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64–797 PDF 2011

LIFTING THE CRUSHING 

BURDEN OF DEBT 

HEARING 

BEFORE THE

COMMITTEE ON THE BUDGET 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

HEARING HELD IN WASHINGTON, DC, MARCH 10, 2011 

Serial No. 112–6 

Printed for the use of the Committee on the Budget 

( 

Available on the Internet: 

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

COMMITTEE ON THE BUDGET 

PAUL RYAN, Wisconsin, Chairman 

SCOTT GARRETT, New Jersey 

MICHAEL K. SIMPSON, Idaho 

JOHN CAMPBELL, California 

KEN CALVERT, California 

W. TODD AKIN, Missouri 

TOM COLE, Oklahoma 

TOM PRICE, Georgia 

TOM MCCLINTOCK, California 

JASON CHAFFETZ, Utah 

MARLIN A. STUTZMAN, Indiana 

JAMES LANKFORD, Oklahoma 

DIANE BLACK, Tennessee 

REID J. RIBBLE, Wisconsin 

BILL FLORES, Texas 

MICK MULVANEY, South Carolina 

TIM HUELSKAMP, Kansas 

TODD C. YOUNG, Indiana 

JUSTIN AMASH, Michigan 

TODD ROKITA, Indiana 

FRANK C. GUINTA, New Hampshire 

ROB WOODALL, Georgia 

CHRIS VAN HOLLEN, Maryland, 

Ranking Minority Member 

ALLYSON Y. SCHWARTZ, Pennsylvania 

MARCY KAPTUR, Ohio 

LLOYD DOGGETT, Texas 

EARL BLUMENAUER, Oregon 

BETTY MCCOLLUM, Minnesota 

JOHN A. YARMUTH, Kentucky 

BILL PASCRELL, JR., New Jersey 

MICHAEL M. HONDA, California 

TIM RYAN, Ohio 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin 

KATHY CASTOR, Florida 

HEATH SHULER, North Carolina 

PAUL TONKO, New York 

KAREN BASS, California 

PROFESSIONAL STAFF

AUSTIN SMYTHE, Staff Director 

THOMAS S. KAHN, Minority Staff Director 
(III) 

C O N T E N T S 

Page 

Hearing held in Washington, DC, March 10, 2011 ............................................... 1 

Hon. Paul Ryan, Chairman, Committee on the Budget ................................ 1 

Prepared statement of ............................................................................... 2 

Hon. Chris Van Hollen, ranking minority member, Committee on the 

Budget ............................................................................................................ 3 

Prepared statement of ............................................................................... 4 

Douglas Holtz-Eakin, president, American Action Forum ............................ 5 

Prepared statement of ............................................................................... 7 

Carmen M. Reinhart, Dennis Weatherstone senior fellow, Peterson Institute for International Economics ................................................................. 13 

Prepared statement of ............................................................................... 14 

Maya MacGuineas, president, Committee for a Responsible Federal Budget, the New America Foundation ................................................................. 16 

Prepared statement of ............................................................................... 18 

Response to question submitted ............................................................... 73 

John D. Podesta, president and CEO, Center for American Progress Action Fund ....................................................................................................... 21 

Prepared statement of ............................................................................... 23 

Response to question submitted ............................................................... 74 

Hon. Marcy Kaptur, a Representative in Congress from the State of 

Ohio, submission for the record: 

Biographies and reported sources of private funding of witnesses ....... 72 

Hon. Michael M. Honda, a Representative in Congress from the State 

of California, questions submitted for the record ....................................... 73 

(1) 

LIFTING THE CRUSHING BURDEN OF DEBT 

THURSDAY, MARCH 10, 2011 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

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

Cannon House Office Building, Hon. Paul Ryan, [Chairman of the 

Committee] presiding. 

Present: Representatives Ryan, Campbell, Calvert, Price, McClintock, Stutzman, Lankford, Ribble, Flores, Mulvaney, Huelskamp, 

Young, Rokita, Woodall, Van Hollen, Schwartz, Kaptur, Blumenauer, Pascrell, Ryan of Ohio, Moore, Castor, Shuler, Tonko, 

and Bass. 

Chairman RYAN. Let me just say, I am excited about this impressive list of witnesses we have. We have well-known, well-regarded 

witnesses on this issue. So I am really excited about getting into 

these details, and I am looking forward to this hearing. I will start 

with a brief opening statement then turn it over to my friend, Mr. 

Van Hollen. 

This is an important hearing, basically on the future of our country. We here in Congress have our differences over how to solve our 

most urgent fiscal challenges, but I don’t think that there is any 

serious debate over the urgency of these challenges. I doubt anyone 

here would dispute the fact that if we fail to act, we are inviting 

a debt crisis with potentially catastrophic consequences. Those 

seeking to cling to our unsustainable status quo are, quite frankly, 

putting us at the greatest risk. 

Erskine Bowles, the Co-Chair of the Fiscal Commission, former 

Chief of Staff to former President Clinton, I think said it best, 

quote, The era of deficit denial is over. The failure to address the 

structural drivers of our debt has been a bipartisan failure over the 

years, yet the gusher of government spending and the creation of 

new, open-ended health care entitlements turned a fiscal challenge 

into a fiscal crisis. 

The White House appears to acknowledge the problem, but 

seems determined to avoid tackling the problem. The latest budget 

proposal from the Obama Administration not only fails to address 

the drivers of our debt, but accelerates us down our unsustainable 

path. It would impose growth-killing tax increases and lock in 

Washington’s reckless spending spree. Its claimed savings amount 

to little more than slogans and budget gimmicks. The status quo 

which the President’s budget commits us to threatens not only our 

livelihoods, but ultimately our way of life. We must work together 

to lift this crushing burden of our debt. 
2 

The good news is this: We still have time to address the drivers 

of our debt and save our nation from bankruptcy. 

We have several witnesses; we have experts today who will help 

us get our arms around the problem. I appreciate your testifying 

today before this committee on the difficulty and about the climb 

we have ahead of us. This is going to be a difficult climb. Our country is facing perhaps the greatest economic challenge in the history 

of our nation. But we do know that we can fix this. We do have 

time, and we can make this climb. The question is whether we 

have the political resolve to do that. 

So the stakes of this challenge are no less than the unique American legacy of bequeathing to our children and grandchildren a better America; that is basically the legacy of this country. Each generation confronts its challenges in front of it, whether it is depression, world wars, or whatnot, so that their kids are better off. We 

know this. We know what is coming. The question is: Are we going 

to do what is necessary to prevent that from happening? 

The way I look at it is, the worst experience that I have had in 

Congress was TARP. And I think most of us would probably agree 

with this. That is an economic crisis that caught us by surprise. We 

had all these meetings with the Federal Reserve Chair and the 

Treasury Secretary, talking about a deflationary spiral, a depression, bank failures were coming, and caught everybody by surprise. 

And I always ask people, What if your President and your member 

of Congress knew what was coming, saw it ahead of time, knew 

what they needed to do to prevent it from happening, but chose, 

instead, not to do anything about it because it was bad politics? 

Think about that. 

This debt crisis is the most predictable economic crisis we have 

had in the history of our country. And if we actually don’t do anything to prevent it from happening, shame on us. And this is the 

moment of truth. We have got to start talking about this stuff. And 

I hope that we can get there. I believe we can. Ultimately, the parties are going to have to come together to fix this problem, and I 

for one believe that the key is to go after spending. Spending is the 

driver of it. And if we do this, then our kids will have a better future. Then we will preserve the American legacy of leaving the 

next generation better off. 

With that, I want to yield to my friend, the Ranking Member, 

Mr. Van Hollen. 

[The prepared statement of Paul Ryan follows:] 

PREPARED STATEMENT OF HON. PAUL RYAN, CHAIRMAN, COMMITTEE ON THE BUDGET

Welcome all, to this important hearing on the future of our country. 

We here in Congress have our differences over how to solve our most urgent fiscal 

challenges. 

But I don’t think there is any serious debate over the urgency of these challenges. 

I doubt anyone here would dispute the fact that, if we fail to act, we are inviting 

a debt crisis with potentially catastrophic consequences. 

Those seeking to cling to our unsustainable status quo are, quite frankly, putting 

us at the greatest risk. 

Erskine Bowles, the co-chairman of the President’s fiscal commission, said it best: 

‘‘The era of deficit denial is over.’’ 

The failure to address the structural drivers of our debt has been a bipartisan 

failure over the years, yet the gusher of government spending and the creation of 

new open-ended health care entitlements turned a fiscal challenge into a fiscal crisis. 
3 

The White House appears to acknowledge the problem, but seems determined to 

avoid tackling it. 

The latest budget proposal from the Obama Administration not only fails to address the drivers of our debt, but accelerates us down our unsustainable path. It 

would impose growth-killing tax hikes and lock in Washington’s reckless spending 

spree. Its claimed savings amount to little more than slogans and budget gimmicks. 

The status quo, which the President’s budget commits us to, threatens not only 

our livelihoods, but also our way of life. We must work together to lift this crushing 

burden of debt. 

The good news is this: We still have time to address the drivers of our debt and 

save our nation from bankruptcy. 

We have several expert witnesses here today who will help us get our arms 

around the problem. I appreciate your testifying today before this committee on the 

difficulty of the climb ahead and the consequences of inaction. 

It will be difficult, but it is a climb we must make. 

The stakes in this challenge are no less than the unique American legacy of bequeathing to our children a more prosperous nation than the one we inherited. 

With that, I will yield to Ranking Member Van Hollen for an opening statement. 

Mr. VAN HOLLEN. Thank you, Mr. Chairman. And I want to join 

Chairman Ryan in welcoming our distinguished witnesses today. I 

am very pleased we are having a hearing on this important subject, 

and I think we can all agree that the long-term debt trajectory is 

unsustainable and unacceptable. And I believe we all agree that it 

is important to come together now, as the Chairman said, to develop and enact a sensible plan to reduce that debt in a steady and 

a predictable fashion. We should have a healthy discussion on what 

such a plan would look like. 

What we should not be doing is taking actions that would hamper our fragile economic recovery. While last month’s jobs numbers 

were promising, millions of Americans remain out of work. Enacting measures that would slow down job growth would not only impose additional and unnecessary economic pain on American families, it will harm the goal of deficit reduction. That is why the 

House Republican plan to make additional, deep, and immediate 

cuts in various investments in order to hit an arbitrary number is 

such a mistake. 

Say what you will about Goldman Sachs, they know a little bit 

about the impact of investments, and their analysts predict that 

the House Republican plan will cost 700,000 Americans their jobs. 

Mark Zandy of Moody’s Analytics, who, like Mr. Holtz-Eakin, was 

an advisor to the presidential campaign of Senator John McCain, 

reached a similar conclusion, as did the Economic Policy Institute. 

Now, I see in Mr. Holtz-Eakin’s testimony that you dispute some 

of those figures, and we can discuss them, but I would point out 

that the Chairman of the Federal Reserve, Ben Bernanke, testified 

just very recently that slashing the budget that way would, quote, 

Translate into a couple hundred thousand jobs, so it is not trivial, 

unquote. In fact, that would wipe out all the job gains from just 

last month. So the question is this: Whether the number of jobs 

lost is 200,000 or 700,000, why in the world would we be doing 

anything right now to cost thousands of Americans their jobs? That 

is a reckless and senseless approach that does virtually nothing to 

address long-term debt. And that is why the bipartisan fiscal commission that was charged with reducing our deficits specifically 

warned against that action right now. 

Yesterday, the members of this committee had an opportunity to 

meet with Erskine Bowles and Alan Simpson. Here’s what the bi-
4 

partisan commission wrote in its report, quote, In order to avoid 

shocking the fragile economy, the commission recommends waiting 

until 2012 to begin enacting programmatic spending cuts, and 

waiting until fiscal year 2013 before making large nominal cuts, 

unquote. That is also what Bowles and Simpson said in their testimony before the Senate Budget Committee the other day, and that 

is what the bipartisan Rivlin-Domenici Commission recommended. 

They issued a similar warning. 

So, Mr. Chairman, I am glad that, today, we are going to take 

a more comprehensive look at the budget situation, rather than 

focus only on the 12 percent sliver of the budget that includes critical investments in education, in scientific research and innovation, 

and transportation and energy infrastructure: investments that are 

critical to growing jobs in America, and winning in the competitive 

global marketplace. 

As the bipartisan commission observed, a serious debt reduction 

plan will require a combination of spending cuts in discretionary 

and mandatory programs, as well as revenue increases. So I hope, 

Mr. Chairman, that this will provide an opportunity to take a, a 

serious and comprehensive look, rather than what many of us see 

as a short-term approach to hit an arbitrary number that will cost 

Americans their jobs. Thank you. 

[The prepared statement of Chris Van Hollen follows:] 

PREPARED STATEMENT OF HON. CHRIS VAN HOLLEN, RANKING MINORITY MEMBER, 

HOUSE COMMITTEE ON THE BUDGET

I join Chairman Ryan in welcoming our witnesses today. I am pleased we are having a hearing on this important subject. We all agree that our current long term 

debt trajectory in unsustainable and unacceptable. And I believe we all agree that 

it is important to come together now to develop and enact a sensible plan to reduce 

that debt in a steady and predictable manner. We should have a healthy discussion 

on what such a plan would look like. 

What we should not do is take actions that would hamper our fragile economy 

recovery. While last month’s jobs numbers were promising, millions of Americans 

remain out of work. Enacting measures that would slow down job growth will not 

only impose additional and unnecessary economic pain on American families; it will 

harm the goal of deficit reduction. 

That is why the House Republican plan to make additional deep and immediate 

cuts in various investments in order to hit an arbitrary number is such a mistake. 

Say what you will about Goldman Sachs, they know a little bit about the impact 

of investments, and their analysts predict the House Republican plan will cost 

700,000 Americans their jobs. Mark Zandi of Moody’s Analytics, who like Dr. HoltzEakin was an advisor to the presidential campaign of Senator John McCain, 

reached a similar conclusion, as did the Economic Policy Institute. Now I see that 

Dr. Holtz-Eakin disputes these figures in his testimony. But the Chairman of the 

Federal Reserve, Ben Bernanke, testified last week that slashing the budget that 

way ‘‘would translate into a couple hundred thousand jobs. So, it’s not trivial.’’ That 

would wipe out all the job gains from last month. So the question is this: Whether 

the number of jobs lost is 200,000 or 700,000, why in the world would we be doing 

anything now that would cost Americans their jobs? That is a reckless and senseless 

approach that does virtually nothing to address the long term debt. And that is why 

the bipartisan Fiscal Commission that was charged with reducing our deficits specifically warned against such action. Yesterday, members of this Committee met 

with the co-chairs of the Commission, Erskine Bowles and Alan Simpson. Here is 

what the bi-partisan Commission wrote in its report: ‘‘In order to avoid shocking the 

fragile economy, the Commission recommends waiting until 2012 to begin enacting 

programmatic spending cuts, and waiting until fiscal year 2013 before making large 

nominal cuts.’’ That is also what Bowles and Simpson said in their testimony before 

the Senate Budget Committee last week. The bipartisan Rivlin-Dominici commission 

issued a similar warning. 
5 

So I am glad that today we will take a more comprehensive look at what it will 

take to seriously tackle deficits and the debt rather than focus only on the 12% sliver of the budget that includes critical investments in education, scientific research 

and innovation, and transportation and energy infrastructure—investments that are 

critical to growing jobs in America and winning in the competitive global marketplace. As the bi-partisan Fiscal Commission observed, a serious debt reduction plan 

will require a combination of spending cuts in discretionary and mandatory programs as well as revenue increases. 

I will close with this observation. In his recent testimony here, Jack Lew, the Director of the Office of Management and Budget, pointed out that when he had last 

appeared before this Committee as President Clinton’s Budget Director, we were 

projecting a $5.6 trillion surplus. Today, we have with us John Podesta, who was 

Chief of Staff to President Clinton at that time. When President Obama was sworn 

in 8 years after Bill Clinton left office, he inherited a record annual deficit of $1.3 

trillion and an economy in total freefall with more than 700,000 Americans losing 

their jobs every month. I make this observation to make this point—during the intervening eight years of the Bush Administration, some terrible decisions were 

made that wreaked havoc on the fiscal stability of our nation. If we are going to 

chart a fiscally responsible course, we are going to have to do many things, including reversing some of those fiscally reckless actions. 

Chairman RYAN. Thank you, Mr. Van Hollen. I would simply just 

ask the witnesses, in the interest of time, because we have lots of 

members who have questions, if you could keep your opening remarks to five minutes, paraphrase your statements, and your written statements will be included in the record. I think we are just 

going to go left to right, right? So, Mr. Holtz-Eakin, why don’t we 

start with you and then we will go on down the line. 

STATEMENTS OF DOUGLAS HOLTZ–EAKIN, PRESIDENT, AMERICAN ACTION FORUM; CARMEN REINHART, DENNIS 

WEATHERSTONE SENIOR FELLOW, PETERSON INSTITUTE 

FOR INTERNATIONAL ECONOMICS; MAYA MACGUINEAS, 

COMMITTEE FOR A RESPONSIBLE FEDERAL BUDGET AT 

THE NEW AMERICA FOUNDATION; AND JOHN PODESTA, 

PRESIDENT AND CEO, CENTER FOR AMERICAN PROGRESS 

ACTION FUND 

STATEMENT OF DOUGLAS HOLTZ–EAKIN 

Mr. HOLTZ-EAKIN. Chairman Ryan and Ranking Member Van 

Hollen, members of the committee, thank you for the privilege of 

being here today. You have my written statement, I will be brief; 

I will make three points. 

First is to echo the remarks of the Chairman about the seriousness of the situation, and the implications of the outlook for rising 

debt. 

Second is to concur that the problem is spending, by almost any 

metric that has got to be the focus. 

And the third is to address the concerns of the Ranking Member 

about the implications of cutting spending for near-term economic 

growth and jobs. 

Everyone has a different way of saying this, but I believe we are 

at a juncture when America’s prosperity and freedom is at stake. 

As I said in my testimony, there is a good news version of continuing down our current path. And in the good news version, massive federal borrowing is displacing investments in workers, in 

equipment, in innovation, productivity stagnates, wages don’t grow, 

and we don’t see the standard of living rise for a prolonged period, 

but we somehow muddle through and leave our children a dimin-
6 

ished economy and, as the Pentagon folks would say, A diminished 

ability to project our values on the globe. That has been the core 

of our ability to protect our freedoms. That is the good news 

version. 

The bad news version is one in which we actually get something 

that is 2008 or worse. We get a cataclysm in financial markets, we 

see sharp freezes in credit, main street economy collapses, and in 

the aftermath of that we still have the same problem to fix. So it 

is unacceptable, in my view, to continue down the path. 

We have to change direction. We have lots of indicators that this 

is coming. Carmen’s much more versed in the implications of rising 

debt to GDP levels, but ours is much too high. Moody’s has put out 

an advisory on how they rate sovereign debt; and if you just take 

their technical criteria at face value, we are on track to be downgraded as a sovereign borrower in a matter of three or four years. 

And we have seen the borrowing around the globe. 

So this is literally, as the Chairman of this Commission called it, 

a moment of truth, and a time to stop deferring the tough decisions 

that are necessary to get us on the right track. Those decisions are 

about spending. As the Congressional Budget Office’s long-term 

budget outlook has said, again, and again, and again, for a decade, 

if you look at current policy in the United States, current law, 

spending rises under current law, above any sensible metric of the 

potential to tax. It rises to 35 percent of GDP or higher. It is driven 

by, largely, the entitlement programs, and especially the health 

programs. There is one, and only one, solution to that problem. You 

will not grow your way out of it, you will not tax your way out of 

it, you simply must modify those programs; entitlement reform is 

at the heart of getting this right. And we have done very little, in 

recent years, to do that. We wasted the decade we had before the 

baby boomers started to retire; they are now retiring. We went the 

wrong direction with the Medicare Modernization Act and Affordable Care Act, to add more health programs, not fix the ones we 

had. And now we are both out of time, and in the financial crisis, 

we have lost our cushion. The GDP has gone up by 20 percentage 

points. 

The time is now to control spending. Now there are these concerns that somehow this is going to be bad for the economy, and 

I want to close with that. If you are a businessman in the United 

States right now, you are an international business trying to figure 

out where to locate, and you look at a country where the good news 

scenario is a future of higher interest rates, or higher taxes, or 

both, and the bad news scenario is a future that has a financial crisis followed by higher interest rates, higher taxes, or both. Why 

would you locate in that country, or why would you expand in that 

country? Why is that a good thing for the economic outlook? It is 

simply not. 

So fixing that problem, undertaking control of the debt, is the 

single most pro-growth policy that Congress and the administration 

could undertake. And that will be at the heart of getting the economy going again, now, and in the future. 

The kinds of studies we have seen, from Goldman Sachs and the 

man I made famous, Mark Zandy, have, at their heart, several 

problems. 
7 

* The opinions expressed herein are mine alone and do not represent the position of the American Action Forum. I am grateful to Sam Batkins, Ike Brannon, Cameron Smith and Matt 

Thoman for assistance. 

1 Congressional Budget Office. 2010. The Long-Term Budget Outlook. Pub. No. 4130. http:// 

www.cbo.gov/ftpdocs/115xx/doc11579/06-30-LTBO.pdf 

Problem number one is that they get the magnitudes all wrong. 

The Congressional Budget Office estimates that out of HR-1, we 

would see a reduction of $9 billion in actual outlays in fiscal year 

2011 from that bill, in a $14 to $15 trillion economy, this is peanuts; it will do nothing, with all due respect to the other economists. 

Second is that not all outlays are purchases of goods and services. They make that mistake. A lot of them are transfer payments. 

And if you look around the globe at the evidence that has been accumulated, the successful strategy for growing and fixing a fiscal 

problem is to keep taxes low and cut transfer payments and government payrolls. That is the strategy that works; this is part and 

parcel of that strategy. 

The third, and most importantly, the analyses are devoid of any 

capacity to change the outlook of individuals in the economy. They 

rule out anything that has to do with sentiment and optimism, and 

they, thus, rule out the very reason you are doing this. You couldn’t 

possibly get another answer. So they are stacked against finding a 

beneficial conclusion. And I find it ironic that they are called 

Keynesian analysis, because John Maynard Keynes was a very sophisticated student of human nature, and put animal spirits and 

optimism at the heart of his economic theories. And so I disagree 

with the bottom line those analyses have. Thank you, Mr. Chairman. I look forward to your questions. 

[The prepared statement of Douglas Holtz-Eakin follows:] 

PREPARED STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, 

AMERICAN ACTION FORUM* 

Chairman Ryan, Ranking Member Van Hollen and Members of the Committee 

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 policymakers in pursing this goal. 

• Effectively controlling spending, reducing deficits, and eliminating future debt 

accumulation can aid near-term economic growth. 

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 post-war 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. 
8 

2 Congressional Budget Office. 2010. An Analysis of the President’s Budgetary Proposals for 

Fiscal Year 2011. Pub. No. 4111. http://www.cbo.gov/ftpdocs/112xx/doc11280/03-24-apb.pdf 3Moody’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 US 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. 

Over the next ten years, according to the Congressional Budget Office’s (CBO’s) 

analysis of the President’s Budgetary Proposals for Fiscal Year 2011,2 the deficit 

will never fall below $700 billion. Ten years from now, in 2020, the deficit will be 

5.6 percent of GDP, roughly $1.3 trillion, of which over $900 billion will be devoted 

to servicing debt on previous borrowing. 

As a result of the spending binge, in 2020 public debt will have more than doubled from its 2008 level to 90 percent of GDP and will continue its upward trajectory. 

The President has now released his budget for Fiscal Year 2012. While CBO has 

yet to have the opportunity to provide a non-partisan look its implications, my reading of the budget is that it is largely replicates the previous year’s outlook. 

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 

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. 

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 the only actions taken thus far have made matters worse. 

As noted above, in 2020 public debt will have more than doubled from its 2008 

level to 90 percent of GDP and will continue its upward trajectory. Traditionally, 

a debt-to-GDP ratio of 90 percent or more is associated with the risk of a sovereign 

debt crisis. 

Indeed, there are warning signs even before the debt rises to those levels. As outlined in a recent report,3 the credit rating agency Moody’s looks at the fraction of 

federal revenues dedicated to paying interest as a key metric for retaining a tripleA 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 2011 Obama Administration budget targets 2015 as 

the year when the federal government crosses the threshold and reaches 14.8 percent. Moreover, the plan is not merely to flirt with a modest deterioration in creditworthiness. In 2020, the ratio reaches 20.1 percent. 

Perhaps even more troubling, much of this borrowing comes from international 

lending sources, including sovereign lenders like China that do not share our core 

values. 

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 
9 

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, pro-active 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 2011 Budget, the CBO projects that over the 

next decade the economy will fully recover and revenues in 2020 will be 19.6 percent 

of GDP—over $300 billion more than the historic norm of 18 percent. Instead, the 

problem is spending. Federal outlays in 2020 are expected to be 25.2 percent of 

GDP—about $1.2 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. 

The Need for Rapid Action. The potential for a U.S. fiscal crisis is rising each day. 

This, it makes sense to quickly adopt reductions in annual discretionary spending 

to reduce future deficits. Discretionary spending is appealing as a starting point because it is the spending most easily and quickly modified by Congress. Any successful strategy will likely be built on three pillars: 

• Rolling back spending to the ‘‘normal’’ funding levels preceding the financial crisis in 2008 and economic downturn; 

• Adhering to a disciplined vision for a small, contained government. Such a vision would provide a demarcation between those things the government is uniquely 

equipped to undertake and those that are best not funded and left to the private 

sector; and 

• Relying on strict oversight to defund those programs that do not effectively 

meet the government’s service obligations. 

At the same time, 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 

generation are exempted from reform, either by design or a failure to move quickly, 
10 

4Some 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/tbb—64.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. 

then the outlay ‘‘problem’’ will have been effectively exempted from reform. This 

would be a fundamental policy failure. 

