invest abroad, it gives them no incentive to send 

jobs overseas. Imagine two Ohio firms, they say: one invests $100 million in Ohio, 

the other $100 million in Brazil. The worldwide approach treats the profits on these 

two investments equally, wisely giving the company that invests in Brazil no advantage over its competitor. 

But this line of reasoning ignores three points. First, because firms all over the 

world will pay lower taxes than the two Ohio companies, the likeliest outcome of 

the scenario is that both firms will fail, unable to compete effectively with global 

rivals. Second, when American multinational firms invest and expand employment 

abroad, they tend also to invest and expand employment in the United States. In 

the end, healthy, competitive firms grow and expand, while uncompetitive firms do 

not, meaning that our goal should be to make sure that American companies don’t 

end up overtaxed, uncompetitive, and eventually out of business. And finally, because the U.S. is the holdout using a worldwide approach, it is at a disadvantage 

as the location for the headquarters of large, global firms. As the U.S. loses the 

headquarters, it will lose as well the employment, research and manufacturing that 

typically is located nearby. 

The corporate tax should be reformed further. At present, companies must depreciate their capital purchases over time. Instead, they should be allowed to deduct 

immediately the full cost of all investments, which would provide a dramatic incentive for spending. We should also consider phasing out the tax-deductibility of the 

interest that companies pay on their borrowing. Because this interest is deductible 

and the companies’ own dividends are not, firms have an incentive to borrow excessively. Removing that incentive—making a firm’s tax liability dependent not on its 

71 

6Moody’s determines debt reversibility from a ratio of interest payments to revenue on a base 

of 10 percent. Wider margins are awarded to various governments to indicate the additional 

‘‘benefit of the doubt’’ Moody’s awards. The U.S. finds itself on the upper end at 14 percent. 

The ratios are ‘‘illustrative and are not hard triggers for rating decisions.’’ See: Aaa Sovereign 

Monitor Quarterly Monitor No. 3. Moody’s Investor Service. March 2010. 

financial decisions but on its real economic profitability—would discourage financial 

engineering and focus corporations on their core mission. 

A more competitive corporate-tax system would be a good start in our effort to 

encourage private-sector growth. But a lot of private-sector economic activity in the 

U.S. isn’t affected by the corporate tax at all. Activity that takes place in sole proprietorships, partnerships, and other ‘‘pass-through entities’’—organizations whose 

income is treated solely as that of their investors or owners—is instead affected by 

the individual income tax. Congress’ Joint Committee on Taxation projects that in 

2011, $1 trillion in business income will be reported on individual income-tax returns. 

It’s important to note that nearly half of that $1 trillion—$470 billion—will be reported on returns that face the top two income-tax rates. A conservative estimate 

is that more than 20 million workers would be employed by firms directly affected 

by those two tax rates. Tax reform should avoid higher marginal tax rates in favor 

of lower rates and a broader base. Marginal tax rates and the taxation of dividends 

and capital gains directly affect companies’ decisions about innovation, investment, 

and savings. 

Americans—from homeowners to small businesspeople to the millions of unemployed—are in desperate need of faster and prolonged economic growth. Congress 

should therefore evaluate tax proposals based on whether they’re likely to trigger 

and support that growth. Tax policy can play a key role in spurring an economic 

recovery—but not without sustained reform of both the corporate and individual income-tax systems. 

The Need for Rapid Action 

Financial markets no longer can comfort themselves with the fact that the United 

States has time and flexibility to get its fiscal act together. Time passed, wiggle 

room vanished, and prior to 2011 the only actions taken have made matters worse. 

There are already warning signs on the horizon. S&P has chosen to lower the 

Federal credit rating. While there has been much discussion about the timing of the 

downgrade and the source of the downgrade, there should be little dispute regarding 

the substance of the critique. 

Consider, for example, the analysis by Moody’s. As outlined in a report, 6 the credit rating agency Moody’s looks at the fraction of Federal revenues dedicated to paying interest as a key metric for retaining a triple-A rating. Specifically, the large, 

creditworthy sovereign borrowers are expected to devote less than 10 percent of 

their revenues to paying interest. Moody’s grants the U.S. extra wiggle room based 

on its judgment that the U.S. has a strong ability to repair its condition after a bad 

shock. The upshot: no downgrade until interest equals 14 percent of revenues. 