For this 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 Role for 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.4 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 

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 
11 

5See http://americanactionforum.org/news/repairing-fiscal-hole-how-and-why-spending-cutstrump-tax-increases 6http://blogs.abcnews.com/thenote/2011/02/goldman-sachs-house-spending-cuts-will-hurteconomic-growth.html 7Zandi, Mark. 2011. A Federal Shutdown Could Derail the Recovery. Moody’s Analytics. 

http://www.economy.com/dismal/article—free.asp?cid=197630&src=wp 

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 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 non-farm payroll data, which showed a loss of 6.8 

million. 

There are glimmers of promise. Since December 2009, 945,000 payroll employment jobs have been added. However at the same time, there are 14.5 million unemployed persons in the economy and many more discouraged workers. Since the start 

of the recession the labor force has fallen by nearly 500,000. 

For these reasons, the current unemployment rate of 8.9 percent likely understates the real duress. Using the BLS alternative unemployment rate (U-6), one 

finds that unemployed, underutilized and discouraged workers are 15.9 percent of 

the total. As evidence of the difficulties, the number of long-term unemployed (27 

weeks or more) is currently 5.9 million and accounts for 43.9 percent of all unemployed persons. 

The fiscal future outlined above represents a direct impediment to job creation 

and growth. The United States is courting 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 a recent American Action Forum the research indicates that the best 

strategy to both grow and eliminate deficits is to keep taxes low and reduce public 

employee costs and transfer payments.5

Keynesian Arguments and Reducing Spending. Recent analyses of H.R. 1, the con- tinuing resolution that called for $61 billion in reduced federal spending, by Goldman Sachs6 and Economy.com7 have been touted by some as evidence that it is not 

feasible to engage in spending reductions. I believe these arguments miss several 

key points. 

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 
12 

8 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. 

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. 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 FY 2010 showed outlays of $3,456 billion on a budget basis, the National Income and Product Accounts8

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. 

Importantly, recent movements in indexes of economic confidence ranging from 

small businesses, to CEOs, to households have shown considerable improvement 

(See Table). 

MEASURES OF ECONOMIC CONFIDENCE 

Jul ’10 Aug ’10 Sept ’10 Oct ’10 Nov ’10 Dec ’10 Jan ’11 Feb ’11 

NFIB Small Business Optimism Index1 ..................... 88.1 88.8 89 91.7 93.2 92.6 94.1 NA 

Chief Executive CEO Confidence Index2 ................... 4.7 5 4.9 5.1 5.8 5.8 6.3 6.4 

Reuters/Michigan Survey of Consumer Sentiment3 .. 67.8 68.9 68.2 67.7 71.6 74.5 74.2 77.5 

1 http://www.nfib.com/Portals/0/PDF/sbet/sbet201102.pdf 

2 http://www.chiefexecutive.net/ME2/Audiences/Default.asp?AudID=328DCF73ACA1493ABBD34BF8AB37D74A 

3 https://customers.reuters.com/community/university/ 

No definitive explanation of month-to-month movements in measures of confidence will emerge from this hearing. However, I find it supportive of the basic argument that confidence improved markedly as the election and Congressional debate shifted toward control of future spending, deficits, and debt. 

Two final aspects of the recent, Keynesian-based opposition to controlling spend- ing are perplexing. Often those who make the claim that 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. 

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 
13 

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. 

STATEMENT OF CARMEN REINHART 

Chairman RYAN. Thank you. Ms. Reinhart. 

Ms. REINHART. Thank you, Chairman Ryan, and other members 

of the committee, for this opportunity. 

Chairman RYAN. Please pull your mic right in front of you. 

Ms. REINHART. The first part I would like to address is just put 

where we are a little bit in historic perspective, and then talk 

about the growth implications of where we are. As regard to where 

we are, historically, I would like to highlight that whether you look 

at gross debt, gross debt right now is 94 percent of GDP, the peak 

debt in 1946 was 121. But let’s move on. 

Let’s look at what the Federal Reserve, the flow of funds include 

debts of the State and local government, and also federal enterprises, which now include Fannie and Freddie. That ratio of debt 

to GDPS of the third quarter is 122 percent, which surpasses the 

peak that we established in 1945. 

Let me highlight that hidden debts are a big issue. And what do 

I mean by hidden debts? I mean contingent liabilities, and not just 

of the Social Security variety. There are huge contingent liabilities 

in the financial industry that we have to be aware of. If you don’t 

think contingent liabilities matter, think of Ireland. 

Let me proceed, very quickly, by saying that the march from financial crisis, to high public debt, to a public debt crisis, is the one 

that we are seeing unfolding in Europe. And that is what one could 

call debt with drama. And it is not over, and it has consequences 

for the U.S. Spain was downgraded overnight. The presumption 

that we are exempt from that pattern is a dangerous one, I would 

point out. It can happen. 

But let’s not go there just yet. Let’s talk about where we are now 

and implications for growth. I have done work with Ken Rogoff 

that did a very simple exercise that looked at various levels of debt, 

and how it related to growth. We have found that years in which 

growth that is above 90 percent of GDP, median growth rates are 

about one percentage point lower. And this is based on post-war 

analysis. It includes 44 economies; it is robust, whether you look 

at emerging markets, whether you look at advanced economies 

alone, whether you look at the post-war, whether you look at longer 

periods. In effect, I want to highlight that the ECB and the IMF 

have done subsequent studies which actually clarify some of the 

areas, because our analysis, we do not pretend to do causality in 

our analysis. But the subsequent studies have taken that issue up. 

And there are two findings worth highlighting. 

One is there is a strong negative causal relationship from high 

debt to lower growth. And secondly, those studies suggest, particularly the ECB study, which is for 12 European economies, ours is 

much broader, does suggest that the debt levels, the thresholds in 

which we placed at 90 percent, may be, actually, somewhat lower 

in the vicinity of 70 to 80 percent. 
14 

The bottom line is we have passed those thresholds, I think, 

without talking about drama, or default, or anything like that. I 

think the growth consequences are in the here and now. 

Let me say something in what time I have left, that the contingent liability issue is a huge one. Right now, states also have what 

we call in the IMF ‘‘below the line financing.’’ This is financing 

through arrears. Illinois, of course: six billion. None of these things 

are embedded in those debt figures, which are in the public domain. By the way, all the analysis that we have done, all this data 

is in the public domain. 

So, without any melodrama, the debt numbers are considerably 

worse than the official estimate because we do have a lot of off balance sheet items that we need to be thinking about. 

Let me conclude, then, on the same note as my testimony about 

a year ago before your Senate counterparts. At that time, I cautioned, it was premature to start cutting, because I was concerned 

about a frail recovery from a very severe financial crisis. But we 

are now, 2001, the crisis began in the summer of 2007, the clock 

has been running. 

Let me conclude, then, the sooner our political leadership reconciles itself to accepting adjustment, the lower the risk of truly 

paralyzing debt problems down the road. Although most governments still enjoy strong access to financial markets at very low interest rates, market discipline can come without warning. Countries that have not laid the groundwork for adjustment will regret 

it. This time is not different. 

[The prepared statement of Carmen M. Reinhart follows:] 

PREPARED STATEMENT OF CARMEN M. REINHART, DENNIS WEATHERSTONE SENIOR

FELLOW, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS

Thank your, Chairman Ryan and the other members of the Committee for the opportunity to comment on the U.S. economy and the risks for the federal budget and 

debt. I am currently Dennis Weatherstone Senior Fellow at the Peterson Institute 

for International Economics. I suspect that I was invited to this hearing titled Lifting the Crushing Burden of Debt because, for more than a decade, my research has 

focused on various types of financial crises, including their fiscal implications and 

other economic consequences. Specifically, some of this work has focused on the historical and international evidence on the links between public debt and economic 

growth. 

The march from financial crisis to high public indebtedness to sovereign default 

or restructuring is usually marked by episodes of drama, punctuated by periods of 

high volatility in financial markets, rising credit spreads, and rating downgrades. 

This historic pattern is unfolding in several European countries at present. That situation is far from resolved and remains a source of uncertainty for the United 

States and the rest of the world. However, the economic effects of high public indebtedness are not limited to turmoil in financial markets. Quite often, a build-up 

of public debt often does not trigger expectation of imminent sovereign default and 

the associated climb in funding costs. But in the background, a serious public debt 

overhang may cast a shadow on economic growth over the longer term, even when 

the sovereign’s solvency is not called into question. 

In a paper written over a year ago with my coauthor Ken Rogoff from Harvard 

University, we examined the contemporaneous connection between debt and growth. 

I summarize here some of the main findings of that paper and as well as our recent 

related work and relevant studies from the IMF and European Central Bank. 

Our analysis was based on newly-compiled data on forty-four countries spanning 

about two hundred years. This amounts to 3,700 annual observations and covers a 

wide range of political systems, institutions, exchange rate arrangements, and historic circumstances. The annual observations were grouped into four categories, according to the ratio of gross central government debt-to GDP during that particular 

year: years when debt-to-GDP levels were below 30 percent; 30 to 60 percent; 60 
15 

to 90 percent; and above 90 percent. Recent observations in that top bracket come 

from Belgium, Greece, Italy, and Japan. 

The main finding of that study is that the relationship between government debt 

and real GDP growth is weak for debt/GDP ratios below 90 percent of GDP. Above 

the threshold of 90 percent, however, median growth rates fall by one percent, and 

average growth falls considerably more. The threshold for public debt is similar in 

advanced and emerging economies and applies for both the post World War II period 

and as far back as the data permit (often well into the 1800s). 

DEBT THRESHOLDS: THE 90 PERCENT BENCHMARK

Mapping a vague concept, such as ‘‘high debt’’ or ‘‘over-valued’’ exchange rates to 

a workable definition for interpreting the existing facts and informing the discussion 

requires making arbitrary judgments about where to draw lines. In the case of debt, 

it turns out that drawing the line at 90 percent was critical one detecting a difference in growth performance. 

A hint about how important is that cutoff comes from the fact that countries rarely allow themselves to enter that high-debt range. Pooling the debt/GDP data for 

the advanced economies over the post-World War II period reveals that the median 

public debt/GDP ratio was 36.4. Fully three-quarters of the observations were below 

the 60 percent criteria in the Maastricht treaty governing the European Union. 

About 92 percent of the observations fall below the 90 percent threshold. If debt levels above 90 percent are indeed as benign as some suggest, one has to explain why 

they are avoided so often over the long sweep of history. (Generations of politicians 

must have been overlooking proverbial money on the street). 

We do not pretend to argue that growth will be normal at 89 percent and subpar 

at 91 percent debt/GDP, any more than a car crash is unlikely at 54 mph and near 

certain at 56 mph. However, mapping the theoretical notion of ‘‘vulnerability regions’’ to bad outcomes by necessity involves defining thresholds, just as traffic signs 

in the U.S. usually specify 55 mph. Subsequent work suggests that we were generous in putting the threshold so high. An analysis at the European Central Bank, 

for instance, presents evidence that the negative impact of debt on growth may start 

at a lower 70-80 percent threshold for European countries. 

DEBT AND GROWTH CAUSALITY

Our analysis looked at contemporaneous relationships between average and median growth and inflation rates and debt. Temporal causality tests are not part of 

the analysis. But where do we place the evidence on causality? For low-to-moderate 

levels of debt there may or may not be one. For high levels of debt, the evidence 

suggests causality runs in both directions. 

Our analysis of the aftermath of financial crisis presents compelling evidence for 

both advanced and emerging markets on the fiscal impacts of the recessions associated with banking crises. There is little room to doubt that severe economic 

downturns, irrespective whether their origins was a financial crisis or not, will, in 

most instances, lead to higher debt/GDP levels contemporaneously and or with a 

lag. There is, of course, a vast literature on cyclically-adjusted fiscal deficits making 

exactly this point. 

A unilateral causal pattern from growth to debt, however, does not accord with 

the evidence. Public debt surges are associated with a higher incidence of debt crises. In the current context, even a cursory reading of the recent turmoil in Greece 

and other European countries can be importantly traced to the adverse impacts of 

high levels of government debt (or potentially guaranteed debt) on county risk and 

economic outcomes. 

There is scant evidence to suggest that high debt has little impact on growth. 

Kumar and Woo (2010) highlight in cross-country analysis that debt levels have 

negative consequences for subsequent growth, even after controlling for other standard determinants in growth equations. For a dozen European countries a study from 

the European Central Bank (Chechrita and Rother, 2010) provides further evidence 

of negative causality from debt to growth. 

I will conclude on the same note of my testimony of about a year ago before your 

Senate counterparts. The sooner our political leadership reconciles itself to accepting 

adjustment, the lower the risks of truly paralyzing debt problems down the road. 

Although most governments still enjoy strong access to financial markets at very 

low interest rates, market discipline can come without warning. Countries that have 

not laid the groundwork for adjustment will regret it. 

This time is not different. 
16 

STATEMENT OF MAYA MACGUINEAS 

Chairman RYAN. Thank you. Ms. MacGuineas. 

Ms. MACGUINEAS. Thank you. Chairman Ryan, Congressman 

Van Hollen, members of the committee, thank you for having me 

here today. You all know better than most the tremendous threats 

the United States faces due to our high debt load. In my written 

testimony, I go over a number of the numbers, including a realistic 

baseline that we put out that shows the problem is worse than you 

often see it looking at current assumptions. 

Bottom line, our debt is unsustainable. Interest payments will be nearly $950 billion by the end of the decade, more than all domestic discretionary spending on its current path. And if we do not 

make changes, we will, at some point, face a fiscal crisis. 

The solution is a multi-year, comprehensive fiscal plan that tackles each area of the budget. And the sooner we enact such a plan, 

the better. We face two paths. Under one, fiscal consolidation is 

used as part of an economic strategy that also includes preserving, 

and, in many cases, increasing, productive investments, and a 

sound safety net, and also fundamentally reforming our tax code to 

enhance competitiveness. The economy, the U.S. standard of living, 

and our well-being would benefit from having taken thoughtful preemptive actions. 

On the other course, we delay due to the difficult policy choices 

and the political stalemate, and it causes the debt to continue to 

grow, which pushes up interest rates and payments, squeezes out 

our important priorities, chokes off economic growth, and it affects 

working families, and ultimately, it leads us to a vicious debt spiral 

which damages the entire economy, and the country. And under 

that scenario, we still have to make the same difficult spending 

and tax choices we face now, but they would be much larger and 

more painful. 

So I will dig a little bit deeper into some of the areas that are 

threatened by high debt levels. There are five major ones: economic, budget, fiscal, psychological, and inter-generational. In 

terms of the economy, increased federal borrowing and debt will 

eventually crowd out private investment and lead to a smaller capital stock, lower incomes, a lower standard of living, and a lowering 

of our global competitiveness. 

In terms of the budget, higher debt levels necessitate higher interest payments—which crowd out room for other spending priorities—and tax cuts. This will make our current battle over limited 

resources seem easy when compared to what we would be facing 

in the future. 

The fiscal risk is that higher debt levels lead to reduced budget 

flexibility as interest payments grow to consume larger portions of 

the federal budget, and they compromise our ability to respond to 

future crises and opportunities as they come along. High debt levels are also psychologically damaging, contributing to business and 

household uncertainty, and harming our willingness to invest in 

ways that would spur the recovery. They also make planning difficult. 

And I will just talk about one policy challenge. We know, in no 

uncertain terms, that changes need to be made to Social Security. 

We know that the sooner they are made, the better. And yet, for 
17 

years and years of delay, it means that we are not letting current 

retirees, workers, or taxpayers know what the future holds for the 

program and its sustainability; and thus, they cannot plan accordingly. It is a terrible disservice to all participants of Social Security. The same level of uncertainty, of course, is there with regard 

to other needed policy changes that affect business owners, students, and normal families trying to plan for their future. 

So finally, high debt levels not only threaten current standards 

of living, but the well-being of future generations. Higher borrowing today pushes the costs onto our children and grandchildren. 

So basically, we should just look our kids in the eye and say, Sorry 

we wanted to spend more today, and we didn’t want to pay for it, 

so we are passing the bills onto you. 

Ultimately, if changes are not made, the country will experience 

some kind of a fiscal crisis. And under such a scenario, creditors 

would demand spending or tax changes to set the new fiscal course. 

We would be doing it on their terms, not our own. No one knows 

exactly when this will happen, what it will look like, or what will 

set it off, but we know this: that the problem will not fix itself, and 

that without changes there will be some kind of painful crisis. It 

will be the worst of all worlds in terms of what it does to our economy, and all of our policy priorities. 

So, in terms of a solution, I believe we need to adopt a multiyear, comprehensive budget plan to put the country on a glide path 

to stabilize the debt at a sustainable level. We probably want to 

bring the debt back down to around 60 percent of GDP over a decade, still significantly higher than our historical levels of below 40 

percent, and then continue on that path to get us closer to historical levels. 

While the debt threat is serious, it is also an opportunity to restructure our budget and tax system. In order to be competitive 

down the road, we must strengthen critical investments. By shifting our budget from a consumption-oriented to an investment-oriented budget, we could lay a new foundation for growth. Entitlement reform must be at the center of any turnaround plan. The 

largest programs in our budget that are growing faster than the 

economy: Social Security, Medicare, and Medicaid, must be reformed. 

Finally, our tax code is simply a mess. There is over a trillion 

dollars of tax expenditures, which are truly more like spending programs in disguise. And we should look at reducing, if not eliminating, many of them, so that we can reduce tax rates, and more 

effectively encourage work and investment, while also helping to 

fuel growth and reduce deficits. 

So while the policy choices involved in tackling and controlling 

the debt are not easy, they are far easier than what we will face 

if we continue to delay. It is our hope that we will spend this year 

developing specific options for tackling the debt, discussing the 

trade-offs, making the necessary compromises, and ultimately passing a multi-year plan to change course. This will reassure markets, 

provide families and businesses with the stability they need, and 

set us on a course for a much brighter economic future. Continuing 

to delay is obviously a very risky strategy. So thanks again for having me today. 
18 

1Projections based on CRFB Realistic Baseline, which assumes the 2001/2003/2010 tax cuts 

are fully extended, war costs slowly decline, scheduled reductions to Medicare payments to physicians continue to be waived for remainder of the decade. After 2021, projections follow CBO 

Alternative Fiscal Scenario, except that revenues are allowed to rise slowly. 

[The prepared statement of Maya MacGuineas follows:] 

PREPARED STATEMENT OF MAYA MACGUINEAS, PRESIDENT, COMMITTEE FOR A

RESPONSIBLE FEDERAL BUDGET, THE NEW AMERICA FOUNDATION

Chairman Ryan, Congressman Van Hollen, Members of the Committee, thank you 

for inviting me here today to discuss the problems presented by our large and growing federal debt. 

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 multi-year budgetary targets and automatic 

triggers to help improve the budget process, and which we believe can be a helpful 

part of fixing our budgetary challenges. 

You all know better than most, the tremendous threats the United States’ debt 

situation poses. Not only is our debt higher than it has ever been in the post-war 

period as a percentage of our economy, we are on track to continue adding to this 

debt indefinitely. 

This year, public debt—the amount the U.S. government owes to domestic and 

foreign investors, and ignoring sums that the government owes to itself via intergovernmental accounts—is set to grow from $9.0 trillion, or 62 percent of GDP at the 

end of last year to $10.4 trillion, or 69 percent of GDP at the end of this year, according to the most recent projections from the Congressional Budget Office. By the 

end of the 10-year period, the debt will have grown to an astronomical $18.3 trillion, 

or 77 percent of GDP. Interest payments will be nearly $800 billion in that last 

year, or more than all domestic discretionary spending. 

Yet even these assumptions are probably too optimistic. The Committee for a Responsible Federal Budget recently released its ‘‘Realistic Baseline’’, which includes 

more realistic assumptions about future tax and spending policies than the current 

law assumptions CBO is directed to follow.1 Our baseline shows deficits growing to 

over $1.3 trillion, or 5.7 percent of GDP by the end of the ten-year window; debt 

growing to $21.8 trillion, or 91.5 percent of GDP; and interest payments reaching 

$947 billion in that final year. 

FIGURE 1.—CRFB REALISTIC BASELINE 

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 10-Year 

BILLIONS OF DOLLARS 

Net Interest .......... $264 $329 $406 $484 $569 $652 $727 $800 $880 $947 $6,058 

Deficits ................. $1,103 $896 $821 $870 $1,006 $1,000 $1,037 $1,170 $1,267 $1,347 $10,516 

Debt ...................... $11,601 $12,581 $13,479 $14,427 $15,507 $16,596 $17,726 $18,990 $20,353 $21,798 N/A 

PERCENT OF GDP 

Net Interest .......... 1.7% 2.0% 2.4% 2.7% 3.0% 3.3% 3.5% 3.7% 3.9% 4.0% 3.0% 

Deficits ................. 7.0% 5.5% 4.8% 4.8% 5.3% 5.0% 5.0% 5.4% 5.6% 5.7% 5.4% 

Debt ...................... 73.9% 76.7% 78.1% 79.3% 81.0% 82.8% 84.7% 86.9% 89.2% 91.5% N/A 

Memorandum: 

CBO Baseline Interest ................ 1.7% 2.0% 2.3% 2.5% 2.8% 3.0% 3.1% 3.2% 3.3% 3.3% 2.8% 

CBO Baseline 

Deficits ............. 7.0% 4.3% 3.1% 3.0% 3.4% 3.1% 2.9% 3.2% 3.2% 3.2% 3.6% 

CBO Baseline 

Debt ................. 73.9% 75.5% 75.3% 74.9% 75.0% 75.2% 75.3% 75.8% 76.2% 76.7% N/A 

I believe it is highly unlikely we would even make it to that point without experiencing some type of a fiscal crisis. 

Under realistic assumptions, debt will continue to grow throughout and beyond 

the decade, rising to over 100 percent of the economy in the mid-2020s, to over 200 

percent in the 2040s, and eventually to over 500 percent by 2080. Driving the 
19 

2Other complicating factors are that larger budget deficits tend to increase private savings, 

for several reasons, and can help increase foreign investment, both of which can mitigate the 

negative effects of increased borrowing. However, CBO states that, overall, these factors do not 

reverse the conclusion that increased borrowing would crowd out private investment. 3 Reinhart and Rogoff. Growth in a Time of Debt, January 2010. 

4Kumar and Woo, Public Debt and Growth, July 2010. 

5Sargent and Wallace (1981), Barro (1995), Cochrane (2010), cited in Kumar and Woo. 

growth in debt will be the aging of the U.S. population, rising health care costs, and 

of course, spiraling interest costs. 

Clearly, no country could sustain debt levels at such heights without destroying 

economic growth, eliminating vital investments, and slashing standards of living. 

But even at heightened levels of debt, like those the U.S. is currently experiencing 

in the short-term and increasingly into the medium- and long-terms, the economy 

and society at large can suffer. 

The solution to all of the risks of higher debt is a multi-year, comprehensive fiscal 

plan that tackles each area of the budget. The sooner we enact such a plan, the better. 

We face two paths. Under one, fiscal consolidation is used as part of an economic 

strategy that also includes preserving—and in many cases, increasing—productive 

public investments and a sound safety net and fundamentally reforming our tax 

code to enhance competitiveness. The economy and U.S. standard of living would 

benefit from having taken thoughtful preemptive actions. Under the other, we delay 

due to the difficult policy choices and political stalemate, which causes the debt to 

continue to grow, pushing up interest rates and payments, squeezing out more important priorities, choking off economic growth and affecting working families, and 

ultimately leading to a vicious debt spiral, which damages the entire economy and 

country. And under that scenario we still have to make the same difficult spending 

and tax choices we face now—but they would have to be larger and more painful. 

I’d like to dig a little deeper into the problems caused by high debt levels: 

1. Economic: Many noted economists and respected organizations, including the 

International Monetary Found (IMF) and the Congressional Budget Office (CBO), 

have conducted analyses on the effects of heightened debt on interest rates; inflation; incentives for workers, businesses, and investors; and economic growth in general. They have found that higher levels of debt do not bode well for continued economic strength or living standards. 

Increased federal borrowing and debt would eventually crowd out private investment in potentially more productive ventures via higher interest rates for government debt. Down the road, the nation would face a smaller capital stock. This need 

not be the case if increased federal borrowing was directed toward investments on 

public capital with returns greater than or equal to returns on forgone private investments.2 Examples of such investments could include infrastructure, research 

and development, and education. However, the U.S. budget is primarily a consumption oriented budget, with spending on health care and retirement costs far out 

stripping investments, and oftentimes, our public investments are not well-directed. 

A smaller capital stock down the road would eventually cause incomes to fall, 

making future generations worse off. Lower incomes would reduce people’s incentives to work. The combined effects of a lower capital stock and labor supply would 

harm economic output in the long-term and decreases U.S. global competitiveness. 

Economists Carmen Reinhart, who is here today, and Ken Rogoff of Harvard University have estimated that debt levels of roughly 90 percent of the economy—looking at a broader measure of debt, which incorporates debts the government owes 

to itself—are correlated with lower annual economic growth of about 1 percentage 

point.3 Likewise, economists at the IMF have estimated that a 10 percentage point 

increase in debt lowers potential output growth by 0.15 percentage point in advanced economies.4

Higher debt can also contribute to higher inflation, whereby deficits add too much 

to aggregate demand in a given time frame, lead monetary authorities to try to reduce the real value of debt by printing more money (often referred to as ‘‘monetizing’’ the debt), or lead some people to believe that monetary authorities could deliberately increase inflation.5 Such outcomes would have obvious negative implications for business and investor confidence and economic growth, as well as many 

savers in society—in particular, the elderly. 