This is small comfort as the 2012 Obama Administration budget targets 2015 as 

the year when the Federal Government crosses the threshold and reaches 14.2 percent. Moreover, the plan is not merely to flirt with a modest deterioration in creditworthiness. In 2021, the ratio reaches 20.3 percent. The Budget Control Act and actions of the Joint Select Committee on Deficit Reduction are intended to alter this 

trajectory, but until their intended actions become budgetary fact, international 

markets will likely remain wary. 

Conclusion 

At this juncture, the United States needs a keen focus on enhancing the rate of 

economic growth. Workers and economy as a whole will benefit from pro-growth 

policies. Central aspects of a pro-jobs and growth agenda are controlling Federal 

spending growth; eliminating the potential for debt accumulation that generates a 

fiscal crisis, or higher taxes and interest rates; and improved tax policy. 

I look forward to answering your questions. 

72 

PREPARED STATEMENT OF WILLIAM JOHNSTONE 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, DAVIDSON COMPANIES

OCTOBER 5, 2011 

Chairman Tester, Ranking Member Vitter, and Members of the Subcommittee, my 

name is Bill Johnstone. I am the President and Chief Executive Officer of Davidson 

Companies. 

Davidson is an employee-owned financial services holding company, 

headquartered in Great Falls, Montana. We have been in business for 76 years, 

have 1,100 employees and operate in 16 States, primarily west of the Mississippi. 

Davidson has three principal lines of business: 

• We provide investment advice and products to approximately 120,000 individual 

and institutional investors. 

• We provide institutional research for approximately 260 companies and make 

markets in approximately 425 stocks (mostly small and mid-cap companies). We 

also trade stocks with institutional investors and provide underwriting and investment banking advisory services to small and mid-cap companies. 

• Last, we trade tax-exempt and taxable bonds with institutional investors and 

underwrite bonds for and provide advisory services to Government units 

throughout the Western United States. 

We are not a commercial bank or depository institution and we do not originate 

or underwrite mortgages or mortgaged backed securities or engage in proprietary 

trading or the creation of or trading in complex derivatives. We have never received 

a Government bailout. In the past 10 years, in the context of challenging financial 

markets and economic conditions and the demise or consolidation of many financial 

services firms, we have remained independent and doubled in size. 

In contrast to the other panelists, I am not an economist, nor do I have significant 

prior academic or Government experience in analyzing or developing tax or economic policy. Prior to my current position, I practiced finance law, managed an 

international law firm and was the CEO of a regional securities firm in the Southwest. 

My views and observations regarding the deficit are shaped and informed by my 

experiences, particularly my recent experience at Davidson. 

In my position, I talk either directly or through our employees with a range of 

investors and businesses. These include retirees, small business persons, families 

saving for retirement and college education, businesses trying to raise capital, commercial bank clients, institutional investors from small to large and State and local 

governmental units that access the bond market. I also speak with colleagues in 

other similar financial services firms. 

I want to make clear that my views and observations do not necessarily represent 

those of Davidson, its employees or clients. 

My larger views and observations are not materially different from those espoused 

by many others. Perhaps some of my sources and reasoning are and will be helpful. 

I want to discuss three key points: 

• There is considerable investor concern about the Federal deficit and our ability 

or will to address it. The concern is negatively influencing the ability of investors and businesses to make business and investment decisions necessary to 

drive economic growth and job creation. 

• Policies to address the deficit should be bold, concrete, and credible, but implementation should be staged to avoid exacerbating the current weakness in the 

economy. While the particulars of the solution are important, more important 

is that the development and implementation of a solution is credible and understood. In this situation, perfection, as defined by narrow self-interest, is the 

enemy of the good. 

• To the extent the solution involves changes in tax policy, as I believe it should, 

we should use this as an opportunity to commence reform of our Federal tax 

laws. 