2. Budget: Higher debt levels necessitate higher interest payments on existing 

debt. Last year, interest payments on our $9 trillion debt totaled $197 billion. By 

2021, however, interest payments are projected to jump fourfold to $792 billion, according to CBO. If policymakers enact legislation that increases deficits and debt 

over the next ten years, interest payments will also increase by even larger factors. 
20 

All of these scenarios assume rather favorable interest rates. As interest payments 

rise, they will squeeze out room for other spending priorities and tax cuts. This will 

make the current battle over limited resources seem easy when compared to what 

is looming in the future. 

3. Fiscal: Higher debt levels lead to reduced budget flexibility as interest payments grow to consume larger and larger portions of the federal budget, and compromise our ability to respond to future crises and opportunities. 

Policymakers would have limited resources to respond to unforeseen events, such 

as wars, humanitarian crises, and economic downturns. In 2008, public debt stood 

at about 40 percent of the economy, affording us the fiscal space to significantly increase spending and cut taxes to support an economic turnaround. Larger debt 

would have hindered such efforts, and threatens our ability to respond to the next 

emergency. By nature, these budgetary costs are unpredictable, both in timing and 

in magnitude. Living at our fiscal limits is an immensely dangerous way to operate 

the government given the many uncertainties the nation faces. 

4. Psychological: Uncertainty surrounding the country’s fiscal path is eroding confidence among businesses and individuals. They don’t know what spending and tax 

policies to expect in the future, and thus cannot plan accordingly. If businesses and 

individuals do not know what spending cuts and/or tax increases they might face 

in the future, or even if the country might face a fiscal crisis of some form or another, they will be less willing to make longer-term investment decisions in our 

economy. As the economic recovery continues to lag, uncertainty contributes to the 

problem of how to encourage businesses to be the engine of growth. 

A lack of confidence or certainty can stem not only from economic expectations, 

but also from policy uncertainty. Whether large spending cuts or tax increases, uncertainty over which spending programs lawmakers might eliminate or which taxes 

they might create or increase are not optimal for growth. 

Just as one example, we know in no uncertain terms that changes need to be 

made to Social Security. We know that the sooner they are made, the better. And 

yet the years and years of delay means that current retirees, workers, and taxpayers, don’t know what changes will be made to make the program sustainable, 

and thus, cannot plan accordingly. It is a terrible disservice to all participants of 

Social Security. The same level of uncertainty with regard to other needed policy 

changes affects business owners, students, and normal families trying to plan for 

their futures. 

5. Intergenerational: Higher debt levels not only threaten current standards of living, but the wellbeing of future generations of Americans. Higher borrowing today 

pushes the costs onto our children and grandchildren. Each generation of Americans 

has passed on improved opportunities and standards of living to the next generation. But for the first time, our fiscal course threatens to burden our children and 

grandchildren with enormous debt and reduced opportunities for the future, as well 

as a lack of fiscal flexibility as we lock them into certain programs and large interest burdens. 

Basically we should all just look our kids in the eye and say, sorry, we wanted 

to spend a lot but not pay for it, so we are passing the bills onto you. Good luck 

with that. 

A FISCAL CRISIS

Ultimately, if changes are not made, the country will experience some type of fiscal crisis. Under such a scenario, creditors would demand spending and/or tax 

changes to set a new fiscal course. No one knows exactly when this will happen, 

what it will look like, or what will set it off. But we know this problem will not 

fix itself and that without changes, there will be a fiscal crisis. 

A year ago, we held a conference on what a tipping point might look like. At this 

cheery gathering economists and budget experts in attendance noted that a crisis 

could take many forms, including scenarios ranging from a gradual rise in interest 

rates and slowing of economic growth, to a rapid crisis where investors pull the plug 

on an economy—with triggering events ranging from a credit rating warning, to 

state budget problems, to a totally unforeseen factor. There was general concern 

that markets were underestimating how soon such a crisis might hit, and that the 

greatest risk was that our economy is already negatively affected by high debt levels, and that a crisis could hit in the next few years. 

Under an abrupt fiscal crisis scenario, the U.S. would not have the luxury of 

spreading fiscal adjustment out among a larger group of federal spending programs 

or taxes, or across more generations. Investors would force immediate spending cuts 

and/or tax increases, threatening our ability to protect the programs on which the 
21 

6 CRFB, Fiscal Turnarounds: International Success Stories, February 2010. 

most vulnerable in society rely. A fiscal crisis would surely exacerbate all the negative economic, fiscal, psychological, and intergenerational effects of high debt. 

For older generations, a fiscal crisis would hurt job security and incomes, and 

threaten retirement security if federal spending on retirement programs or taxes 

had to be altered abruptly. For younger generations, a crisis would also threaten 

job opportunities, incomes, and affordability of big ticket items. Workers would have 

to expect to work much longer than their parents and grandparents’ generations. 

We can never be sure when we might confront such a scenario, but we know for 

sure that we would ultimately face some type of crisis. It is far better to make fiscal 

changes on our accord than have markets force changes on us.6

THE SOLUTION: A FISCAL PLAN

We need to adopt a multi-year, comprehensive budget plan to put the country on 

a glide path to stabilize the debt at a sustainable level. We probably want to bring 

the debt down to around 60 percent of GDP over a decade—still significantly higher 

than the historic average of below 40 percent, and continue on a path that leads 

us back down closer to historical averages beyond that. 

All areas of the budget should be on the table. Spending caps on discretionary portions of the budget—including both defense and non-defense programs—, entitlement reform, and fundamental tax reform are critical for tackling the magnitude of 

future deficits. 

The debt threat is serious, but it is also an opportunity to restructure our budget 

and tax system for the 21st century. In order to be competitive down the road, we 

must strengthen critical investments in infrastructure, high value research and development, and education. By shifting our budget from one based more on consumption to investment, we can lay a new foundation for growth. 

Entitlement reform must be at the center of any turnaround plan. The largest 

programs in our budget that are growing faster than the economy—Social Security, 

Medicare, and Medicaid—must be reformed. Their open-ended growth is already 

squeezing out other parts of the budget, threatens to push up tax rates to truly 

damaging levels, and their automatic nature removes the critical oversight and evaluation processes that should be a central part of budgeting. 

And finally, 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 key in turning our fiscal situation around and strengthening 

our economic well-being. 

A comprehensive fiscal plan that stabilizes debt and then reduces it thereafter 

must be center to any economic recovery and growth strategy. The economy and private investment would become unburdened by debt, the country would have the 

budget flexibility to respond to emergencies and to invest in critical areas for longterm prosperity, investors would remain confident in our ability to repay our debts, 

and businesses and consumers would have certainty over future spending cuts and 

tax changes. Most importantly, we would be handing down even better opportunities 

to the next generation. 

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. It is our hope 

that we will spend this year developing specific options for tackling the debt, discussing the trade-offs, making the necessary compromises, and ultimately passing 

a multi-year plan to change course. This will reassure markets, provide families and 

businesses with the stability they need, and set us on a course for a much brighter 

economic future. Continuing to delay is a very risky strategy. 

Thank you to the Committee for all your work on this and the opportunity to appear here today. 

STATEMENT OF JOHN PODESTA 

Chairman RYAN. Thank you. Mr. Podesta. 

Mr. PODESTA. Thank you, Mr. Chairman, and Mr. Van Hollen, 

members of the committee, thanks for inviting me back to the committee. Mr. Chairman, you will be surprised to know that I agree 

with your goal in your opening statement. I, of course, disagree a 
22 

little bit with the analysis of how we got here, so let me just start 

there and do it very briefly. 

I was fortunate, as you know, to serve as President Clinton’s 

Chief of Staff. When our administration came to a close, the budget 

outlook was very different than it is today. Although President 

Clinton did inherit a budget deficit of 4.6 percent of GDP and growing, by 1998 we had a balanced budget. We left the incoming administration with a balance sheet that was $236 billion in the 

black, the largest surplus since 1948. And CBO projected that by 

2008, the federal government would essentially be debt-free on the 

policies then in place. By the time President Obama was sworn in, 

the deficit had already reached $1.2 trillion, a remarkable swing of 

11 percent of GDP since our administration left office. 

How did we get from record surpluses to record deficits? First, 

deep tax cuts especially for high earners in 2001 and 2003 dramatically affected the federal balance sheet. The wars in Iraq and Afghanistan, and a major new entitlement program, Medicare Part D, 

were enacted without being paid for. The predictable result was a 

swift return to massive deficits and a growing debt. By 2007, instead of being nearly debt-free, the federal government’s publicly 

held debt had nearly doubled. 

Second, near the end of President Bush’s second term, the onset 

of the Great Recession made a bad fiscal situation worse. Tax revenues plummeted, and this is the point where I disagree with you, 

Mr. Chairman. In fiscal year 2009, they dropped to their lowest 

level since 1950, where they have stayed. In fact, decline in tax 

revenues between 2008 and 2009 were four times larger than the 

new spending passed during President Obama’s first year in office. 

We are left with a serious mid-term deficit problem, as well as an 

acute deficit and debt outlook, and on that, I agree with the panelists. 

The only way to improve our long-term budget outlook is to combine fiscal discipline, as we did in the 1990s, with policies that create robust economic growth. So while we must reduce wasteful 

spending and take bold steps toward fiscal balance, both today and 

in the long run, it is also clear that sudden drastic spending cuts 

to government programs to keep the wheels of our economy turning 

will cost jobs, stall the fragile economic recovery, and that is why 

we both supported at cap [spelled phonetically], targeted investments, but have also listed specific cuts. 

We look for savings in every part of the budget because it is impossible to balance the budget by cutting non-security discretionary 

spending alone. Not only is this one area of spending decidedly not 

the source of our deficit problems, it is also home to the most important public investments that are fundamental to our future economic growth. And it adds, as Mr. Van Hollen noted, at less than 

15 percent of the budget, there are just not enough non-security 

discretionary dollars to fill the budget gap. 

Rather than limiting the spending discussion to one part of the 

budget, we should broaden it to include mandatory spending, defense spending, government efficiency improvements, and especially tax expenditures, as Ms. MacGuineas noted. Every year we 

are spending twice as much on tax expenditures, more than a trillion dollars, as we do on non-security discretionary spending. Yet 
23 

many of these tax expenditures are wasteful giveaways. They provide the biggest tax breaks to those who need them the least. They 

are subject to much less scrutiny and oversight than spending. And 

some are so specific and targeted on such a few number of people, 

that I think it is fair to call them tax earmarks. 

Finally, new revenue absolutely must be part of the solution. 

There is little hope for deficit reduction, no matter what the size 

in spending cuts, without looking to revenue side of the ledger. 

With so many challenges facing our country today, we have to continue to invest in infrastructure, in clean energy, and science, and 

innovation, and education, to keep our economy competitive, to support the middle class, to create jobs, and to get wages growing 

again. 

As I go into in some detail in my written testimony, limiting federal revenue to the historical average, or some level slightly above 

that, is going to be insufficient to address the challenges of the day. 

In fact, the last time the historic level of revenue would have actually balanced the budget was in 1966. And both the country and 

the budget looked quite a bit different 45 years later, after we 

passed Medicaid and Medicare in particular. 

So I urge the committee to scrutinize and realize savings from 

every part of the budget, including in entitlements alongside strategic investments in revenue. We have identified specific cuts in 

non-security discretionary spending, in unneeded Pentagon spending, in wasteful tax expenditures, in mandatory spending, in restrained health care costs, in addition to targeted revenue increases. 

Our plan, and hopefully I think, the blueprint for this committee 

that you will put forward soon would bring the budget into primary 

balance where federal revenues equal program spending by 2015. 

I hope that you can meet that mark, and put us on a firm footing 

to fully balance the budget in the future. It enforces fiscal discipline through the proven mechanisms of hard but realistic discretionary caps, and a real and comprehensive PAYGO system. And 

will bring the budget closer to balance without the weighing or reversing the fragile economy we have fostered over the past two 

years. So, again, thank you, and I look forward to your questions. 

[The prepared statement of John D. Podesta follows:] 

PREPARED STATEMENT OF JOHN D. PODESTA, PRESIDENT AND CEO, 

CENTER FOR AMERICAN PROGRESS ACTION FUND

Chairman Ryan, Ranking Member Van Hollen, and members of the committee, 

thank you for the opportunity to testify concerning America’s deficit and debt challenges. 

The broad contours of our long-term deficit challenge are well-known. Over the 

next several years, the eye-catching deficits during the Great Recession will subside, 

but deficits will not disappear. Over time, if nothing is done, those deficits will 

widen, causing us to take on an unsustainable debt burden, and forcing us to put 

an ever-increasing share of our national income toward servicing that debt, rather 

than making important investments in our economy and our people. This is clearly 

a future we must avoid. 

But our long-term deficit dilemma is not, as is so often claimed, purely a ‘‘spending problem.’’ There is no question that current projections of federal spending are 

alarming and clearly unsustainable. It is not the case, however, that all federal 

spending is contributing equally to that trajectory. In fact, most federal spending 

is actually expected to remain steady or even fall, as a share of the economy, over 

the next 10 years and beyond. The exception, however, is federal health spending, 

and to a much smaller degree, Social Security. This suggests that, far from being 
24 

a ‘‘spending problem,’’ what the United States actually faces is an aging population, 

and a ‘‘rising cost of health care’’ problem. 

That is why it is so important that Congress and the administration work diligently to implement the cost containment strategies and delivery reforms that were 

part of the Affordable Care Act. These reforms, along with the rest of the bill’s provisions, are projected to reduce the deficit by more than $230 billion over the next 

10 years and begin to restrain the growth in health care spending. 

We also have a problem on the other side of the balance sheet. While rising health 

care costs and an aging population will combine to drive up government spending, 

at the same time a stubborn devotion to a tax code riddled with inefficiencies and 

loopholes will ensure that the country takes on ever more debt to pay for even the 

most basic of public services. Those who would limit federal revenue to the ‘‘historical average’’ of 18 percent of gross domestic product are ignoring an important, inescapable reality: The challenges we face today and will face in the future are different from those we faced 50 years ago. 

They are also ignoring the simple fact that this historical average level of revenue 

has always been inadequate, even by historical standards. In 45 out of the past 50 

years, the federal budget was in the red. I am proud to have served as chief of staff 

to President Bill Clinton, who oversaw three of those five elusive budget surpluses. 

The last time that 18 percent of GDP in revenue would have been sufficient to balance the budget was 1966. The budget and the country looked quite a bit different 

45 years ago than they do today. 

Forty-five years ago, Medicare and Medicaid had just passed and total federal 

health care spending was less than 0.3 percent of GDP. We spent about one-fourth 

as much on veterans’ hospitals and medical care, in real dollars, as we do today. 

We spent about one-tenth as much on law enforcement. There was no school breakfast program, no Children’s Health Insurance Program, no Transportation Safety 

Administration, to name a few. These programs and services arose to meet new 

needs, like the need for greater airport safety, or as ways to address enduring problems like childhood and elderly poverty. 

The underlying demographics of the country have also shifted dramatically and 

will continue to do so. In 1966, just 9 percent of the population was over the age 

of 64. Today, 13 percent of the population is. By 2030, that proportion is expected 

to rise to almost 20 percent. How could we realistically expect to meet the needs 

of a population in which one out of every five people is a senior citizen using revenue levels from a time when less than 1 out of every 10 was? Remember, too, that 

programs like Social Security, Medicare, and Medicaid have been remarkably successful. In 1966, nearly 30 percent of all senior citizens lived in poverty. Today less 

than 10 percent do. Unless we decide, as a society, that we no longer have a responsibility to ensure a secure retirement and adequate health care for all older Americans, that we would be willing to go back to the senior poverty levels of the early 

1960s, then we will, necessarily, be required to spend more over the next several 

decades than we have over the past several. 

Higher spending to meet new challenges is clearly nothing new. Neither is raising 

more revenue. Citing the postwar average of federal revenue makes it appear as if 

that level of revenue was constant during that period. It was not. In the 1950s, average annual federal revenue totaled 17.2 percent of GDP, but then increased in 

every subsequent decade of the 20th century. In fiscal year 2000, revenue peaked 

at 20.6 percent of GDP. Far from being constant or stable at 18 percent, there is 

a clear pattern of higher revenue in each new decade. The pattern held for five 

straight decades, and it was only broken by the massive tax cuts implemented by 

President George W. Bush. 

Even slightly higher levels of revenue—the chairman, for example, has suggested 

19 percent of GDP as a target—have been and would continue to be inadequate. 

Only five times in the past 40 years would 19 percent of GDP be sufficient to balance the budget. And that is before taking account of the major demographic and 

health care cost challenges we are now facing. 

Unfortunately, there is no magic level of revenue or spending that will balance 

the budget now and forever. Fundamentally, we need to make budget decisions 

based on our current and future circumstances, not on our past ones. We must grapple with the real underlying causes, and offer real and specific solutions, to address 

our growing federal debt. 

The Center for American Progress, since our founding eight years ago, has been 

consistent in calling for a national effort to address these long-term challenges. 

When we began, the fiscal discipline of the Clinton administration had been recently 

abandoned in favor of massive tax cuts skewed heavily toward the wealthy. These 

were enacted during a time of war with its attendant spending increases. Adding 

to the fiscal damage was a new domestic entitlement program, Medicare Part D, 
25 

which was passed without adequate funding. The predictable result was a return 

to large deficits and an unprecedented run-up of debt. This was the fiscal situation 

before the onslaught of the Great Recession, which itself had a dramatic effect on 

the nation’s bottom line. The combined effect of the recession and the poor fiscal 

stewardship prior to it was to pull our long-term deficit problems closer toward us 

and create an intermediate deficit problem to go along with the long-term one. 

Over the past few years, the Center for American Progress has offered several 

specific plans for spending cuts and revenue increases that would put the country 

on a path back toward fiscal stability. We have also been glad to see others start 

producing similar plans that, importantly, have started to be as specific and detailed 

as ours. There appears to be a growing recognition of something that we have long 

believed: Once you get past political rhetoric, solving the deficit problem is going 

to be extremely difficult. There are simply no easy answers or magic bullets. Solving 

this problem will require careful consideration of all the options, a fair weighing of 

the costs and benefits, and compromise. 

There is one additional prerequisite to achieving our shared goal of a more sustainable federal budget: a strong and growing economy. We should not labor under 

the illusion that we can grow our way out of our budget woes. But neither should 

we ignore the fact that without a strong economy, solving our fiscal problem will 

go from being merely very difficult to being truly impossible. Given this reality, we 

strongly believe that every care must be taken in the near term not to disrupt the 

fragile recovery. While we strongly believe in getting the budget back to full balance 

eventually, our initial steps must be measured. 

The shock of vastly constrained government spending, in the immediate, would 

have undeniably deleterious effects on the wider economy. Analysts from Goldman 

Sachs recently estimated that the cuts contained in H.R. 1 would slice 1.5 to 2 

points from economic growth in the second and third quarters of this year. Moody’s 

chief economist Mark Zandi estimated that the cuts in the House bill would lead 

to a loss of about 700,000 jobs. Federal Reserve Chairman Ben Bernanke agreed 

that H.R. 1 would result in a ‘‘couple of hundred thousand jobs’’ lost. 

Though estimates clearly vary on the magnitude, there is wide consensus on the 

general impact. And given the crucial moment that we now find ourselves in—with 

private sector job growth just beginning to expand—it would be counterproductive 

to deliberately undertake contractionary policies of this magnitude in the near term. 

Instead, we should be focusing on putting in place policies that will bring the federal deficit down to sustainable levels in the medium term and full balance over the 

long term. During normal economic times, there is no good reason to take on debt 

to pay for the ordinary, day-to-day operations of the federal government. There is 

no need, however, to try to solve the entire budget deficit at one enormous stroke. 

Steady, clear, step-by-step progress toward the eventual goal is both more likely to 

ultimately produce success and has the great advantage of requiring less dramatic 

change in the intermediate period. 

Eventually, balancing the budget is going to require some difficult spending cuts 

and tax increases that neither Republicans nor Democrats, nor the American public 

for that matter, seem ready to embrace. We commend the efforts of the bipartisan 

group of senators who are even now trying to develop a framework for solving our 

long-term budget problems. We are hopeful that their effort, building on the general 

framework of the Bowles-Simpson proposal, will yield results that will be acceptable 

to both parties and both chambers of Congress. But even if it proves impossible to 

achieve a consensus right now on all the elements of a long-term deficit budget plan, 

that does not absolve us of the responsibility to start down the path toward fiscal 

sustainability. That is why we should also agree to adopt an intermediate goal 

somewhere between here and full balance. 

We suggest a path to put the federal budget into primary balance by 2015 as that 

intermediate goal. Primary balance is when total government revenues equal total 

government expenditures, with the exception of net interest payments on the debt. 

This equates to a deficit of about 3 percent of GDP. At that level of deficits, publicly 

held debt, as a share of GDP, ceases to rise. Getting to primary balance by 2015 

will not be easy. With the deficit currently standing at just under 10 percent of 

GDP, reducing it all the way down to 3 percent will require not just a restored economy but some substantial policy changes. 

Nevertheless, we can reach primary balance without the kind of dramatic, fundamental shifts in public services and the tax code that will likely be required to 

achieve full balance. And by doing so, we will stabilize the debt-to-GDP ratio, demonstrate our resolve, and buy ourselves some much-needed fiscal breathing room. 

There are four basic steps that we must take over the next several years to reach 

that intermediate goal. First, Congress and the executive branch should focus intently on making government work more effectively, more productively, and more 
26 

efficiently. Don’t misunderstand. Eliminating so-called, ‘‘waste, fraud, and abuse,’’ 

will not, by itself, solve our deficit problems. Not even close. Nor is it a simple matter to even determine what constitutes wasteful spending. Improving the productivity of the government, and identifying and rooting out inefficiency, will take a serious commitment and effort. The recent report from the General Accounting Office 

that identified dozens of areas of potential duplication in the federal government is 

a good starting point. 

The real work of figuring out exactly which programs and services are successful 

and which are not begins now. At the Center for American Progress we have an 

entire project that we call Doing What Works, which is devoted this effort. Our 

premise is that the American people deserve a government in which every tax dollar 

is spent wisely, every program is held to clear standards, and everyone is accountable for achieving goals in an efficient manner. We believe that these efforts also 

have the potential to save billions, perhaps even hundreds of billions. We’ve already 

identified the potential for up to $16 billion in annual savings from modernizing 

government informational technology systems and another $40 billion from federal 

contracting and procurement reforms. 

Though improving government efficiency and rooting out waste will save money, 

we cannot pretend that it will dramatically alter the trajectory of government 

spending. To do that, we need to take a hard look at all parts of the federal budget 

and not merely limit our attention to one small sliver. The recent focus on nonsecurity discretionary spending is badly misplaced. Nonsecurity discretionary spending 

makes up less than 15 percent of the entire budget, and it is actually projected to 

decline over time. These are not the programs and services that are driving up our 

long-term deficits. 

On the contrary, this category is home to most of the vital investments that are 

the keys to our future economic growth: education, transportation and infrastructure, science and technology research, and services that foster competiveness and 

innovation. H.R. 1 would cut all of these substantially including $1 billion from 

Head Start, which would force 200,000 children out of the program; $700 million 

from grants to local school districts; and $500 million from teacher quality grants. 

It would slash $6 billion from science and technology research including reductions 

to the National Science Foundation, the National Laboratories, and more than third 

from the National Institute of Standards and Technology. It would even cut the 

Small Business Administration and the International Trade Administration—offices 

that seek to bolster American businesses and American exports. 

The misguided limitation of spending cuts to just this one category forces these 

kinds of cuts to investments that are fundamental to our future economic growth. 

Not only will these cuts cause job losses right away, but they will drag down our 

economy for years to come. 

And despite the name of the category, we also end up cutting a variety of services 

designed to keep every American safe as they go about their daily lives. H.R. 1 

would mean cuts to meat inspections, to the Centers for Disease Control and Prevention, to poison control centers, to law enforcement grants to cities and towns, to 

the Consumer Product Safety Commission, and to the Federal Aviation Administration. Meat inspections and poison control are not the reason we face a budget deficit. 

But they are fundamental services that the American people expect out of their government. 

By concentrating only on this one category of spending, we ignore the potential 

for savings in all other parts of the budget. The Department of Defense, for example, is certainly not immune from waste and excess. Over the past several years, 

the Center for 

American Progress has released several reports detailing specific savings that 

could be had from the Pentagon’s budget without weakening our national defense. 

There is also no reason to exempt mandatory programs from scrutiny. The Center 

for American Progress has identified several programs that could be streamlined or 

scaled back. For instance, in a time of exceedingly high commodity prices and high 

net farm income, should we continue paying high direct agriculture subsidies? The 

Government Accountability Office recently reported that billions of dollars are wasted in improper payments in Medicare. Restricting our attention to nonsecurity discretionary spending leaves these inefficiencies in place and leaves savings on the 

table. 

Similarly, we should not ignore those spending programs that operate through the 

tax code. These tax expenditures are economically equivalent to their direct spending counterparts, but they are generally subject to less scrutiny and evaluation. 

Some of them are so specific and target such a tiny number of people or industries 

that they are best thought of as ‘‘tax earmarks.’’ A balanced approach to cuts should 

include close examination of all spending programs, including tax expenditures, to 
27 

make sure they are achieving their goals efficiently and effectively. The days of hiding special spending programs deep in the bowels of the tax code have to come to 

an end. 

We also need to return to the successful budget processes of the 1990s, which will 

help ensure that any steps taken in the coming years to restrain the deficit are not 

undermined by future Congresses. These processes include statutory PAY-GO, 

which the 111th Congress successfully reinstated, as well as meaningful caps on 

both defense and nondefense discretionary spending, enforced through sequestration. The lesson of the 1990s is that caps such as these can work, so long as they 

are not arbitrary or punitive. Successful budget enforcement processes should also 

include congressional rules that make it difficult to pass legislation that would increase the deficit. The Senate has such rules, and in the previous Congress, so too 

did the House. Unfortunately, the current House leadership has chosen to abandon 

those rules in favor of something they call ‘‘Cut-Go,’’ whereby spending increases 

must be offset by spending cuts, but tax cuts do not need to be offset at all. This 

is a recipe for fiscal disaster. Allowing tax cuts to not be paid for will inevitably 

result in massive deficits, as President Bush’s economic policies convincingly and repeatedly proved. 

We must remember that the word ‘‘deficit’’ is not a synonym for ‘‘spending.’’ The 

deficit is actually a product of a mismatch between spending and revenue. While 

improving government efficiency and subjecting all parts of the federal budget to 

close scrutiny will help in addressing one half of the deficit equation, we simply cannot afford to ignore the other side of the balance sheet. 

This year, for the third year in a row, federal revenues will be at their lowest 

level, as a share of GDP, in nearly 60 years. While the effects of the recession explain much of the dramatic drop in revenues, the other culprit is repeated tax cuts. 

Going forward, the obvious first step must be to jettison the bonus tax cuts for the 

wealthy put in place under President Bush. During the last decade and before the 

Great Recession, average income for the richest 1 percent grew by more than 20 percent, while at the same time median household income actually fell. Those at the 

top also weathered the recent economic storm far better than the middle class, and 

they are recovering faster as well. 

The enormous tax cuts bestowed on the very rich in 2001 and 2003 were a mistake then, as they were an important contributor to the unnecessary deficits of 2002 

through 2007. Maintaining them is an $800 billion mistake now. 

In our plan for reaching primary balance, we also recommend implementing a 

millionaires’ surtax. This would be 2 percent on adjusted gross income over $1 million and an additional 3 percent on AGI over $10 million. This surtax would raise 

about $30 billion a year. Ideas like these should be part of the discussion, not least 

because a tax on millionaires is, as evidenced by a recent Wall Street Journal poll, 

the single most popular way to reduce the deficit. 

Balancing the budget and reducing our debt burden is going to require making 

hard choices. But by approaching the issue in a balanced and measured way, it does 

not have to mean sacrificing our future economic prosperity or a robust safety net 

for the vulnerable. If we dedicate ourselves to scouring the government for efficiencies, to subjecting the entire federal budget to scrutiny, not just one sliver of 

it, and to raising the revenue that the 21st century requires of us, then we will be 

able to balance the budget and leave the next generation with a fiscal inheritance 

that we can be proud of. 

Chairman RYAN. Thank you. First, let me just start off. You 

know, we obviously don’t agree on everything, but I want to thank 

you for having been a member of the fiscal commission. Your think 

tank, Center for American Progress, actually gave us ideas. You 

know, you actually did a lot of work and a lot of research and you 

are contributing to the debate, and for that, I thank you. And some 

of them, believe it or not, I agree with. So, thank you for that. 

I want to bring up the chart on the bond markets. 
28 

I want to ask the economists, and there is a lot of members here, 

so give me the five minute deal, is that all right? So, let’s do that 

for ourselves, because I want to get to people. 

This is what the, PIMCO calls the ring of fire. This is rating our 

countries in this very dangerous debt zone. And the U.S.A. is right 

up there with France, Italy, Japan, Greece, Ireland, the U.K., 

Spain. Ms. Reinhart, do you see it this way? I understand PIMCO, 

which gives us this chart, dumped their Treasury bills in their 

major bond fund the other day. I am very worried this thing is 

starting to accelerate. And Doug, because you are an economist as 

well, what does this look like? What does a debt crisis look like? 

I mean, everybody says, debt crisis is coming. What does that 

mean, exactly? What form does it take place? What does it look 

like? And I am going to have to ask you the question which I know 

no one likes to answer: How much time do you think we actually 

have? I hear speculation from bond traders and economists. What 

is your speculation? And then I want to get to the non-economists. 

Not that that is a bad thing, but go ahead. 

Ms. REINHART. [inaudible] was, was using some of our data. So, 

that tells you something about highlighting some of the same problems I was in my remarks. In terms of the timing: I tried to reiterate that you don’t know when bond markets will turn, but I 

think the perception that we have, a five nice year window in 

which we can do things, we can wait for oil prices to be in the right 

place, is not in the cards. 

How do debt crises build up? They build up with a lot of hidden 

debts, and if they were not hidden, we would know about it. That 

is part of the problem. When you see the build-up of a debt crisis 

coming, you also see build-up of arrears, which we are seeing, certainly, at the municipal level; we are seeing it at the state and 

local level. We see now, then, also, that the closer you get to surpassing any historic benchmark, which we have already done, 
29 

when we take into account state enterprises, the closer you move 

to a downgrade. 

Japan, which is a lender to the rest of the world, has already 

been downgraded several times. You don’t get to a debt crisis with 

very predictable, unless you are shut out of the credit market, like 

Argentina was; we are not Argentina. But where we see it is in 

these hidden debts in which contingent liabilities continue to build 

up. The bottom line is that at the current pace, we do not have a 

five year window in which we can wait for the right opportunity. 

Chairman RYAN. Dr. Holtz-Eakin. 

Mr. HOLTZ-EAKIN. I concur with this analysis. The horizontal 

axis is what I talk about, prosperity, right? The more you public 

debt you have, you are crowding out the ability of people to get 

educations and do investments; so as you go out that way, you are 

imperiling your prosperity. As you go down the vertical axis and 

you are borrowing from abroad, that is, that is our freedoms. We 

are not going to negotiate with our bankers. And some of our bankers don’t share our values. So that analysis is right. 

What would it look like when it hits? Well, you know, you would 

see a spike overnight in Treasury borrowing costs. We have an 

enormous amount of Treasury financing this very short-term right 

now, and so essentially we are borrowing at teaser rates. They 

would bounce right up, we would have to refinance at much higher 

rates that would flow right through into every mortgage, every car 

loan, every interest rate in the economy, and you would see just a 

collapse in the economy. 

So it would be a very painful, very shocking experience. And we 

have been through something like that. We don’t want to do it 

again. 

The last thing I would say is, people always want to say that the 

U.S. is different. You know, we are not being disciplined by bond 

markets, we are exempt, and I want to echo, you just can’t believe 

that. I mean, Rudy Penner, who was the former director of the 

CBO, always says, We are the best-looking horse in the glue factory, and that doesn’t mean we won’t turn out to be glue. And it 

is very important that we not even test the notion that, somehow, 

as the world’s largest economy or its reserve currency, we are exempt. We control our future. The indicators say trouble arrives 

soon, within five years, so let’s not go there, and let’s not find out 

if we really are different. 

Chairman RYAN. Let me ask the two, because I want to be respectful of time, if neither political party, if neither the House, the 

Senate, or the administration proposes in the next year or two to 

fix this problem, does that send the signals to the credit markets 

that the Americans are done? That the Americans don’t have this 

figured out, that the Americans aren’t serious? And does that, 

therefore, accelerate a debt crisis? 

Mr. HOLTZ-EAKIN. In my opinion, yes. I am terribly worried 

about this. 

Chairman RYAN. I mean just showing political leadership buys 

us time. Is that your assessment? 

Mr. HOLTZ-EAKIN. Absolutely. I want to echo what Maya said in 

her opening remarks. Fiscal security. A, it is the right thing to do 

for everyone now and in the future. B, it is analytically not hard. 
30 

C, it sends the right message to bond markets: that we are willing 

to take the country in a different direction. Do it, and do it tomorrow. 

Ms. MACGUINEAS. I am going to first give a non-economist answer to your economics question. But when you are walking on thin 

ice, right, lots of things can cause it to crack. And so we are at risk 

for so many things right now, whether it is sovereign debt contagion, or something that goes wrong in the States, any of these 

landmines in the budget, the contingent liabilities that are there. 

PIMCO, when they start to get out of Treasuries, that sends major 

signals. Right? Everybody on Wall Street is looking; everybody 

around the world is looking at this right now. So suddenly, anything can make a change very, very quickly. 

And the bottom line is even though our bond markets have 

looked like there is not a problem, and people keep saying, Look, 

rates are so low, what are you worrying about? As soon as you 

start to see the problem in the markets, it is too late to do this on 

our own terms. There is no excuse for not getting ahead of a crisis 

which you know is coming your way. 

In terms of policy and politics, we know the policies are incredibly difficult, and we also know what is involved in them, and we 

can do it. And I encourage, you know, as many roadmaps, let’s get 

them out there, as possible. We need to get to specifics. We are now 

past the point of just talking about this is a problem, and kind of 

worrying about it. We need to know we get the specifics on the 

table and figure out how to fix the problem, and we need to do 

enough this year, hopefully a comprehensive plan, but enough to 

make markets more confident in the political process. 

When I talk to folks from Wall Street, and someone who runs the 

Committee for the Responsible Federal Budget, Wall Street people 

didn’t used to care, really. It wasn’t like the people who called all 

the time. And they do now. The markets are paying a whole lot of 

attention, and they really are worried about our political process in 

all of this. 

So, I think there is no question that, particularly with the Fiscal 

Commission having come out with a solution, that if this all dies 

on the vine and nothing happens politically, the next two years is 

not okay. We can’t delay until after the election; something has to 

happen before then to reassure markets, other countries, and everybody who is watching this, that we have the political ability to 

face up to these problems. 

Chairman RYAN. I know we have gone over, but John, I do not 

want to stifle you, so please, go ahead. 

Mr. PODESTA. Well, Mr. Chairman, I would note that I am more 

used to the fire than the ellipses on that chart. But I would say 

this: This is the year where we have to show, on a bipartisan basis, 

a determination to stop our debt from going up. And that has to 

be in the midterm. I suggested 2015, you may have a different year 

in mind, but I think if we can do that on a bipartisan basis and 

lock that in, get on a path so that our debt does not continue to 

grow, and then we could begin the tough path of bringing it down, 

bringing the debt down, hopefully getting on a path back to balance. We would have accomplished a lot. And that is going to require a balanced plan, and as I said in my opening comments, it 
31 

can’t just be in one narrow part of the budget. It is going to have 

to work across the entire federal budget. 

Chairman RYAN. Thank you. Mr. Van Hollen. 

Mr. VAN HOLLEN. Thank you, Mr. Chairman. I want to join the 

Chairman in thanking all of you for your testimony. And, as I said 

in my opening remarks, this is a very important hearing. And I 

agree that we need to come together on a bipartisan basis now, to 

come up with a plan that shows we are going to reduce the deficits 

and debt in a predictable, sustained manner. So I think there is 

agreement on that. 

As I said in my opening remarks, also, I do think it is risky to 

do anything that could weaken the economy during this very fragile time. And Chairman of the Federal Reserve, of course, Mr. 

Holtz-Eakin is the guy who is supposed to be expert in interpreting 

the animal spirits, in fact, every time he makes a comment, he has 

got to be thinking of the confidence levels. And when he says that 

he thinks that a reduction of the magnitude we are talking about 

in the Republican plan, in the time period that we are, would cost 

a couple hundred thousand jobs, and makes the point it is not insignificant. I do think, when we are measuring confidence in the 

economy in part by the month-to-month job numbers, if we start 

to see any dip in that it is a big problem for confidence; it is also 

a big problem for the people who have lost their jobs. 

But here is what I would like to focus on for a minute. I want 

to accept the premise, absolutely accept the premise that, in order 

to get the deficit and debt down, we have got to reduce spending. 

We are going to have to reduce spending in discretionary programs, 

and we are going to have to do it in mandatory programs. So let’s 

accept that premise, for many of the reasons we have talked about 

here. And we should come up with a plan to do that now. 

But I do want to pick up on some of the remarks that Mr. Podesta made. Because it is absolutely true that when he and the Clinton Administration left office, they left with large projected surpluses, and now when President Obama was sworn in he inherited 

a $1.3 trillion deficit. The day he put his hand on the Bible, he had 

already had a record deficit for that year. 

So, if I could start with you, Mr. Holtz-Eakin. Because when you 

left the Bush Administration and went to become the Director of 

the Congressional Budget Office, there were many who wanted you 

to do analysis that showed that the Bush tax cuts in 2001, at that 

time, actually paid for themselves. And you rejected that analysis. 

And as recently as last August, August 2010 you stated, and I am 

quoting, I have never been in the camp that believes that, quote, 

‘tax cuts pay for themselves,’ unquote, there is no serious evidence 

to support that. I assume it is safe to say that you hold that same 

opinion today that you did in August. 

Mr. HOLTZ-EAKIN. Yes. 

Mr. VAN HOLLEN. Okay. Now, so on pages two and three of your 

testimony, you say that, for the past eight years, nine years, we 

have frittered away our time without addressing the problem. And 

you list three things that made the problem worse. Three things. 

You mentioned the financial crisis: no dispute there. You mentioned the prescription drug bill that was signed by President 

Bush, that was not paid for: no dispute there, that makes things 
32 

worse. You mentioned the Affordable Care Act; I am not going to 

get into a big debate about that, other than to say, we have had 

this discussion in this committee, the CBO scored that it is 2010 

in deficit reduction, and a trillion over 20 years, we throw that in. 

No mention of, of the wars that we didn’t pay for, and continue 

to pay interest on. But most importantly, as Mr. Podesta pointed 

out, no mention of the 2001 and 2003 tax cuts during the Bush Administration, which, of course, your former boss, Senator McCain, 

voted against, because of his concern about the impact on the deficit. 

Now, in today’s CBA, they just issued in January, they estimate 

that if you continue all the tax cuts—I am not proposing that we 

stop all the tax cuts, but just make the point here, they say in their 

analysis, if you were to return to moving from Clinton era tax rates 

to the Bush tax rates, we are adding $3 trillion to the deficit over 

the next 10 years, if you include the debt service: two and a half 

trillion dollars just because of the tax cuts, another half trillion dollars debt service. 

So, my question is this: You have a reputation as a straight 

shooter. Seriously, now, how can you have testimony that doesn’t 

even address the revenue side? And again, I understand we have 

got to get it, there is no dispute. This hearing is entitled, Lifting 

the Crushing Burden of Debt. 

Mr. HOLTZ-EAKIN. Right. 

Mr. VAN HOLLEN. How can you not even address that issue in 

your testimony? 

Mr. HOLTZ-EAKIN. Right. Because I am not interested in relitigating history. I think the central problem we face is that, if you 

look forward 10 years, using the President’s budget, or, or any 

other projection, those projections have the following character: 

They say, we are out of Iraq and Afghanistan; the financial crisis 

is a distant memory; we are back to full employment; and we are 

raising revenue that is well above historic norms, 19, 20 percent of 

GDP, and despite that we have enormous deficits, trillions of dollars, much of which is interest on previous debt, and so it is the 

future accumulation of debt, driven by that characteristic that concerns me. And at the heart of that is spending issues. And the additions to spending that have been most threatening have been 

those in the health area. We did the Medicare Modernization Act, 

and we did the Affordable Care Act. So that is how I got to that 

conclusion, it is very straightforward. 

Mr. VAN HOLLEN. Well, let me just to follow up on that. And 

again, I am accepting the premise that we have got to deal with 

the spending side. What I find interesting is that even when you 

were at CBO, and you issued these reports, you showed that the 

consequences of going from the Clinton era tax rates to the Bush 

era tax rates had serious consequences on the deficit. And I just 

point out, in 2004, when you were here in a non-partisan capacity, 

testifying and making comments on the budget, you said, you 

weighed these two things. You weighed the positive aspects of the 

tax cuts, and then you counterbalanced that with the concerns with 

respect to the deficit. 

And here is what you said. I am quoting: The cumulative corrosive impacts of sustained deficits in the face of a full appointment 
33 

economy, would unbalance, make the extension of the tax cuts a, 

quote, ‘modestly negative policy choice’? 

Now, that was at a time when projected deficits and debt were 

a lot lower than they are now. And so we have the Fiscal Commission. The Fiscal Commission said we have got to look at these tax 

expenditures. By the way, the Fiscal Commission’s baseline, the 

baseline assumes that we return, with respect to the high-income 

individuals, assumes that we return to the Clinton era tax cuts. 

So, I guess my question is that, we are not disputing that spending is part of it. What accounts for this total reversal from 2004, 

when that was a, a modestly negative choice. In other words, continuing them, even though the projected deficits and debt were not 

as bad, and today. 

Mr. HOLTZ-EAKIN. So, I don’t remember the context; I was probably asked. I believe that it is important to identify the top priorities. And those are on the spending side, I won’t repeat that. The 

second point, which I think, the Fiscal Commission has said very 

clearly, is that should it be the case that, collectively, we decide we 

are going to raise more revenue: the route is tax reform. Our tax 

system is deeply broken. I have a long discussion in my written 

testimony; I encourage you to read it. Simply raising tax rates, 

going back to the, to the Clinton era tax rates, is not a good solution to raising more revenue. 

And the third thing I would say, a personal opinion in my judgment, is I am deeply concerned about the following phenomenon: 

We have a rising projection of spending that is undisputed. And we 

have this concern that the international community is going to just 

cut us off, and we will have a fiscal calamity. Well, suppose you 

raise taxes a little to run off concerns out there in the bond markets, but you don’t deal with the spending problem. Well, everyone 

calms down for a couple years. You go forward, same problem 

arises, you bounce tax rates up a little bit, problem goes away for 

a little while. You go a couple more years, you bounce taxes up 

again. Pretty soon, you are jacking taxes up right along that projected spending route, and that takes you to 30, 40 percent of GDP. 

And you will, you don’t have to be a crazy [unintelligible] setter, 

you will kill the economy. 

So, I am just trying to lobby, in an undisguised fashion, for, A, 

good tax policy; I am all for that. But B, dealing with the fact that 

if you don’t control spending, you are going to have enormously 

higher taxes come, one way or another, and that is a bad thing. 

Chairman RYAN. Thank you. Mr. Campbell. 

Mr. CAMPBELL. Thank you, Mr. Chairman, and thank you, panelists. Let me try and summarize what I think I heard a little bit 

from all four of you, and, frankly, from the Chairman and Ranking 

Member, too, that there is some disagreement as to how we got 

here, and that there is some disagreement on the weighting of the 

different elements of the solution. But that there is no disagreement that the solution has to involve basically all of the above: has 

to involve mandatory spending, discretionary spending, tax reform, 

and the revenue side, in one form or another. And that there is no 

disagreement that we are heading towards a debt crisis which, 

when the Chairman asked his question, What does it look like? I 

think I heard you all pretty much say, It looks really ugly. And 
34 

maybe, this is my words, not yours, but maybe like September, October of 2008, only a lot worse. And that it is probably coming— 

we have five years or less to solve the problem. Did I misstate anything? 

Okay. If that is the case, that we are facing a really ugly, ugly 

economic scenario, for anything that any of us in this room care 

about, and we have five years or less to deal with it. And the entitlements, mandatory spending, have to be part of the solution because they are such a large chunk of spending. Can we solve this 

without reducing costs of Social Security, Medicare, Medicaid, and 

the other entitlements, within the next five years? In other words, 

not changing things that might affect five years, or 10 years, or 15 

years out, but reducing the costs of those programs within the next 

five years. And whoever wants to comment on that can comment. 

Yes. 

Mr. HOLTZ-EAKIN. If I could, I mean, there are two kinds of urgency involved. Number one is the urgency I think we have conveyed about the debt crisis and the fact that reducing spending is 

going to have to be a comprehensive effort, so that would include 

the entitlement programs. The second urgency I try to describe this 

way: think of Social Security. I am 53 years old. I am the trailing 

edge of the baby boom generation. It has been conventional in Social Security reform proposals to exempt those in, for good reasons, 

or near retirement. And 55 has been the industry standard for near 

retirement. If we continue to do that, that means you have two 

years before I get grandfathered. If you grandfather me, you grandfather the baby boom, which means you have grandfathered the 

problem. 

So yes, in the next five years, it is absolutely essential that we 

move, and move quickly. 

Mr. CAMPBELL. Okay. Other comments on it, Mr. Podesta, did 

you, go ahead, oh sorry. 

Ms. REINHART. Very briefly on the five years. I think there is a 

second scenario that I would like to put on the table, which is 

death by a thousand cuts. And it is still death. And that doesn’t 

involve a big blowout crisis, but a stalling. And so, my own view 

is that when it comes to the budget we really should leave no stone 

unturned because of the orders of magnitude. And the need to act 

quickly, I think, is in my view, imperative. But your point about 

no stone unturned is, I think, called for, by the order of magnitude. 

Lastly, let me say that the prospect of a delay does not necessarily mean that we are going to have a crisis tomorrow. And I 

don’t know whether I am more worried about not having a crisis 

tomorrow or muddling through, in Japanese style, for the next 10 

years. 

Mr. CAMPBELL. Thank you. Mr. Podesta. 

Mr. PODESTA. Mr. Campbell, I think the big numbers really, are 

on the health care side, and particularly in Medicare. So I think 

that continuing and accelerating, the President has some ideas in 

his current budget, on how to do that. Cost containment, on the 

health care side, both in the public programs and in the overall 

health care system, including in the private sector system, by 

changing the way we deliver health care, and reducing the overall 

costs. It is really, I think, the thing that is the most needed and 
35 

it is going to do the most to contain the big surge in the projections 

that Mr. Holtz-Eakin talked about. 

I don’t think anybody anticipates that tax rates are going to 

climb to those levels. They never have, they never will. But they 

need to be consistent with the commitments we have at a time by 

2020, 20 percent of our population is going to be over 65. And, as 

I noted in my testimony, in 1965 when Medicare and Medicaid was 

passed, nine percent was over 65. We are going to have to have 

revenue to do that, but we are going to have to have deep restraint. 

With respect to Social Security, just very briefly, I don’t think, 

in the short term, it really compounds this problem. It is a solvable 

problem. We have thrown out a full-blown plan to get to 75 years, 

at my center, have thrown out a full-blown plan to get to 75 years 

of actuarial integrity, and strengthen the bottom, restrain the top. 

It has some near-term effect on the deficit and debt, but not much. 

Chairman RYAN. Thank you. Ms. Schwartz. 

Ms. SCHWARTZ. Thank you, Mr. Chairman. And thank you, panelists. I think, pretty much, we have all talked. And I want to 

thank some of you, particularly, for the important work that you 

have done in helping to put out very clear ideas out there, about 

how we can, and must, reduce this deficit. 

Let me just disagree, if I may, with the previous question, at 

least as a beginning premise that there is disagreement about how 

we got here. I think, except possibly for the first speaker, there has 

been pretty clear agreement about how we got here. The only reason to go back over that at all is that we don’t repeat negative history, that we don’t actually believe that tax cuts pay for themselves, which there is some agreement on. Or that it doesn’t matter 

if we actually have two, three trillion dollars of unpaid-for war, or 

tax cut, or additional health benefits. I mean, it is really clear. I 

think all of you would agree, you are all nodding, that in fact the 

way we got here was, and the way this President inherited an 

enormous deficit, and a terrible recession that reduced revenues, 

were expenditures that were not paid for by the previous administration. 

I know the other side doesn’t want to hear that, but that is the 

reality. So we have inherited that problem. Tax cuts of a trillion 

dollars for the wealthiest two percent of Americans, that they want 

to continue unpaid for. The Part D prescription drug benefit for 

Medicare, which was the largest growth in the entitlement of Medicare: a trillion dollars, unpaid for; they don’t want to talk about. 

We think we ought to do Part D, but we ought to pay for it. And, 

and of course the wars that cost us a trillion dollars. 

So I think we have agreement on that. And we also have agreement that we have to tackle spending. And that includes the current year, which we have already offered and passed $50 billion 

this current year, almost $50 billion in cuts. So the issue really is 

going forward. Can we, and this is going to be a debate that is pretty clear, so they all want to know what your answer is. Can we 

solve the problem, the serious, serious problem of the debt this 

country is in, and the cost of the interest payments on that debt, 

simply by tackling twelve percent of our budget on spending cuts 

in non-defense discretionary? 
36 

That is, so far, the only action that the other side has taken, is 

to say we have got to have dramatic cuts in twelve percent of our 

budget. Not defense. Not on the tax side, tax expenditures, apparently, are not expenditures, as far as the other side is concerned. 

That is serious from our point of view. So my two questions are: 

Is it true that we can actually tackle this problem long-term by 

simply, and it is a big deal, cutting education, cutting infrastructure, cutting investments that the government makes today, in a 

fragile economy? Will that get us there. 

And secondly, my question is: What if, in fact, we do nothing on 

investments for the future? Mr. Ryan talks a lot about investments 

for our children. We all make investments for our children; it is 

usually called education, helping them go to college, helping them 

be able to be prepared. What if our nation does nothing? What if 

the other side continues to reject the President’s proposal that we 

not only cut, but we make investments for the future so we can 

grow economically in a global marketplace, that we can be economically competitive? Can we be the great country that we have always been, economically and politically, if in fact, we do nothing 

about investments for our future, to grow the economy? 

So my questions are simple, and I am going to start with Maya, 

because you, I think, were very clear in articulating the importance 

of everything being on the table: tax expenditures, and spending, 

includes DOD, and making the investments. And I would like Mr. 

Podesta, also, to speak. So Ms. MacGuineas. 

Ms. MACGUINEAS. Great. Thank you. I mean certainly when we 

think about where we have come from there is so many contributing problems to where we are, right? We ran deficits for a decade 

when we should have been running surpluses. You want to balance 

the budget over the business cycle, or something like that. So we 

came into this problem in a weakened fiscal state. We then were 

hit with a terrible economic downturn which caused us to enlarge 

our deficits, both because of the economy and the policy responses. 

And now, the biggest problem that we face has always been 

there: the long-term spending problem fueled by health care and 

aging, which was a long-term problem, we delayed taking action, 

it is now at our doorstep. So we sort of are getting hit with all the 

fiscal problems you could have. 

Ms. SCHWARTZ. I only, I only have a couple seconds left, but I 

wanted John Podesta to answer as well. 