Historically, the Federal deficit and its implications were not frequently voiced investor concerns. At least three developments have occurred to change it. The growth 

in the deficit’s size (absolutely and relatively), this summer’s highly publicized debt 

limit debate and the financial crisis in Europe. Most investors, whether institutional 

or individual, have concluded that the deficit, and as important its projected growth, 

will result in substantial damage to our economy unless we make meaningful 

changes. The situation in Europe has heightened awareness of the economic impliVerDate Nov 24 2008 15:14 Jun 01, 2012 Jkt 048080 PO 00000 Frm 00076 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\10-05 PERSPECTIVES ON THE ECONOMIC IMPLICATIONS OF THE F
73 

cations of fiscal deficits and the difficulty of addressing them, particularly if responses are delayed. At the same time, the length and nature of the debt limit debate raises serious questions among investors and business persons as to whether 

Government has the ability to develop and implement a deficit solution. 

Certainly, the deficit is not the only factor inhibiting economic growth and, at 

present, maybe not the most important factor. The continuing difficulties in the 

housing market, high unemployment, the apparent increase in regulatory burden 

and general deleveraging by consumers and business are among other important 

factors that I frequently hear in my discussions. But the deficit and the uncertainty 

of whether and how it will be addressed are critical factors in reducing investor and 

business confidence and willingness to take risk and make business and investment 

decisions necessary to drive economic growth and job creation. I consistently hear 

that from investors and businesses and their representatives and I see it in their 

behavior. 

The financial system is short of neither capital nor liquidity to fund economic 

growth. The financial system, businesses and the consumer are short of confidence 

and much of this deficit in confidence is related to the Federal deficit. 

I am not here to offer a recommendation regarding the details of a policy response 

to address the deficit. There is a plethora of reasonable potential responses, including those suggested or discussed by the other panelists. I happen to believe the 

Simpson-Bowles Commission offered a number of thoughtful and sensible suggestions and provides a very good starting point. However, I will share my views regarding what I believe are three important elements of a solution. 

First, I would be an advocate of a larger rather than smaller reduction target 

more in the range of the Simpson-Bowles suggestions, for a couple of reasons. I 

think it better addresses the issue. And, it reflects my skepticism regarding the ultimate outcome of the legislative process and the natural inclination to develop overly 

optimistic projections of future revenue growth and expense reduction. 

Second, as has been oft noted by others more expert than I, the desire (perhaps 

zeal) to make a meaningful and quick reduction in the deficit has to be balanced 

with the realities of the current economic situation and the scope and economic impact of the policy changes. The required changes necessarily will be profound in 

their scope and impact. They have to be evolutionary, not revolutionary. While implementation of a plan should be staged, the plan should be agreed to sooner than 

later. The longer we wait the more costly the solution, the more limited the policy 

options and the more damage arising from the current uncertainty. 

Last, I am struck by the difference in the narrative I hear in my conversations 

with employees, clients and business persons and the narrative I hear from Washington, DC. My audience is probably somewhat older and more conservative than 

the general populace. And certainly, there are significant differences of opinion. 

However, in general, the narrative I hear is more pragmatic, balanced and in my 

view sensible relative to the range of appropriate policy options. And, the narrative 

reflects an acknowledgement that change is necessary and that it will require some 

sacrifice and loss of benefit or advantage that is conferred by existing policy. 

I will only briefly note my belief that any deficit reduction plan should include 

some effort to reform our Federal income tax, both corporate and individual. I am 

skeptical that the necessary deficit reduction can be accomplished entirely on the 

expense side or that some increase in revenue will materially damage our economic 

prospects, and I would not approach the issue on the condition that revenue cannot 

or should not be increased. However, regardless of how you stand on that point, we 

need to move to a tax code that is simpler and fairer, with lower marginal rates 

and with far fewer deductions and exemptions. The proliferation of targeted deductions, exemptions or distinctions in sources of income too often distorts rational economic and business decision making and should be reversed. This has been a widely 

held policy goal for decades. Perhaps the reality of our current challenges will 

produce the will to do something. 

Thank you for allowing me to share my thoughts on this important topic. 

74 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

STATEMENT SUBMITTED BY ROBERT L. REYNOLDS, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, PUTNAM INVESTMENTS, AND PRESIDENT OF THE PUTNAM FUNDS 

I am Robert L. Reynolds, president and chief executive officer of Putnam Investments and president of the Putnam Funds. My thanks to the Subcommittee for inviting me to share with you our concerns about an issue directly related to ongoing 

efforts to curb Federal deficits: the need to also preserve, indeed extend, incentives 

for retirement savings in America. 