Ms. MACGUINEAS. Okay, well then let me quickly just agree with 

you in terms of investments, that absolutely, we should not be 

shortchanging the piece of our investment budget. We should expand this discussion beyond the twelve percent of the budget to the 

entire budget. But I also think we want to think about reorienting 

our budget. Because so much is focused on consumption; we need 

to think about retargeting inefficient spending and spending on 

consumption, and move it towards investment so those dollars are 

better spent in a time of fiscal austerity. 

Mr. CAMPBELL [presiding]. Okay. Next. Mr. Calvert. 

Ms. SCHWARTZ. Thank you. 

Mr. CALVERT. Thank you. And I am an optimist by nature, but 

being on this committee, it is difficult. 
37 

You know, we talk about revenue and, of course, spending and 

I would remind the gentle lady that we may have cut $60 billion, 

but the United States Senate has not determined yet that we are 

cutting anything. So as Mr. Rayburn used to say, Our friends on 

the other side are our adversaries. The Senate is the enemy. So 

that is where we are at. I think we can all agree with that. 

One thing I was looking at on the chart, the ring of fire: Italy, 

Japan, France, Ireland, U.K., Greece, and of course U.S.A. in the 

middle. One thing that you notice, or at least I notice on that chart, 

is that the one thing that U.S. has different than the rest of these 

countries is we have resources. And I look at the chart, the countries outside that chart, for the most part, Norway, the Netherlands, and Australia have resources. And the United States, you 

know, we are a country that puts extension cords out everywhere, 

you know, into the Middle East, and our friends in Canada and 

Mexico. And we extract resources from them, rather than from ourselves. And we have significant resources within our own country, 

and certainly in Alaska and in the upper State. 

If, in fact, we are talking about revenues, and I just had a hearing the other day, I am an appropriator, I confess. But we were 

having a meeting the other day about the former MMS left $50 billion on the table in not collecting revenues from metal resource extraction. If, in fact, the United States went out after its own resources, extracting those resources, and the revenue that brings to 

the country, and obviously, national security benefits and the rest, 

don’t you think that would be a significant part of turning this 

country around? I know the entitlement spending part is the biggest issue that we have got to deal with. But when you say everything is on the table, don’t you think when we are paying $4 a gallon for gasoline, that that is a tax? That every consumer out there 

right now is paying a considerable tax because we don’t face up to 

the problems in our own country, and developing our own resources? So with that, I will just leave it to the committee. 

Mr. PODESTA. Well Mr. Calvert, I think that you put your finger 

on something that is really quite important, which is the interrelationship between our dependence on oil and the fact that 50 

percent of our trade deficit comes from importing oil, and the ability to move to a different kind of energy base in this country, and 

what that would do for the economy. How it would spur innovation, 

job growth, and business formation. 

I think the biggest place to look right now, in that regard, is 

both, clean technology, the kinds of things that are going to make 

the economy more efficient, including in the building sector as well 

as in the transportation sector; and then utilizing the vast resources we have of natural gas that are available to us, need to be 

done in a smart way. The New York Times has been writing a 

bunch of articles about what is happening in Pennsylvania right 

now. They need to be done in a smart way, but if we could move 

more of our transportation fleet to natural gas it would have a dramatic impact, I think, on our transportation sector, in particular. 

And the problem with keeping, down the track, of just drilling 

for oil even in the Gulf, which you know, I think we need to do, 

is that it just keeps that dependence alive on foreign oil, which is 
38 

at 60 percent now. So I think we need a comprehensive strategy 

to use all the resources that we have in our country. 

Mr. CALVERT. I agree on all the above, I agree with you. Let’s 

kind of move across here. 

Mr. HOLTZ-EAKIN. I think two points. I mean, number one, I 

don’t know the numbers on the receipts that would flow into the 

Treasury if we had greater exploration and extraction. I doubt it 

solves the problem. 

Mr. CALVERT. I am not saying that it solves the problem. 

Mr. HOLTZ-EAKIN. We have to be realistic. The second thing is 

that, in the end, our current account deficit is the difference between how much we save and how much we invest. And while, if 

we don’t change how much we save and we don’t change our investment, we can change the nature of our energy portfolio dramatically. We will just change the composition of our trade deficit. 

It will still be there. So we have to change the fundamentals. And 

our biggest problem with our saving is our federal budget deficit. 

Mr. CALVERT. Well I would just make the point, if folks back 

home are spending four bucks for gas, they don’t have a lot of 

money to save even for a pizza and a beer on the weekend. Thank 

you. 

Mr. HOLTZ-EAKIN. The last thing to remember on this, and I 

know that time is up, is that if you are going to change the energy 

portfolio, that is costly. And we are coming out of a recession; and 

to change our energy portfolio dramatically is not a benefit, it is 

a cost. It might be worth it, we can have that debate. But let’s be 

clear, it is a cost. 

Mr. CAMPBELL. Thank you, Mr. Holtz, I am going to try and be 

a little ruthless on the time so we make sure we get to everybody. 

Mr. Blumenauer. 

Mr. BLUMENAUER. Thank you. Although I would note that if we 

drain America dry of our oil it goes into a global pool. We only consume 20 percent of it; it is kind of goofy that we consume 20 percent of it. But it is a global price. And to the extent to which it 

drives anything down, most of the benefit will flow through the 

Chinese, to the Japanese, to the Europeans. I don’t know that we 

are going to get anywhere on that. But I want to come back to gas 

prices in a moment. 

But, again, the more I sit on this committee, and listen to witnesses like that, the more optimistic I get. Because having had a 

chance to look at various ups and downs in the government process 

over the last 40 years from all different levels, we end up affirming 

Churchill’s aphorism that, You can rely on Americans to do the 

right thing after they have exhausted every possibility. I think we 

are reaching that point now on the federal level, and it is of a 

greater magnitude. But it seems to me that the whole issue underlying this is how we do business. 

And I actually think there is a lot of agreement that is coming 

forward. I think there is an opportunity; I feel guilty for being 

away from a Ways and Means meeting right now where we are 

talking about tax reform. And I think there is an opportunity to 

change that system. I think there is a dramatic opportunity, in this 

Congress, to change how we subsidize agriculture in this country 

to help more farmers and ranchers, and spend less money doing it, 
39 

with less market distortion. And I think there is bipartisan interest 

in pursuing that. 

And I agree, Social Security, any 10 people around a Rotary Club 

table could, in 30 minutes and a website, can come up with three 

alternatives that are largely going to represent what we will ultimately do. I hope, and I agree with Ms. MacGuineas, let’s get to 

some specifics. 

And I would like to focus on one specific. Because for over 50 

years, there has been an agreement in this country, going back to 

President Eisenhower, about a self-supporting trust fund for infrastructure investment. And that always, to this point, has been bipartisan. Ronald Reagan, in 1982, when economic times were 

tough, supported a five cent increase in the gas tax, a user fee that 

helped us move forward. Yesterday we had lunch with Senator 

Simpson, Mr. Bowles, and they had proposed a significant and periodic increase in the gas tax to be able to deal with both problems 

with that, and the fact that we are draining the general fund to 

prop up something that has been sub-supporting to this point. 

We have record unemployment in the construction industry. We 

have infrastructure in every one of our communities that is falling 

apart, for roads, transit, and water. Isn’t this an area where we 

could move forward with a tax increase or user fee that actually 

has broad support? This panel, in a prior hearing, had people from 

the Chamber of Commerce, AAA, and construction unions come in 

and testify in support of an increase. Is that part of a solution that 

might get us moving in this direction, put people to work, protect 

the budget deficit, and maybe even reduce some dependence on foreign oil at some point? 

Anybody want to take that on the panel? 

Mr. HOLTZ-EAKIN. So I will be brief. I mean, there was a report 

that came out of the bipartisan policy center from a commission 

that I served on two years on transportation reform. And I would 

encourage everyone to look at that. What it says pretty clearly is, 

number one; we have to reform the transportation programs, because we have never identified, what is really the federal role. We 

know that, in principle, infrastructure is important, but we have 

never decided what is the appropriate role for the federal government. 

We have a hundred programs over there, and we proposed creating four. And then you have to finance them effectively. And I 

completely agree with that. One thing to note is that many people 

believe the gas tax itself is obsolete, and that we need to go to an 

alternative. 

Ms. REINHART. Let me just point out that I think we have to be 

very discriminating and very clear about how we define infrastructure. Japan spent a massive amount on infrastructure in an effort 

to prop up the economy, and I am not an expert in that area, but 

it has to be very focused on productivity enhancements. 

Ms. MACGUINEAS. Yes, I agree with so much of what you said. 

I think we need to focus far more on investment spending than consumption spending, and this is one of the more important areas. 

Second, we need to tax more the things we want less of, like pollution, through energy taxes, not the things we want more of, like 

work and saving. Third, I think the commission’s proposal on how 
40 

to not spend more than the tax raises, and to increase the tax to 

cover our highway costs and other transportation costs is a very 

good idea. 

Fourth, I do think we have to make sure that what we do in 

terms of investment we do very well. We don’t want to run the risk 

of suddenly calling everything investment, you know, farm subsidies, that is investment, and suddenly it loses all credibility. We 

want to do investment that really has productive payoffs. 

Finally, I want to increase investment spending, and I also, on 

the tax side want to do some, I would call, sweeteners. I want to 

lower the corporate tax rate. These are the things that I think 

should be part of a broad, comprehensive deal, as sweeteners, to 

help move them forward. I would be worried to do them on their 

own. 

Mr. CAMPBELL. All right, thank you. Have to cut off now, and go 

to Dr. Price of Georgia. 

Mr. PRICE. Thank you, Mr. Chairman. I want to thank the panelists as well. And I think there is a remarkable unanimity, as has 

been discussed, the need to address the spending side in both discretionary and entitlement, automatic spending, and how we get 

there is the challenge. It seems that every one of these comments 

in this committee starts with some finger pointing at the other 

side, and I would just remind my friends on the other side of the 

aisle that the Budget Committee’s responsibility is to come up with 

a budget to provide direction for the country. And in the last Congress, of course, there was no budget. So as we grapple with these 

challenges, I think it is important to remember that. 

I would also point out, and I don’t know if we can bring up S6, 

but it is the deficit record by President. And, here it is. And you 

kind of bop along there for, for, with some deficits in the 200 to 

$400 billion range, and under a Democrat president and Republican Congress, we balanced the budget appropriately and had 

some surpluses. And then you see what has happened under the 

current administration. I think all of us can look at that, certainly 

the American people look at that and say, What the heck is going 

on? 

In terms of, I don’t know if we could put up S2, which is the tidal 

wave of debt that is coming, and the red chart here, the red line 

here that you can see, it increases astronomically, and clearly 

unsustainable. And then, finally, the issue that I want to get the 

panel to weigh in on is something that hasn’t yet been talked about 

to a significant degree, and that is the issue of short-term debt and 

interest rates. 
41 

All of the presumptions, candidly, on both sides, have low interest rates. If interest rates increase any significant degree at all, 

then it blows up the models that all of us have. So I would ask you 

each if you would comment on the consequences of any increase in 

interest rates, and what, if anything, we are able to do about that. 

And then, also, if you can touch on short-term debt, the chart 

that I had wanted to refer to has a significant increase in the 

short-term debt, the debt that comes due within a year to three 

years. And we are up in the 60 percent, or pushing the 60 percent 

range on that. What are the consequences of that? Is there anything that we can do about that? So if I could ask you to address 

interest rates and short-term debt, please. 

Mr. HOLTZ-EAKIN. I will just be real brief. I mentioned this in 

my remarks, we have moved to very short-term financing, it is like 

financing on a teaser rate. And if we get a sharp spike, we are 

going to have to roll over a big fraction of Treasuries at much higher interest rates; that is going to feed through the budget, it is 

going to feed through all the interest rates in the economy, whether 

they are mortgages, or car loans, or anything else. So, we are exposed, both in terms of a financial management point of view, and 

also an economic point of view. 

Mr. PRICE. And anything that we can do, I would ask to address 

that issue, as a Congress. 

Ms. REINHART. Let me say that a characteristic, when Chairman 

Ryan asked, of what a crisis looks like, in the run-up to debt crisis, 

in the run-up to severe financial crisis, you see the rise of shortterm debt, in total debt. That is worrisome. What has been done? 

Some of the stuff that was done was quite out of the picture now. 

In 1951, we actually had a debt conversion, called the TreasuryFederal Reserve Accord, which took marketable medium to shortterm debt and converted it to 29-year bonds. Now we don’t call that 
42 

a restructuring or a default because an interest rate sweetener was 

offered. But it was, of course, under very different circumstances. 

But what I am suggesting is that if we are faced with a sudden 

rise in interest rates, we may see a return of what is called financial repression. And captive audiences, like pension funds and financial institutions would be targets. It has happened. 

Mr. PRICE. Maya. 

Ms. MACGUINEAS. CBO recently, a couple years ago, I guess, did 

a great study on this showing the massive costs that are affiliated, 

I think it was at the request of Congressman Ryan, the massive 

costs that are affiliated with increases in interest rates. Obviously 

we are highly vulnerable to that; if you look at where we are right 

now. It is like a credit card teaser rate, right, it is luring us in, 

we are borrowing more, Look, rates are low, we can keep borrowing. When those rates go up, we are incredibly vulnerable. 

There is another issue which I don’t know exactly what to make 

of it, but when QE2 ends this summer, nobody knows exactly how 

that is going to play out. We don’t know whether it is the flow or 

stock of debt that is going to have an effect. But we are more vulnerable than we would have been. 

Third, you asked what we could do, and you made the first point. 

Stop finger-pointing and come up with specific solutions. It is the 

only thing we can do to be less vulnerable to the upward tick in 

interest rates. 

Mr. PRICE. Great. John. 

Mr. PODESTA. Well, I basically agree with Maya’s points. I think 

that they, right now we don’t see that spike in interest rates, but 

we are vulnerable to it. And I think we need to ensure, as I think 

Mr. Bernanke and the Fed have tried to ensure, that this recovery 

gets roots, that jobs begin to grow, that is the most important thing 

to, I think, solve both the debt crisis and the jobs crisis and the 

economic crisis, over the long term. 

But I think the one thing that Congress could do is, you know, 

we are now repeating ourselves, is to come up with a framework 

in which the debt stops growing. And I think if you could do that 

on a bipartisan basis over the next couple of years, that would, I 

think, settle these markets down. 

Mr. PRICE. Within the five year window. Thank you. 

Mr. CAMPBELL. Thank you, Mr.Podesta; Mr. Pascrell of New Jersey. 

Mr. PASCRELL. Thank you, Mr. Chairman. You know, I agree 

with my friend from Georgia that we can’t point fingers. I would 

rather put it a different way, we need to put things in context. We 

need to put things in context so we understand. You know, sometimes I get the impression in this committee, and other committees 

that deal with the budget, spending, and revenue, that we are involved in a gigantic science project. And all science projects turn 

out very positive. They all do. But, you know, we can have brilliant 

results, it will have very little positive impact on the people we represent in reality. 

See, I read a story this morning about a quadriplegic guy from 

New Jersey. His parents are fighting insurance companies over denial of 24 hour care. So, you know, we are not simply dealing in 

a numbers project here. We are dealing with human beings. And 
43 

we have to deal with the numbers, there is no question about it. 

But those numbers need to be placed in context so we have a Gestalt, an overview of what really is happening. 

We are all to blame, and we are all to gain. There is no one party 

that caused this mess. I think we all should agree on that; that is 

a good starter. But I look at reports, for instance, from the SMP 

indexes in the year ending December 10, health care costs covered 

by commercial insurance rose by 7.75 percent, as measured by the 

SMP health care economic commercial index. 

Medicare claim costs associated with hospital and professional 

services for patients covered under Medicaid increased at a more 

modest 3.27 percent rate, over the ending, as of December, as 

measured by the, the SMP. 

So, health care reform is important in the, quote unquote entitlement, or, better known, a sure objective, Obamacare, when you 

take a look at it; it is interesting. One third of that entire document talks about the budget, we need to put that budget together, 

dealt with Medicare and Medicaid. If we read the bill, all 975 

pages, because our 2,200 page document was rejected, so that we 

really accepted the Senate version. 

According to the CBO, the Affordable Health Care Act reduced 

deficits by $210 billion over 10 years, and by more than one trillion 

over 20 years, the most significant deficit reduction since 1997, the 

Balanced Budget Act, which I proudly, and some of us may have 

voted for. 

So, Mr. Podesta, I have always enjoyed working with you because 

you are a pretty straight shooter, I think Mr. Ryan is a straight 

shooter, Chris is a straight shooter. But when you put things in 

context, we might come out with different answers, I think. We 

have been attacked, on our side, with accusations that neither we 

nor the President has come forward with proposals for entitlement 

reform, which we say, if we are going to look at everything in the 

budget, that is one of the things we will have to look at. We certainly need to look at it. I reject the claim. 

Last Congress, we passed the Patient Protection Affordable Care 

Act. As I said, one third of it is devoted, if you read it, if you get 

a chance, in the document, I can list 17 places, Mr. Chairman, and 

the Ranking Member. Seventeen places. The first step of entitlement reform was received with attack ads claiming 500 billion in 

benefit cuts to seniors in death panels. I heard somebody mention 

death panels yesterday. 

To date the only action this majority has taken at entitlement reform is repealing the reforms. So Mr. Podesta, are you familiar 

with the roadmap? 

Mr. PODESTA. Yes, Mr. Pascrell. 

Mr. PASCRELL. Mr. Podesta, are you familiar with how it proposes to control costs in Medicare? 

Mr. PODESTA. It basically voucherizes Medicare. 

Mr. PASCRELL. I am sorry? 

Mr. PODESTA. It creates a voucher in Medicare. It essentially 

shifts costs from the federal government onto recipients. 

Mr. CAMPBELL. Mr. Pascrell, your time has expired. 

Mr. PASCRELL. Can I finish my sentence, my question? 
44 

Mr. CAMPBELL. Okay. But he won’t be able to answer. I am just 

trying to get everybody a chance. 

Mr. PASCRELL. Thank you. Has the cost of health care risen, as 

compared to inflation? That is what we are concerned about. And 

what happens in the voucher system is you never, ever, ever catch 

up. 

Mr. CAMPBELL. Thank you, Mr. Pascrell. 

Mr. PASCRELL. So let’s be, put everything on the table in context, 

Mr. Chairman. Thank you. 

Mr. CAMPBELL. Time has expired. Thank you, Mr. Pascrell. Mr. 

McClintock of California. 

Mr. MCCLINTOCK. Well, Professor Reinhart, you mentioned that 

there has been one other time in our history when we had proportional debt. I am hoping that history offers us some lab notes. How 

did we get out of that? And we have also had several other spikes 

right after the Assumption Act in 1792; we suddenly had 35 percent debt. We were able to finance the War of 1812, and the Louisiana Purchase, and pay off all of that debt by 1830. What lessons 

can history offer us? 

Ms. REINHART. Okay. Let me be very brief. One thing that makes 

the situation of more concern than the end of World War II, which 

was our last really big debt spike, is private debt. At the end of 

World War II we were lean and mean. Households and firms, financial and non-financial, were lean and mean. So it was exclusively a public debt issue. But public debt now is much more broadly defined. We have a lot of contingent liabilities. 

But how did we get out of World War II, well, making cuts after 

war was a lot easier. But let me also say, I mentioned the issue 

of financial repression. That was actually a tax, but it was a tax 

that was never legislated. We kept interest rates very low through 

a lot of financial regulation. We created a lot of markets in the financial industry for holding government debt. That was a factor. 

We also ran balanced budgets for an extended period of time. 

So you had the post-war reductions, which were somewhat more 

obvious than they are today. 

Mr. MCCLINTOCK. About $85 billion. 

Ms. REINHART. Indeed. There was a series of balanced budgets, 

even some surpluses. And there was a lot of financial repression; 

do not underestimate the power of that. It amounts to about three 

percent in revenues, meaning lower interest costs and actual liquidation of debt. That is how we got out of debt out of World War 

II. 

Mr. MCCLINTOCK. So we had repressed demand, plus dramatic 

reductions in spending. 

Ms. REINHART. Indeed. 

Mr. MCCLINTOCK. And then actually produced balanced budgets. 

Which gets me to the next question, and that is, we talk about 

taxes and deficits as if they are opposite things. Aren’t they really 

the same thing? Isn’t the deficit is simply a future tax? Aren’t those 

merely the two ways that we finance spending? And isn’t spending 

the principle? 

Ms. REINHART. And this is now seat of the pants because I have 

not tested this empirically, as I have other things, but one of the 

reasons why we find high levels of debt cause low growth, or asso-
45 

ciate it with low growth, has to do with anticipated future uncertainty, either of lower benefits or higher tax liabilities. 

Mr. MCCLINTOCK. So, to borrow from the Clinton Administration, 

with obvious apologies, it is the ‘‘spending, stupid.’’ 

Ms. REINHART. The point I am trying to make is that the last 

time we were in this, we really did touch all bases. We had severe, 

or sharp spending cuts. 

Mr. MCCLINTOCK. If I may, I am going to need to go to Mr. Podesta for a moment. Mr. Podesta, you mentioned that the state of the 

economy at the outset of the Clinton Administration, we were running huge deficits; we were in some economic difficulty. The Clinton Administration ended up reducing federal spending by a full 

four percent of GDP, which is miraculous, produced the only four 

surpluses that we have had in the last 40 years. It approved the 

biggest capital gains tax cut in U.S. history, it tackled entitlement 

spending with welfare reform. We were doing pretty well at the 

end of that administration, as you pointed out. 

Mr. PODESTA. Well, I agree with that, Congressman. I think that 

was a combination. We did increase revenues in 1993, and painfully, because it led to, at least in part, losing both Houses of Congress in 1994, but they did increase revenues. But he did restrain 

spending over the whole period of time, and that resulted in an 

economy that produced 10 times as many jobs, much stronger wage 

growth. 

Mr. MCCLINTOCK. Cut spending four percent. Now, George W. 

Bush takes office, and ends up increasing federal spending by a full 

two percent of GDP. He approved the biggest increase in entitlement spending since the Great Society, he embarked on massive 

stimulus spending, and as we all know, the condition of the economy and the budget wasn’t so hot at the end of that experiment. 

So my question is why do we keep employing policies that we know 

don’t work, and instead go back to those policies that your administration employed, by reducing spending, that the Truman Administration employed, that the Reagan Administration employed, all of 

which were marked by substantial economic progress and advancement. 

Mr. CAMPBELL. Just to remind members, the five minutes includes the answer time. 

Mr. PODESTA. Well, I will send you a note on that, Congressman. 

Mr. CAMPBELL. All right. Mr. Tonko of New York. 

Mr. TONKO. Thank you, Mr. Chair. Mr. Chair, I know that we 

have colleagues here from both sides of the aisle that share my appreciation for American history, and I would like to use my time 

here today to explore a few elements of our shared past. 

Mr. Holtz-Eakin, certainly you were the director of the Congressional Budget Office from 2003 to 2005. The CBO, as we know, is 

a non-partisan institution. So I would like to highlight some of your 

non-partisan observations from that time, as I think they were insightful and fair, and have real meaning, I think, for the debate 

that we have here today. 

This is a, a Washington Post article from January 27 of 2004, 

and CBO’s annual budget report had just come out, under your direction, showing that the Bush Administration had asked for more 

than $1 trillion, had added more than $1 trillion to the deficit in 
46 

just six months, and that that government debt could more than 

double if President Bush succeeded in making his tax cuts permanent. According to this article, you noted at that time that the massive deficits that would result from extending the Bush tax cuts, 

which were grossly skewed to favor the wealthy would, and I quote, 

lower national savings, reduce economic productivity, and ultimately, ultimately, curtail economic growth. Is that accurate? 

Mr. HOLTZ-EAKIN. That is what I said, yes, absolutely, and I continue to worry about deficits; that is the implication to have. 

Mr. TONKO. This is a Washington Post article from one year 

later, on January 27, of 2005. You were still at CBO, and due to 

the rising cost of the wars in Iraq and Afghanistan, the tax cuts 

for the wealthy, and a prescription drug plan that wasn’t paid for, 

things were looking worse. You are quoted in this article in saying, 

again, and I quote, We are doing a little bit worse over the long 

term, and it is largely due to policy, policy changes. Could you tell 

me, is that quote accurate? And which political party was in charge 

of the White House, the House of Representatives, and the Senate 

at the time? 

Mr. HOLTZ-EAKIN. I have no reason to believe it is not accurate, 

and Republicans controlled both Houses of Congress and the White 

House. 

Mr. TONKO. Finally, this is an op-ed that you posted through 

your organization, the American Action Forum, just two weeks ago. 

And it reads, There has been talk that the House would pursue a 

series of short-term, two-week CRs, instead of a full-year CR. There 

could be no greater management nightmare than the inability to 

plan for more than two weeks at a time. And my point is that I 

agree with you on that point, certainly. And though we may not 

agree on everything, I think you have offered this chamber very 

sound advice in the past. 

I was not here in 2004 and 2005, but I cannot help but think 

that if our leaders would have listened to you then, we might not 

be in the place we are in right now. Today our fiscal challenges are 

so great that the Republican leadership in our House is proposing 

calling for cuts to programs that range from preschool literacy programs, to senior health benefits. And yet, we still refuse to look at 

the policies that really got us here. And two wars on the credit 

card, the deregulation of Wall Street, and tax cuts for billionaires, 

simply didn’t appear to be the formula for success. 

No matter how many times we say it, the Koch Brothers are not 

a small business, and I do not believe they need taxpayer dollars 

to fund union-busting campaigns in Wisconsin. I don’t believe it 

any more than I believe that if we are going to give oil companies 

bigger subsidies, they will someday become charitable institutions 

that won’t gouge my constituents at the pump, and bring in record 

profits in the midst of the Middle East crisis. 

Tax cuts for the wealthiest two percent of Americans were a bill 

of goods sold to us on the promise that they would create jobs, but 

even before the financial meltdown, they failed, at a cost of trillions 

of dollars. If we are going to spend that kind of money, America 

should be better for it. But while CEO pay doubles and triples 

throughout the decades, the purchasing power of the minimum 
47 

wage has declined by nearly 10 percent. Where is that American? 

Where is that fair? 

According to the CIA, the United States ranks 42nd globally in 

income and equality, putting us in the same range as Uganda, 

Nicaragua, and Iran. We cannot move forward this way and hope 

to compete economically with numbers like that. And we just need 

to address, I think, the inequitable treatment in our situation 

which has really seen a growth, exponentially, in the top one percent of wealth in this country and its income availability. And how 

can we go forward without strengthening a middle class in this 

country? It just confuses me economically, and irritates me programmatically. Thank you. 

Chairman RYAN [presiding]. Thank you. Mr. Ribble. 

Mr. RIBBLE. Thank you, Mr. Chairman. I have been listening, 

somewhat entertained here this morning, but disappointed in several ways with some of the hyperbole with massive tax cuts and 

all this kind of stuff, and how our deficit is because of massive tax 

cuts. And that revenue after the tax cuts in 2003, by OMB’s numbers, went up in the next five years by 100 billion, 371 billion, 624 

billion, 785 billion, 801 billion, and in 2010, after the global meltdown overnight, over 2003 numbers after the tax cuts, up 400 billion. 

So, revenue is a difficult thing to really project what is going to 

happen, quite frankly. I have run my own business for 30 years. 

When we do budgeting I realize that a cut in spending is a direct 

savings, and something I can control 100 percent. I can choose 

whether to spend the money, or not to spend the money. I have the 

choice. I cannot choose whether a customer will buy from me, 

whether my business will grow. I can plan and strategize and try 

to do those things. And in the broad economic sense, addressing 

this strictly on the revenue side is nearly impossible. Not that it 

shouldn’t be done, not that we shouldn’t include that. But I do 

know that on the spending side we do have lots of control. And a 

dollar not spent is a dollar saved. 

I actually have a question for Ms. MacGuineas. I appreciated 

your testimony a lot, and I want to give you a few minutes here 

to expound a little bit on something that I have talked about for 

about the last six months, and that is the psychology of the American consumer and the American business owner. You address it a 

little bit. 

We have a psychological problem in this country and it relates 

to and affects economic growth, don’t we? And could you talk a little bit about that? You didn’t have enough time in your comments 

to do that. 

Ms. MACGUINEAS. Great. Thank you for the opportunity, because 

I do think that the lack of certainty that surrounds businesses and 

households is certainly a factor in keeping the economic recovery 

from moving forward as much as we want it to. And if you look at, 

sort of, the ideal model for fiscal consolidation, and how to deal 

with the fact that we are also coming out of a very weak economy, 

most people have said that what we want to do is put in place a 

multi-year plan that doesn’t have to phase in so quickly, because 

you can still leave some time for the recovery to take hold. So you 

wouldn’t have to have tax increases or spending cuts very, very 
48 

early on. We recommended starting them next year. As long as 

that plan was credible, and so that markets believed that that plan 

was going to be implemented. 

I think that plan, to be credible, would have to be bipartisan, it 

would have to be put in statute, and it would have to come with 

budgetary triggers, so if those changes weren’t made, that changes 

would come automatically. That would allow households to know 

what is going to happen. Importantly, because of all the capital on 

their balance sheets right now that would allow businesses to know 

what is going to happen. 

If you look at part of the model in London, when they are, in 

England, going through their consolidation efforts, they have hoped 

that businesses would, kind of, be the drivers of growth, and fuel 

the recovery. There haven’t been as many policies to help enable 

that, so you want to surround that with policies that allow businesses to help be an engine of growth in this recovery. We can’t 

look to government to spend our way out of this, or households, 

who are over-indebted, to spend our way out of this. We do want 

businesses to be the engine of growth. None of that works in place, 

in terms of reassuring markets, letting households know what to 

expect, in terms of tax and spending policies, or having businesses 

invest in the longer term, unless we put in place policies that are 

credible, and likely to stay in place, and will put us on a glide path 

to something stable. 

Mr. RIBBLE. How long have you been studying this topic, and 

this whole issue of economics here, as it relates to this budget crisis? Been a few years? 

Ms. MACGUINEAS. It has been a few years. We haven’t made that 

much progress. 

Mr. RIBBLE. Do you think that, that the Congress has acted 

credibly in the past? Are there examples that we can point to that 

might help us? 

Ms. MACGUINEAS. I mean, sure, the budget deals that we had in 

’90, and ’93, and ’97, all of those are different models, when we 

fixed Social Security, they were all different models for people coming together. There were a number of factors that made them work. 

You need leadership, you need real leadership. You need an understanding in the public of the problems and a commitment to fixing 

them. You do need bipartisan cooperation for anything that is hard, 

otherwise there is going to be immediate pressure to take back 

whatever policy changes you have put in place. And I do think that 

public component is actually quite important. You need people to 

understand. 

Remember there was the Ross Perot moment; it kind of changed 

the whole world, right? But you need people to understand why 

this is something that you do for the country. And the narrative 

really has to be that this is part of a successful growth strategy. 

It is not just all about, you know, we are the eat your spinach 

crowd, it is not all doom and gloom though; it is about part of 

building a long term economic growth strategy in the country. And 

I think that has to be told to people, and then they are willing to 

step up to the plate and make those changes. 

Mr. RIBBLE. That psychology will change, then, won’t it? 

Ms. MACGUINEAS. Absolutely. 
49 

Mr. RIBBLE. Okay. Thank you very much, and I yield back. Mr. 

Chairman. 

Chairman RYAN. Ms. Bass. 

Ms. BASS. Thank you. Ms. MacGuineas, I wanted to ask you a 

couple of questions. If I heard you right, I think you said, a few 

minutes ago in your presentation, that several events could tip us 

over the edge, seriously increase the crisis. And one of those events 

could be something going wrong in the states. And I really wondered, given what is happening in the states, what you meant by 

that, considering so many of the states are in such a deep crisis. 

California, a couple of years ago, had a budget of $110 billion: 

budget now is $83 billion, and we are facing a $23 billion deficit 

with no real clear way out of it. They are attempting a balanced 

approach in California, hopefully it will be voted on in the next 

week. But I wanted to know what you meant. What else could go 

wrong in the states that you are referring to? 

Ms. MACGUINEAS. Well, there is certainly the situation that 

states may not be able to pay what they owe on their debt, and 

that this could be the beginning of a cycle of markets losing faith 

in the ability of the U.S. to make good on all of its commitments. 

There are also the structural problems in the states, which are a 

result of the economy. And then there are also the long-term problems, that we are all aware of, but their pensions and their health 

care commitments, which are obviously unsustainable. And again, 

much like what is going on at the federal level, this is a problem 

that we need to get out ahead of. This is a problem where they, 

these reforms need to take place in advance so that the states don’t 

bump up against their limits. 

Just one final problem with the states that we have been seeing 

is that the information, the data on the states is very, very poor. 

You can’t make an apples to apples comparison of fiscal positions 

of various states. And so, transparency is a piece of all of this. We 

need to understand the fiscal well-being of the federal government 

and the states, and right now we don’t have the information to do 

that. 

Ms. BASS. Thank you. One other question. It seems as though, 

in several of your comments, that you were supportive of a balanced approach to us getting out of this crisis. And, on the revenue 

side, which I think we spend an awful lot of time talking about the 

spending side, and I would agree we certainly need to pay very 

careful attention to that, and rein in spending, but I don’t think a 

whole lot is said on the revenue side. And it seemed as though, you 

talked about tax reform, and I know I have certainly attempted 

that in my time in California, and that is very big, very difficult 

to get to. So I would see that as a long term, and something that 

we definitely need to do. But in the short term, in terms of revenue, what suggestions would you have? And would you include, 

maybe closing some tax loopholes as part of it? 

Ms. MACGUINEAS. Yes. I actually think that the answer to that 

question, what you would do in the short term, closing those tax 

loopholes, is in many ways the right start for the long term fundamental reforms, too. I think the fiscal commission put out a really, 

really smart structure, which said, let us show you how much we 
50 

can bring rates down aggressively by clearing out all the trillion 

dollars in tax expenditures from the base. 

Now, realistically, they are not all going to be cleared out. But, 

once you start funneling them back, and you say, well, we want 

part of this to still be there, or we want all of this to still be there, 

you bring up rates accordingly, and you actually have the cost of 

these. So we haven’t had a budget for tax expenditures, they have 

been like mandatory spending, on automatic pilot. This creates a 

sense of the tradeoffs, and it certainly starts the, the right direction 

for fundamental tax reform, which is broaden that rate base as 

much as possible, bring rates down. And I believe you need to use 

a piece of that revenue to close the fiscal gap. And because tax expenditures are so big, there is actually plenty to do on both sides. 

So I think the framework by the fiscal commission is immensely 

helpful. 

Ms. BASS. Thank you. We attempted the broadening in California, too, and everywhere you talk about broadening. 

Ms. MACGUINEAS. Somebody likes that tax break, of course. 

Ms. BASS. Exactly, it is so difficult. But in my remaining time, 

Mr. Podesta, you mentioned that health care spending was one of 

the drivers. And I wanted to know if, in the last few seconds, if you 

could give us your opinion as to whether or not the Affordable Care 

Act begins to address some of the concerns you raised around 

health care spending. 

Mr. PODESTA. Well, Mr. Pascrell went through a list of the items 

in which there is restraint in the Affordable Care Act that begins 

to move that cost curve down. The CBO, as has been noted, estimates that it has some savings in the, in the near-term budget 

window, but over a trillion dollars in the second 20 years, which 

is really where the money is. 

I think that the other place to look is to the CMS actuarial report 

from last summer, which indicated that health care spending 

would, would rise just slightly in the United States, by .2 percent, 

but include coverage for 32 million people. So I think that, at that 

point, the trend line is going down, whereas if you repealed health 

care, the trend line would continue to rocket up, as it has been for 

the last decade. So it is really important, I think, to be able to fulfill the authorities that are included in the Affordable Care Act, including the IPAB, the demonstration projects, changed the way we 

deliver health care, get on with trying to put more emphasis on primary care, try to get more errors, as the administration is currently doing, out of the system, so that we, across the board, in 

both the public programs, and in private sector health care, we 

begin to reduce the cost, which is extremely expensive, and not producing the results that we need. 

Chairman RYAN. Mr. Mulvaney. 

Mr. MULVANEY. Thank you, Mr. Chairman. My colleague raises 

the issue of the balanced approach, which is something that we 

have been talking about as a committee, both within our party, and 

in a bipartisan basis. I think you have started to see in some of 

the discussion today that a lot of us agree that, in fact, I think Mr. 

Van Hollen actually said that we agree that we need to have some 

spending cuts. What is the right balance? I will put that question 

to each of you, very briefly. What is the right balance between 
51 

spending cuts and revenue enhancements, to use a euphemism? Is 

it 50-50, is it 80-20, is it 110 with tax cuts? What is the right balance? Has anybody given that any thought? Let us go right to left 

because Mr. Podesta always gets left off at the end, and I am always good with starting on the right hand start of things. 

Mr. PODESTA. Thank you. I think that the right balance is probably in the arena of 50-50. I think that the Simpson-Bowles was 

two-thirds, one-third. I am looking more at the near term, at the 

course of the next five years; it is probably in the range of 50-50. 

Over the long term, particularly as we get these health care costs 

under control, it shifts, and begins to probably look more like twothirds, one-third. Two-thirds on the spending restraint side, one 

third on the revenue side. 

Ms. MACGUINEAS. Great question. When you think about balance, two things complicate it; baselines, what baseline are you 

using, and how you allocate interest. I look at this as, actually, you 

could solve the problem on the spending side alone, but nobody 

wants to. There is not a politician who is talking about what you 

would have to do to current retirees. So we might as well get realistic, that revenues have to be part of it. And I think one of the 

keys is that that has to be combined with very serious structural 

reforms to entitlements. And there has to be an understanding that 

those revenues are going to close the fiscal gap, not to funnel into 

new spending. And then I think we can start being more realistic 

about that. 

I don’t think 50-50 is the right balance. I think, if you look at 

the problem, it is a spending problem, if you look at where the 

growth in the budget is, and compare it to historical averages. But 

since no one is willing to close it completely on the spending side, 

I think you start at, maybe, 80-20, and you end up at, maybe two 

to one. And you, you do what you have to do to get it done. But 

the problem is a spending problem, and both are going to have to 

be on the table for the solution. 

Ms. REINHART. Two-thirds, one-third. And I say that on the basis 

of, simply, demographics. And this is not a short-run issue, but a 

medium-term issue. And a lot of our problems have to do with an 

aging population; this effects both the health and the social security side. 

Mr. HOLTZ-EAKIN. I don’t think you should frame the question 

that way. I really don’t. I think we get lost in a, in a debate over 

whether the number is eight or nine, we lose our way. We need to 

rethink the government budget from top to bottom, identify those 

things the government can and should do, their traditional roles, 

fund them effectively, and, and build a vision for growth and opportunity, and articulate that. And there is nothing right now that is 

going to produce growth or opportunity. Congresses of both parties 

have a long history of spending tons very ineffectively and not 

funding them adequately. That has got to change. Spend the money 

effectively; fund it adequately. And let us, let us get started fast. 

Mr. MULVANEY. And here is why I asked the question, and I appreciate that. But, if you look at it historically, no one has ever 

been able to turn this type of situation around on a 50-50 basis. 

It simply has never happened. And if you look at it historically, Ms. 

Reinhart, maybe you can speak to this, Mr. Holtz-Eakin, really, 
52 

that the folks who do this successfully are the folks who are more 

down in the 80-20 range. In fact, of the successful fiscal consolidations in the last several years, there is actually more evidence that 

110 percent worth of cuts in spending, with tax reductions, because 

it leads to what you have just described, which is the opportunity 

for growth and economic development, that that is the model that 

we use. 

Mr. HOLTZ-EAKIN. I want to concur with that. I mean, that is 

the, that is the international evidence. Successful growth and consolidation episodes are grounded on keeping taxes down and cutting kinds of spending, government payrolls and transfer programs. 

Those are the, those are the heart of those things, I completely concur. I just think if you want to go to the American people and say, 

We are going to cut X dollars, that is not a very compelling story. 

What you need to do is explain to them, This is important for the 

opportunities that our children will have. These are the roles we 

have assigned for our government. We are going to do that, and 

this is how it adds up. 

Mr. MULVANEY. Mr. Podesta. 

Mr. PODESTA. Congressman, that might be true, if you are starting from a very high revenue base, but as I noted in my testimony, 

we are starting from a historically low revenue base. We are at 15 

percent of GDP in collections. That hasn’t happened since 1950. We 

have a lot bigger government than we had in 1950. And so if you 

begin, particularly with the notion that we are going to go further 

down the revenue stream from there, and begin to think you are 

going to be able to make that up on the spending side, it is just 

not realistic. 

Under President Reagan, our average spending was 21, 22 percent of GDP. How are we going to get down to that 15 percent rate 

that is currently the base that we are looking at? Mr. Holtz-Eakin 

said that the Obama budget gets to 19.6 percent. It does, but on 

the basis of a bunch of policies which I don’t think he supports. So 

I think that we have got to have some balance here, on 

mandatories, on discretionary, including defense, as well as with 

respect to revenue. And I think, if you look at the ’93 balanced 

budget, I think it was about 60-40 cuts versus revenue. So I think 

we are in similar places, but you have to start from the premise 

that revenue is at a very low base right now. 

Chairman RYAN. Mr. Shuler. 

Mr. SHULER. Thank you Mr. Chairman. I would like to thank the 

Chairman and the Ranking Member, put a great panel together. 

Here is the ironic thing about it, four non-elected officials could 

probably sit down and come up with a plan that, that would, the 

American people would agree with. Unfortunately, and I will say 

this on both sides, the maturity level is not there from the United 

States Congress yet. We are still playing politics with the future 

of the next generation. And at some point in time we are going to 

have to stop that, because time is of the essence. I look around the 

room; there are not many moderates on this committee. There is 

very few of us. I would, I would ask each of you: is there a policy 

out that is available now for us to review, that you think would be 

acceptable to the American people? I am not asking, would it be acceptable to the Congress, because we are not there yet. 
53 

Mr. HOLTZ-EAKIN. I think you could do a lot worse than to start 

with what Bowles and Simpson came up with. That commission did 

a remarkably good job of examining the problem and proposing solutions. And I am deeply disappointed that it has been left on a 

shelf, and in the dustbin. We really need to take this problem on. 

Mr. SHULER. Dr. Reinhart. 

Ms. REINHART. I really would like to echo that. It is in the spirit 

of starting afresh, we are here where we are, and maximizing the 

options. Bowles-Simpson is a good starting point. 

Mr. SHULER. Ms. MacGuineas. 

Ms. MACGUINEAS. Bowles-Simpson is a great starting point. I 

mean, they gave us exactly what we need. They gave us good policies, they found where good political compromises are. It is a commission report, so it gives you all the political cover to get behind 

it, and say what they are all saying, we don’t like every part of it, 

but it is a good way to start the discussion. You can see what is 

going on in the Senate, and it is a very productive discussion that 

is moving forward. 

This is what the country needs. It saves $4 trillion over 10 years. 

I think anything less than that is probably insufficient. And so I 

wouldn’t see why anybody would walk away from this opportunity 

to start the discussion there. 

Mr. SHULER. Mr. Podesta. 

Mr. PODESTA. I just want to add one note of caution. I think, actually, there is a lot of agreement, to some extent, on the panel, 

on the long-run. One note of caution is, to the extent that, it is 

what Ms. Bass said, to the extent that moving forward requires a 

complete revision of the tax code, I am for that. We should get rid 

of a lot of the junk in the tax code and get rates down. I am for 

that. But the process of producing that is going to be very, very difficult. And we can’t wait for that to be done before we begin to 

tackle these midterm deficit problems, so that we get the debt stabilized. 

So if it has to be in two bites, I can live with that. And I think 

the first bite, I think we also mostly agree on, you have got to go 

after mandatory, you have got to go after discretionary, and restrain it. I am for putting defense on the table, because I think 

there is a lot of waste in the defense budget, you could save some 

money there. And I think, particularly going after these tax expenditures, and getting rid of these loopholes that really don’t 

produce much, economically for the country, you could get a balanced package, and get bipartisan support for it. 

Mr. SHULER. Well I certainly hope, and I am very optimistic that 

we can come to a conclusion. At some point in time, we are going 

to have to be grown-ups about this. And the next generation will 

look at us, and wonder if we made the right decision. And if we 

lose our elections, if all of us lose our elections in 2012 because we 

made the right decision for the next generation, then that is good 

for us, and that is good for the American people. Because, 10 years 

from now, they will say that we will be the best Congress to have 

ever served. 

So I am pleading, I have heard all the back and forth, and unfortunately, most of the, the higher-ranking, up on the top tier, on 

both sides, continue their political debate and posturing, because it 
54 

is easy for them to get reelected. And I want to see us start working together across the aisle to make this work for the American 

people, and for our next generation. I yield back. 

Chairman RYAN. Thank you. Mr. Huelskamp. 

Mr. HUELSKAMP. Thank you, Mr. Chairman. I appreciate the opportunity to ask a few questions, and as a member of the freshman 

class, I know there is a lot of finger pointing in this room, but there 

are some members here that shouldn’t be pointed at. I am not saying anybody is, but just to point out, that is the lead-in to one of 

my questions. And that would be, throughout the last 20 years of 

Congress, there have been all kinds of balanced budget mechanisms; we are going to solve that. 

We can sit here and talk about tough decisions and making 

those, and I guess the question would be for Mr. Holtz-Eakin, what 

mechanisms would you say are necessary in order to make a deal 

secure in future years? Because I would say folks in my district 

have no confidence, in either the Congress or the President, to actually implement, and to maintain. And I would agree, I think multiple congresses, multiple presidents that haven’t balanced that, 

didn’t care to balance it. And so what kind of mechanisms would 

you suggest are necessary for implementation? 

Mr. HOLTZ-EAKIN. I have a couple of observations. The first, and 

the one that I think is most important, is there are no budgetary 

mechanisms, PAYGO rules, discretionary spending caps, or anything of that sort, that are a substitute for the Congress having the 

political will to do this, and agreeing it has to be done. Because any 

Congress can circumvent rules, and does on a regular basis. 

So, rules are not the solution; deciding to solve the problem is 

the top priority. Having done that, you can then agree on some sort 

of fiscal goal. I actually don’t care deeply which one. Whether it is 

debt to GDP, spending targets, anything that gives you a way to 

identify that you are off track; we agreed to do this, but we are off 

track, you get a warning signal, and gives you a way to say no, 

Yes, we would like to do that, but the larger priority is our kids 

and the growth of this economy, we are not going to do that, we 

have this limit that we can’t bust. That is what you need. 

And there is no magic to the particular flavors. You have to have 

an agreement to do it, you have to have identifiers you are not 

doing it, and you have to have a way to say no. 

Mr. HUELSKAMP. Would the rest of the panel agree with that assessment? In short response? 

Ms. MACGUINEAS. I would just jump in, because we ran a commission called Peterson-Pew Commission for two years that focused 

on budget process. And we recommended a set of budgetary targets, so everybody knows what you are trying to get to, triggers, 

so that if you don’t get there they would enforce them and move 

you back on track, and help keep you on track, and transparency. 

So the three T’s: targets, triggers, and transparency. 

But the bottom line is, it won’t force anybody to do anything they 

don’t want to do, but it will give you political cover if you do want 

to do the right thing, and it gives you the way to say no. So I think 

that framework is really important to help move us in that direction and keep us on track. 
55 

Mr. PODESTA. What did produce a balanced budget and a surplus 

were hard budget caps on the discretionary side, and a real 

PAYGO that covered both mandatory and revenue. And so, I think, 

if you go back and look at history, it is worth at least attempting 

to say, that worked before, why don’t we try it again? 

Mr. HUELSKAMP. Yeah, and I appreciate that, historically. But 

we are at such historically high levels, and I don’t know how you 

could implement that. I mean, you lock in trillion dollar deficits, as 

the President’s indicated, sustainable deficits forever. So, Carmen? 

Ms. REINHART. Simply put, in this environment, debt targets. 

Taking into account that Europe has blown Maastricht, but having 

credible debt targets would be a useful starting point. 

Mr. HUELSKAMP. I didn’t hear anyone mention though, and I 

come from state-level, where we have a mandatory balanced budget 

requirement unlike some other states; no one mentioned a balanced 

budget amendment, those kind of things, which would be, there 

would be no legislative way around that, is there opposition to that 

from any of these members here that believe they don’t work, or 

would not work at the federal level? 

Mr. HOLTZ-EAKIN. That is a fiscal rule, and would have the same 

benefits that, that I mentioned for others. Getting there is going to 

be awfully hard. We are so far from balanced. And so, I am all for 

a balanced budget, but I encourage you first to tell me how we are 

going to get there. 

Mr. HUELSKAMP. Well, that, that was the requirement for the 

panel members today. 

Mr. HOLTZ-EAKIN. I have my plan. 

Mr. HUELSKAMP. The follow-up question I would have, in reference to that is, and quickly, for each of you, I just have a few 

seconds left. How many years do we have, and it might have been 

asked already, counts to five years, I have heard less years, I am 

going to be listening very closely. How many years do we have, 

quickly? 

Mr. HOLTZ-EAKIN. We don’t know; pretend you have none. 

Ms. REINHART. Great answer. 

Ms. MACGUINEAS. It is a great answer. I am worried, because I 

have heard the number five around today. And I think that that 

is too optimistic, chances are that is too optimistic. There are a lot 

of people who believe that the risk is it could be in the next year 

or two. 

Mr. PODESTA. I think you have this year to lock in a bipartisan 

agreement to stop the debt from going up. 

Mr. HUELSKAMP. All right. I look forward to help from the Senate, and from the administration. Thank you. 

Mr. LANKFORD [presiding]. Great. Thank you, Mr. Ryan. 

Mr. RYAN OF OHIO. Thank you, Mr. Chairman. We had a meeting 

yesterday with Mr. Bowles and Senator Simpson, and I have got 

to say it was very sobering, to just sit with them for an extended 

period of time, and kind of embody the real gravity of the problem 

here. I know Mr. Van Hollen has said this, as well as others in the 

Democratic Caucus, I think, and to Mr. Podesta’s point that he just 

made, I believe that this needs to happen in the next year because 

if it doesn’t, we are going to get into a political year, which we are 
56 

already actually into the presidential election, already, as the 

media is portraying it. And, so that whole year will be wasted. 

And now we are two years down the line, and all of you are saying, act like it is happening now, which I think we need to do. So 

just from this perch here, I think we need to drop the rhetoric on 

both sides and come to an agreement. I think it is important, it has 

been noted here, President Reagan raised taxes eleven different 

times, gas, tax, and others. So we are not going to get there from 

here. We have got to get ourselves in a position where we all agree 

that the wealthiest, as the Bowles-Simpson proposal has, the 

wealthiest are going to have to pay more. Because the larger issue 

for them with investments and business creation, are going to be 

the credit markets. 

And so I think most of them would be willing to pay an extra 

30, 40, 50, $100,000 a year, if you are making millions of dollars, 

if they know that business activity is going to increase. And I think 

we have got to talk about all of this in that context as well. And 

also, to make the point that there are tradeoffs here, when we ask 

the wealthiest to pay a little bit more, what are those programs, 

what is that money going into? It is going into Pell grants, it is 

going into job retraining, it is going into research, it is going into 

things that are going to yield us all a lot of economic activity, as 

we see China investing hundreds of billions of dollars into clean energy. And I am from a steel district, in Youngstown, Ohio, and Ms. 

Kaptur is from Toledo, where they are generating solar panel industry. 