Even as we struggle to bring our deficits down and get our national debt back 

onto a sustainable path, I believe that savings, and retirement savings specifically 

have a vital role to play in a transition that America absolutely has to make. Simply 

put, our Nation needs to move away from rising debt, leverage and debt-driven consumption to a new economic model, grounded on higher savings, and greater incentives for investment, business formation and job creation. Ultimately, the best way 

to deal with our deficits and debt will be to outgrow them. Robust retirement savings will be key to spurring such renewed growth. National solvency and personal 

solvency go hand in hand. Economic policy should never pit one against the other. 

Regrettably, though, there is a real risk that incentives for companies to offer 

workplace savings plans and for individuals to participate in them could be undermined by ill-considered policy changes aimed at reducing the budget deficit. 

Proposals to cap or roll back tax deferrals for retirement savings are particularly 

dangerous. If adopted, they could have the effect of reversing a generation’s worth 

of Congressionally driven progress on retirement savings. They would undercut incentives for thousands of small and emerging companies to offer their workers retirement plans at all, and could send millions of future workers toward retirement 

with no access to workplace savings plans. Moreover, cuts to current retirement savings initiatives would likely return far less revenue to Treasury than their proponents estimate—even over the short-term—while placing millions of future retirees at risk. 

The background to this policy debate is well known. Americans today live longer, 

more active lives; the cost of health care, especially in later life, has increased dramatically; traditional pension plans have declined in number and scope, and only 

a small fraction of today’s workers participate in them. Meanwhile, Social Security’s 

projected ability to replace preretirement income is declining, even under current 

law, as a result of rising eligibility age and the costs of Medicare deductions. 

To supplement these dwindling sources of assured retirement income, working 

Americans have come to rely on a broad spectrum of retirement savings programs 

that Congress has created over the past several decades. These include individual 

retirement accounts (IRAs); defined-contribution savings vehicles, including 401(k), 

403(b) and 457 plans; and tax-advantaged variable annuities. These programs have 

enabled millions of workers and their families to enjoy more secure, dignified retirements. While they can—and should—be improved on, these programs represent a 

major, made-in-America success story. 

A study of the retirement readiness of nearly 3,300 working Americans sponsored 

by Putnam Investments and Brightwork Partners earlier this year underscores the 

importance of workplace savings programs as a vital adjunct to Social Security. The 

study found that working Americans overall are on track to replace 64 percent of 

their current income in retirement. This is somewhat short of what they are likely 

to need but close enough so that most people—though not all—can still achieve secure retirements if they act now to raise savings. 

The details of these findings are particularly revealing. Including future Social Security benefits, the best-prepared quartile of working Americans is on track to replace 100 percent of current income in retirement. The least-prepared quartile is on 

track to replace just 46 percent of preretirement income. Yet the mean household 

income of both groups is an identical $93,000. 

What accounts for this vast difference in retirement readiness? Several factors 

stand out, but one in particular appears crucial: The very best-prepared Americans—roughly 19 million workers according to Brightwork estimates—both enjoy access to a 401(k) or other defined-contribution plan at work and contribute 10 percent 

or more of their income to their plan. In other words, today’s existing 401(k) plan 

structure can deliver solid retirement security for those workers who make the decision to take part and who also defer 10 percent of more of their salaries. In effect, 

we have discovered an antidote to the risk of elderly poverty—and it has three simple ingredients: access to a workplace savings plan, the decision to save; and willingness to defer at rates of 10 percent of more. 

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Precisely because the results they can deliver are so clearly in the public interest, 

today’s retirement savings programs were given the advantage of deferring Federal 

income taxes in the first place. Tax deferrals offer a powerful incentive for workers 

to maximize their savings. They have contributed greatly to the success of these 

plans. Today, roughly 70 percent of American families have tax-advantaged retirement savings, and assets held in employer-sponsored retirement plans, IRAs and 

annuities totaled $17.5 trillion at year end 2010. (Source: 2011 Investment Company 

Fact Book, pages 100–102: http://www.ici.org/pdf/2011lfactbook.pdf.) 

Building on these programs, improving them and extending them to the tens of 

millions of Americans who lack access to on-the-job savings plans should be among 

our most important national goals. That is why I believe that Congress should not 

only preserve all existing savings incentives, but support solid, bipartisan ideas such 

as the Auto-IRA, which would extend access to workplace savings coverage for the 

many millions of workers who currently lack such on-the-job plans. 