We are starting to lose the solar panel industry to China. So we 

are going to reduce our dependence on foreign oil, and then we are 

going to become dependent on China for our batteries, our solar 

panels, and everything else. So these investments have to be made, 

and we have got to ask everybody to participate. And remember 

that George Herbert Walker Bush lost his election, as Mr. Shuler 

was just talking about, because he raised taxes because he had to. 

And that led to Mr. Podesta and crew coming in, and President 

Clinton, and that leading to enormous economic activity, 20 million 

new jobs. 

One point, and then one question I will let everybody kind of 

take a bite at, that I wanted to make. The point has been made, 

and we talked about animal, animal spirits, and my friend Mr. 

Ribble was talking about psychology, we have a psychological problem. We have a psychological problem in the market because wages 

have been stagnant for 30 years. This is not psychological; it is a 

real problem that we have. In the last 10 years we have lost wages. 

And in Ohio we are going to see tuition increases because of the 

economic collapse, we are going to see a lot of cuts, we are going 

to see more burden placed on families. And so, if we don’t address 

the issue of wages, and Paul Krugman’s column just talked about 

this in the last day or so, about the high-growth jobs in the recovery aren’t coming. It is the low-growth jobs that are expanding 

now. 

So we have got a real issue, if we are going to continue to have 

this economic instability and political instability if we don’t address 

the issue of wages in the United States, and health care and other 

things fit into that. 
57 

So, my time is out, Mr. Podesta, if you could just comment on 

this, and if there is time, we could just work our way down, about 

the top tax rates. There has been a lot of talk about, those are the 

people who create jobs. I know you guys, when you came in in ’93 

made that decision, raised the top tax rate. 

Mr. PODESTA. Yes raised the top tax rate, the top two percent. 

Mr. RYAN OF OHIO. How did that play out, and how would all 

of you guys see that playing out as a big diminishment in economic 

growth? 

Mr. PODESTA. Again, you can’t make a direct comparison, but 

GDP growth was twice as strong during Clinton as it was under 

Bush. Business investment was much stronger under Clinton than 

it was under Bush, with a 39.6, you know, top tax rate. And so this 

idea that just by merely cutting the top tax rate we are going to 

eliminate investment and the economy is going to tank, I think it 

is just not borne out by history. I think you need a balanced program, one that does exactly what you are suggesting: invests in 

human capital in science and technology, in the things that power 

the economy forward. And that is what is going to get wages growing again. 

And the only thing I would disagree with you about, Mr. Ryan, 

is that wages did grow in the 1990s, and they grew substantially 

in the middle and at the bottom during the 1995 to 2000 period. 

Mr. LANKFORD. I wish we had time to get all the other responses. 

Mr. Young. 

Mr. YOUNG. Thanks so much to all of our panelists, I really appreciate you being here today. I am going to focus my question on, 

if time permits, the role of the U.S. dollar in the world, its current 

position as the world’s reserve currency, how that might be threatened, and the implications thereof. 

Before I get into that, though, I would like your thoughts on, 

what I typically discuss in southern Indiana, as I mix with my constituents, and try and inform them on this issue, get their thoughts 

and concerns. And one of the things that I try and do is bring it 

down to the human level. Individual persons and businesses and 

families, and I thought you might be able to add some additional 

texture to that overall portrait. 

What will things look like if the doomsday scenario, if the debt 

crisis does in fact play out, if the United States suffers from a 

Greece, or Japan-like, situation, where either they have to go 

through a lost decade themselves, or instead, there is a sudden response by the markets as a result of a lack of a credible plan to 

bring down our debt to GDP ratio. 

Some of the things I emphasize are the increase in our interest 

rates for our treasury instruments, which redounds to an increase 

in interest rates for all manner of different loans and credit instruments that will impact individuals that I serve. An increase in 

taxes, perhaps an immediate increase, required to calm the credit 

markets. An immediate decrease in spending, in a non-deliberative 

and, frankly inhumane way; it is inhumane, not because our efforts 

wouldn’t be well-intentioned to calm the credit markets, it would 

be inhumane because we failed to act now, when we could put in 

place a smooth trajectory, a gradual mechanism to get our debt 

under control, one that would maintain our social insurance pro-
58 

grams for the least fortunate. It would also result, this doomsday 

scenario, I anticipate, in a decrease in investment, in physical capital, in human capital, all these things that help us enjoy those 

higher-paying jobs that Mr. Ryan was just lamenting are not as 

abundant as they once were. Can someone speak to that overall 

private human impact that we might experience? 

Mr. HOLTZ-EAKIN. I am not the place people usually go for 

humanizing events. But I think you have captured the mechanics 

of the collapse pretty well. But it will be far more devastating than 

that, because in that collapse, you will have panic. You think back 

to 2008, there was palpable panic among individuals, among policymakers, and when people are panicky, and seeing their social services, you know, rendered, you lose a sense of social cohesion. So I 

believe that there is a lot more at stake here than the economics 

of it. I believe our social cohesion is, and will be tested, if we fail 

to address this. And we will, in those moments, also pull back on 

commitments we have made around the globe. You know, we will 

bring back the troops from those bases, we will cut off our ground 

forces in different ways, and we will be more exposed and less of 

a leader in liberty than we want to be. And I think those are all 

very damaging things. 

Ms. REINHART. I would say, at the very human level, one thing 

we have to, at some point, start to face, is that the past 10 years 

were not a good indicator of the next 10. Households have negative 

equity. That some, many households have negative equity, that is 

something that has to be dealt with. Households have a debt overhang. Those are issues that were not issues 10 years ago, that we 

have to think about. I would like to think that, sort of a gradualist 

approach to debt reduction is more likely. It is, historically, it 

hasn’t worked out that way. 

Let me conclude with a commentary on the dollar. One of the 

things that is actually, actually helping us be more gradualist than 

we otherwise could be, is that people, notably central banks from 

all over the world, willing to hold U.S. Treasury securities. But 

that is also a dangerous proposition. Without gloom and doom, it 

involves a level of vulnerability that we didn’t have 20 years ago. 

Mr. PODESTA. Congressman, you know, I think you can go too far 

with this. I think that, we are not Greece. The United States is not 

Greece. We have a pretty darn strong set of fundamentals and basics in this country, including the best workforce in the world, the 

most liquid capital markets, the most innovation, the highest levels 

of science and technology. But I think what will happen is we will 

get further away, for many, many people, from the American 

dream, the ability to really make their children’s lives better than 

theirs, to succeed in their own right. And that is what we have got 

to be worried about, that is why we have got to take the steps now, 

I think, to get on a better path. 

Mr. YOUNG. Thank you all. 

Mr. LANKFORD. Thank you, thank you as well. Ms. Castor. 

Ms. CASTOR. Thank you very much, and thanks to the panel for 

all of your expert advice and involvement in this critical issue. 

Back home, when folks focus on the debt and deficit, I think they 

do appreciate that President Obama named a national commission 

of fiscal responsibility and reform. But if he has seen some of the 
59 

polling across the country, they, they rank the debt and deficit very 

high as a problem, and then you say, but they don’t want any cuts 

on anything. So we really need to find something to pull us on that 

glide path with a comprehensive plan. And the one that seems to 

get a little traction at home is tax reform, and lowering the rates. 

And then you have got to begin this dialogue about, especially, 

the tax expenditures, I think. Because when you are talking about 

the tax code, it has got to be holistic. And I want you all to be specific. You can go back to the commission on fiscal responsibility and 

reform and highlight your favorites, but give us the targets for 

these tax earmarks, and tax expenditures, especially the ones that 

have been built up over the years by high-paid lobbyists; people 

know it, they know it at home. 

Give us those, your best targets, so that we can reduce the overall tax rates for the average hardworking American. I would like 

to hear from each of you on this. 

Ms. MACGUINEAS. Well, I will say, I think people are going to 

want to understand two important things. And one is, do you have 

a plan? And two, is it fair? And that is going to help people be willing to sacrifice. I think they need to feel that if they make these 

sacrifices themselves, it will not lead to not fixing the problem, but 

it will lead to an actual fix. 

In terms of tax expenditures, you are putting out a tough question there, but I am sure we will all give you pretty similar answers. There are two big ones that need to be reformed: the health 

care exclusion, the home mortgage interest deduction. That is the 

bottom line, every policy analyst on both sides of the aisle knows 

that these are not good policies, and that is, the core of really 

thinking about tax reform. And people can choose to go after them 

and try to demagogue them, or people can talk about the benefits 

of a better tax system that is not regressive, that has more oversight, that leads to lower rates, and is part of a fiscal fix. And these 

tax breaks and others have to be reformed. 

Mr. PODESTA. Well, Ms. Castor, I think they fall into two big categories. Maya mentioned one, which is on the personal income tax 

side: the exclusion and home interest deductions. And, particularly 

on second homes, you could go after that fairly easily, I think. But 

I think there is a lot in the code on the business side that would 

strike people back home as, what I would describe as, you know, 

tax exclusions that they think of, tax expenditures that are really 

narrow, they are focused on a very small number of businesses. 

I guess my favorite still remains the tax breaks to the oil and 

gas industry. The top five oil companies have made $931 billion in 

profits in the last 10 years. Do they really need additional incentives to continue to produce what they are producing in their business? I don’t think so. And it is a waste of money, and I think people are getting gouged at the pump right now, and they would understand why that level of support to an industry that doesn’t need 

it could be withdrawn, in a time when we have high deficits. 

Ms. REINHART. I would like to point out that, realistically, I think 

there is broad agreement that we need higher savings and that interest deduction on housing is something that should go. But let us 

look at the housing market. The housing market is in an all-time, 

historic slump. The timing for that is probably problematic. So it 
60 

really goes back to my two-thirds and one-third. I do really think 

that one has to go back to, I would like to be told by the doctor 

that I can lose weight and eat just as much. But I really do think 

that the expenditures side, particularly in light of demographics, is 

unavoidable. 

Mr. HOLTZ-EAKIN. Briefly, I think we have to educate the American people on the reality of the tax code. For the majority of Americans, the biggest tax they pay is the payroll tax. So if you talk 

about tax reform to them, there is nothing to do. A minority of 

Americans are now paying the income tax, and it needs to be radically reformed to reflect the reality. 

Go to the President’s panel from a couple years ago, the growth 

investment tax plan, adopt it tomorrow. Way better than anything 

we have got. 

Ms. CASTOR. I am not even familiar with what that is. 

Mr. HOLTZ-EAKIN. I would encourage you to become familiar. 

Mortgage interest, the health exclusion; those have been on the 

table for years. Congress has never touched them. You should go 

do exactly what Bowles-Simpson did with the corporate tax. You 

should go to a territorial system with a low rate, because, in the 

end it is the American worker who is paying that tax. Companies 

don’t pay taxes, people do. And the workers are getting hurt by the 

uncompetitiveness. 

Ms. CASTOR. Thank you. 

Mr. LANKFORD. Thank you. Mr. Flores. 

Mr. FLORES. Thank you, Mr. Chairman. And I want to thank the 

panel for joining us today. And except for the rock-throwing back 

and forth, it has been a fairly-informed panel, and I apologize, I am 

sorry that you had to put up with the rock-throwing. I am not 

going to throw any rocks. I am going to ask a couple of questions 

for you. We have got a couple of alternatives out there. We have 

got this, that is supposed to be winning the future. You have got 

the Bowles-Simpson Commission that I think did some really good 

work. Looking at the Bowles-Simpson plan, and I would like each 

of you to limit your answers to about 15 or 20 seconds, what would 

you do to make the Bowles-Simpson plan better? We all said that 

is a good place to start. What would you do to make it better? So 

let us start on the right with Mr. Podesta. 

Mr. PODESTA. Well, I think that, I noted earlier, that we think 

that Social Security reform could be tackled, but I think the way 

they tackled it is wrong. And I think there is a way to protect people at the bottom in Social Security and still get that 75 years of 

actuarial integrity and that is where I would probably start. 

Mr. FLORES. Okay. 

Ms. MACGUINEAS. I think it is a terrific plan, I think the main 

thing that needs to be filled out is how you would live within the 

health care budget that they proposed. So in the decade when you 

would start controlling health care cost to GDP plus one, we need 

to figure out structures that are going to fill that in. And I actually 

think, on Social Security, we use too much of the revenue to funnel 

into Social Security, and I would use that more on investments, 

and bring benefits down for the well-off in Social Security a little 

bit more aggressively. 

Mr. FLORES. Okay. So greater means-testing. Ms. Reinhart? 
61 

Ms. REINHART. I think we need to be a little more aggressive on 

Social Security benefits. 

Mr. FLORES. Okay. Mr. Holtz-Eakin? 

Mr. HOLTZ-EAKIN. I am going to echo those, I think the biggest 

hole though is, we really took a pass, a serious pass on health programs. And those are the problem going forward, so you have to 

take those on. 

Mr. FLORES. You talked about health programs, but it seems to 

me like Medicare is the biggest issue, that is the biggest gaping 

wound that we have in our future financial security. 

Mr. HOLTZ-EAKIN. I believe that if you look at Medicare, Medicaid, and the Affordable Care Act collectively they are the threat. 

Mr. FLORES. Okay, thank you. Looks like I have some more time, 

so I am going to ask you another question. This hasn’t been 

brought up. One of the things that I have seen, I was a CEO of 

a small company, and one of the things that I felt, and that people 

are feeling today, is the impact of regulation on the economy. We 

haven’t touched that, and that is not going to be in the budget, but 

I think it is an important component of what is restraining the 

economy. And so I would like each of you just, again, 10, 15 seconds, do you think that our regulatory zeal today is hurting our 

economic potential? Let us start on the left. 

Mr. HOLTZ-EAKIN. Absolutely. A chief indicator of regulatory activity is federal register pages, and last year we set a record, exceeding even when the Bush Administration set up the Department 

of Homeland Security, I never thought we would beat that. And 

that is before we see the implementation of the Affordable Care 

Act, before we see the Dodd-Frank common line and before the 

EPA rolls out its boilers and other foremeasure rules. So we are in 

the midst of a massive regulatory push. 

Mr. FLORES. That is a terrifying metric. Ms. Reinhart. 

Ms. REINHART. I alluded to this in my earlier remarks; I think 

we are going to see even more heavy-handed regulation. It won’t 

be called financial repression, it will come under the guise of prudential regulation, but I think we will, and pension funds will be 

importantly affected. 

Mr. FLORES. But is it or is it not hurting us, in terms of economic 

potential? 

Ms. REINHART. The historic experience has been that financial 

repression is not conducive to growth. 

Mr. FLORES. Okay. Ms. MacGuineas. 

Ms. MACGUINEAS. Yes, I certainly agree with that point, and I 

think we need to do everything we can to enhance competitiveness, 

both by lowering the corporate tax rate in a revenue-neutral way, 

and dealing with regulations. And I think that principle, that businesses don’t pay taxes, people pay taxes is very important. I also, 

however, have a real belief that the income and equality problems 

that we have are real. And so, while I would try to bring down burdens on businesses, I am perfectly comfortable with a more progressive tax code that reflects people who are doing well also contributing at the personal level, and letting businesses thrive and be 

an engine of growth. 

Mr. FLORES. Okay. So, by having a more moderate regulatory 

scheme, I am assuming, partially. 
62 

Ms. MACGUINEAS. That is one of the necessary components for 

increasing competitiveness. 

Mr. FLORES. Right, good. Mr. Podesta. 

Mr. PODESTA. I think one, I think one of the history lessons of 

the past couple of years is that, if you take the argument too far, 

regulatory laxity produces really disastrous results. And the failure 

to regulate the financial sector led to a meltdown that is being felt 

today in every community across America. So you have got to find 

the right balance. I think that the new executive order that the 

President signed at the beginning of the year to try to find that 

right balance, get rid of regulations that are not producing the results that they are seeking to achieve, while you push forward with 

smart regulation is where the country needs to be. 

Mr. FLORES. One last question, as I am about to run out of time. 

Ms. Reinhart, I really appreciate your work that you have done to 

talk about the impact on GDP versus debt levels. My question is 

this; inside the President’s budget this year, it has some GDP 

growth assumptions based on what I consider to be a fairly high 

debt level. It doesn’t even talk about actuarial unfunded liabilities. 

What do you think about the economic assumptions of, basically, 

four percent GDP growth in this? 

Ms. REINHART. In one word, improbable. 

Mr. FLORES. Okay. 

Mr. LANKFORD. One word is perfect for the timing. 

Mr. FLORES. Thank you. 

Mr. LANKFORD. Mrs. Moore. 

Ms. MOORE. Thank you so much, Mr. Chairman. And thank you 

very much for appearing today. I am really proud to see women as 

experts in economics, and so I really appreciate your being here. 

Everything has been asked, except that everybody hasn’t asked it. 

So forgive me if I am asking some of the same kinds of questions. 

I want to get right into the discussion of some of the Bowles-Simpson’s recommendations, and to really flesh out this whole thing 

about entitlements. You know, it has become such a buzz word; we 

have got to reform entitlements. 

In my understanding, I am glad there was already a discussion 

about some of the tax expenditures. But farm subsidies, and as you 

pointed out, Mr. Holtz-Eakin, the prescription drug program where 

we did not ask pharmaceutical companies, at all, to lower their 

prices, or to negotiate with them, as being one of the problems. And 

you also pointed out, Mr. Holtz-Eakin, that the problem was the 

cost curve in health care, period, at least I thought, not being 

curved. Not so much a problem with, as I think Mr. Podesta pointed out, that when Medicare and Medicaid came into effect, just like 

three-tenths of one percent of federal spending on health care. But 

this unsustainable growth. 

So I want you all to comment on the problem with entitlements 

and mandatory spending as being something other than Social Security. I don’t think that that is the driver of the debt, I think it 

is these mortgage interest deduction tax expenditures, which are 

mandatory spending, farm subsidies, is that correct? People are 

using this entitlement thing, and people are interpreting it as Social Security, and that is not correct, am I correct about that? 
63 

Mr. HOLTZ-EAKIN. It is not just Social Security, but Social Security is certainly part of the problem. Running a cash flow deficit 

right now and those cash flow deficits will rise with time, and the 

program is on track to deliver to the next generation, 22 percent 

across the board cuts, that is unconscionable. 

Ms. MOORE. Okay, so let others answer, please. 

Ms. MACGUINEAS. Well, entitlements are all programs of mandatory spending that don’t go through a normal appropriations authorization process. 

Ms. MOORE. Like the mortgage interest deduction, for something, 

it goes to Oprah. 

Ms. MACGUINEAS. That is right, I would completely agree, that 

tax expenditures are very much like entitlements in their automatic nature, and that we should be budgeting for all. 

Ms. MOORE. So when we talk about it, I am just saying, we need 

to not just hone in and say Social Security. 

Ms. MACGUINEAS. No, I think we hone in on the ones that are 

the biggest drivers of growth, though, which are the ones that are 

related to aging and health care. So Social Security, Medicare, and 

Medicaid are the most problematic, but the way we budget, we 

need to look at all of these things on a regular basis. 

Ms. MOORE. Let me get Mr. Podesta to answer this question, and 

then let me move on. 

Mr. PODESTA. Well, I think you are exactly right, Congresswoman, that the mandatory spending is broader, I think, with respect to health care. That is a challenge of delivering better health 

care at a lower cost across the board, not just in the federal programs. That is where we really need to, I think, spend our time 

and attention, which will have impact on the federal programs, I 

think as one of the previous members pointed out, the inflation in 

the federal programs is actually lower than it is on the private sector. So we need to produce that result. 

Ms. MOORE. I didn’t understand, for example, why Mr. HoltzEakin, said we ought to get rid of the American Care Act, but then 

he agreed we need to slow the growth in the private health care. 

I just didn’t understand how that could be done. And Mr. Podesta, 

I want you to comment on his testimony. 

Mr. PODESTA. Well Doug and I have debated this for a long time, 

I think that the drivers in the bill will restrain the growth of 

health care spending, and I think, if you repeal it, as the CBO indicated, you are going to have both a negative effect on the overall 

federal budget deficit, and a negative effect on health care spending. 

Ms. MOORE. Thank you, Mr. Podesta. I do have 50 seconds left. 

I turned on the news today, and thank God they weren’t talking 

about Charlie Sheen or Lindsay Lohan but they mentioned that 

there were, you know, 199 new billionaires during this whole 

worldwide recession. And so I guess I wanted to ask you, I didn’t 

vote for the extension of the Bush-era tax cuts, even the ones that 

benefit the lower-income people, because I see that they benefit 

wealthy people six times as much as they do higher-income people. 

How does inequality fit in with some of our deficit problems? There 

won’t be people to consume, for example. Mr. Podesta. 
64 

Mr. PODESTA. Inequality; I think that if judged by history, when 

we have a thriving middle class, when we have people at the bottom who are getting into the middle class, that produces a stronger 

economy overall, stronger receipts, it actually has an effect on the 

budget, so I think we very much should be concerned about it. 

Ms. MOORE. Thank you so much. This is a great panel. Thank 

you Mr. Chair. 

Mr. PODESTA. Thank you. 

Mr. LANKFORD. Thank you. Mr. Stutzman. 

Mr. STUTZMAN. Thank you, Mr. Chairman, and thank you to the 

panel for being here today; I really enjoyed the conversation today. 

The title of the hearing today is Lifting the Crushing Burden of 

Debt and I guess what I have heard a lot of today is, we need to 

control spending, we need to possibly raise revenue through tax increases, and I want to start with Mr. Podesta. In your testimony, 

we are all talking just recently, here in the House, about where do 

we start cutting debt? And on page six of your testimony, you mention the shock of asset-constrained government spending in the immediate would have an undeniable effect on our wider economy. 

Our Moody’s chief economist says that it could lead to a loss of 

about 700,000 jobs, and then Chairman Bernanke agrees that it 

could result in a couple of hundred thousand jobs, and then you 

mention that there is wide consensus on the general impact. 

Mr. PODESTA. Except for Mr. Holtz-Eakin. 

Mr. STUTZMAN. Well this is what I want to ask, is what kind of 

job loss are we looking at? 

Mr. PODESTA. Well I think that virtually everybody who has 

taken a look at this, Doug is an exception, has said that there will 

be some loss of jobs, and there is a range of forecasts there. And 

I think that the general direction is clear, and that is why I am 

not saying that we shouldn’t restrain non-defense discretionary 

spending. We call for specific cuts to do so. But the deep cuts that 

are included in HR 1, I think, would have a negative effect in the 

very near term, and my other beef is that you don’t go after any 

of the other components. You are narrowly focused on 12 percent 

of the budget. So those things will have an impact in the short 

term. 

Mr. STUTZMAN. Are these primarily public or private jobs? 

Mr. PODESTA. I think they are on both sides of the ledger, mostly 

in the private sector. 

Mr. STUTZMAN. This is what concerns me, and I give the Clinton 

administration a lot of credit for the way that they handled the situation throughout the 90s. There were tax increases right at the 

beginning, there were tax cuts at the end, and I believe that Republicans, when they were in charge were in the early part of this 

last decade, failed, and that there should have been better control 

in spending. And I think that we need to go into this very disciplined, and my concern is when we start—we are only talking 

about $6 to $60 billion in cuts right now, and when we go out and 

we hear the rhetoric saying, Well we are going to lose up to 

700,000 jobs, that puts fear in the American people. That puts fear 

in Congress. We don’t want to do that. And if we can’t even cut $6 

to $60 billion right now in the near term, I don’t see the political 

will long-term, ever. And I guess that is my concern, at some point 
65 

this type of rhetoric needs to stop, because I think the American 

economy is more resilient than this. 

Mr. PODESTA. Well so far, it has been partly because of the deep 

financial shock from the recession, it has been less resilient than 

I think a lot of people would have predicted. But it is coming back, 

the private sector is producing jobs, almost a million jobs produced 

last year, we need to make sure that keeps going, I think. That is 

key, I think, to create the circumstances under which you actually 

can get the deficit down because it takes money out of the unemployment insurance system, et cetera. And it will increase revenues. 

Mr. STUTZMAN. Okay, really quick, I just want to ask this question of the entire panel, and answer is as long as we have time. 

My question is what is a predictable and sustained rate of debt to 

GDP? 

Ms. MACGUINEAS. Well we have recommended that it be brought 

back down to 60 percent of GDP within a decade, but that it needs 

to go back to historical levels of below 40 percent to maintain fiscal 

flexibility. 

Ms. REINHART. The median debt-to-GDP in the advanced economies has actually been 36 percent post-World War II. We are a 

long range from there. I think 60 is a good starting point. 

Mr. HOLTZ-EAKIN. I concur. 

Mr. STUTZMAN. Okay. I think that again, we need to start looking at our, we need to control spending first before we even discuss, 

and I like what Erskine Bowles and Simpson did propose, I think 

that is a great starting point in the dialogue, but until we start 

controlling our own spending, and I think this sort of fear put into 

not only Congress. 

Ms. MACGUINEAS. One quick question which is, while I think 

there is some problems with HR 1, that it is probably too large, too 

small a part of the budget, and a little bit too early, we are starting 

to control spending, and that is going to have large positive fiscal 

effects, the fact that we are talking about cuts. And even though 

it will have some negative effect in the short run, what these studies don’t show is that it will have positive gains over a longer period, to make these fiscal improvements. And that is what we need 

to emphasize. 

Mr. STUTZMAN. Thank you. 

Mr. LANKFORD. Thank you. The gentlelady from Ohio is recognized. 