Well-intentioned but misguided advocates for reducing the Federal budget deficit 

would take the Nation in the opposite direction by seeking to cut back the tax advantages that help drive retirement savings. The rationale behind such proposals 

is that the tax deferrals at the heart of 401(k) plans and similar savings vehicles 

represent tax ‘‘expenditures’’ that significantly reduce needed tax revenue. Nothing 

could be further from the truth. Retirement savings deferrals are not permanent tax 

expenditure at all, but only temporary postponements of tax obligations. When retirement savings are drawn down, the money is taxed as ordinary income, even 

though the retirement accounts themselves are typically composed mostly of longterm capital gains. 

Equally misleadingly, the Congressional Budget Office uses a 10-year window for 

analyzing the costs of tax deferrals. As a result, it cannot accurately measure the 

true cost of tax provisions that are incurred over the periods of decades that make 

up the typical worker’s career. Today’s tax deferrals are counted as revenue losses, 

but the taxes that will be paid beyond a decade forward not counted at all. This 

practice distorts the true ‘‘full-lifecycle’’ costs of these incentives, understates their 

social and economic benefits and overstates the revenue that would be generated by 

cutting back on them. 

Workplace-based retirement programs are particularly beneficial for lower- and 

middle-income workers. Research by the American Society of Pension Professionals 

& Actuaries found that households with annual incomes below $100,000 pay 26 percent of income taxes but receive 62 percent of the benefit from 401(k) plans. In contrast, families earning more than $200,000 per year pay more than half (52 percent) 

of income taxes, but receive just 11 percent of the benefits from these plans. Source: 

‘‘ASPPA Testifies in Defense of 401(k) System’’, September 15, 2011: http:// 

www.asppanews.org/2011/09/15/asppa-testifies-in-defense-of-401k-system. 

Underscoring the importance of payroll savings plans to low and moderate income 

workers, an analysis by the Employee Benefits Research Institute found that that 

more than 70 percent of workers with annual incomes of between $30,000 and 

$50,000 do save for retirement if they have access to a workplace plan. Yet fewer 

than 5 percent of their peers who lack access to a workplace plan save through 

IRAs. Absent access to workplace-based savings, then, most American workers simply fail to accumulate any serious savings with which to fund their retirements or 

supplements their Social Security benefits. Reducing the incentive for retirement 

plan sponsors to offer workplace savings plans, then, could force millions of low- and 

moderate-income workers to face retirement with little or no savings. 

Cutting into tax advantages for retirement accounts would thus be far more than 

just a marginal revenue measure. It would mark a fundamental shift away from 

highly successful programs that Congress has supported for the past several decades. Doing so would risk irreparable harm to millions of future retirees and by reducing investment flows to the capital markets, might also limit future economic 

growth. 

Without question, the skyrocketing Federal debt is a genuine threat to our longterm prosperity. But attempting to reduce Federal dis-saving by cutting incentives 

for personal savings is a bizarre and short-sighted approach. By definition, every 

dollars saved by individuals is one less dollar that they may need to ask for in public assistance in the future. The gain of a dollar in tax revenue today would be offset 

by the immediate loss of capital for investment in new business formation, job creation and economic growth. And it will be far offset tomorrow by the loss of investment gains in workers’ retirement portfolios and by the risk that many of these lesswell-off workers may need public assistance in their later years. 

Policy changes that could diminish retirement security for future generations of 

workers and increase in poverty among elderly Americans, would betray the optiVerDate Nov 24 2008 15:14 Jun 01, 2012 Jkt 048080 PO 00000 Frm 00079 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\10-05 PERSPECTIVES ON THE ECONOMIC IMPLICATIONS OF THE F
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mistic vision that has driven Americans for generations, and erode public confidence 

and personal dignity. 

For all of these reasons, I urge all members of Congress to oppose any policy 

change that would undermine incentives for employers to offer workplace savings 

plans or for individuals to use them to save for their retirement. 

My thanks to the Subcommittee for this chance to express my concerns. I request 

that my longer statement on this issue (Reflections on National and Personal Solvency) be included in the record as an addendum. 

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