Ms. KAPTUR. Thank you, Mr. Chairman. Welcome to the panelists, I am sorry I had two, actually three concurrent hearings, so 

I came late and I have read your testimonies. The housing sector’s 

continued demise, with 26.5 percent of the American people being 

underwater on their mortgages and in my district, 37.5, continues 

to be a serious damper on recovery. Ohio, Wisconsin, where we see 

people mobilizing in the state capitals, are in deep trouble because 

their property taxes have not been paid in at the normal rate, and 

with the large numbers of foreclosures, school systems and state 

governments just simply can’t keep up. And therefore the solution 

I see them proposing out there, at least those governors is, Well, 

get rid of teachers, get rid of police, rather than solve the fundamental problem, which is recovery in the housing sector. 
66 

Now a few Wall Street banks took us down this very dangerous 

road, and they threw our economy into a very deep ditch, and what 

I see happening is that the six big ones that remain, that now control two-thirds of the banking system of this country; Citigroup, 

J.P. Morgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley, 

and Bank of America are making extraordinary profits, $55 billion 

just last year for those six. This year, Bank of America is going to 

get a $666 million refund, and those six institutions have paid a 

net effective tax rate of 11 percent when businesses in my district 

are paying a 35 percent rate. I am thinking, what is fair about 

this? Wait a minute; we are not addressing the housing problem. 

Not one prosecution, not one. And the housing sector continues to 

deteriorate, and they are running away with the money, and they 

control two-thirds of the banking system in this country. I call that 

a great crime. Now I notice a number of you actually have ties to 

Wall Street, and I am going to place this in the record. Mr. HoltzEakin, the Board of Directors for American Action Forum, does it 

still include Robert Steele? 

He is gone. Okay. He had been a former executive of Goldman 

Sachs when he served on your board. You personally were a senior 

staff economist for President Bush at the Council of Economic Advisers, am I correct on that? 

Mr. HOLTZ-EAKIN. That is correct. 

Ms. KAPTUR. Correct and Mr. Bush never submitted one single 

balanced budget to this Congress, because I served during those 

years. I am not saying you don’t have a lot to contribute to the conversation, but let us look at the record. Now Ms. Reinhart, you are 

a fellow at the Peterson Institute, and you had been the chief economist, am I correct? For the investment bank of Bear Stearns back 

in the 1980s. And the Peterson Institute receives major contributions from Mr. Peterson, and he had been the former chairman and 

CEO of Lehman Brothers. Am I correct in that? Is my information 

correct? 

And he co-founded the private equity firm of Blackstone Group. 

I am just saying, the influences on Congress, where we get our 

opinion from, we have many new members. It is important to know 

who is giving us information and who isn’t. Ms. MacGuineas, you 

are with the Committee for a Responsible Federal Budget. 

Mr. Peterson also contributes money to the Committee for the 

Responsible Federal Budget, am I right on that, Ms. MacGuineas? 

Yes, I think that is really important to place on the record. And 

Mr. Podesta, you were the chief of staff to the only president that 

ever gave us a balanced budget in my whole career here, so it 

seems to me you have got something to contribute to the conversation here. But my fundamental question is, in the housing sector, 

we lack a solution as a country, and that is pulling us down coast 

to coast. You really haven’t addressed it in your testimonies to any 

great extent. The fact that it is missing is of great concern for me. 

Should it be? 

Ms. REINHART. It certainly should. One of the things I have been 

saying for many years now, since the crisis began, is that we 

should move forward to write down bad loans. The problem of having mortgages with negative equity is a serious one, and it is time 

to start having financial institutions price those loans closer to 
67 

market. Until we do get rid of that debt overhang and those zombie 

loans, they were called zombie loans when they were in Japan, we 

will have a very weak housing market. 

Ms. KAPTUR. You know, by the way, that the majority of those 

asset-backed securities, the mortgage-backed securities, were traded through Cancun? I don’t know if people on the committee know 

that. Any comments about why that might have been done? You 

know it is a tax haven? Goldman Sachs and the companies that did 

that made a whole lot of money. Nobody has done a single thing 

about it. Thank you, Mr. Chairman. 

Mr. LANKFORD. The gentleman from Georgia, Mr. Woodall, is recognized. 

Mr. WOODALL. Thank you, Mr. Chairman. I want to inherently 

I associate myself with my friends on the left because I think they 

bring a lot of value. I want to disassociate myself with Ms. Kaptur’s comments and tell you how much I appreciate you being here, 

in particular Mr. Podesta and Ms. MacGuineas. You all invested 

time in us at the bipartisan freshman retreat, and I remember 

those sessions well. We had a particular amount of fun on the chief 

of staff session; you all gave us a lot of good stories, and I don’t 

know where we go as freshman if folks aren’t willing to come and 

invest in us like this. I tell folks regularly that the best part of my 

job is really smart people who want to come by and make me 

smarter. And I certainly appreciate the willingness to engage and 

do that as the last fellow who generally gets to ask questions here 

in the Ws, folks are often anxious to depart, but I just had a couple 

of things on my mind. 

Everybody talks a lot about tax expenditures. I wish there were 

more of my colleagues left, I actually have the only bill in Congress 

that eliminates all corporate tax expenditures. I am a big believer 

that those are spending measures. It is the Fair Tax Bill, it actually abolishes the corporate tax rate altogether, because I believe, 

as you all have said, that only consumers pay taxes, whether it is 

the shareholders or whether it is the employees or whether it is the 

purchaser, it is only us at the end of the day that pay those taxes, 

and I would have welcomed more support for going after those tax 

expenditures, but let us talk about the regulation side again, and 

we started down that with Mr. Flores a little bit earlier. 

Do you think that is coming? Because I saw an editorial in the 

Wall Street Journal, I think it was in January, that had a giant 

spike in the cost of compliance with reg.s back in ’92, as the Clean 

Air Act was coming online, and then it dropped down and was fairly level throughout the ’90s and the early part of this decade, but 

the last four years, we had spiked back up to those 2000, or that 

1992 level and even gone 25 percent higher in 2010. If we can 

agree that tax expenditures are just the same as spending and 

ought to have the same amount of oversight on them, can we also 

say that about regulation, that we ought to consider each and every 

reg. with the same critical process that we consider each spending 

bill and each tax bill? 

Mr. HOLTZ-EAKIN. I believe so, yes. I mean, these are the same 

as taxes. Just as you remit tax payments, you have compliance 

costs, you have to spend money, and in the same way that taxes 

can cause a business not to hire one more person, not to make the 
68 

last investment, regulation can have the exactly the same influence 

in economic activity. And so I am concerned about the pace at 

which new regulations are being rolled out for two reasons. One, 

the overall economic burden might not be matched by benefits. I 

mean, these things aren’t done gratuitously. There is a reason regulations show up. But I am worried that we have gone too far. And 

the second is that rapid rule-making is generally bad rule-making. 

The Affordable Care Act and the Dodd-Frank Bill both share a 

characteristic of what I think are unrealistic rule-making deadlines 

that will produce bad regulation in the end. 

Mr. WOODALL. We talked a little bit about income inequality, 

that is something that concerns me as well, though it concerns me 

more that if it comes from a place of productivity, inequality. And 

I actually think of what we are doing on the tax code and the reg. 

side of things as creating productivity inequality among American 

citizens. It doesn’t trouble me if we have income inequality if it is 

in line with what one produces and contributes. Can anybody point 

me to any studies, information where I can educate myself about 

whether we have seen a change in productivity inequality as we 

have seen a change of income inequality? 

Mr. PODESTA. Mr. Woodall, I would be happy to try to get you 

something for the record. I think the one thing that is characteristic really, of the recent period of economic history is that 

productivity gains in the economy have not been shared by the entire workforce of the enterprises that are making those productivity 

gains, the way they had been in previous decades and particularly 

in the post-World War II period. So we have a lot of productivity 

in the economy, most of the revenue from that, most of the gains 

from that, have gone to the top, and that has been a change and 

that has led to the deep income inequality that was commented on 

earlier. 

Mr. WOODALL. And let me use my last 10 seconds to say, as 

much as I value the Gingrich-Clinton years, and I do, I view those 

as very productive years, I look back at what we did with Medicare 

reform, where we are still kicking the doc fix and the SGR down 

the road, what are we now? Twelve years later, 15 years later, and 

so as scary as it is to do things today, to do things now, to do 

things immediately, I have seen what happens when we put something on the list for three years from now, and I appreciate folks 

being willing to do things today. Thank you all for being here. 

Mr. LANKFORD. Thank you. The Hoosier from Indiana, Mr. 

Rokita. 

Mr. ROKITA. Thank you, Mr. Chair. Only place where Hoosiers 

are from, really. Unless I am missing some of my constituents I 

need to get to. Thank you for your leadership, Mr. Chair. I want 

to put some things on the record, and for nothing else, I appreciate 

today’s discussion. I appreciate you all coming, I appreciate what 

Mr. Ryan from Ohio said, I appreciate even what Mr. Pascrell said 

earlier, and I also enjoy Congresswoman Kaptur. We have been 

able to have some excellent conversations in the short time that we 

have known each other, maybe with today’s issue aside. But even 

with today, I know that what you say comes from a genuine concern. 
69 

What I saw that was disingenuous, Mr. Chairman, on this committee today are comments from Ms. Schwartz. And they are almost so silly that I risk using time to refute them, but I think the 

record deserves it. To say that what we are dealing with here in 

terms of a $14 trillion debt, in terms of $100 trillion in promises 

made to future generations, is somehow the fault of the last administration, that is her words, is ridiculous. And then to further compound that problem by saying the only thing that this current Congress has done is propose $61 billion in cuts, really puts salt in the 

wounds. Her party can’t even get to $61 billion in cuts, and I agree 

with her that it is only 12 percent, that discretionary spending is 

only 12 percent of the budget. Can’t even get there. And that is 

why Mr. Ryan’s comments, Ms. Kaptur’s, and Mr. Pascrell’s, even, 

are so important. We need to get there. To make sure we have a 

full picture for the record, Mr. Podesta, I just want to ask you a 

few direct questions before I get onto some other ones, and hope 

they have direct answers. And I hope you would agree with them. 

The years that President Clinton, and I appreciate his leadership, because he led on the budget—in the years that we had a balanced budget, which party controlled Congress in each one of those 

years? 

Mr. PODESTA. In 1998, 1999, 2000, and I would probably put 

2001 in that as well, the Republican Party led the Congress. 

Mr. ROKITA. That is what I wanted to know. I will get to some 

other questions here now, reclaiming my time. And under the Constitution, is it not the Congress’ job to control the purse strings? 

To create and pass a budget is one of our core constitutional duties. 

Mr. PODESTA. I would hope so. 

Mr. ROKITA. Okay, right. And wasn’t Ms. Schwartz’s party in the 

last Congress that failed to do that? 

Mr. PODESTA. Well, Ms. Schwartz’s party passed a continuing 

resolution that funded the government. 

Mr. ROKITA. That is what I thought, okay. Just want to make 

sure we have that full picture there. As much as I appreciate Mr. 

Clinton’s leadership, it takes two to tango, especially when it comes 

to a budget, in this case, a Congress that is also willing to lead. 

And that is what we need now, and that is what we are trying to 

do now. 

Mr. PODESTA. You know what? I agree with you. 

Mr. ROKITA. Thank you. Can you put the cartoon slide up, if you 

can, please? The one with the ship and the submarine? Let me get 

to that question. As they are putting that up, let us talk about the 

way in which the growing U.S. debt could impact America’s status 

as a world power, as well as its freedom to act. According to the 

CBO’s long-term budget projections, U.S. interest payments on the 

debt will begin to exceed our yearly defense spending in 2022, and 

then double in 2037. Can a country that borrows this much maintain its economic and military power and diplomatic leverage over 

the long run? 

Mr. HOLTZ-EAKIN. I clearly expressed my concern about that. I 

don’t believe so. 

Mr. ROKITA. Okay, thank you. Ms. Reinhart. 

Ms. REINHART. All we have to do is look at the loss of the British 

Empire. 
70 

Mr. ROKITA. Okay, thank you. Maya. 

Ms. MACGUINEAS. Our influence in the world is clearly already 

on the decline, and I will just quote a friend of mine, former member of Congress Tanner, who always says, We have an agreement 

that we would protect Taiwan. If China were to attack, the problem 

is we would have to go and borrow the money from China. That 

is just not the position we want to be in. 

Mr. ROKITA. I laugh so I don’t cry. John? 

Mr. PODESTA. I agree. 

Mr. ROKITA. Final thing, just to put all your comments in context, I just want to ask you a basic one real quick. Art Laffer’s 

curve, does it have validity or not when it comes to the tax issues 

you brought up? 

Mr. HOLTZ-EAKIN. It is correct in principle, but we have never 

been over the top of it. 

Ms. REINHART. I concur. 

Ms. MACGUINEAS. It is not relevant to where we are in the tax 

rates right now. 

Mr. ROKITA. John? 

Mr. PODESTA. Well, I again reference back to the last couple decades of history, and I think it would probably be a bad place to 

begin this conversation. 

Mr. ROKITA. Thank you all very much. I yield back. 

Mr. LANKFORD. Thank you, and I yield to myself the five minutes 

that remain here as the final person doing the questioning. Yesterday we had the privilege of having a joint session of Congress and 

the prime minister of Australia; she came and spoke to Congress 

and to all of us as American people. And one of the interesting 

things she kept coming back to was this clear statement, that she 

believed as a child watching us land on the moon, Those are Americans and they can do anything. And there is this sense that is rising up that I sense from Americans, saying we have got to take on 

the big, difficult thing of our time, and that is our debt. And it has 

been very interesting to be able to hear your comments on it, and 

to especially hear you say, this is not something that can be done 

five years from now. This is something that has to be done right 

now. So I appreciate your comments and all of your work, and for 

you coming here and spending so much time with us and letting 

us get a chance to ask you some random questions with it. 

Knowing that, we are fully aware you can’t just shut the government down for a couple years and say we are not going to spend 

money on anything. This conversation that is happening between 

investing while we are also trying to cut the debt. We understand 

we have to do infrastructure projects; there are things that still 

need to be able to continue on. What would you recommend as a 

balance, or as a thought that you have clearly between this balance 

between investing, and also we have got to get aggressive in cutting the debt. 

Mr. HOLTZ-EAKIN. I think the key is to recognize that the budget 

at the moment is structured so that the legacy programs of our 

past, the Medicare’s, the Medicaid’s, the Social Securities, are going 

to crush our ability to invest in the future. They are literally just 

pushing out any ability to do discretionary spending. And if you are 
71 

going to let your past crush your future, you are going nowhere as 

a nation. So you have got to fix that. 

Mr. LANKFORD. Any comments from anyone on that? 

Mr. PODESTA. Yes, Congressman. You know, this is where the 

rubber hits the road. Because this is where the tough choices need 

to get made. And I think that we know what produces productivity 

in the economy, we have seen it in the past, investments in education, and building human capital in giving people the skills they 

need to succeed in science and technology, those produce strong results. So we have to find a way to pay for those. And the issue 

around health care and particularly Social Security, I come back to 

what I said in my prepared statement, which is in the early 1960s, 

nearly 30 percent of elderly Americans lived in poverty. Today less 

than 10 percent do. So we can’t abandon that commitment; we 

have got to find a way to produce health care in a way that is going 

to produce good results at a lower cost. 

Mr. LANKFORD. Right. And I don’t hear a lot of people trying to 

abandon that commitment. The question becomes how do we do 

that? Because currently we are trying to make life in this generation easier by making it harder on the next generation, and it is 

progressively getting closer and closer to this generation making it 

much tougher, based on putting the hard decisions off, putting it 

off, putting it off. 

Mr. PODESTA. I agree with that. 

Mr. LANKFORD. Let me bring up just some process things to you 

as well, just for perspective. Since 1921, the President has submitted a budget to Congress, which I understand since 1922 has 

been dead on arrival each year when it comes, but just this perpetual process of the President setting out the wish list, both parties, and then Congress trying to work through the process on that. 

Is there a benefit to setting some harder caps on it a year before, 

that Congress is able to send to the President, You can submit a 

budget no larger than, please work with your agencies and submit 

a budget that fits under this criteria, and that allows the Executive 

Branch and the Legislative Branch then that next year to work on 

a budget, knowing that we are all dealing with the same numbers. 

Ms. MACGUINEAS. I would say that right now, given where we 

are in our budget challenges, what we should really be thinking 

about is multi-year budgeting. And we need to have a fiscal path 

that would bring us to stabilizing the debt at a sustainable level 

and then below over more time, and I think the way to do that is 

multi-year budgeting, and I think you have to put hard caps and 

triggers in the budget. Again, budget process will never fix this 

problem alone, but it needs to be there to strengthen whatever policy deals people came up with so we can stay on track over the 

multi years it will take to get us back to a place of fiscal health. 

Mr. LANKFORD. Thank you. Other comments on that? 

Mr. PODESTA. I agree with that, I just had one note, which is 

that in the 1980s, after Gramm-Rudman-Hollings passed, the caps 

were set at an unrealistically low level, and therefore they were 

continuously blown through and Congress set them aside. I think 

they have to be realistic, but I think having hard caps that can be 

enforced is really the trajectory on the discretionary side, and as 

I said earlier, I think you have to have the same kind of discipline 
72 

through a strong PAYGO mechanism on mandatory and the revenue side. 

Mr. LANKFORD. Terrific. Thank you all for coming and for being 

a part of this, I really appreciate it. You worked right through 

lunch, I am sure you had a long day of preparing yesterday and 

then a trip to be able to get over here and come through security 

and everything that you did today, so I appreciate very much your 

time and for being here and investing in the future of our country. 

With that this budget hearing is adjourned. 

[Additional submission from Ms. Kaptur follows:] 

SUBMISSION OF HON. MARCY KAPTUR, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OHIO

BIOGRAPHIES AND REPORTED SOURCES OF PRIVATE FUNDING OF WITNESSES

Douglas J. ‘‘Doug’’ Holtz-Eakin—President of the American Action Forum 

In early 2010, Mr. Holtz-Eakin became president of the conservative American Action Forum. 

According to the New York Times, the Board of Directors for the American Action 

Forum includes Robert K. Steel, a former executive of Wachovia and Goldman 

Sachs. A major contributor is believed to be Kenneth G. Langone, a founder of Home 

Depot and a former director of the New York Stock Exchange. 

1. Appointed to the Financial Crisis Inquiry Commission in 2009 

2. Chief Economic Policy Adviser to U.S. Senator John McCain’s 2008 presidential 

campaign 

3. Senior Staff Economist for President George H. Bush’s Council on Economic Advisors. 

4. Director of the Congressional Budget Office, from 2003—2005 

5. Visiting Fellow at the Peterson Institute, from 2007—2008 

6. Former academic appointments at Princeton and Columbia Universities. He 

later received tenure at Syracuse University. 

Carmen M. Reinhart, Ph.D.—Fellow at the Peterson Institute for International Economics 

Reinhart is also a researcher at the National Bureau of Economic Research and 

the Centre for Economic Policy Research and a member of the Congressional Budget 

Office Panel of Economic Advisers and Council on Foreign Relations. 

The Peterson’s Institute receives major contributions from Peter G. Peterson and 

his wife. Mr. Peterson is a former Chairman and CEO of Lehman Brothers, and he 

co-founded the private equity firm the Blackstone Group. In 2009, he reportedly 

gave the Peterson Institute $8.5 million. 

1. Formerly a professor of economics at the University of Maryland 

2. Chief Economist and Vice President at the investment bank Bear Stearns in 

the 1980s. 

3. Also spent several years at the International Monetary Fund. 

Maya MacGuineas—President of the Committee for Responsible Federal Budget 

She has served as the group’s President since 2003. 

Ms. MacGuineas’ organization reportedly receives major funding from billionaire 

Pete Peterson. (Peterson, who also provided contributions to the Peterson Institute 

for International Economics, was Chairman and CEO of Bell & Howell, from 1963 

to 1971. From 1973 to 1984, he was Chairman and CEO of Lehman Brothers. In 

1985 he co-founded the private equity firm, the Blackstone Group. He also served 

as Secretary of Commerce under Nixon.) 

1. Served on The Washington Post editorial board, in the Spring of 2009, covering 

economic and fiscal policy, and writing extensively on the health care reform debate 

2. Social Security Adviser to the McCain Presidential Campaign. (She claims to 

be nonpartisan) 

3. Worked at the Brookings Institution and the Concord Coalition 

4. Worked on Wall Street (Firms Unknown) 

John Podesta—President and CEO of the Center for American Progress 

Major individual donors include to the Center for American Progress include Peter 

Lewis (Ohio based Chairman of Progressive Insurance), Steve Bing (New York Real 

Estate Developer and liberal philanthropist), George Soros, and Herbert M. Sandler. 
73 

*EDITOR’S NOTE: As of publication deadline, the committee has received no response from the 

witness. 

1. Co-chairman of the Obama-Biden Transition Project, and visiting Professor of 

Law at Georgetown University 

2. Assistant to the President, Deputy Chief of Staff, and White House Chief of 

Staff during the Clinton Administration 

3. In 1988, Podesta founded with his brother, Tony, Podesta Associates, Inc., a 

Washington, D.C., ‘‘government relations and public affairs’’ lobbying firm. Now 

known as the Podesta Group, the firm ‘‘has been retained by some of the biggest 

corporations in the country, including Wal-Mart, BP and Lockheed Martin.’’ 

4. Podesta held positions on Capitol Hill, including Counselor to Democratic Leader Senator Thomas Daschle (1995—1996); Chief Counsel for the Senate Agriculture 

Committee (1987—1988); Chief Minority Counsel for the Senate Judiciary Subcommittees on Patents, Copyrights, and Trademarks; Security and Terrorism; and 

Regulatory Reform; and Counsel on the Majority Staff of the Senate Judiciary Committee (1979—1981). 

5. Podesta worked as a trial attorney for the Department of Justice’s Honors Program in the Land and Natural Resources Division (1976—1977), and as a Special 

Assistant to the Director of ACTION, the Federal volunteer agency (1978—1979). 

[Questions for the record and their responses follow:] 

QUESTIONS FOR THE RECORD SUBMITTED BY HON. MICHAEL M. HONDA, A

REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

Ms. Reinhart: Economists contend that mandatory spending will drive the impending fiscal crisis. Because of this, would you agree that it is impossible to bring 

our debt and deficit crisis in line through a plan that solely cuts non-defense discretionary spending?* 

Ms. MacGuiness: You testified today about the psychological aspects of the debt 

crisis. As I understand it, you are suggesting that as long as we pass a credible plan 

that brings our debt-to-GDP level to sustainable levels in a reasonable amount of 

time, it will create enough certainty in the bond markets to stave off disaster and 

allow us the time to implement that plan. Is that correct? 

Since we agree that the Republican spending bill, HR 1, is not a credible plan 

and therefore is not an effective way to calm bond markets and delay the onset of 

a major fiscal meltdown, there seems to be no reason to pass this legislation—legislation that hundreds of notable economists including Goldman Sachs, Mark Zandi 

and Ben Bernanke believe will cost hundreds of thousands of jobs and endanger our 

economic recovery. 

We know there is a better way. 

Mr. Podesta: You outline an alternative, credible plan. The plan has a number of 

features including reducing spending and increasing revenue. It also, however, includes strategic investments in education, transportation, infrastructure, and R&D, 

all areas slashed in HR 1. Please explain to the Committee why these kinds of investments are a key component of any credible long-term plan to put our fiscal 

house in order. 

MS. MACGUINEAS’ RESPONSE TO MR. HONDA’S QUESTION FOR THE RECORD

You testified today about the psychological aspects of the debt crisis. As I understand it, you are suggesting that as long as we pass a credible plan that brings our 

debt-to-GDP level to sustainable levels in a reasonable amount of time, it will create 

enough certainty in the bond markets to stave off disaster and allow us the time 

to implement that plan. Is that correct? 

Yes, that is correct. I believe that we cannot completely backload a plan or it will 

appear that politicians are merely pushing all the hard choices into the future. But 

if we adopt a credible multi-year plan we can buy ourselves some time and don’t 

need to implement major policy changes this year when they are more likely to disrupt the economic recovery. It is worth noting that whenever we start fiscal consolidation, it is likely to have short-term negative affects on growth, but it will be extremely beneficial in the long-term compared to doing nothing. 

But any plan will have to be credible. I think that means being bipartisan, so one 

party does not try to undo it, statutory, and coupled with triggers so that if changes 

do not occur, automatic changes will. 

I believe the best approach is a comprehensive, multi-year plan that includes cuts 

to domestic discretionary spending, as the House Republicans are pushing—though 
74 

I would prefer to wait another year or two for ones this large—but also changes to 

defense, entitlements and revenues. But it is important that those who oppose the 

cuts in domestic discretionary spending go on record on the comprehensive budgetary changes they do support-not just argue against those they oppose. 

MR. PODESTA’S RESPONSE TO MR. HONDA’S QUESTION FOR THE RECORD

Of course, deficit reduction is going to have be a mix of spending restraint and 

new revenue. But we cannot ignore a third crucial ingredient: strong economic 

growth. 

There is a broad consensus that overall investment levels are key driver of future 

economic growth and prosperity. Public investment drives technological innovation 

and productivity growth, builds a strong workforce through education and job training, and helps new industries like clean energy to grow. Often, it induces the private sector to invest as well: a 2003 study of 17 economically developed countries 

found that for every dollar of public investment in research and development, private firms spent about 70 cents more thanks to new opportunities created by government investment. And it supports and expands the American middle class, who 

can take advantage of better education and employment opportunities to start a 

business or pursue an invention, move up in the workforce, and give their children 

a better life. 

Moreover, while other countries are investing in the technology, infrastructure, 

and education systems of the future, net U.S. investment is currently at its lowest 

level since World War II. We need to invest to stay competitive in the global economy, and we are already falling behind. 

While our budget problems are too big and too complicated to simply ‘‘grow our 

way out of,’’ without robust economic growth, we can never hope to solve them. Public investment is critical to getting our economy back on track and spurring strong, 

sustained and broadly shared prosperity. Deficit reduction and renewed public investment need not be mutually exclusive. On the contrary, strong public investment 

must be made alongside targeted deficit reduction to create jobs, encourage private 

investment, and help grow our economy back to health. 

[Whereupon, at 12:56 p.m., the committee adjourned subject to 

the call of the Chair] 

Æ